NOTE
1
.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do
not
include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income and cash flows for the unaudited interim periods.
The results of operations for the
three
month period ended
March 31, 2018
are
not
necessarily indicative of the results to be expected for the year ending
December 31, 2018
or any other period. The unaudited consolidated financial statements and notes presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Eagle Bancorp Montana, Inc.’s (“the Company” or “Eagle”) Form
10
-K for the year ended
December 31, 2017.
Certain loan amounts were reclassified for prior periods to conform to the presentation for
2018.
These reclassifications had
no
impact on net income or total shareholders’ equity. During the quarter ended
March 31, 2018,
Eagle completed the acquisition of TwinCo, Inc. (“TwinCo”). See Note
12.
Mergers and Acquisitions for more information. The acquisition included the addition of over
$55,000,000
in gross loans and added a considerable amount to Eagle’s agricultural loans. There was
no
impact to Eagle’s loan policies due to the acquisition.
The Company evaluated subsequent events for potential recognition and/or disclosure through
May 10, 2018,
the date the unaudited consolidated financial statements were issued.
NOTE
2
.
INVESTMENT SECURITIES
Investment securities are summarized as follows:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
9,619
|
|
|
$
|
-
|
|
|
$
|
(103
|
)
|
|
$
|
9,516
|
|
|
$
|
4,881
|
|
|
$
|
13
|
|
|
$
|
(37
|
)
|
|
$
|
4,857
|
|
Municipal obligations
|
|
|
78,745
|
|
|
|
385
|
|
|
|
(1,555
|
)
|
|
|
77,575
|
|
|
|
67,508
|
|
|
|
807
|
|
|
|
(429
|
)
|
|
|
67,886
|
|
Corporate obligations
|
|
|
14,199
|
|
|
|
6
|
|
|
|
(244
|
)
|
|
|
13,961
|
|
|
|
14,725
|
|
|
|
18
|
|
|
|
(99
|
)
|
|
|
14,644
|
|
Mortgage-backed securities
|
|
|
26,916
|
|
|
|
274
|
|
|
|
(453
|
)
|
|
|
26,737
|
|
|
|
24,770
|
|
|
|
364
|
|
|
|
(265
|
)
|
|
|
24,869
|
|
Collateralized mortgage obligations
|
|
|
23,843
|
|
|
|
5
|
|
|
|
(640
|
)
|
|
|
23,208
|
|
|
|
20,051
|
|
|
|
7
|
|
|
|
(270
|
)
|
|
|
19,788
|
|
Asset-backed securities
|
|
|
7,464
|
|
|
|
-
|
|
|
|
(44
|
)
|
|
|
7,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
160,786
|
|
|
$
|
670
|
|
|
$
|
(3,039
|
)
|
|
$
|
158,417
|
|
|
$
|
131,935
|
|
|
$
|
1,209
|
|
|
$
|
(1,100
|
)
|
|
$
|
132,044
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
2.
INVESTMENT SECURITIES - continued
Proceeds from sales of available-for-sale securities and the associated gross realized gains and losses were as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of available-for-sale securities
|
|
$
|
25,994
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross realized gain on sale of available-for-sale securities
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross realized loss on sale of available-for-sale securities
|
|
|
(105
|
)
|
|
|
-
|
|
Net realized loss on sale of available-for-sale securities
|
|
$
|
(105
|
)
|
|
$
|
-
|
|
The amortized cost and fair value of securities 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.
|
|
March 31, 2018
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
3,231
|
|
|
$
|
3,224
|
|
Due from one to five years
|
|
|
14,399
|
|
|
|
14,136
|
|
Due from five to ten years
|
|
|
18,191
|
|
|
|
17,957
|
|
Due after ten years
|
|
|
74,206
|
|
|
|
73,155
|
|
|
|
|
110,027
|
|
|
|
108,472
|
|
Mortgage-backed securities
|
|
|
26,916
|
|
|
|
26,737
|
|
Collateralized mortgage obligations
|
|
|
23,843
|
|
|
|
23,208
|
|
Total
|
|
$
|
160,786
|
|
|
$
|
158,417
|
|
Maturities of securities do
not
reflect repricing opportunities present in adjustable rate securities.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
2.
INVESTMENT SECURITIES – continued
The Company’s investment securities that have been in a continuous unrealized loss position for less than
twelve
months and those that have been in a continuous unrealized loss position for
twelve
or more months were as follows:
|
|
March 31, 2018
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In Thousands)
|
|
U.S. government and agency
|
|
$
|
8,175
|
|
|
$
|
(60
|
)
|
|
$
|
1,342
|
|
|
$
|
(43
|
)
|
Municipal obligations
|
|
|
40,648
|
|
|
|
(740
|
)
|
|
|
15,263
|
|
|
|
(815
|
)
|
Corporate obligations
|
|
|
9,969
|
|
|
|
(227
|
)
|
|
|
2,485
|
|
|
|
(17
|
)
|
Mortgage-backed securities and collateralized mortgage obligations
|
|
|
15,424
|
|
|
|
(388
|
)
|
|
|
21,319
|
|
|
|
(705
|
)
|
Asset-backed securities
|
|
|
7,420
|
|
|
|
(44
|
)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
81,636
|
|
|
$
|
(1,459
|
)
|
|
$
|
40,409
|
|
|
$
|
(1,580
|
)
|
|
|
December 31, 2017
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In Thousands)
|
|
U.S. government and agency
|
|
$
|
2,493
|
|
|
$
|
(14
|
)
|
|
$
|
1,363
|
|
|
$
|
(23
|
)
|
Municipal obligations
|
|
|
15,404
|
|
|
|
(87
|
)
|
|
|
16,675
|
|
|
|
(342
|
)
|
Corporate obligations
|
|
|
7,643
|
|
|
|
(71
|
)
|
|
|
3,981
|
|
|
|
(28
|
)
|
Mortgage-backed securities and collateralized mortgage obligations
|
|
|
9,107
|
|
|
|
(81
|
)
|
|
|
21,653
|
|
|
|
(454
|
)
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
34,647
|
|
|
$
|
(253
|
)
|
|
$
|
43,672
|
|
|
$
|
(847
|
)
|
Management evaluates securities for other-than-temporary impairment at least quarterly, 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. As of
March 31, 2018
and
December 31, 2017,
there were, respectively,
134
and
87
securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has
not
been recorded.
As of
March 31, 2018,
93
U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately
2.47%
from the Company’s amortized cost basis of these securities. At
December 31, 2017,
52
U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately
1.28%
from the Company’s amortized cost basis of these securities. As of
March 31, 2018,
15
corporate obligations had unrealized losses of approximately
1.92%
from the Company’s amortized cost basis of these securities. At
December 31, 2017,
15
corporate obligations had an unrealized loss with aggregate depreciation of approximately
0.84%
from the Company's amortized cost basis of these securities. 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.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
2.
INVESTMENT SECURITIES – continued
As of
March 31, 2018,
23
mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses with aggregate depreciation of approximately
2.89%
from the Company’s amortized cost basis of these securities. At
December 31, 2017,
20
MBSs and CMOs had unrealized losses with aggregate depreciation of approximately
1.71%
from the Company’s amortized cost basis. Management’s analysis as of
March 31, 2018
revealed
no
expected credit losses on the securities and therefore, declines are
not
deemed to be other than temporary.
As of
March 31, 2018,
3
asset-backed securities (“ABSs”) had unrealized losses with aggregate depreciation of approximately
0.59%
from the Company’s amortized cost basis of these securities. The ABSs were purchased during the quarter ended
March 31, 2018.
Management’s analysis as of
March 31, 2018
revealed
no
expected credit losses on the securities and therefore, declines are
not
deemed to be other than temporary.
NOTE
3
.
LOANS RECEIVABLE
Loans receivable consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
139,499
|
|
|
$
|
135,217
|
|
Commercial real estate
|
|
|
272,915
|
|
|
|
244,783
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
52,028
|
|
|
|
52,672
|
|
Consumer
|
|
|
17,252
|
|
|
|
15,712
|
|
Commercial
|
|
|
86,296
|
|
|
|
65,863
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
567,990
|
|
|
|
514,247
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees, net
|
|
|
(1,008
|
)
|
|
|
(1,093
|
)
|
Allowance for loan losses
|
|
|
(6,130
|
)
|
|
|
(5,750
|
)
|
Total loans, net
|
|
$
|
560,852
|
|
|
$
|
507,404
|
|
Within the commercial real estate loan category,
$12,957,000
and
$13,114,000
was guaranteed by the United States Department of Agriculture Rural Development, at
March 31, 2018
and
December 31, 2017,
respectively. The commercial real estate loan category and the commercial category also include
$2,567,000
and
$1,973,000
of loans guaranteed by the United States Department of Agriculture Farm Service Agency at
March 31, 2018,
respectively. The United States Department of Agriculture Farm Service Agency guaranteed loans were acquired through the TwinCo acquisition. In addition, within the commercial loan category,
$283,000
and
$486,000
were in loans originated through a syndication program where the business resides outside of Montana, at
March 31, 2018,
and
December 31, 2017,
respectively.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE
–
continued
The following table includes information regarding nonperforming assets.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
$
|
1,740
|
|
|
$
|
977
|
|
Accruing loans delinquent 90 days or more
|
|
|
-
|
|
|
|
-
|
|
Restructured loans, net
|
|
|
1,622
|
|
|
|
-
|
|
Total nonperforming loans
|
|
|
3,362
|
|
|
|
977
|
|
Real estate owned and other repossessed assets, net
|
|
|
639
|
|
|
|
525
|
|
Total nonperforming assets
|
|
$
|
4,001
|
|
|
$
|
1,502
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a percentage of total assets
|
|
|
0.49
|
%
|
|
|
0.21
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
6,130
|
|
|
$
|
5,750
|
|
|
|
|
|
|
|
|
|
|
Percent of allowance for loan losses to nonperforming loans
|
|
|
182.33
|
%
|
|
|
588.54
|
%
|
|
|
|
|
|
|
|
|
|
Percent of allowance for loan losses to nonperforming assets
|
|
|
153.21
|
%
|
|
|
382.82
|
%
|
Allowance for loan losses activity was as follows:
|
|
Residential
|
|
|
Commercial
|
|
|
Home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Equity
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2018
|
|
$
|
1,301
|
|
|
$
|
2,778
|
|
|
$
|
506
|
|
|
$
|
225
|
|
|
$
|
940
|
|
|
$
|
5,750
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(80
|
)
|
|
|
(27
|
)
|
|
|
(23
|
)
|
|
|
(130
|
)
|
Recoveries
|
|
|
-
|
|
|
|
3
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
8
|
|
Provision
|
|
|
-
|
|
|
|
421
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
|
502
|
|
Ending balance, March 31, 2018
|
|
$
|
1,301
|
|
|
$
|
3,202
|
|
|
$
|
427
|
|
|
$
|
200
|
|
|
$
|
1,000
|
|
|
$
|
6,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2018 allocated to loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2018 allocated to loans collectively evaluated for impairment
|
|
$
|
1,301
|
|
|
$
|
3,202
|
|
|
$
|
427
|
|
|
$
|
196
|
|
|
$
|
1,000
|
|
|
$
|
6,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2018
|
|
$
|
139,499
|
|
|
$
|
272,915
|
|
|
$
|
52,028
|
|
|
$
|
17,252
|
|
|
$
|
86,296
|
|
|
$
|
567,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2018 of loans individually evaluated for impairment
|
|
$
|
1,325
|
|
|
$
|
1,524
|
|
|
$
|
241
|
|
|
$
|
110
|
|
|
$
|
162
|
|
|
$
|
3,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2018 of loans collectively evaluated for impairment
|
|
$
|
138,174
|
|
|
$
|
271,391
|
|
|
$
|
51,787
|
|
|
$
|
17,142
|
|
|
$
|
86,134
|
|
|
$
|
564,628
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE - continued
|
|
Residential
|
|
|
Commercial
|
|
|
Home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Equity
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2017
|
|
$
|
1,241
|
|
|
$
|
2,079
|
|
|
$
|
460
|
|
|
$
|
193
|
|
|
$
|
797
|
|
|
$
|
4,770
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
8
|
|
|
|
-
|
|
|
|
13
|
|
Provision
|
|
|
10
|
|
|
|
199
|
|
|
|
6
|
|
|
|
18
|
|
|
|
68
|
|
|
|
301
|
|
Ending balance, March 31, 2017
|
|
$
|
1,251
|
|
|
$
|
2,278
|
|
|
$
|
471
|
|
|
$
|
210
|
|
|
$
|
865
|
|
|
$
|
5,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2017 allocated to loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
46
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2017 allocated to loans collectively evaluated for impairment
|
|
$
|
1,251
|
|
|
$
|
2,278
|
|
|
$
|
471
|
|
|
$
|
194
|
|
|
$
|
819
|
|
|
$
|
5,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2017
|
|
$
|
136,990
|
|
|
$
|
234,467
|
|
|
$
|
49,037
|
|
|
$
|
14,786
|
|
|
$
|
54,614
|
|
|
$
|
489,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2017 of loans individually evaluated for impairment
|
|
$
|
221
|
|
|
$
|
-
|
|
|
$
|
336
|
|
|
$
|
136
|
|
|
$
|
146
|
|
|
$
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2017 of loans collectively evaluated for impairment
|
|
$
|
136,769
|
|
|
$
|
234,467
|
|
|
$
|
48,701
|
|
|
$
|
14,650
|
|
|
$
|
54,468
|
|
|
$
|
489,055
|
|
The Company utilizes an
8
point internal loan rating system, largely based on regulatory classifications, as follows:
Loans
R
ated 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
R
ated 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
R
ated Substandard
– these loans in category
7
are inadequately protected by the current net worth and paying capacity of the obligor of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are
not
corrected.
Loans
R
ated 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
R
ated 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 affected in the future.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE - continued
On an annual basis, or more often if needed, the Company formally reviews the ratings of all commercial real estate, construction, and commercial business loans that have a principal balance of
$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.
Internal classification of the loan portfolio was as follows:
|
|
March 31, 2018
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
111,756
|
|
|
$
|
-
|
|
|
$
|
1,135
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
112,891
|
|
Residential 1-4 family construction
|
|
|
26,152
|
|
|
|
-
|
|
|
|
456
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,608
|
|
Commercial real estate
|
|
|
213,383
|
|
|
|
-
|
|
|
|
1,825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
215,208
|
|
Commercial construction and development
|
|
|
32,308
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,308
|
|
Farmland
|
|
|
25,399
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,399
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
51,787
|
|
|
|
-
|
|
|
|
241
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,028
|
|
Consumer
|
|
|
17,096
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
4
|
|
|
|
17,252
|
|
Commercial
|
|
|
69,337
|
|
|
|
-
|
|
|
|
201
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,538
|
|
Agricultural
|
|
|
16,624
|
|
|
|
-
|
|
|
|
134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,758
|
|
Total
|
|
$
|
563,842
|
|
|
$
|
-
|
|
|
$
|
4,144
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
567,990
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
109,167
|
|
|
$
|
-
|
|
|
$
|
744
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
109,911
|
|
Residential 1-4 family construction
|
|
|
24,850
|
|
|
|
-
|
|
|
|
456
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,306
|
|
Commercial real estate
|
|
|
194,502
|
|
|
|
-
|
|
|
|
303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194,805
|
|
Commercial construction and development
|
|
|
38,351
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,351
|
|
Farmland
|
|
|
11,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,627
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
52,430
|
|
|
|
-
|
|
|
|
242
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,672
|
|
Consumer
|
|
|
15,549
|
|
|
|
-
|
|
|
|
136
|
|
|
|
-
|
|
|
|
27
|
|
|
|
15,712
|
|
Commercial
|
|
|
63,165
|
|
|
|
-
|
|
|
|
113
|
|
|
|
-
|
|
|
|
22
|
|
|
|
63,300
|
|
Agricultural
|
|
|
2,563
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,563
|
|
Total
|
|
$
|
512,204
|
|
|
$
|
-
|
|
|
$
|
1,994
|
|
|
$
|
-
|
|
|
$
|
49
|
|
|
$
|
514,247
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE - continued
Credit risk profile based on payment activity of the loan portfolio was as follows:
|
|
March 31, 2018
|
|
|
|
|
|
|
|
Restructured
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
Loans
|
|
|
Nonperforming
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
112,022
|
|
|
$
|
626
|
|
|
$
|
243
|
|
|
$
|
112,891
|
|
Residential 1-4 family construction
|
|
|
26,152
|
|
|
|
-
|
|
|
|
456
|
|
|
|
26,608
|
|
Commercial real estate
|
|
|
213,684
|
|
|
|
996
|
|
|
|
528
|
|
|
|
215,208
|
|
Commercial construction and development
|
|
|
32,308
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,308
|
|
Farmland
|
|
|
25,399
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,399
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
51,787
|
|
|
|
-
|
|
|
|
241
|
|
|
|
52,028
|
|
Consumer
|
|
|
17,142
|
|
|
|
-
|
|
|
|
110
|
|
|
|
17,252
|
|
Commercial
|
|
|
69,376
|
|
|
|
-
|
|
|
|
162
|
|
|
|
69,538
|
|
Agricultural
|
|
|
16,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,758
|
|
Total
|
|
$
|
564,628
|
|
|
$
|
1,622
|
|
|
$
|
1,740
|
|
|
$
|
567,990
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Restructured
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
Loans
|
|
|
Nonperforming
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
109,436
|
|
|
$
|
-
|
|
|
$
|
475
|
|
|
$
|
109,911
|
|
Residential 1-4 family construction
|
|
|
25,306
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,306
|
|
Commercial real estate
|
|
|
194,805
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194,805
|
|
Commercial construction and development
|
|
|
38,351
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,351
|
|
Farmland
|
|
|
11,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,627
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
52,430
|
|
|
|
-
|
|
|
|
242
|
|
|
|
52,672
|
|
Consumer
|
|
|
15,559
|
|
|
|
-
|
|
|
|
153
|
|
|
|
15,712
|
|
Commercial
|
|
|
63,193
|
|
|
|
-
|
|
|
|
107
|
|
|
|
63,300
|
|
Agricultural
|
|
|
2,563
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,563
|
|
Total
|
|
$
|
513,270
|
|
|
$
|
-
|
|
|
$
|
977
|
|
|
$
|
514,247
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE - continued
The following tables include information regarding delinquencies within the loan portfolio.
|
|
March 31, 2018
|
|
|
|
Loans Past Due and Still Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days
|
|
|
and
|
|
|
|
|
|
|
Non-Accrual
|
|
|
Current
|
|
|
Total
|
|
|
|
Past Due
|
|
|
Greater
|
|
|
Total
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
253
|
|
|
$
|
-
|
|
|
$
|
253
|
|
|
$
|
243
|
|
|
$
|
112,395
|
|
|
$
|
112,891
|
|
Residential 1-4 family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
456
|
|
|
|
26,152
|
|
|
|
26,608
|
|
Commercial real estate
|
|
|
338
|
|
|
|
-
|
|
|
|
338
|
|
|
|
528
|
|
|
|
214,342
|
|
|
|
215,208
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,308
|
|
|
|
32,308
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,399
|
|
|
|
25,399
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
710
|
|
|
|
-
|
|
|
|
710
|
|
|
|
241
|
|
|
|
51,077
|
|
|
|
52,028
|
|
Consumer
|
|
|
230
|
|
|
|
-
|
|
|
|
230
|
|
|
|
110
|
|
|
|
16,912
|
|
|
|
17,252
|
|
Commercial
|
|
|
31
|
|
|
|
-
|
|
|
|
31
|
|
|
|
162
|
|
|
|
69,345
|
|
|
|
69,538
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,758
|
|
|
|
16,758
|
|
Total
|
|
$
|
1,562
|
|
|
|
-
|
|
|
$
|
1,562
|
|
|
$
|
1,740
|
|
|
$
|
564,688
|
|
|
$
|
567,990
|
|
|
|
December 31, 2017
|
|
|
|
Loans Past Due and Still Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days
|
|
|
and
|
|
|
|
|
|
|
Non-Accrual
|
|
|
Current
|
|
|
Total
|
|
|
|
Past Due
|
|
|
Greater
|
|
|
Total
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
898
|
|
|
$
|
-
|
|
|
$
|
898
|
|
|
$
|
475
|
|
|
$
|
108,538
|
|
|
$
|
109,911
|
|
Residential 1-4 family construction
|
|
|
409
|
|
|
|
-
|
|
|
|
409
|
|
|
|
-
|
|
|
|
24,897
|
|
|
|
25,306
|
|
Commercial real estate
|
|
|
291
|
|
|
|
-
|
|
|
|
291
|
|
|
|
-
|
|
|
|
194,514
|
|
|
|
194,805
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,351
|
|
|
|
38,351
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,627
|
|
|
|
11,627
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
212
|
|
|
|
-
|
|
|
|
212
|
|
|
|
242
|
|
|
|
52,218
|
|
|
|
52,672
|
|
Consumer
|
|
|
111
|
|
|
|
-
|
|
|
|
111
|
|
|
|
153
|
|
|
|
15,448
|
|
|
|
15,712
|
|
Commercial
|
|
|
116
|
|
|
|
-
|
|
|
|
116
|
|
|
|
107
|
|
|
|
63,077
|
|
|
|
63,300
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,563
|
|
|
|
2,563
|
|
Total
|
|
$
|
2,037
|
|
|
$
|
-
|
|
|
$
|
2,037
|
|
|
$
|
977
|
|
|
$
|
511,233
|
|
|
$
|
514,247
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE
-
continued
The following tables include information regarding impaired loans.
|
|
March 31, 2018
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
|
(In Thousands)
|
|
With no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
869
|
|
|
$
|
885
|
|
|
$
|
-
|
|
Residential 1-4 family construction
|
|
|
456
|
|
|
|
456
|
|
|
|
-
|
|
Commercial real estate
|
|
|
1,524
|
|
|
|
1,524
|
|
|
|
-
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
241
|
|
|
|
269
|
|
|
|
-
|
|
Consumer
|
|
|
106
|
|
|
|
157
|
|
|
|
-
|
|
Commercial
|
|
|
162
|
|
|
|
165
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential 1-4 family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
|
869
|
|
|
|
885
|
|
|
|
-
|
|
Residential 1-4 family construction
|
|
|
456
|
|
|
|
456
|
|
|
|
-
|
|
Commercial real estate
|
|
|
1,524
|
|
|
|
1,524
|
|
|
|
-
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
241
|
|
|
|
269
|
|
|
|
-
|
|
Consumer
|
|
|
110
|
|
|
|
161
|
|
|
|
4
|
|
Commercial
|
|
|
162
|
|
|
|
165
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,362
|
|
|
$
|
3,460
|
|
|
$
|
4
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE - continued
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
|
(In Thousands)
|
|
With no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
475
|
|
|
$
|
487
|
|
|
$
|
-
|
|
Residential 1-4 family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
242
|
|
|
|
263
|
|
|
|
-
|
|
Consumer
|
|
|
126
|
|
|
|
176
|
|
|
|
-
|
|
Commercial
|
|
|
85
|
|
|
|
87
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential 1-4 family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
27
|
|
|
|
27
|
|
|
|
27
|
|
Commercial
|
|
|
22
|
|
|
|
22
|
|
|
|
22
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
|
475
|
|
|
|
487
|
|
|
|
-
|
|
Residential 1-4 family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
242
|
|
|
|
263
|
|
|
|
-
|
|
Consumer
|
|
|
153
|
|
|
|
203
|
|
|
|
27
|
|
Commercial
|
|
|
107
|
|
|
|
109
|
|
|
|
22
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
977
|
|
|
$
|
1,062
|
|
|
$
|
49
|
|
The difference between the recorded investment for restructured loans and the unpaid contractual principal balance of those loans is considered insignificant at
March 31, 2018.
There were
no
restructured loans at
December 31, 2017.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
3
.
LOANS RECEIVABLE
–
continued
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average Recorded Investment
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
672
|
|
|
$
|
221
|
|
Residential 1-4 family construction
|
|
|
228
|
|
|
|
-
|
|
Commercial real estate
|
|
|
762
|
|
|
|
-
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
242
|
|
|
|
338
|
|
Consumer
|
|
|
131
|
|
|
|
116
|
|
Commercial
|
|
|
135
|
|
|
|
73
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
2,170
|
|
|
$
|
748
|
|
Interest income recognized on impaired loans for the
three
months ended
March 31, 2018
and
2017
is considered insignificant.
NOTE
4
.
TROUBLE
D
DEBT RESTRUCTURINGS
A troubled debt restructured (“TDR”) 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 TDR loan would generally be considered impaired in the year of modification and will be assessed periodically for continued impairment.
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 Company previously had
one
TDR loan at
December 31, 2016
with a recorded investment of
$43,000
and a
$34,000
charge-off at time of restructure. The loan was a home equity loan and was on accrual status. The remaining recorded investment of
$42,000
was paid-off during the quarter ended
June 30, 2017
and the
$34,000
charge-off was recovered.
During the
three
months ended
March 31, 2018
and
2017,
there were
no
new restructured loans. However,
three
TDR’s were acquired through the TwinCo acquisition. See Note
12.
Mergers and Acquisitions for more information related to the acquisition.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
4.
TROUBLED DEBT RESTRUCTURINGS – continued
Information related to the acquired TDR’s is as follows:
|
|
March 31, 2018
|
|
|
|
Accrual
|
|
|
Non-Accrual
|
|
|
Total
|
|
|
|
Status
|
|
|
Status
|
|
|
Modification
|
|
|
|
(In Thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
626
|
|
|
$
|
-
|
|
|
$
|
626
|
|
Residential 1-4 family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
996
|
|
|
|
-
|
|
|
|
996
|
|
Commercial construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,622
|
|
|
$
|
-
|
|
|
$
|
1,622
|
|
The difference between the recorded investment for restructured loans and the unpaid contractual principal balance of those loans is considered insignificant at
March 31, 2018.
The Bank’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Bank’s policy generally refers to
six
months of payment performance as sufficient to warrant a return to accrual status.
There were
no
loans modified as a troubled debt restructured loan within the previous
three
months for which there was a payment default during the
three
months ended
March 31, 2018.
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
March 31, 2018
and
December 31, 2017,
the Company had
no
commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures.
NOTE
5
.
DEPOSITS
Deposits are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Noninterest checking
|
|
$
|
133,933
|
|
|
$
|
99,799
|
|
Interest bearing checking
|
|
|
110,636
|
|
|
|
99,255
|
|
Savings
|
|
|
106,244
|
|
|
|
88,603
|
|
Money market
|
|
|
108,934
|
|
|
|
89,558
|
|
Time certificates of deposit
|
|
|
166,188
|
|
|
|
143,349
|
|
Total
|
|
$
|
625,935
|
|
|
$
|
520,564
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
6
.
OTHER
LONG-TERM DEBT
Other long-term debt consisted of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Unamortized
|
|
|
|
|
|
|
Unamortized
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
Debt
|
|
|
|
Principal
|
|
|
Issuance
|
|
|
Principal
|
|
|
Issuance
|
|
|
|
Amount
|
|
|
Costs
|
|
|
Amount
|
|
|
Costs
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes fixed at 5.75%, due 2022
|
|
$
|
10,000
|
|
|
$
|
(169
|
)
|
|
$
|
10,000
|
|
|
$
|
(180
|
)
|
Subordinated debentures fixed at 6.75%, due 2025
|
|
|
10,000
|
|
|
|
(159
|
)
|
|
|
10,000
|
|
|
|
(164
|
)
|
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035
|
|
|
5,155
|
|
|
|
-
|
|
|
|
5,155
|
|
|
|
-
|
|
Total other long-term debt
|
|
$
|
25,155
|
|
|
$
|
(328
|
)
|
|
$
|
25,155
|
|
|
$
|
(344
|
)
|
In
February 2017,
the Company completed the issuance, through a private placement, of
$10,000,000
aggregate principal amount of
5.75%
fixed senior unsecured notes due in
2022.
The interest will be paid semi-annually through maturity date. The notes are
not
subject to redemption at the option of the Company.
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.
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 in
December 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
3.732%
and
3.114%
as of
March 31, 2018
and
December 31, 2017,
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.
For the
three
months ended
March 31, 2018
and
2017,
interest expense on other long-term debt was
$347,000
and
$272,000,
respectively.
NOTE
7
.
EARNINGS PER SHARE
Basic earnings per share for the
three
months ended
March 31, 2018
was computed using
5,311,527
weighted average shares outstanding. Basic earnings per share for the
three
months ended
March 31, 2017
was computed using
3,811,409
weighted average shares outstanding. Diluted earnings per share was computed using the treasury stock method by adjusting the number of shares outstanding by the shares purchased. The weighted average shares outstanding for the diluted earnings per share calculations was
5,375,987
for the
three
months ended
March 31, 2018
and
3,875,677
for the
three
months ended
March 31, 2017.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
8
.
DIVIDENDS AND STOCK REPURCHASE PROGRAM
For the year ended
December 31, 2017,
Eagle paid dividends of
$0.08
per share for the quarters ended
March 31
and
June 30, 2017.
Eagle paid dividends of
$0.09
per share for the quarters ended
September 30
and
December 31, 2017.
A dividend of
$0.09
per share was declared on
January 25, 2018
and paid
March 1, 2018
to shareholders of record on
February 9, 2018.
A dividend of
$0.09
per share was declared on
April 19, 2018,
payable on
June 1, 2018
to shareholders of record on
May 11, 2018.
On
July 20, 2017,
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 year ended
December 31, 2017
or the
three
months ended
March 31, 2018.
The plan expires on
July 20, 2018.
On
July 21, 2016,
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.
No
shares were purchased under this plan. The plan expired on
July 21, 2017.
NOTE
9
.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table includes information regarding the activity in accumulated other comprehensive income (loss).
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
on Derivatives
|
|
|
on Investment
|
|
|
|
|
|
|
|
Designated as
|
|
|
Securities
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
Available-for-Sale
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018
|
|
$
|
234
|
|
|
$
|
79
|
|
|
$
|
313
|
|
Other comprehensive income (loss), before reclassifications and income taxes
|
|
|
262
|
|
|
|
(2,583
|
)
|
|
|
(2,321
|
)
|
Amounts reclassified from accumulated other comprehensive income, before income taxes
|
|
|
(325
|
)
|
|
|
105
|
|
|
|
(220
|
)
|
Income tax benefit
|
|
|
17
|
|
|
|
660
|
|
|
|
677
|
|
Total other comprehensive loss
|
|
|
(46
|
)
|
|
|
(1,818
|
)
|
|
|
(1,864
|
)
|
Balance, March 31, 2018
|
|
$
|
188
|
|
|
$
|
(1,739
|
)
|
|
$
|
(1,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017
|
|
$
|
330
|
|
|
$
|
(741
|
)
|
|
$
|
(411
|
)
|
Other comprehensive income, before reclassifications and income taxes
|
|
|
341
|
|
|
|
279
|
|
|
|
620
|
|
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes
|
|
|
(558
|
)
|
|
|
-
|
|
|
|
(558
|
)
|
Income tax benefit (expense)
|
|
|
88
|
|
|
|
(113
|
)
|
|
|
(25
|
)
|
Total other comprehensive (loss) income
|
|
|
(129
|
)
|
|
|
166
|
|
|
|
37
|
|
Balance, March 31, 2017
|
|
$
|
201
|
|
|
$
|
(575
|
)
|
|
$
|
(374
|
)
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
10
.
D
ERIVATIVES AND HEDGING ACTIVITIES
Mortgage Loan Commitments
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held-for-sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to
60
days after inception of the rate lock.
Interest Rate Lock Commitments
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amount of interest rate lock commitments was
$31,067,000
and
$15,338,000
at
March 31, 2018
and
December 31, 2017,
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
1
1
.
FAIR VALUE DISCLOSURES
FASB ASC
820
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall
not
be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is
not
a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and, (iv) willing to transact.
FASB ASC
820
requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied.
Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs
may
be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, FASB ASC
820
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level
1
Inputs
–
Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, or convert to cash in the short term.
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.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
11.
FAIR VALUE DISCLOSURES
–
continued
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 the lower of cost or fair value. Fair value is determined based on expected proceeds based on sales contracts and commitments and are considered Level
2
inputs.
Repossessed Assets
– Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based upon primary
third
party appraisals, less costs to sell. The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in Level
3
classification of the inputs for determining fair value. Repossessed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on same or similar factors above.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
11.
FAIR VALUE DISCLOSURES
–
continued
The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
|
|
March 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
|
$
|
-
|
|
|
$
|
9,516
|
|
|
$
|
-
|
|
|
$
|
9,516
|
|
Municipal obligations
|
|
|
-
|
|
|
|
77,575
|
|
|
|
-
|
|
|
|
77,575
|
|
Corporate obligations
|
|
|
-
|
|
|
|
13,961
|
|
|
|
-
|
|
|
|
13,961
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
26,737
|
|
|
|
-
|
|
|
|
26,737
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
23,208
|
|
|
|
-
|
|
|
|
23,208
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
7,420
|
|
|
|
-
|
|
|
|
7,420
|
|
Loans held-for-sale
|
|
|
-
|
|
|
|
8,979
|
|
|
|
-
|
|
|
|
8,979
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
|
$
|
-
|
|
|
$
|
4,857
|
|
|
$
|
-
|
|
|
$
|
4,857
|
|
Municipal obligations
|
|
|
-
|
|
|
|
67,886
|
|
|
|
-
|
|
|
|
67,886
|
|
Corporate obligations
|
|
|
-
|
|
|
|
14,644
|
|
|
|
-
|
|
|
|
14,644
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
24,869
|
|
|
|
-
|
|
|
|
24,869
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
19,788
|
|
|
|
-
|
|
|
|
19,788
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans held-for-sale
|
|
|
-
|
|
|
|
8,949
|
|
|
|
-
|
|
|
|
8,949
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
1
1
.
FAIR VALUE DISCLOSURES - continued
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are
not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
March 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Impaired loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,358
|
|
|
$
|
3,358
|
|
Repossessed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
639
|
|
|
|
639
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Impaired loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
928
|
|
|
$
|
928
|
|
Repossessed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
525
|
|
|
|
525
|
|
As of
March 31, 2018,
certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of
$3,362,000
were reduced by specific valuation allowance allocations totaling
$4,000
to a total reported fair value of
$3,358,000
based on collateral valuations utilizing Level
3
valuation inputs.
As of
December 31, 2017,
certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of
$977,000
were reduced by specific valuation allowance allocations totaling
$49,000
to a total reported fair value of
$928,000
based on collateral valuations utilizing Level
3
valuation inputs.
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.
|
|
Fair Value at
|
|
Principal
|
|
Significant
|
|
Range of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Valuation
|
|
Unobservable
|
|
Signficant Input
|
|
Instrument
|
|
2018
|
|
|
2017
|
|
Technique
|
|
Inputs
|
|
Values
|
|
(Dollars In Thousands)
|
|
Impaired loans
|
|
$
|
3,358
|
|
|
$
|
928
|
|
Appraisal of collateral
(1)
|
|
Appraisal adjustments
|
|
10
|
-
|
30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repossessed assets
|
|
$
|
639
|
|
|
$
|
525
|
|
Appraisal of collateral
(1)(3)
|
|
Liquidation expenses
(2)
|
|
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 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.
|
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
1
1
.
FAIR VALUE DISCLOSURES - continued
FASB ASC Topic
825
requires disclosure of the fair value of financial instruments, both assets and liabilities recognized and
not
recognized in the statement of financial position, for which it is practicable to estimate fair value. Below is a table that summarizes the fair market values of all financial instruments of the Company at
March 31, 2018
and
December 31, 2017,
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.
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Estimated
|
|
|
Carrying
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair Value
|
|
|
Amount
|
|
|
|
(In Thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,911
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,911
|
|
|
$
|
12,911
|
|
Federal Home Loan Bank stock
|
|
|
3,704
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,704
|
|
|
|
3,704
|
|
Federal Reserve Bank stock
|
|
|
2,019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,019
|
|
|
|
2,019
|
|
Loans receivable, net
|
|
|
-
|
|
|
|
-
|
|
|
|
552,644
|
|
|
|
552,644
|
|
|
|
557,494
|
|
Accrued interest and dividends receivable
|
|
|
3,212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,212
|
|
|
|
3,212
|
|
Mortgage servicing rights
|
|
|
-
|
|
|
|
-
|
|
|
|
7,733
|
|
|
|
7,733
|
|
|
|
6,613
|
|
Cash surrender value of life insurance
|
|
|
14,575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,575
|
|
|
|
14,575
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturing interest bearing deposits
|
|
|
-
|
|
|
|
325,814
|
|
|
|
-
|
|
|
|
325,814
|
|
|
|
325,814
|
|
Noninterest bearing deposits
|
|
|
133,933
|
|
|
|
-
|
|
|
|
-
|
|
|
|
133,933
|
|
|
|
133,933
|
|
Time certificates of deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
164,377
|
|
|
|
164,377
|
|
|
|
166,188
|
|
Accrued expenses and other liabilities
|
|
|
4,697
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,697
|
|
|
|
4,697
|
|
Federal Home Loan Bank advances and other borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
68,993
|
|
|
|
68,993
|
|
|
|
69,528
|
|
Long-term debt
|
|
|
-
|
|
|
|
-
|
|
|
|
23,901
|
|
|
|
23,901
|
|
|
|
25,155
|
|
Off-balance-sheet instruments
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward delivery commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commitments to extend credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rate lock commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
1
1
.
FAIR VALUE DISCLOSURES
–
continued
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Estimated
|
|
|
Carrying
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair Value
|
|
|
Amount
|
|
|
|
(In Thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,437
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,437
|
|
|
$
|
7,437
|
|
Federal Home Loan Bank stock
|
|
|
4,086
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,086
|
|
|
|
4,086
|
|
Federal Reserve Bank stock
|
|
|
1,465
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,465
|
|
|
|
1,465
|
|
Loans receivable, net
|
|
|
-
|
|
|
|
-
|
|
|
|
505,615
|
|
|
|
505,615
|
|
|
|
506,476
|
|
Accrued interest and dividends receivable
|
|
|
2,555
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,555
|
|
|
|
2,555
|
|
Mortgage servicing rights
|
|
|
-
|
|
|
|
-
|
|
|
|
7,312
|
|
|
|
7,312
|
|
|
|
6,578
|
|
Cash surrender value of life insurance
|
|
|
14,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,481
|
|
|
|
14,481
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturing interest bearing deposits
|
|
|
-
|
|
|
|
277,416
|
|
|
|
-
|
|
|
|
277,416
|
|
|
|
277,416
|
|
Noninterest bearing deposits
|
|
|
99,799
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99,799
|
|
|
|
99,799
|
|
Time certificates of deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
142,202
|
|
|
|
142,202
|
|
|
|
143,349
|
|
Accrued expenses and other liabilities
|
|
|
4,822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,822
|
|
|
|
4,822
|
|
Federal Home Loan Bank advances and other borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
82,579
|
|
|
|
82,579
|
|
|
|
82,969
|
|
Long-term debt
|
|
|
-
|
|
|
|
-
|
|
|
|
24,209
|
|
|
|
24,209
|
|
|
|
25,155
|
|
Off-balance-sheet instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward delivery commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commitments to extend credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rate lock commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments. However, the Form
10
-K for the year ended
December 31, 2017
provides additional description of valuation methodologies used in estimating fair value of these financial instruments.
Cash,
I
nterest
B
earing
A
ccounts,
A
ccrued
I
nterest and
D
ividend
R
eceivable and
A
ccrued
E
xpenses and
O
ther
L
iabilities
– 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 F
ederal Home
L
oan
B
ank of Des Moines (“FHLB”)
and F
ederal
R
eserve
B
ank (“FRB”)
– The fair value of stock approximates redemption value.
Loans
R
eceivable
– 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.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
11.
FAIR VALUE DISCLOSURES
–
continued
Mortgage
S
ervicing
R
ights
– the fair value of servicing rights was determined at loan level using a discount rate of
13.00%
for all investor types, prepayment speeds ranging from
100.00%
to
247.00%
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
1.25%
for all investor types.
Cash Surrender Value of Life I
nsurance
– The carrying amount for cash surrender value of life insurance approximates fair value as policies are recorded at redemption value.
Deposits and Time C
ertificates of
D
eposit
– 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
/Other Borrowings
and
Other Long-Term
Deb
t
– 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
March 31, 2018
and
December 31, 2017,
respectively if the borrowings repriced according to their stated terms.
Off-
B
alance-
S
heet
I
nstruments
- 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.
NOTE
12.
MERGERS AND ACQUISITIONS
On
September 5, 2017,
the Company entered into an Agreement and Plan of Merger with TwinCo, a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire
100%
of TwinCo’s equity voting interests. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated
2
branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. The acquisition closed
January 31, 2018,
after receipt of approvals from regulatory authorities, approval of TwinCo shareholders and the satisfaction of other closing conditions. The total consideration paid was
$18,930,000
and included cash consideration of
$9,900,000
and common stock issued of
$9,030,000.
The transaction was accounted for under the acquisition method of accounting in accordance with FASB ASC
805,
Business Combinations. In business combination transactions in which the consideration given is
not
in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value of the consideration given or the fair value of the asset (or net assets) acquired, whichever is more clearly evident and, thus, a more reliable measure.
Under FASB ASC
805,
all of the assets acquired and liabilities assumed in a business combination are recognized at acquisition at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination guidance. Accordingly, goodwill will
not
be amortized, but will be tested for impairment annually. The goodwill recorded is
not
deductible for federal income tax purposes.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
12.
MERGERS AND ACQUISITIONS
–
continued
The assets acquired and liabilities assumed were recorded on the consolidated statement of financial condition at estimated fair value on acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed, consideration paid and the resulting goodwill.
|
|
January 31,
|
|
|
|
2018
|
|
|
|
(In Thousands)
|
|
Assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,657
|
|
Investment securities
|
|
|
30,728
|
|
Loans
|
|
|
55,057
|
|
Premises and equipment
|
|
|
1,605
|
|
Other real estate owned
|
|
|
135
|
|
Core deposit intangible
|
|
|
1,609
|
|
Other assets
|
|
|
1,258
|
|
Total assets acquired
|
|
$
|
96,049
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Deposits
|
|
$
|
82,190
|
|
Accrued expenses and other liabilities
|
|
|
19
|
|
Total liabilities assumed
|
|
$
|
82,209
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,840
|
|
|
|
|
|
|
Consideration paid:
|
|
|
|
|
Cash
|
|
$
|
9,900
|
|
Common stock issued (446,774 shares)
|
|
|
9,030
|
|
Total consideration paid
|
|
$
|
18,930
|
|
|
|
|
|
|
Goodwill resulting from acquisition
|
|
$
|
5,090
|
|
The fair value analysis of the loan portfolio resulted in a valuation adjustment for each loan based on an amortization schedule of expected cash flow. Individual amortization schedules were used for each loan over a certain amount and those with specifically identified loss exposure. The remainder of the loans were grouped by type and risk rating into loan pools (based on loans type, fixed or variable interest rate, revolving or term payments and risk rating). Yield inputs for the amortization schedules included contractual interest rates, estimated prepayment speeds, liquidity adjustments and market yields. Credit inputs for the amortization schedules included probability of payment default, loss given default rates and individually identified loss exposure.
Information regarding loans acquired as of acquisition date is as follows:
|
|
January 31,
|
|
|
|
2018
|
|
|
|
(In Thousands)
|
|
Contractually required principal and interest at acquisition
|
|
$
|
56,891
|
|
Contractual cash flows not expected to be collected (nonaccretable discount)
|
|
|
(1,346
|
)
|
|
|
|
|
|
Expected cash flows at acquisition
|
|
|
55,545
|
|
Interest component of expected cash flows (accretable discount)
|
|
|
(488
|
)
|
|
|
|
|
|
Fair value of acquired loans
|
|
$
|
55,057
|
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
12.
MERGERS AND ACQUISITIONS
–
continued
Core deposit intangible assets of
$1,609,000
are being amortized using an accelerated method over the estimated useful lives of the related deposits of
10
years.
The core deposit intangible value is a function of the difference between the cost of the acquired core deposits and the alternative cost of funds. This cash flow stream was discounted to present value. The fair value of other deposit accounts acquired were valued by estimating future cash flows to be received or paid from individual or homogenous groups of assets and liabilities and then discounting those cash flows to a present value using rates of return that were available in financial markets for similar financial instruments on or near
January 31, 2018.
Direct costs related to the acquisition were expensed as incurred. The Company recorded acquisition costs of
$234,000
during the quarter ended
March 31, 2018
and
$676,000
during the year ended
December 31, 2017.
Acquisition costs included legal and professional fees incurred related to the acquisition.
Operations of TwinCo have been included in the consolidated financial statements since
February 1, 2018.
The Company does
not
consider TwinCo a separate reporting segment and does
not
track the amount of revenues and net income attributable to TwinCo since acquisition. As such, it is impracticable to determine such amounts for the period from
February 1, 2018
through
March
31,
2018.
The accompanying consolidated statements of income include the results of operations of the acquired entity since the
January 31, 2018
acquisition date. The following table presents unaudited pro forma results of operations for the
three
months ended
March 31, 2018
and
2017
as if the acquisition had occurred on
January 1, 2017.
This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. The pro forma information does
not
necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of TwinCo on
January 1, 2017.
Cost savings are also
not
reflected in the unaudited pro forma amounts for the
three
months ended
March 31, 2018
and
2017.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In Thousands)
|
|
Pro forma net income
1)
|
|
|
|
|
|
|
|
|
Net interest income after loan loss provision
|
|
$
|
6,628
|
|
|
$
|
6,110
|
|
Noninterest income
|
|
|
2,714
|
|
|
|
3,289
|
|
Noninterest expense
|
|
|
8,475
|
|
|
|
8,112
|
|
Income before income taxes
|
|
|
867
|
|
|
|
1,287
|
|
Income tax expense
|
|
|
173
|
|
|
|
360
|
|
Net income
|
|
$
|
694
|
|
|
$
|
927
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share
1)
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.24
|
|
Diluted earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
5,311,527
|
|
|
|
3,811,409
|
|
Weighted average shares outstanding, diluted
|
|
|
5,375,987
|
|
|
|
3,875,677
|
|
1
)
|
Significant assumptions utilized include the acquisition cost noted above, accretion of interest rate fair value adjustments and a
20%
effective tax rate.
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
1
3
.
RECENT ACCOUNTING PRONOUNCEMENTS
In
May 2014,
the FASB issued ASU
No.
2014
-
09,
Revenue from Contracts with Customers (Topic
606
). This guidance is a comprehensive new revenue recognition standard that 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. In
July 2015,
the FASB agreed to delay the effective date of the standard by
one
year. Therefore, the new standard was effective in the
first
quarter of
2018
and was adopted by the Company. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU
2014
-
09,
and non-interest income. The largest percentage of our non-interest income is derived from the gain on sale of mortgage loans. The gains are recognized at the time of the sale of the loan, when proceeds are sent to us by the investor purchasing the loan.
No
change in the recognition of revenue on that portion of our noninterest income was recognized. We also evaluated the impact of this standard on our revenue from our wealth management division and it did
not
have a significant impact on our 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 (Subtopic
825
-
10
). 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 was adopted by the Company in the
first
quarter of
2018.
The Company’s Note
11.
Fair Value Disclosures for
March 31, 2018,
reflects the provisions of this pronouncement.
In
February 2016,
the FASB issued ASU
No.
2016
-
02,
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. We currently lease
four
locations that serve as full-service branches, with the longest running lease expiring in
2027.
We are exploring options to use a
third
party vendor to assist with the implementation of this standard.
In
September 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. In that regard, we have established a working group under the direction of our Chief Financial Officer and Chief Credit Officer. The group is composed of individuals from the finance and credit administration areas of the Company. We are currently developing an implementation plan, including assessment of processes, segmentation of the loan portfolio and identifying and adding data fields necessary for analysis. The adoption of this standard is likely to result in an increase in the allowance for loan and lease losses as a result of changing from an “incurred loss” model to an “expected loss” model. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE
13.
RECENT ACCOUNING PRONOUNCEMENTS – continued
In
January 2017,
the FASB issued ASU
No.
2017
-
04,
Intangibles – Goodwill and Other (Topic
350
) to amend and simplify current goodwill impairment testing to eliminate Step
2
from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance will be effective for the Company on
January 1, 2020
and is
not
expected to have a significant impact on the Company’s consolidated financial statements. We have improved our internal reporting systems as it relates to profitability by divisions and markets within the Company. We expect these systems to help in our evaluation of potential impairment.
In
March 2017,
the FASB issued ASU
No.
2017
-
08,
Receivables–Nonrefundable Fees and Other Costs (Subtopic
310
-
20
) to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does
not
change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after
December 15, 2018,
and interim periods within those fiscal years. Early adoption is permitted, including in an interim period. We have currently been following this guidance based on our internal investment policy guidelines. There is little impact on our consolidated financial statements, as we typically do
not
invest in these types of securities.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2
.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company’s primary business activity is the ownership of its wholly owned subsidiary, Opportunity Bank of Montana (the “Bank”). The Bank is a Montana chartered commercial bank that focuses on both consumer and commercial lending. It engages in typical banking activities: acquiring deposits from local markets and originating loans and investing in securities. Its deposits are insured by the Federal Deposit Insurance Corporation. The Bank’s primary component of earnings is its net interest margin (also called spread or margin), the difference between interest income and interest expense. The net interest margin is managed by management (through the pricing of its products and by the types of products offered and kept in portfolio), and is affected by changes in market interest rates. The Bank also generates noninterest income in the form of fee income and gain on sale of loans.
The Bank has a strong mortgage lending focus, with a large portion of its loan originations represented by 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, the Bank has also focused on adding commercial loans to its portfolio, both real estate and non-real estate. We have made significant progress in this initiative. The purpose of this diversification is to mitigate the Bank’s dependence on the residential mortgage market, as well as to improve its ability to manage its spread. The Bank’s management recognizes that fee income will also enable it to be less dependent on specialized lending and it now maintains a significant loan serviced portfolio which provides a steady source of fee income. Fee income is also supplemented with fees generated from the Bank’s 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 deposits do not automatically reprice as interest rates rise. Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity.
Management continues to focus on improving the Bank’s core earnings. Core earnings can be described as income before taxes, with the exclusion of gain on sale of loans and adjustments to the market value of the Bank’s loan servicing portfolio. Management believes that the Bank will need to continue to concentrate on increasing net interest margin, other areas of fee income and control of operating expenses to achieve earnings growth going forward. Management’s strategy of growing the bank’s loan portfolio and deposit base is expected to help achieve these goals as follows: loans typically earn higher rates of return than investments; a larger deposit base should yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to the strategy is funding the growth of the Bank’s balance sheet in an efficient manner. Though deposit growth has been 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.
The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee changed the federal funds target rate from 0.75% to 1.50% during the year ended December 31, 2017. The rate increased from 1.50% to 1.75% during the three months ended March 31, 2018.
On October 13, 2017, the Company successfully completed a public offering of its common stock, and issued 1,189,041 shares and received approximately $20.16 million in net cash proceeds.
On September 5, 2017, the Company entered into an Agreement and Plan of Merger with TwinCo Inc. (“TwinCo”), a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated 2 branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. The acquisition closed January 31, 2018, after receipt of approvals from regulatory authorities, approval of TwinCo shareholders and the satisfaction of other closing conditions. The total consideration paid was $18.93 million and included cash consideration of $9.90 million and common stock issued of $9.03 million.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Comparisons of financial condition in this section are between March 31, 2018 and December 31, 2017.
Total assets were $815.94 million at March 31, 2018, an increase of $99.16 million, or 13.8%, from $716.78 million at December 31, 2017. The increase was largely due to the change in securities and loans receivable as a result of the acquisition of TwinCo. Securities available-for-sale increased $26.38 million, or 20.0%, to $158.42 million at March 31, 2018 from $132.04 million at December 31, 2017. Loans receivable increased by $53.45 million, or 10.5%, to $560.85 million at March 31, 2018, from $507.40 million at December 31, 2017. Total liabilities were $724.99 million at March 31, 2018, an increase of $91.82 million, or 14.5%, from $633.17 million at December 31, 2017. The increase was mainly due to an increase in deposits largely due to the TwinCo acquisition partially offset by a decrease in Federal Home Loan Bank (“FHLB”) advances and other borrowings. Total deposits increased by $105.38 million, or 20.2%, to $625.94 million at March 31, 2018, from $520.56 million at December 31, 2017. FHLB advances and other borrowings decreased $13.44 million to $69.53 million at March 31, 2018 from $82.97 million at December 31, 2017.
Balance Sheet Details
Investment
Activities
The following table summarizes investment activities:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Fair Value
|
|
|
Percentage
of Total
|
|
|
Fair Value
|
|
|
Percentage
of Total
|
|
|
|
(Dollars in Thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
|
$
|
9,516
|
|
|
|
5.62
|
%
|
|
$
|
4,857
|
|
|
|
3.48
|
%
|
Municipal obligations
|
|
|
77,575
|
|
|
|
45.80
|
%
|
|
|
67,886
|
|
|
|
48.66
|
%
|
Corporate obligations
|
|
|
13,961
|
|
|
|
8.24
|
%
|
|
|
14,644
|
|
|
|
10.50
|
%
|
Mortgage-backed securities
|
|
|
26,737
|
|
|
|
15.79
|
%
|
|
|
24,869
|
|
|
|
17.83
|
%
|
Collateralized mortgage obligations
|
|
|
23,208
|
|
|
|
13.70
|
%
|
|
|
19,788
|
|
|
|
14.18
|
%
|
Asset-backed securities
|
|
|
7,420
|
|
|
|
4.38
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
|
158,417
|
|
|
|
93.53
|
%
|
|
|
132,044
|
|
|
|
94.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
1,641
|
|
|
|
0.97
|
%
|
|
|
1,920
|
|
|
|
1.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
3,591
|
|
|
|
2.12
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB capital stock, at cost
|
|
|
3,704
|
|
|
|
2.19
|
%
|
|
|
4,086
|
|
|
|
2.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRB capital stock, at cost
|
|
|
2,019
|
|
|
|
1.19
|
%
|
|
|
1,465
|
|
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
169,372
|
|
|
|
100.00
|
%
|
|
$
|
139,515
|
|
|
|
100.01
|
%
|
Securities available-for-sale were $158.42 million at March, 31, 2018, an increase of $26.38 million, or 20.0%, from $132.04 million at December 31, 2017. All categories of securities available-for-sale securities increased during the period with the exception of corporate obligations. The increases were mainly related to the acquisition of TwinCo. The decrease in corporate obligations was primarily due to a call prior to maturity.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition – continued
Lending Activities
The following table includes the composition of the Bank’s loan portfolio by loan category:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
|
(Dollars in thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
(1)
|
|
$
|
112,891
|
|
|
|
19.88
|
%
|
|
$
|
109,911
|
|
|
|
21.37
|
%
|
Residential 1-4 family construction
|
|
|
26,608
|
|
|
|
4.68
|
%
|
|
|
25,306
|
|
|
|
4.92
|
%
|
Commercial real estate
|
|
|
215,208
|
|
|
|
37.89
|
%
|
|
|
194,805
|
|
|
|
37.88
|
%
|
Commercial construction and development
|
|
|
32,308
|
|
|
|
5.69
|
%
|
|
|
38,351
|
|
|
|
7.46
|
%
|
Farmland
|
|
|
25,399
|
|
|
|
4.47
|
%
|
|
|
11,627
|
|
|
|
2.26
|
%
|
Total first mortgage loans
|
|
|
412,414
|
|
|
|
72.61
|
%
|
|
|
380,000
|
|
|
|
73.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
52,028
|
|
|
|
9.16
|
%
|
|
|
52,672
|
|
|
|
10.24
|
%
|
Consumer
|
|
|
17,252
|
|
|
|
3.04
|
%
|
|
|
15,712
|
|
|
|
3.06
|
%
|
Commercial
|
|
|
69,538
|
|
|
|
12.24
|
%
|
|
|
63,300
|
|
|
|
12.31
|
%
|
Agricultural
|
|
|
16,758
|
|
|
|
2.95
|
%
|
|
|
2,563
|
|
|
|
0.50
|
%
|
Total other loans
|
|
|
155,576
|
|
|
|
27.39
|
%
|
|
|
134,247
|
|
|
|
26.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
567,990
|
|
|
|
100.00
|
%
|
|
|
514,247
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees
|
|
|
(1,008
|
)
|
|
|
|
|
|
|
(1,093
|
)
|
|
|
|
|
Allowance for loan losses
|
|
|
(6,130
|
)
|
|
|
|
|
|
|
(5,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
560,852
|
|
|
|
|
|
|
$
|
507,404
|
|
|
|
|
|
(1)
Excludes loans held-for-sale.
|
Loans receivable increased $53.45 million to $560.85 million at March 31, 2018 largely due to the TwinCo acquisition. The TwinCo acquisition included $55.07 million of acquired loans. Excluding acquired loans, loans receivable decreased by $1.61 million. Including acquired loans, commercial real estate loans increased $20.40 million, farmland loans increased $13.77 million, agricultural loans increased $14.20 million, commercial loans increased $6.24 million, residential 1-4 family loans increased $2.98 million, consumer loans increased $1.54 million and residential 1-4 family construction loans increased $1.30 million. These increases were slightly offset by net decreases in commercial construction and development loans of $6.04 million and home equity loans of $644,000 including acquired loans. Total loan originations were $84.57 million for the three months ended March 31, 2018, with residential mortgage accounting for $50.82 million of the total. Commercial real estate loan originations were $15.47 million and commercial construction and development loan originations were $754,000. Residential 1-4 family construction loan originations were $2.62 million. Consumer loan originations were $1.91 million and home equity originations were $1.99 million. Farmland loan originations were $1.21 million and agricultural loan originations were $1.40 million. Commercial loans originations were $8.40 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale increased slightly to $8.98 million at March 31, 2018 from $8.95 million at December 31, 2017.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition – continued
Lending Activities
– continued
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. Subsequent write-downs are recorded as a charge to operations. As of March 31, 2018, the Bank had $618,000 of real estate owned.
The following table sets forth information regarding nonperforming assets:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in Thousands)
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
243
|
|
|
$
|
475
|
|
Residential 1-4 family construction
|
|
|
456
|
|
|
|
-
|
|
Commercial real estate
|
|
|
528
|
|
|
|
-
|
|
Other loans:
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
241
|
|
|
|
242
|
|
Consumer
|
|
|
110
|
|
|
|
153
|
|
Commercial
|
|
|
162
|
|
|
|
107
|
|
Accruing loans delinquent 90 days or more
|
|
|
-
|
|
|
|
-
|
|
Restructured loans:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
|
626
|
|
|
|
-
|
|
Commercial real estate
|
|
|
996
|
|
|
|
-
|
|
Total nonperforming loans
|
|
|
3,362
|
|
|
|
977
|
|
Real estate owned and other repossed property, net
|
|
|
639
|
|
|
|
525
|
|
Total nonperforming assets
|
|
$
|
4,001
|
|
|
$
|
1,502
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans
|
|
|
0.59
|
%
|
|
|
0.19
|
%
|
Total nonperforming loans to total assets
|
|
|
0.41
|
%
|
|
|
0.14
|
%
|
Total allowance for loan loss to nonperforming loans
|
|
|
182.33
|
%
|
|
|
588.54
|
%
|
Total nonperforming assets to total assets
|
|
|
0.49
|
%
|
|
|
0.21
|
%
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition – continued
Deposits and Other Sources of Funds
The following table includes deposit accounts by category:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
(Dollars in Thousands)
|
|
Noninterest checking
|
|
$
|
133,933
|
|
|
|
21.40
|
%
|
|
$
|
99,799
|
|
|
|
19.17
|
%
|
Interest bearing checking
|
|
|
110,636
|
|
|
|
17.68
|
%
|
|
|
99,255
|
|
|
|
19.07
|
%
|
Savings
|
|
|
106,244
|
|
|
|
16.97
|
%
|
|
|
88,603
|
|
|
|
17.02
|
%
|
Money market accounts
|
|
|
108,934
|
|
|
|
17.40
|
%
|
|
|
89,558
|
|
|
|
17.20
|
%
|
Total
|
|
|
459,747
|
|
|
|
73.45
|
%
|
|
|
377,215
|
|
|
|
72.46
|
%
|
Certificates of deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRA certificates
|
|
|
27,679
|
|
|
|
4.42
|
%
|
|
|
28,189
|
|
|
|
5.42
|
%
|
Brokered certificates
|
|
|
4,601
|
|
|
|
0.74
|
%
|
|
|
4,601
|
|
|
|
0.88
|
%
|
Other certificates
|
|
|
133,908
|
|
|
|
21.39
|
%
|
|
|
110,559
|
|
|
|
21.24
|
%
|
Total certificates of deposit
|
|
|
166,188
|
|
|
|
26.55
|
%
|
|
|
143,349
|
|
|
|
27.54
|
%
|
Total deposits
|
|
$
|
625,935
|
|
|
|
100.00
|
%
|
|
$
|
520,564
|
|
|
|
100.00
|
%
|
Deposits increased by $105.38 million, or 20.2%, to $625.94 million at March 31, 2018 from $520.56 million at December 31, 2017. The increase was largely due to increased deposits as a result of the TwinCo acquisition. Noninterest checking increased by $34.13 million. Certificates of deposit increased by $22.84 million. Money market accounts increased by $19.38 million. Savings and interest bearing checking also increased by $17.64 million and $11.38 million, respectively.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition – continued
The following table summarizes borrowing activity:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Percent
|
|
|
Net
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
(Dollars in Thousands)
|
|
FHLB advances and other borrowings
|
|
$
|
69,528
|
|
|
|
73.69
|
%
|
|
$
|
82,969
|
|
|
|
76.98
|
%
|
Other long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes fixed at 5.75%, due 2022
|
|
|
9,831
|
|
|
|
10.42
|
%
|
|
|
9,820
|
|
|
|
9.11
|
%
|
Subordinated debentures fixed at 6.75%, due 2025
|
|
|
9,841
|
|
|
|
10.43
|
%
|
|
|
9,836
|
|
|
|
9.13
|
%
|
Subordinated debentures variable, due 2035
|
|
|
5,155
|
|
|
|
5.46
|
%
|
|
|
5,155
|
|
|
|
4.78
|
%
|
Total other long-term debt
|
|
|
24,827
|
|
|
|
26.31
|
%
|
|
|
24,811
|
|
|
|
23.02
|
%
|
Total borrowings
|
|
|
94,355
|
|
|
|
100.00
|
%
|
|
|
107,780
|
|
|
|
100.00
|
%
|
FHLB advances and other borrowings decreased by $13.44 million, or 16.2%, to $69.53 million at March 31, 2018 from $82.97 million at December 31, 2017. The decreased borrowings are attributed to acquired deposits exceeding acquired loans and investments, as well as organic increase in deposits with slower loan growth.
Shareholders’ Equity
Total shareholders’ equity increased $7.33 million, or 8.8%, to $90.95 million at March 31, 2018 from $83.62 million at December 31, 2017. This was primarily the result of stock issued in connection with the TwinCo acquisition of $9.03 million and net income of $573,000. These increases were partially offset by other comprehensive loss of $1.86 million and dividends paid of $492,000.
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.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Net Interest Income
– continued
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.
|
|
For the Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
|
Daily
|
|
|
and
|
|
|
Yield/
|
|
|
Daily
|
|
|
and
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Cost
(4)
|
|
|
Balance
|
|
|
Dividends
|
|
|
Cost
(4) (5)
|
|
|
|
(Dollars in Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
151,316
|
|
|
$
|
989
|
|
|
|
2.65
|
%
|
|
$
|
128,074
|
|
|
$
|
729
|
|
|
|
2.31
|
%
|
FHLB and FRB stock
|
|
|
6,006
|
|
|
|
79
|
|
|
|
5.33
|
%
|
|
|
4,067
|
|
|
|
40
|
|
|
|
3.97
|
%
|
Loans receivable, net
(1)
|
|
|
573,015
|
|
|
|
6,872
|
|
|
|
4.86
|
%
|
|
|
474,439
|
|
|
|
5,570
|
|
|
|
4.76
|
%
|
Other earning assets
|
|
|
5,665
|
|
|
|
17
|
|
|
|
1.22
|
%
|
|
|
468
|
|
|
|
1
|
|
|
|
0.87
|
%
|
Total interest earning assets
|
|
|
736,002
|
|
|
|
7,957
|
|
|
|
4.38
|
%
|
|
|
607,048
|
|
|
|
6,340
|
|
|
|
4.24
|
%
|
Noninterest earning assets
|
|
|
80,686
|
|
|
|
|
|
|
|
|
|
|
|
55,493
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
816,688
|
|
|
|
|
|
|
|
|
|
|
$
|
662,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
|
|
$
|
108,836
|
|
|
$
|
9
|
|
|
|
0.03
|
%
|
|
$
|
94,266
|
|
|
$
|
7
|
|
|
|
0.03
|
%
|
Savings
|
|
|
101,183
|
|
|
|
14
|
|
|
|
0.06
|
%
|
|
|
81,502
|
|
|
|
9
|
|
|
|
0.04
|
%
|
Money market
|
|
|
106,763
|
|
|
|
48
|
|
|
|
0.18
|
%
|
|
|
91,536
|
|
|
|
25
|
|
|
|
0.11
|
%
|
Certificates of deposit
|
|
|
162,237
|
|
|
|
355
|
|
|
|
0.89
|
%
|
|
|
164,059
|
|
|
|
339
|
|
|
|
0.84
|
%
|
Advances from FHLB and other borrowings including long-term debt
|
|
|
108,885
|
|
|
|
684
|
|
|
|
2.55
|
%
|
|
|
83,667
|
|
|
|
477
|
|
|
|
2.31
|
%
|
Total interest bearing liabilities
|
|
|
587,904
|
|
|
|
1,110
|
|
|
|
0.77
|
%
|
|
|
515,030
|
|
|
|
857
|
|
|
|
0.67
|
%
|
Noninterest checking
|
|
|
126,553
|
|
|
|
|
|
|
|
|
|
|
|
84,488
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
13,554
|
|
|
|
|
|
|
|
|
|
|
|
4,271
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
728,011
|
|
|
|
|
|
|
|
|
|
|
|
603,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
88,677
|
|
|
|
|
|
|
|
|
|
|
|
58,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
816,688
|
|
|
|
|
|
|
|
|
|
|
$
|
662,541
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate spread
(2)
|
|
|
|
|
|
$
|
6,847
|
|
|
|
3.61
|
%
|
|
|
|
|
|
$
|
5,483
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
(3)
|
|
|
|
|
|
|
|
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
Total interest earning assets to interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
125.19
|
%
|
|
|
|
|
|
|
|
|
|
|
117.87
|
%
|
(1)
|
Includes loans held-for-sale.
|
(
2
)
|
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.
|
(
5
)
|
Calculated based on actual days. Previously calculated on a 360 day basis.
|
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (1) changes in volume multiplied by the old rate; (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume, which have been allocated proportionately to the change due to volume and the change due to rate.
|
|
For the Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Due to
|
|
|
|
|
|
|
|
|
|
|
Due to
|
|
|
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
(In Thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
132
|
|
|
$
|
128
|
|
|
$
|
260
|
|
|
$
|
(90
|
)
|
|
$
|
72
|
|
|
$
|
(18
|
)
|
FHLB and FRB stock
|
|
|
19
|
|
|
|
20
|
|
|
|
39
|
|
|
|
(3
|
)
|
|
|
12
|
|
|
|
9
|
|
Loans receivable, net
|
|
|
1,157
|
|
|
|
145
|
|
|
|
1,302
|
|
|
|
520
|
|
|
|
213
|
|
|
|
733
|
|
Other earning assets
|
|
|
19
|
|
|
|
(3
|
)
|
|
|
16
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
Total interest earning assets
|
|
|
1,327
|
|
|
|
290
|
|
|
|
1,617
|
|
|
|
424
|
|
|
|
298
|
|
|
|
722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking, savings and money market accounts
|
|
|
7
|
|
|
|
23
|
|
|
|
30
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
Certificates of deposit
|
|
|
(4
|
)
|
|
|
20
|
|
|
|
16
|
|
|
|
26
|
|
|
|
(1
|
)
|
|
|
25
|
|
Advances from FHLB and other borrowings including long-term debt
|
|
|
144
|
|
|
|
63
|
|
|
|
207
|
|
|
|
(25
|
)
|
|
|
107
|
|
|
|
82
|
|
Total interest bearing liabilities
|
|
|
147
|
|
|
|
106
|
|
|
|
253
|
|
|
|
3
|
|
|
|
104
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
1,180
|
|
|
$
|
184
|
|
|
$
|
1,364
|
|
|
$
|
421
|
|
|
$
|
194
|
|
|
$
|
615
|
|
Res
ults of Operations for the
Three
Months Ended
March 31, 201
8
and
March 31,
201
7
Net Income
.
Eagle’s net income for the three months ended March 31, 2018 was $573,000 compared to $763,000 for the three months ended March 31, 2017. This decrease of $190,000, or 24.9%, was due to an increase in noninterest expense of $885,000 and a decrease in noninterest income of $529,000, partially offset by an increase in net interest income after loan loss provision of $1.17 million and a decrease in income tax expense of $61,000. Basic and diluted earnings per share were both $0.11 for the current period. Basic and diluted earnings per share were both $0.20 per share for the prior year comparable period.
Net Interest Income
.
Net interest income increased to $6.85 million for the three months ended March 31, 2018, from $5.48 million for the same quarter in the prior year. This increase of $1.37 million, or 25.0%, was primarily the result of an increase in interest and dividend income of $1.62 million, partially offset by an increase in interest expense of $253,000.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the T
hree Months Ended March 31, 2018
and
March 31,
201
7
– continued
Interest and Dividend Income
.
Interest and dividend income was $7.96 million for the three months ended March 31, 2018, compared to $6.34 million for the three months ended March 31, 2017, an increase of $1.62 million, or 25.6%. Interest and fees on loans increased to $6.87 million for the three months ended March 31, 2018 from $5.57 million for the three months ended March 31, 2017. This increase of $1.30 million, or 23.3%, was due to an increase in the average balance of loans, as well as an increase in the average yield of loans for the three months ended March 31, 2018. Average balances for loans receivable, net, including loans held-for-sale, for the three months ended March 31, 2018 were $573.02 million, compared to $474.44 million for the prior year period. This represents an increase of $98.58 million, or 20.8% and was largely due to the TwinCo acquisition. The average interest rate earned on loans receivable increased by 10 basis points, from 4.76% for the three months ended March 31, 2017, to 4.86% for the three months ended March 31, 2018. Interest and dividends on investment securities available-for-sale increased by $260,000 or 35.7% for the three months ended March 31, 2018. Average balances for investments increased to $151.32 million for the three months ended March 31, 2018, from $128.07 million for the three months ended March 31, 2017. This increase was also largely due to the TwinCo acquisition. Average interest rates earned on investments also increased from 2.31% for the three months ended March 31, 2017, to 2.65% for the three months ended March 31, 2018.
Interest Expense.
Total interest expense for the three months ended March 31, 2018 was $1.11 million compared to $857,000 for the three months ended March 31, 2017. The increase of $253,000, or 29.5%, was largely attributable to an increase in interest expense on advances from FHLB and other borrowings including long-term debt. The average borrowing balance for advances from FHLB and other borrowings including long-term debt increased from $83.67 million for the three months ended March 31, 2017 to $108.89 million for the three months ended March 31, 2018. In addition, the average rate paid increased from 2.31% for the three months ended March 31, 2017, to 2.55% for the three months ended March 31, 2018. In February 2017, the Company completed the issuance of $10.00 million in aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. The increase in interest on deposits of $46,000 or 12.1% also contributed to the overall increase in total interest expense.
Loan
Loss
Provision
.
Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by management of the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank and past due loans in the portfolio. The Bank’s policies require a review of assets on a quarterly basis. The Bank classifies loans as well as other assets if warranted. While 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. The Bank recorded $502,000 in provision for loan losses for the three months ended March 31, 2018 and $301,000 for the three months ended March 31, 2017. Management believes the level of total allowances is adequate. The Bank has $639,000 in other real estate owned and other repossessed assets at March 31, 2018.
Noninterest Income
.
Total noninterest income was $2.68 million for the three months ended March 31, 2018 compared to $3.21 million for the three months ended March 31, 2017. The decrease of $529,000 or 16.5% is largely due to a decrease in net gain on sale of loans of $386,000 and a net loss on sale of available-for-sale securities for the three months ended March 31, 2018 of $105,000. During the three months ended March 31, 2018, $47.01 million mortgage loans were sold compared to $56.57 million for the three months ended March 31, 2017.
Noninterest Expense
.
Noninterest expense was $8.32 million for the three months ended March 31, 2018 compared to $7.44 million for the three months ended March 31, 2017. The increase of $885,000, or 11.9%, is largely due to an increase in salaries and employee benefits expenses of $476,000. The increase in salaries expense is due in part to higher commission-based compensation related to the continued loan growth and additional staff related to compliance with mortgage rules. Salaries and employee benefits was also impacted by the addition of staff related to the TwinCo acquisition. In addition, the Company incurred acquisition costs of $234,000 related to the TwinCo acquisition.
Income Tax Expense
.
Income tax expense was $127,000 for the three months ended March 31, 2018, compared to $188,000 for the three months ended March 31, 2017. The was due to lower income before income taxes for the three months ended March 31, 2018 compared to the same period in the prior year, as well as the impact of the Tax Cuts and Job Act enacted in December 2017.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Federal Reserve Bank (“FRB”) regulations. The liquidity requirement is retained for safety and soundness purposes, and 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 both March 31, 2018 and December 31, 2017.
The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed and collateralized mortgage obligation securities, maturities of investments, funds provided from operations, and advances from the FHLB of Des Moines and other borrowings. Scheduled repayments of loans and mortgage-backed and collateralized mortgage obligation 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 commitments to make loans and management’s assessment of the Bank’s ability to generate funds.
Capital Resources
As of March 31, 2018, 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 4.7% compared to an increase of 2.7% as of December 31, 2017. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.
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.
The Bank’s Tier 1 leverage ratio, as measured under State of Montana and FRB rules, decreased from 12.175% as of December 31, 2017 to 11.124% as of March 31, 2018. The Bank’s capital position helps to mitigate its interest rate risk exposure.
As of March 31, 2018, 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. As of March 31, 2018, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 15.984%, 14.938%, 14.938% and 11.124%
,
respectively, compared to regulatory requirements of 9.875%, 7.875%, 6.375% and 4.00%, respectively. All of these ratios with the exception of the Tier 1 leverage ratio include the capital conservation buffer of 1.875% phased-in beginning January 1, 2018.
The Bank’s regulatory capital was impacted by the TwinCo acquisition through an increase in paid-in capital by the amount invested in the acquired bank which was partially offset by a cash dividend to Eagle in the amount of the cash portion of the agreed upon deal with TwinCo shareholders.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
and
Capital Resources – continued
Capital Resources
– continued
|
|
March 31, 2018
|
|
|
|
(Unaudited)
|
|
|
|
Dollar
|
|
|
% of
|
|
|
|
Amount
|
|
|
Assets
|
|
|
|
(Dollars in Thousands)
|
|
Total risk-based capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
Capital level
|
|
$
|
93,641
|
|
|
|
15.984
|
%
|
Requirement
|
|
|
57,852
|
|
|
|
9.875
|
|
Excess
|
|
$
|
35,789
|
|
|
|
6.109
|
%
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
Capital level
|
|
$
|
87,511
|
|
|
|
14.938
|
%
|
Requirement
|
|
|
46,135
|
|
|
|
7.875
|
|
Excess
|
|
$
|
41,376
|
|
|
|
7.063
|
%
|
|
|
|
|
|
|
|
|
|
Common equity tier I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
Capital level
|
|
$
|
87,511
|
|
|
|
14.938
|
%
|
Requirement
|
|
|
37,347
|
|
|
|
6.375
|
|
Excess
|
|
$
|
50,164
|
|
|
|
8.563
|
%
|
|
|
|
|
|
|
|
|
|
Tier I capital to adjusted total average assets:
|
|
|
|
|
|
|
|
|
Capital level
|
|
$
|
87,511
|
|
|
|
11.124
|
%
|
Requirement
|
|
|
31,468
|
|
|
|
4.000
|
|
Excess
|
|
$
|
56,043
|
|
|
|
7.124
|
%
|
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.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Rate Risk
– continued
The Bank has established acceptable levels of interest rate risk as follows: Projected net interest income 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 Bank’s net interest income sensitivity analysis.
Changes in Market
|
|
|
Rate Sensitivity
|
|
|
|
|
|
Interest Rates
|
|
|
As of March 31, 2018
|
|
|
Policy
|
|
(Basis Points)
|
|
|
Year 1
|
|
|
Year 2
|
|
|
Limits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+200
|
|
|
|
1.86%
|
|
|
|
3.96%
|
|
|
|
-15.00%
|
|
-100
|
|
|
|
-2.21%
|
|
|
|
-6.61%
|
|
|
|
-15.00%
|
|
Impact of Inflation and Changing Prices
Our financial statements and the accompanying notes 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.
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES