Annual Statements Open main menu

Eagle Bancorp Montana, Inc. - Quarter Report: 2013 September (Form 10-Q)

a50744516.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2013
 
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


 
For the transition period from _____ to _____.

Commission file number 1-34682

Eagle Bancorp Montana, Inc.

(Exact name of small business issuer as specified in its charter)
 
Delaware
27-1449820
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
1400 Prospect Avenue, Helena, MT 59601

(Address of principal executive offices)
 
(406) 442-3080

(Issuer's telephone number)

Website address: www.americanfederalsavingsbank.com
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes [X]     No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [ X ]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer                                          [   ]                      Accelerated filer    [   ]
Non-accelerated filer                                            [   ]                      Smaller reporting company   [X]
(Do not check if smaller
 reporting company)

Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act).   Yes [   ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
 
Common stock, par value $0.01 per share
3,898,685  shares outstanding
As of November 13, 2013

 
 
 

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
PART I.
 
FINANCIAL INFORMATION
PAGE
 
           
           
Item1.
  Financial Statements (Unaudited)      
           
       
           
       
           
       
           
       
           
       
           
    Notes to the Unaudited Consolidated Financial Statements    
           
Item 2.
  Management's Discussion and Analysis of Financial Condition and Results of Operations    
           
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk    
           
Item 4.
  Controls and Procedures    
           
PART II.
 
OTHER INFORMATION
     
           
Item 1.
  Legal Proceedings    
Item 1A.
  Risk Factors    
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds    
Item 3.
  Defaults Upon Senior Securities    
Item 4.
  Mine Safety Disclosures    
Item 5.
  Other Information    
Item 6.
  Exhibits    
           
 
   
           
Exhibit 31.1
       
           
Exhibit 31.2
       
           
Exhibit 32.1
       
           
101.INS XBRL
Instance Document
     
           
101.SCH XBRL
Taxonomy Extension Schema Document
     
           
101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document
     
           
101.DEF XBRL
Taxonomy Extension Definition Linkbase Document
     
           
101.LAB XBRL
Taxonomy Extension Label Linkbase Document
     
           
101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document
     
 
 
 
 
 

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
Note Regarding Forward-Looking Statements

This report includes “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  All statements other than statements of historical fact are statements that could be forward-looking statements.  You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,”  “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to:

 
·
statements of our goals, intentions and expectations;
 
·
statements regarding our business plans, prospects, growth and operating strategies;
 
·
statements regarding the asset quality of our loan and investment portfolios; and
 
·
estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 
·
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
 
·
general economic conditions, either nationally or in our market areas, that are worse than expected;
 
·
competition among depository and other financial institutions;
 
·
changes in the prices, values and sales volume of residential and commercial real estate in Montana;
 
·
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
 
·
changes or volatility in the securities markets;
 
·
our ability to enter new markets successfully and capitalize on growth opportunities;
 
·
our ability to successfully integrate acquired entities or businesses;
 
·
the possibility of goodwill impairment charges in the future;
 
·
changes in consumer spending, borrowing and savings habits;
 
·
our ability to continue to increase and manage our commercial and residential real estate, multi-family, and commercial business loans;
 
·
possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;
 
·
the level of future deposit premium assessments;
 
·
the impact of the current economic conditions on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;
 
·
the impact of recently enacted legislation to restructure the U.S. financial and regulatory system, including proposals to reform the housing markets and government-sponsored enterprises serving such markets;
 
·
the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates;
 
·
changes in the financial performance and/or condition of our borrowers and their ability to repay their loans when due; and
 
·
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.  For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC.  We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware.
 
 
 

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
 
     
September 30,
   
June 30,
 
     
2013
   
2013
 
 ASSETS            
 
Cash and due from banks
  $ 6,493     $ 3,776  
 
Interest-bearing deposits with banks
    633       2,385  
 
Federal funds sold
    -       -  
 
Total cash and cash equivalents
    7,126       6,161  
                   
 
Securities available-for-sale,
               
 
     at market value
    201,832       218,963  
 
Federal Home Loan Bank stock, at cost
    1,914       1,931  
 
Investment in Eagle Bancorp Statutory Trust I
    155       155  
 
Mortgage loans held-for-sale
    20,717       20,807  
 
Loans receivable, net of deferred loan expenses of $215 at September 30, 2013
               
 
     and $117 at June 30, 2013 and allowance for loan losses of $2,000 at
               
 
     September 30, 2013 and $2,000 at June 30, 2013
    233,345       214,677  
 
Accrued interest and dividends receivable
    2,339       2,387  
 
Mortgage servicing rights, net
    3,420       3,192  
 
Premises and equipment, net
    18,801       18,943  
 
Cash surrender value of life insurance
    10,953       10,869  
 
Real estate and other repossessed assets acquired in settlement of loans, net
    496       550  
 
Goodwill
    6,890       6,890  
 
Core deposit intangible, net
    875       922  
 
Other assets
    4,992       4,087  
                   
 
Total assets
  $ 513,855     $ 510,534  


See accompanying notes to the unaudited consolidated financial statements.
 
 
-1-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
 
   
September 30,
   
June 30,
 
   
2013
   
2013
 
LIABILITIES
           
Deposit accounts:
           
Noninterest bearing
  $ 62,533     $ 52,972  
Interest bearing
    365,747       364,779  
     Total deposits
    428,280       417,751  
                 
Accrued expenses and other liabilities
    3,761       3,535  
Federal funds purchased
    -       -  
FHLB advances and other borrowings
    28,466       34,861  
Subordinated debentures
    5,155       5,155  
     Total liabilities
    465,662       461,302  
                 
                 
EQUITY
               
Preferred stock (no par value, 1,000,000 shares
               
  authorized, none issued or outstanding)
    -       -  
Common stock (par value $0.01 per share;
               
    8,000,000 shares authorized; 4,083,127 shares issued;
               
    3,898,685 shares outstanding at September 30, 2013 and June 30, 2013)
    41       41  
Additional paid-in capital
    22,114       22,109  
Unallocated common stock held by employee
               
   stock ownership plan ("ESOP")
    (1,348 )     (1,390 )
Treasury stock, at cost
    (1,993 )     (1,993 )
Retained earnings
    34,233       33,849  
Accumulated other comprehensive loss
    (4,854 )     (3,384 )
     Total equity
    48,193       49,232  
                 
     Total liabilities and equity
  $ 513,855     $ 510,534  

See accompanying notes to the unaudited consolidated financial statements.
 
 
-2-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
 (Dollars in Thousands, Except for Per Share Data)
(Unaudited)

 
 
   
Three Months Ended
 
   
September 30,
 
   
2013
   
2012
 
Interest and Dividend Income:
           
Interest and fees on loans
  $ 3,121     $ 2,551  
Securities available-for-sale
    1,019       669  
Interest on deposits with banks
    1       5  
Total interest and dividend income
    4,141       3,225  
                 
Interest Expense:
               
Deposits
    321       248  
FHLB advances & other borrowings
    182       294  
Subordinated debentures
    21       24  
Total interest expense
    524       566  
                 
Net Interest Income
    3,617       2,659  
Loan loss provision
    159       235  
Net interest income after loan loss provision
    3,458       2,424  
                 
Noninterest income:
               
Service charges on deposit accounts
    279       166  
Net gain on sale of loans (includes $582 and $192 for the three
               
    months ended September 30, 2013 and 2012, respectively,
               
    related to accumulated other comprehensive earnings reclassification)
    1,591       812  
Mortgage loan servicing fees
    314       234  
Net gain on sale of available for sale securities (includes $431 and $52
               
    for the three months ended September 30, 2013 and 2012, respectively,
               
    related to accumulated other comprehensive earnings reclassification)
    431       67  
Net loss on sale of OREO
    (28 )     (17 )
Net gain on fair value hedge
    23       37  
Other
    488       276  
Total noninterest income
    3,098       1,575  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
 
-3-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)
 (Dollars in Thousands, Except for Per Share Data)
(Unaudited)

 
   
Three Months Ended
 
   
September 30,
 
   
2013
   
2012
 
Noninterest expense:
           
Salaries and employee benefits
    3,342       1,441  
Occupancy and equipment expense
    687       342  
Data processing
    448       147  
Advertising
    251       201  
Amortization of mortgage servicing rights
    193       187  
Amortization of core deposit intangible and tax credits
    109       -  
Federal insurance premiums
    84       49  
Postage
    42       26  
Legal, accounting, and examination fees
    124       91  
Consulting fees
    86       26  
Acquisition costs
    -       477  
Valuation losses on OREO
    -       68  
Other
    487       380  
Total noninterest expense
    5,853       3,435  
                 
Income before provision for income taxes
    703       564  
                 
Income tax expense (includes ($1,011) and $97 for the three
               
months ended September 30, 2013 and 2012, respectively,
               
related to income tax (benefit) expense from reclassification items)
    36       142  
                 
Net income
  $ 667     $ 422  
                 
                 
Basic earnings per common share
  $ 0.17     $ 0.11  
                 
Diluted earnings per common share
  $ 0.17     $ 0.11  
                 
Weighted average shares outstanding (basic eps)
    3,898,685       3,724,789  
                 
Weighted average shares outstanding (diluted eps)
    3,977,542       3,928,945  
 
See accompanying notes to the unaudited consolidated financial statements.
 

 
 
-4-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
 (Dollars in Thousands)
(Unaudited)
 
     
Three Months Ended
 
     
September 30,
 
     
2013
   
2012
 
               
  NET INCOME   $ 667     $ 422  
                   
  OTHER ITEMS OF COMPREHENSIVE (LOSS) INCOME:                
 
Change in unrealized (loss) gain on investment securities
               
 
available for sale, before income taxes
    (2,058 )     304  
 
Reclassification adjustment for realized gains on investment
               
 
securities included in net earnings, before income tax
    (431 )     (52 )
 
Change in fair value of derivatives designated as cash flow hedges,
               
 
before income taxes
    590       178  
 
Reclassification adjustment for realized gains on derivatives
               
 
designated as cash flow hedges, before income taxes
    (582 )     (192 )
 
Total other items of comprehensive (loss) income
    (2,481 )     238  
                   
 
Income tax (expense) benefit related to:
               
 
Investment securities
    1,014       (103 )
 
Derivatives designated as cash flow hedges
    (3 )     6  
        1,011       (97 )
                   
  COMPREHENSIVE (LOSS) INCOME   $ (803 )   $ 563  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
 
-5-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended September 30, 2013 and 2012
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
 
               
ADDITIONAL
               
ACCUMULATED
       
               
UNALLOCATED
               
OTHER
       
   
PREFERRED
   
COMMON
   
PAID-IN
   
ESOP
   
TREASURY
   
RETAINED
   
COMPREHENSIVE
       
   
STOCK
   
STOCK
   
CAPITAL
   
SHARES
   
STOCK
   
EARNINGS
   
INCOME(LOSS)
   
TOTAL
 
                                                 
Balance, July 1, 2012
  $ -     $ 41     $ 22,112     $ (1,556 )   $ (2,210 )   $ 32,990     $ 2,273     $ 53,650  
                                                                 
  Net income
                                            422               422  
                                                                 
  Other comprehensive income
                                                    141       141  
                                                                 
Dividends paid ($0.07125 per share)
                                            (277 )             (277 )
                                                                 
ESOP shares allocated or committed to be released for allocation (4,154 shares)
                    1       42                               43  
                                                                 
Balance, September 30, 2012
  $ -     $ 41     $ 22,113     $ (1,514 )   $ (2,210 )   $ 33,135     $ 2,414     $ 53,979  
 
 
                                                 
Balance, July 1, 2013
  $ -     $ 41     $ 22,109     $ (1,390 )   $ (1,993 )   $ 33,849     $ (3,384 )   $ 49,232  
                                                                 
  Net income
                                            667               667  
                                                                 
  Other comprehensive loss
                                                    (1,470 )     (1,470 )
                                                                 
Dividends paid ($.0725 per share)
                                            (283 )             (283 )
                                                                 
ESOP shares allocated or committed to be released for allocation (4,154 shares)
                    5       42                               47  
                                                                 
Balance, September 30, 2013
  $ -     $ 41     $ 22,114     $ (1,348 )   $ (1,993 )   $ 34,233     $ (4,854 )   $ 48,193  


See accompanying notes to the unaudited consolidated financial statements.
 
 
 
-6-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
 
   
Three Months Ended
 
   
September 30,
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 667     $ 422  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    159       235  
Valuation losses on OREO
    -       68  
Depreciation
    283       189  
Net amortization of marketable securities premium and discounts
    895       111  
Amortization of mortgage servicing rights
    193       187  
Amortization of core deposit intangible and tax credits
    109       -  
Gain on sale of loans
    (1,591 )     (812 )
Net realized gain on sale of available-for-sale securities
    (431 )     (67 )
Increase in cash surrender value of life insurance
    (83 )     (75 )
Loss on sale of OREO
    28       17  
Gain on fair value hedge
    (23 )     (37 )
Change in assets and liabilities:
               
(Increase) decrease in assets:
               
Accrued interest and dividends receivable
    48       19  
Loans held-for-sale
    1,688       2,251  
Other assets
    43       (227 )
Increase (decrease) in liabilities:
               
Accrued expenses and other liabilities
    297       510  
     Net cash provided by operating activities
    2,282       2,791  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Activity in available-for-sale securities
               
Sales
    16,149       574  
Maturities, principal payments, calls
    9,738       4,811  
Purchases
    (11,710 )     (14,153 )
FHLB stock redeemed
    17       18  
Net (increase) decrease in loan receivable, excludes transfers to real estate
               
acquired in settlement of loans
    (19,247 )     5,874  
Proceeds from the sale of real estate and other repossessed
               
property acquired in the settlement of loans
    26       582  
Purchase of property and equipment
    (141 )     (156 )
     Net cash used in investing activities
    (5,168 )     (2,450 )
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
-7-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
 
   
Three Months Ended
 
   
September 30,
 
   
2013
   
2012
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase in checking and savings accounts
  $ 10,529     $ 912  
Net change in advances from the FHLB and other borrowings
    (6,395 )     (9,050 )
Dividends paid
    (283 )     (277 )
     Net cash provided by (used in) financing activities
    3,851       (8,415 )
                 
Net increase (decrease) in cash
    965       (8,074 )
                 
CASH AND CASH EQUIVALENTS, beginning of period
    6,161       19,814  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 7,126     $ 11,740  
                 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid during the period for interest
  $ 532     $ 629  
                 
Cash paid during the period for income taxes
  $ -     $ -  
                 
Assets acquired through foreclosure
  $ -     $ 243  
                 
NON-CASH INVESTING ACTIVITIES:
               
Decrease in market value of securities available-for-sale
  $ (2,489 )   $ (252 )
                 
Mortgage servicing rights recognized
  $ 421     $ 319  
                 
ESOP shares released
  $ 46     $ 43  
                 
See accompanying notes to the unaudited consolidated financial statements.
 
 
 
-8-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 complete 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 results for the unaudited interim periods.

The results of operations for the three month period ended September 30, 2013 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2014 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’s Form 10-K for the fiscal year ended June 30, 2013.

The Company evaluated subsequent events for potential recognition and/or disclosure through November 13, 2013 the date the consolidated financial statements were issued.

NOTE 2. INVESTMENT SECURITIES

Investment securities are summarized as follows:
 
   
September 30, 2013
   
June 30, 2013
 
         
(In Thousands)
       
         
Gross
               
Gross
       
   
Amortized
   
Unrealized
   
Fair
   
Amortized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
(Losses)
   
Value
   
Cost
   
Gains
   
(Losses)
   
Value
 
Available-for-sale:
                                               
  U.S. government and
                                               
   agency obligations
  $ 48,815     $ 281     $ (888 )   $ 48,208     $ 50,904     $ 514     $ (487 )   $ 50,931  
  Municipal obligations
    87,639       678       (7,003 )     81,314       88,948       1,072       (5,584 )     84,436  
  Corporate obligations
    7,134       23       (152 )     7,005       9,130       84       (153 )     9,061  
  Mortgage-backed securities -
                                                         
   government backed
    26,911       33       (745 )     26,199       27,680       35       (813 )     26,902  
  CMOs - government backed
    40,116       223       (1,233 )     39,106       48,594       307       (1,268 )     47,633  
                                                                 
Total
  $ 210,615     $ 1,238     $ (10,021 )   $ 201,832     $ 225,256     $ 2,012     $ (8,305 )   $ 218,963  
 
 
 
-9-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
NOTE 2. INVESTMENT SECURITIES - continued

The following table discloses, as of September 30, 2013 and June 30, 2013, 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:
 
   
September 30, 2013
 
   
Less Than 12 Months
   
12 Months or Longer
 
   
(In Thousands)
 
   
Estimated
   
Gross
   
Estimated
   
Gross
 
   
Market
   
Unrealized
   
Market
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
 
                         
U.S. government and agency
  $ 16,951     $ 887     $ 144     $ 1  
Corporate obligations
    5,008       152       -       -  
Municipal obligations
    61,010       6,902       534       101  
Mortgage-backed and CMOs
    48,151       1,894       1,733       84  
                                 
Total
  $ 131,120     $ 9,835     $ 2,411     $ 186  
                                 
   
June 30, 2013
 
   
Less Than 12 Months
   
12 Months or Longer
 
   
(In Thousands)
 
   
Estimated
   
Gross
   
Estimated
   
Gross
 
   
Market
   
Unrealized
   
Market
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
 
                                 
U.S. government and agency
  $ 19,615     $ 487     $ -     $ -  
Corporate obligations
    5,017       153       -       -  
Municipal obligations
    60,910       5,495       539       89  
Mortgage-backed & CMOs
    52,548       2,080       309       1  
                                 
Total
  $ 138,090     $ 8,215     $ 848     $ 90  

In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell or if it is more likely than not that it will be required to sell impaired debt securities.  In so doing, management considers contractual constraints, liquidity, capital, asset/liability management and securities portfolio objectives.  With respect to its impaired debt securities at September 30, 2013 and June 30, 2013, management determined that it does not intend to sell and that there is no expected requirement to sell any of its impaired debt securities.

As of September 30, 2013 and June 30, 2013, there were, respectively, 128 and 126 securities in an unrealized loss position and were considered to be temporarily impaired and therefore an impairment charge has not been recorded.  All of such temporarily impaired investments are debt securities.

 
 
-10-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
NOTE 2. INVESTMENT SECURITIES - continued

At September 30, 2013, 12 U.S. government and agency obligations had unrealized losses with aggregate depreciation of approximately 4.94% from the Company’s amortized cost basis of these securities.  We believe these unrealized losses are principally due to interest rate movements.  As such, the Company determined that none of such securities had other-than-temporary impairment.

At September 30, 2013, 90 municipal obligations had unrealized losses with aggregate depreciation of approximately 10.22% from the Company’s amortized cost basis of these securities.  We believe these unrealized losses are principally due to interest rate movements and recent credit concerns in the overall municipal bond market.  As such, the Company determined that none of such securities had other-than-temporary impairment.

At September 30, 2013, 5 corporate obligations had an unrealized loss of approximately 2.95% from the Company’s amortized cost basis of this security.  We believe these unrealized losses are principally due to interest rate movements.  As such, the Company determined that none of this security had other-than-temporary impairment.

At September 30, 2013, 21 mortgage backed and CMO securities had unrealized losses with aggregate depreciation of approximately 3.82% from the Company’s cost basis of these securities.  We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market.    Management considers available evidence to assess whether it is more likely than not that all amounts due would not be collected.  In such assessment, management considers the severity and duration of the impairment, the credit ratings of the security, the overall deal and payment structure, including the Company's position within the structure, underlying obligor, financial condition and near term prospects of the issuer, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates.  There has been no disruption of the scheduled cash flows on any of the securities.  Management’s analysis as of September 30, 2013 revealed no expected credit losses on these securities.

As of September 30, 2012 and June 30, 2012, there were, respectively, 16 and 25 securities in an unrealized loss position and were considered to be temporarily impaired and therefore an impairment charge was not recorded.  All of such temporarily impaired investments are debt securities.

At September 30, 2012, 5 U.S. government and agency obligations had unrealized losses with aggregate depreciation of approximately 0.50% from the Company’s amortized cost basis of these securities.  We believe these unrealized losses are principally due to interest rate movements.  As such, the Company determined that none of such securities had other-than-temporary impairment.

At September 30, 2012, 4 municipal obligations had unrealized losses with aggregate depreciation of approximately 2.90% from the Company’s amortized cost basis of these securities.  We believe these unrealized losses are principally due to interest rate movements and recent credit concerns in the overall municipal bond market.  As such, the Company determined that none of such securities had other-than-temporary impairment.

At September 30, 2012, 1 corporate obligation had an unrealized loss with aggregate depreciation of approximately 1.50% from the Company's cost basis.  This unrealized loss was principally due to changes in interest rates and some concern the issuer may have exposure to Europe.  No credit issues had been identified that caused management to believe the declines in market value are other than temporary.  In analyzing the issuer's financial condition, management considers industry analysts' reports, financial performance and if available projected target prices of investment analysts within a one-year time frame.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.

At September 30, 2012, 6 mortgage backed and CMO securities had unrealized losses with aggregate depreciation of approximately 2.90% from the Company’s cost basis of these securities.  We believe these unrealized losses were principally due to the credit market’s concerns regarding the stability of the mortgage market.  One of the CMO securities was a non-agency security.  At September 30, 2012 the fair value of this non-agency security was $174,000 with an unrealized loss of $26,000, or 13.0% of the Company’s amortized cost basis.  Management considers available evidence to assess whether it is more likely than not that all amounts due would not be collected.  In such assessment, management considers the severity and duration of the impairment, the credit ratings of the security, the overall deal and payment structure, including the Company's position within the structure, underlying obligor, financial condition and near term prospects of the issuer, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates.  There was minimal disruption of the scheduled cash flows on any of the securities.  Management’s analysis as of September 30, 2012 revealed no expected credit losses on these securities. 
 
 
-11-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE

Loans receivable consist of the following:

 
   
September 30,
   
June 30,
 
   
2013
   
2013
 
   
(In Thousands)
 
First mortgage loans:
           
  Residential mortgage (1-4 family)
  $ 76,017     $ 70,453  
  Commercial real estate
    79,399       74,395  
  Real estate construction
    4,224       2,738  
                 
Other loans:
               
  Home equity
    36,117       35,660  
  Consumer
    12,883       11,773  
  Commercial
    26,920       21,775  
                 
Total
    235,560       216,794  
                 
Less:  Allowance for loan losses
    (2,000 )     (2,000 )
Add:   Deferred loan expenses
    (215 )     (117 )
                 
Total
  $ 233,345     $ 214,677  
 
Within the commercial real estate loan category above, $13,012,000 and $13,134,000 was guaranteed by the United States Department of Agriculture Rural Development, at September 30, 2013 and June 30, 2013, respectively.  Within the commercial loan category above, $3,579,000 and $0 were in loans originated through a syndication program where the business resides outside of Montana, at September 30, 2013, and June 30, 2013, respectively.

The following is a summary of changes in the allowance for loan losses:
 
   
Three Months
   
Three Months
   
Twelve Months
 
   
Ended
   
Ended
   
Ended
 
   
September 30,
   
September 30,
   
June 30,
 
   
2013
   
2012
   
2013
 
   
(In Thousands)
 
                   
Balance, beginning of period
  $ 2,000     $ 1,625     $ 1,625  
  Provision charged to operations
    159       235       678  
  Charge-offs
    (160 )     (64 )     (365 )
  Recoveries
    1       4       62  
                         
Balance, end of period
  $ 2,000     $ 1,800     $ 2,000  
 
 
 
-12-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
NOTE 3. LOANS RECEIVABLE - continued

Non-Performing Assets – The following table sets forth information regarding non-performing assets as of the dates indicated.
 
             
   
September 30,
   
June 30,
 
   
2013
   
2013
 
   
(Dollars in Thousands)
 
             
Non-accrual loans
  $ 744     $ 470  
Accruing loans delinquent 90 days or more
    -       -  
Restructured loans, net
    215       303  
 Total nonperforming loans
    959       773  
Real estate owned and other repossessed assets, net
    496       550  
      Total
  $ 1,455     $ 1,323  
                 
Total non-performing assets as a percentage of total assets
    0.28 %     0.30 %
                 
 Allowance for loan losses
  $ 2,000     $ 2,000  
                 
Percent of allowance for loan losses to non-performing loans
    208.6 %     258.7 %
                 
Percent of allowance for loan losses to non-performing assets
    137.5 %     151.2 %
                 
 
 
 
-13-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
NOTE 3. LOANS RECEIVABLE - continued

The following tables set forth information regarding the activity in the allowance for loan losses for the dates as indicated:

 
 
   
Three Months Ended
 
   
September 30, 2013
 
   
(In Thousands)
 
   
1-4 Family
   
Commercial
         
Home
                   
   
Real Estate
   
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
Allowance for credit losses:
                                         
Beginning balance, June 30, 2013
  $ 423     $ 952     $ 15     $ 290     $ 40     $ 280     $ 2,000  
Charge-offs
            (154 )             (5 )     (1 )             (160 )
Recoveries
                                    1               1  
Provision
    20       20       10       39       32       38       159  
Ending balance, September 30, 2013
$ 443     $ 818     $ 25     $ 324     $ 72     $ 318     $ 2,000  
                                                         
Ending balance allocated to loans
                                                       
individually evaluated for impairment
  $ -     $ -     $ -     $ 30     $ 4     $ -     $ 34  
                                                         
Ending balance allocated to loans
                                                       
collectively evaluated for impairment
  $ 443     $ 818     $ 25     $ 294     $ 68     $ 318     $ 1,966  
                                                         
Loans receivable:
                                                       
Ending balance September 30, 2013
$ 76,017     $ 79,399     $ 4,224     $ 36,117     $ 12,883     $ 26,920     $ 235,560  
                                                         
Ending balance of loans individually
                                                       
evaluated for impairment
                                                       
September 30, 2013
  $ 308     $ 130     $ -     $ 509     $ 128     $ 210     $ 1,285  
                                                         
Ending balance of loans collectively
                                                       
evaluated for impairment
                                                       
September 30, 2013
  $ 75,709     $ 79,269     $ 4,224     $ 35,608     $ 12,755     $ 26,710     $ 234,275  


 
 
-14-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued
 
   
Three Months Ended
 
   
September 30, 2012
 
   
(In Thousands)
 
   
1-4 Family
   
Commercial
         
Home
                   
   
Real Estate
   
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
Allowance for credit losses:
                                         
Beginning balance, June 30, 2012
  $ 403     $ 772     $ 10     $ 156     $ 78     $ 206     $ 1,625  
Charge-offs
    (55 )     -       -       -       (8 )     (1 )     (64 )
Recoveries
    -       -       -       -       4       -       4  
Provision
    40       90       1       61       10       33       235  
Ending balance, September 30, 2012
$ 388     $ 862     $ 11     $ 217     $ 84     $ 238     $ 1,800  
                                                         
Ending balance allocated to loans
                                                       
individually evaluated for impairment
  $ -     $ 9     $ -     $ 147     $ 1     $ 15     $ 172  
                                                         
Ending balance allocated to loans
                                                       
collectively evaluated for impairment
  $ 388     $ 853     $ 11     $ 70     $ 83     $ 223     $ 1,628  
                                                         
Loans receivable:
                                                       
Ending balance September 30, 2012
$ 56,600     $ 65,110     $ 1,363     $ 23,316     $ 8,328     $ 14,408     $ 169,125  
                                                         
Ending balance of loans individually
                                                       
evaluated for impairment
                                                       
September 30, 2012
  $ 728     $ 782     $ -     $ 446     $ 74     $ 997     $ 3,027  
                                                         
Ending balance of loans collectively
                                                       
evaluated for impairment
                                                       
September 30, 2012
  $ 55,872     $ 64,328     $ 1,363     $ 22,870     $ 8,254     $ 13,411     $ 166,098  
 
 
The Company utilizes a 5 point internal loan rating system, largely based on regulatory classifications, for 1-4 family real estate, commercial real estate, construction, home equity and commercial loans as follows:

Loans rated Pass: these are loans that are considered to be protected by the current net worth and paying capacity of the obligor, or by the value of the asset or the underlying collateral.

Loans rated Special Mention: these loans have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

Loans rated Substandard: these loans are inadequately protected by the current net worth and paying capacity of the obligor of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Loans rated Doubtful: these loans have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans rated Loss: these loans are considered uncollectible and of such little value that their continuance as assets without establishment of a specific reserve is not warranted.  This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather, that it is not practical or desirable to defer writing off a basically worthless asset even though practical recovery may be effected in the future.
 
 
-15-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
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 $500,000 or more. Quarterly, the Company reviews the rating of any consumer loan, broadly defined, that is delinquent 90 days or more.  Likewise, quarterly, the Company reviews the rating of any commercial loan, broadly defined, that is delinquent 60 days or more.  Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following tables set forth information regarding the internal classification of the loan portfolio as of the dates indicated:
 
 
   
September 30, 2013
 
   
(In Thousands)
 
   
1-4 Family
   
Commercial
         
Home
                   
   
Real Estate
   
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
Grade:
                                         
Pass
  $ 75,709     $ 79,269     $ 4,224     $ 35,609     $ 12,754     $ 26,710     $ 234,275  
Special mention
    -       -       -       -       -       -       -  
Substandard
    308       130       -       478       115       66       1,097  
Doubtful
    -       -       -       -       10       144       154  
Loss
    -       -       -       30       4       -       34  
     Total
  $ 76,017     $ 79,399     $ 4,224     $ 36,117     $ 12,883     $ 26,920     $ 235,560  
                                                         
Credit Risk Profile Based on Payment Activity
                                                 
                                                         
Performing
  $ 76,017     $ 79,088     $ 4,224     $ 35,701     $ 12,795     $ 26,776     $ 234,601  
Restructured loans
    -       85       -       130       -       -       215  
Nonperforming
    -       226       -       286       88       144       744  
     Total
  $ 76,017     $ 79,399     $ 4,224     $ 36,117     $ 12,883     $ 26,920     $ 235,560  

 
   
June 30, 2013
 
   
(In Thousands)
 
   
1-4 Family
   
Commercial
         
Home
                   
   
Real Estate
   
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
Grade:
                                         
Pass
  $ 70,138     $ 73,680     $ 2,738     $ 34,881     $ 11,695     $ 21,654     $ 214,786  
Special mention
    -       715       -       -       -       -       715  
Substandard
    315       -       -       626       62       121       1,124  
Doubtful
    -       -       -       -       10       -       10  
Loss
    -       -       -       153       6       -       159  
     Total
  $ 70,453     $ 74,395     $ 2,738     $ 35,660     $ 11,773     $ 21,775     $ 216,794  
                                                         
Credit Risk Profile Based on Payment Activity
                                               
                                                         
Performing
  $ 70,395     $ 74,092     $ 2,738     $ 35,355     $ 11,732     $ 21,709     $ 216,021  
Restructured loans
    -       303       -       -       -       -       303  
Nonperforming
    58       -       -       305       41       66       470  
     Total
  $ 70,453     $ 74,395     $ 2,738     $ 35,660     $ 11,773     $ 21,775     $ 216,794  


 
-16-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued

The following tables set forth information regarding the delinquencies within the loan portfolio as indicated:
 
   
September 30, 2013
 
   
(In Thousands)
 
                                 
Recorded
 
         
90 Days
                     
Investment
 
   
30-89 Days
   
and
   
Total
         
Total
   
>90 Days and
 
   
Past Due
   
Greater
   
Past Due
   
Current
   
Loans
   
Still Accruing
 
                                     
1-4 Family real estate
  $ 316     $ -     $ 316     $ 75,701     $ 76,017     $ -  
Commercial real estate
    -       202       202       79,197       79,399       -  
Construction
    -       -       -       4,224       4,224       -  
Home equity
    285       269       554       35,563       36,117       -  
Consumer
    130       74       204       12,679       12,883       -  
Commercial
    32       144       176       26,744       26,920       -  
     Total
  $ 763     $ 689     $ 1,452     $ 234,108     $ 235,560     $ -  

 
 
   
June 30, 2013
 
   
(In Thousands)
 
                                 
Recorded
 
         
90 Days
                     
Investment
 
   
30-89 Days
   
and
   
Total
         
Total
   
>90 Days and
 
   
Past Due
   
Greater
   
Past Due
   
Current
   
Loans
   
Still Accruing
 
                                     
1-4 Family real estate
  $ 312     $ 5     $ 317     $ 70,136     $ 70,453     $ -  
Commercial real estate
    39       217       256       74,139       74,395       -  
Construction
    -       -       -       2,738       2,738       -  
Home equity
    265       196       461       35,199       35,660       -  
Consumer
    279       37       316       11,457       11,773       -  
Commercial
    187       -       187       21,588       21,775       -  
     Total
  $ 1,082     $ 455     $ 1,537     $ 215,257     $ 216,794     $ -  

 
 
-17-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. LOANS RECEIVABLE - continued

The following tables set forth information regarding impaired loans as indicated:
 
 
   
September 30, 2013
 
   
(In Thousands)
 
         
Unpaid
         
Interest
   
Average
 
   
Recorded
   
Principal
   
Related
   
Income
   
Recorded
 
   
Investment
   
Balance
   
Allowance
   
Recognized
   
Investment
 
                               
With no related allowance:
                             
  1-4 Family
  $ 308     $ 308     $ -     $ 4     $ 312  
  Commercial real estate
    130       243       -       -       426  
  Construction
    -       -       -       -       -  
  Home equity
    407       513       -       2       404  
  Consumer
    124       156       -       1       98  
  Commercial
    210       239       -       1       166  
                                         
With a related allowance:
                                       
  1-4 Family
    -       -       -       -       -  
  Commercial real estate
    -       -       -       -       -  
  Construction
    -       -       -       -       -  
  Home equity
    102       102       30       -       241  
  Consumer
    4       4       4       -       5  
  Commercial
    -       -       -       -       -  
                                         
Total:
                                       
  1-4 Family
    308       308       -       4       312  
  Commercial real estate
    130       243       -       -       426  
  Construction
    -       -       -       -       -  
  Home equity
    509       615       30       2       645  
  Consumer
    128       160       4       1       103  
  Commercial
    210       239       -       1       166  
     Total
  $ 1,285     $ 1,565     $ 34     $ 8     $ 1,652  
 
 
 
-18-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued
 
   
June 30, 2013
 
   
(In Thousands)
 
         
Unpaid
         
Interest
   
Average
 
   
Recorded
   
Principal
   
Related
   
Income
   
Recorded
 
   
Investment
   
Balance
   
Allowance
   
Recognized
   
Investment
 
                               
With no related allowance:
                             
  1-4 Family
  $ 315     $ 315     $ -     $ 14     $ 158  
  Commercial real estate
    722       722       -       38       361  
  Construction
    -       -       -       -       -  
  Home equity
    400       400       -       10       200  
  Consumer
    72       72       -       2       36  
  Commerical
    121       121       -       7       61  
                                         
With a related allowance:
                                       
  1-4 Family
    -       -       -       -       -  
  Commercial real estate
    -       -       -       -       113  
  Construction
    -       -       -       -       -  
  Home equity
    379       404       153       9       -  
  Consumer
    6       6       6       -       4  
  Commerical
    -       -       -       -       -  
                                         
Total:
                                       
  1-4 Family
    315       315       -       14       158  
  Commercial real estate
    722       722       -       38       474  
  Construction
    -       -       -       -       -  
  Home equity
    779       804       153       19       200  
  Consumer
    78       78       6       2       40  
  Commerical
    121       121       -       7       61  
     Total
  $ 2,015     $ 2,040     $ 159     $ 80     $ 933  
 
 
 
-19-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
NOTE 4. TROUBLED DEBT RESTRUCTURINGS

The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the quarter ended December 31, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (July 1, 2011) for identification as troubled debt restructurings. The Company identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired.  As of September 30, 2013, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $215,000 (310-40-65-1(b)), and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $120,000 (310-40-65-1(b)).

Modification Categories
The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

Rate Modification – A modification in which the interest rate is changed.

Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification – Any other type of modification, including the use of multiple categories above.





 
-20-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




NOTE 4. TROUBLED DEBT RESTRUCTURINGS - continued

The following tables present troubled debt restructurings as of September 30, 2013 and June 30, 2013:

 
 
   
September 30, 2013
 
   
(In Thousands)
 
   
Accrual
   
Non-Accrual
   
Total
 
   
Status
   
Status
   
Modification
 
                   
Residential Mortgage (1-4 family)
  $ -     $ -     $ -  
Commercial Real Estate
    85       130       215  
Real estate construction
    -       -       -  
Home equity
    -       -       -  
Consumer
    -       -       -  
Commercial
    -       -       -  
Total
  $ 85     $ 130     $ 215  
                         
   
June 30, 2013
 
   
(In Thousands)
 
   
Accrual
   
Non-Accrual
   
Total
 
   
Status
   
Status
   
Modification
 
                         
Residential Mortgage (1-4 family)
  $ -     $ -     $ -  
Commercial Real Estate
    86       217       303  
Real estate construction
    -       -       -  
Home equity
    -       -       -  
Consumer
    -       -       -  
Commercial
    -       -       -  
Total
  $ 86     $ 217     $ 303  


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.
 
 
-21-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. TROUBLED DEBT RESTRUCTURINGS - continued

The following tables present newly restructured loans that occurred during the three months ended September 30, 2013:

 
 
   
Three Months Ended
 
   
September 30, 2013
 
   
(In Thousands)
 
   
Rate
   
Term
   
Interest Only
   
Payment
   
Combination
   
Total
 
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
 
Pre-modification Outstanding
                                   
  Recorded Investment:
                                   
  Residential Mortgage (1-4 family)
  $ -     $ -     $ -     $ -     $ -     $ -  
  Commercial Real Estate
    -       -       -       -       -       -  
  Real estate construction
    -       -       -       -       -       -  
  Home equity
    -       -       -       -       -       -  
  Consumer
    -       -       -       -       -       -  
  Commercial
    -       -       -       -       -       -  
  Total
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
   
Three Months ended
 
   
September 30, 2013
 
   
(In Thousands)
 
   
Rate
   
Term
   
Interest Only
   
Payment
   
Combination
   
Total
 
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
 
Post-modification Outstanding
                                               
  Recorded Investment:
                                               
  Residential Mortgage (1-4 family)
  $ -     $ -     $ -     $ -     $ -     $ -  
  Commercial Real Estate
    -       -       -       -       -       -  
  Real estate construction
    -       -       -       -       -       -  
  Home equity
    -       -       -       -       -       -  
  Consumer
    -       -       -       -       -       -  
  Commercial
    -       -       -       -       -       -  
  Total
  $ -     $ -     $ -     $ -     $ -     $ -  



 
-22-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

NOTE 4. TROUBLE DEBT RESTRUCTURINGS - continued

 
   
Three months ended
 
   
September 30, 2012
 
   
(In Thousands)
 
   
Rate
   
Term
   
Interest Only
   
Payment
   
Combination
   
Total
 
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
 
Pre-modification Outstanding
                                   
  Recorded Investment:
                                   
Residential Mortgage (1-4 family)
  $ -     $ -     $ -     $ -     $ -     $ -  
Commercial Real Estate
    -       -       97       -       -       97  
Real estate construction
    -       -       -       -       -       -  
Home equity
    -       -       -       -       -       -  
Consumer
    -       -       -       -       -       -  
Commercial
    -       -       -       -       1,385       1,385  
Total
  $ -     $ -     $ 97     $ -     $ 1,385     $ 1,482  
                                                 
   
Three months ended
 
   
September 30, 2012
 
   
(In Thousands)
 
   
Rate
   
Term
   
Interest Only
   
Payment
   
Combination
   
Total
 
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
   
Modification
 
Post-modification Outstanding
                                               
  Recorded Investment:
                                               
Residential Mortgage (1-4 family)
  $ -     $ -     $ -     $ -     $ -     $ -  
Commercial Real Estate
    -       -       88       -       -       88  
Real estate construction
    -       -       -       -       -       -  
Home equity
    -       -       -       -       -       -  
Consumer
    -       -       -       -       -       -  
Commercial
    -       -       -       -       715       715  
Total
  $ -     $ -     $ 88     $ -     $ 715     $ 803  


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 September 30, 2013. 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 September 30, 2013 and June 30, 2013, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures.


 
-23-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




NOTE 5. DEPOSITS
 
Deposits are summarized as follows:
 
   
September 30,
   
June 30,
 
   
2013
   
2013
 
   
(In Thousands)
 
             
Noninterest checking
  $ 62,533     $ 52,972  
Interest-bearing checking
    66,092       65,876  
Savings
    56,988       56,051  
Money market
    86,390       85,361  
Time certificates of deposit
    156,277       157,491  
Total
  $ 428,280     $ 417,751  
 
NOTE 6. EARNINGS PER SHARE

Basic earnings per share for the nine months ended September 30, 2013 was computed using 3,898,685 weighted average shares outstanding. Basic earnings per share for the three months ended September 30, 2012 was computed using 3,724,789 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 3,977,542 for the three months ended September 30, 2013 and 3,928,945 for the three months ended September 30, 2012.
 
NOTE 7. DIVIDENDS AND STOCK REPURCHASE PROGRAM
 
For the fiscal year July 1, 2012 through June 30, 2013, Eagle paid dividends of $0.07125 per share for the first three quarters and paid $0.0725 per share in the fourth quarter.  A dividend of $0.0725 per share was declared on July 26, 2013, and paid September 6, 2013 to stockholders of record on August 16, 2013.  A dividend of $0.0725 per share was declared on October 29, 2013, payable on December 6, 2013 to shareholders of record on November 15, 2013.

On July 1, 2013, the Company announced that its Board of Directors authorized a common stock repurchase program for 150,000 shares of common stock, effective July 1, 2013.  The program is intended to be implemented through purchases made from time to time in the open market or through private transactions.

The Company did not purchase any shares of our common stock during the first quarter of our fiscal year ending June 30, 2014.

NOTE 8. DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company entered into an interest rate swap agreement on August 27, 2010 with a third party to manage interest rate risk associated with a fixed-rate loan.  The interest rate swap agreement effectively converted the loan’s fixed rate into a variable rate. Derivatives and hedging accounting requires that the Company recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with this guidance, the Company designates the interest rate swap on this fixed-rate loan as a fair value hedge.



 
-24-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 8. DERIVATIVES AND HEDGING ACTIVITIES - continued

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to this agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.

If certain hedging criteria specified in derivatives and hedging accounting guidance are met, including testing for hedge effectiveness, hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships.

The hedge documentation specifies the terms of the hedged item and the interest rate swap. The documentation also indicates that the derivative is hedging a fixed-rate item, that the hedge exposure is to the changes in the fair value of the hedged item, and that the strategy is to eliminate fair value variability by converting fixed-rate interest payments to variable-rate interest payments.

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items in the same line item—noninterest income—as the offsetting loss or gain on the related interest rate swap.

The hedged fixed rate loan has an original maturity of 20 years and is not callable.  This loan is hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount, maturity, and fixed rate coupons. The swap is not callable. At September 30, 2013, and June 30, 2013, the loan had an outstanding principal balance of $11,107,000, and $11,191,000 and the interest rate swap had a notional value of $11,107,000, and $11,191,000, respectively.

 
   
Effect of Derivative Instruments on Statement of Financial Condition
 
   
Fair Value of Derivative Instruments
 
                                                 
   
Asset Derivatives
   
Liabilities Derivatives
 
(In Thousands)
 
September 30, 2013
   
June 30, 2013
   
September 30, 2013
   
June 30, 2013
 
   
Balance
         
Balance
         
Balance
         
Balance
       
   
Sheet
   
Fair
   
Sheet
   
Fair
   
Sheet
   
Fair
   
Sheet
   
Fair
 
   
Location
   
Value
   
Location
   
Value
   
Location
   
Value
   
Location
   
Value
 
Derivatives designated
                                               
as hedging instruments
                                               
under ASC 815
                         
Other
         
Other
       
   Interest rate contracts
    n/a     $ -       n/a     $ -    
Liabilities
    $ 45    
Liabilities
    $ 115  
                                                             
Change in fair value of
                                                           
financial instrument being
                                                     
hedged under ASC 815
                                                           
   Interest rate contracts
 
Loan
    $ 54    
Loans
    $ 101       n/a     $ -       n/a     $ -  
                                                                 
   
Effect of Derivative Instruments on Statement of Income
 
   
For the three Months Ended September 30, 2013 and 2012
 
                                                                 
(In Thousands)
                                                 
Amount of
                           
Location of
         
Gain or (Loss)
   
Derivatives Designated
     
Gain or (Loss)
         
Recognized in
   
as Hedging Instruments
     
Recognized in
         
Income on Derivative
   
Under ASC 815
     
Income on Derivative
          2013       2012  
                                                                 
   
Interest rate contracts
         
Noninterest income
          $ 23     $ 37  
 
 
 
 
-25-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 9. 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.

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.
 
 
 
-26-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
NOTE 9. FAIR VALUE DISCLOSURES - continued
 
Repossessed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans.  The value is based upon primary third party appraisals, less costs to sell.  The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.  Such discounts are typically significant and result in Level 3 classification of the inputs for determining fair value.  Repossessed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on same or similar factors above.

Loan Subject to Fair Value Hedge – The Company has one loan that is carried at fair value subject to a fair value hedge.  Fair value is determined utilizing valuation models that consider the scheduled cash flows through anticipated maturity and is considered a Level 3 input.

Derivative financial instruments – Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts.  These instruments are valued using Level 3 inputs utilizing valuation models that consider: (a) time value, (b) volatility factors and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Although the Company utilizes counterparties’ valuations to assess the reasonableness of its prices and valuation techniques, there is not sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2013 and June 30, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
 
 
 
-27-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 9. FAIR VALUE DISCLOSURES - continued
 
 
   
September 30, 2013
 
   
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
  $ -     $ 48,208     $ -     $ 48,208  
Municipal obligations
    -       81,314       -       81,314  
Corporate obligations
    -       7,005       -       7,005  
Mortgage backed securities
                               
 government backed
    -       26,199       -       26,199  
CMOs - government backed
    -       39,106       -       39,106  
Loan subject to fair value hedge
    -       11,161       -       11,161  
Loans held-for-sale
    -       20,717       -       20,717  
Financial Liability:
                               
Derivative financial instruments
    -       45       -       45  
                                 
   
June 30, 2013
 
   
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
  $ -     $ 50,931     $ -     $ 50,931  
Municipal obligations
    -       84,436       -       84,436  
Corporate obligations
    -       9,061       -       9,061  
Mortgage-backed securities
                               
 government backed
    -       26,902       -       26,902  
Private lable CMOs
    -       -       -       -  
CMOs - government backed
    -       47,633       -       47,633  
Loan subject to fair value hedge
    -       11,306       -       11,306  
Loans held-for-sale
    -       20,807       -       20,807  
Financial Liability:
                               
Derivative financial instruments
    -       115       -       115  


The following tables presents, for the three months ended September 30, 2013 and 2012, the changes in loan subject to fair value hedges and the related derivative financial instrument that are measured at fair value on a recurring basis.
 
         
Total Realized/
             
         
Unrealized Gains
   
Purchases,
       
   
Balance
   
(Losses) Included
   
Sales,
   
Balance
 
   
as of
   
in Noninterest
   
Issuances, and
   
as of
 
   
July 1, 2013
   
Income
   
Settlements, net
   
September 30, 2013
   
(In Thousands)
 
Financial Assets (Liability):
                       
     Loan subject to fair value hedge
  $ 11,306     $ (61 )   $ (84 )   $ 11,161  
     Derivative financial instruments
    (115 )     70       -       (45 )

 
 
-28-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

NOTE 9. FAIR VALUE DISCLOSURES - continued
 
         
Total Realized/
             
         
Unrealized Gains
   
Purchases,
       
   
Balance
   
(Losses) Included
   
Sales,
   
Balance
 
   
as of
   
in Noninterest
   
Issuances, and
   
as of
 
   
July 1, 2012
   
Income
   
Settlements, net
   
September 30, 2012
   
(In Thousands)
                   
Financial Assets (Liability):
                       
     Loan subject to fair value hedge
  $ 12,372     $ 44     $ (85 )   $ 12,331  
     Derivative financial instruments
    (1,054 )     (7 )     -       (1,061 )
 
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis as of September 30, 2013 and June 30, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
   
September 30, 2013
 
   
(In Thousands)
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
 
   
Inputs
   
Inputs
   
Inputs
   
Value
 
Impaired loans
  $ -     $ -     $ 1,251     $ 1,251  
Repossessed assets
    -       -       496       496  
                                 
   
June 30, 2013
 
   
(In Thousands)
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
 
   
Inputs
   
Inputs
   
Inputs
   
Value
 
Impaired loans
  $ -     $ -     $ 2,015     $ 2,015  
Repossessed assets
    -       -       550       550  


During the quarter ended September 30, 2013, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $1,285,000 were reduced by specific valuation allowance allocations totaling $34,000 to a total reported fair value of $1,251,000 based on collateral valuations utilizing Level 3 valuation inputs.
 
 
 
-29-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
NOTE 9. FAIR VALUE DISCLOSURES - continued

Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements – The following table represents the Banks’s Level 3 financial assets and liabilities, the valuation techniques used to measure the fair value of those financial assets and liabilities, and the significant unobservable inputs and the ranges of values for those inputs:

 
Instrument
 
Fair Value at September 30, 2013
 
Principal Valuation Technique
Significant Unobservable Inputs
 
Range of Significant Input Values
 
(Dollars In Thousands)
 
                 
       
Appraisal of
Appraisal
     
Impaired loans
  $ 1,251  
collateral (1)
adjustments
    10-30 %
                     
         
Appraisal of
Liquidation
       
Repossessed Assets
  $ 496  
collateral (1)(3)
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 by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
  (3)   
Includes qualitative adjustments by management and estimated liquidation expenses.

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 September 30, 2013 and June 30, 2013, followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies.  However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
 
-30-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
 
   
September 30, 2013
 
   
(In Thousands)
 
                     
Total
       
   
Level 1
   
Level 2
   
Level 3
   
Estimated
   
Carrying
 
   
Inputs
   
Inputs
   
Inputs
   
Fair Value
   
Amount
 
Financial Assets:
                             
  Cash and cash equivalents
  $ 7,126     $ -     $ -     $ 7,126     $ 7,126  
  FHLB stock
    1,914       -       -       1,914       1,914  
  Loans receivable, net
    -       -       238,199       238,199       233,345  
  Accrued interest on dividends receivable
    2,339       -       -       2,339       2,339  
  Mortgage servicing rights
    -       -       4,463       4,463       3,420  
  Cash surrender value of life insurance
    10,953       -       -       10,953       10,953  
Financial Liabilities:
                                       
  Non-maturing interest bearing deposits
    -       -       209,470       209,470       209,470  
  Non-interest bearing deposits
    62,533       -       -       62,533       62,533  
  Time certificates of deposit
    -       -       157,058       157,058       156,277  
  Accrued expenses and other liabilities
    3,761       -       -       3,761       3,761  
  Advances from the FHLB & other borrowings
    -       -       29,001       29,001       28,466  
  Subordinated debentures
    -       -       3,858       3,858       5,155  
Off-balance-sheet instruments
                                       
  Forward loan sales commitments
    -       -       -       -       -  
  Commitments to extend credit
    -       -       -       -       -  
  Rate lock commitments
    -       -       -       -       -  
 
 
 
 
-31-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
NOTE 9. FAIR VALUE DISCLOSURES – continued

 
 
   
June 30, 2013
 
                     
Total
       
   
Level 1
   
Level 2
   
Level 3
   
Estimated
   
Carrying
 
(Dollars in Thousands)
 
Inputs
   
Inputs
   
Inputs
   
Fair Value
   
Amount
 
                               
   
(In Thousands)
 
Financial Assets:
                             
Cash and cash equivalents
  $ 6,161     $ -     $ -     $ 6,161     $ 6,161  
FHLB stock
    1,931       -       -       1,931       1,931  
Loans receivable, net
    -       -       219,894       219,894       214,677  
Accrued interest on dividends receivable
    2,387       -       -       2,387       2,387  
Mortgage servicing rights
    -       -       3,589       3,589       3,192  
Cash surrender value of life insurance
    10,869       -       -       10,869       10,869  
Financial Liabilities:
                                       
Interest bearing deposits
    -       -       207,288       207,288       207,288  
Non-interest bearing deposits
    52,972       -       -       52,972       52,972  
Time certificates of deposit
    -       -       158,452       158,452       157,491  
Accrued expenses and other liabilities
    3,535       -       -       3,535       3,535  
Advances from the FHLB & other borrowings
    -       -       35,611       35,611       34,861  
Subordinated debentures
                    3,860       3,860       5,155  
Off-balance-sheet instruments
                                       
Forward loan sales 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 2013 Form 10-K provides additional description of valuation methodologies used in estimating fair value of these financial instruments.

Cash, interest-bearing accounts, accrued interest and dividend receivable, and accrued expenses and other liabilities – The carrying amounts approximate fair value due to the relatively short period of time between the origination of these instruments and their expected realization.

Stock in the FHLB – The fair value of stock in the FHLB approximates redemption value.

Loans receivable – Fair values are estimated by stratifying the loan portfolio into groups of loans with similar financial characteristics.  Loans are segregated by type such as real estate, commercial, and consumer, with each category further segmented into fixed and adjustable rate interest terms.  For mortgage loans, the Company uses the secondary market rates in effect for loans that have similar characteristics.  The fair value of other fixed rate loans is calculated by discounting scheduled cash flows through the anticipated maturities adjusted for prepayment estimates.  Adjustable interest rate loans are assumed to approximate fair value because they generally reprice within the short term.

Fair values are adjusted for credit risk based on assessment of risk identified with specific loans, and risk adjustments on the remaining portfolio based on credit loss experience.

Assumptions regarding credit risk are judgmentally determined using specific borrower information, internal credit quality analysis, and historical information on segmented loan categories for non-specific borrowers.
 
 
-32-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
NOTE 9. FAIR VALUE DISCLOSURES - continued

Mortgage servicing rights – The fair value of servicing rights was determined using discount rates ranging from 9.0% to 20.0%, prepayment speeds ranging from 140% to 324% PSA, depending on stratification of the specific right.  The fair value was also adjusted for the effect of potential past dues and foreclosures.

Deposits and time certificates of deposit – The fair value of deposits with no stated maturity, such as checking, passbook, and money market, is equal to the amount payable on demand.  The fair value of time certificates of deposit is based on the discounted value of contractual cash flows.  The discount rate is estimated using the rates currently offered for deposits of similar maturities.

Advances from the FHLB & Subordinated Debentures – The fair value of the Company’s advances and debentures are estimated using discounted cash flow analysis based on the interest rate that would be effective September 30, 2013 and June 30, 2013, respectively if the borrowings repriced according to their stated terms.

Off-balance-sheet instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fair values of these financial instruments are considered insignificant.  Additionally, those financial instruments have no carrying value.

NOTE 10. BUSINESS COMBINATION

On June 29, 2012, the Company and Sterling Savings Bank, a Washington state-chartered bank (“Sterling”) entered into a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Eagle agreed to purchase Sterling’s banking operations in the state of Montana, including seven branch locations, certain deposit liabilities, loans and other assets and liabilities associated with such branch locations.   The actual amount of deposits, loans and value of other assets and liabilities transferred to Eagle and the actual price paid was determined at the time of the closing of the transaction, in accordance with the terms and conditions of the Agreement.  The closing of the transaction was subject to the terms and conditions set forth in the Agreement. The transaction was completed on November 30, 2012.  The purchase price was $7.92 million and exceeded the estimated fair value of tangible net assets acquired by approximately $7.92 million, which was recorded as goodwill and intangible assets.

Cash flow information relative to the asset purchase agreement is as follows (in thousands):
 
 
Fair value of net assets acquired
  $ 182,463  
 
Cash paid for deposit premium
    (7,921 )
 
Liabilities assumed
    (182,463 )
           
 
Goodwill and intangible assets recorded
  $ (7,921 )
 
The primary purpose of the acquisition is to expand the Company’s market share in southern Montana provide existing customers with added convenience and service and to provide our new customers with the opportunity to enjoy the outstanding personalized service and commitment of a Montana-based community bank.  Factors that contributed to a purchase price resulting in goodwill include the strategically important locations of Sterling’s branches, a historical record of earnings, capable employees and the Company’s ability to expand in the southern Montana market, which will complement with the Company’s existing growth strategy.  Fair value adjustments and related goodwill are recorded in the statement of financial condition of the Company.
 
 
 
-33-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
NOTE 10. BUSINESS COMBINATION - continued

The following is a condensed balance sheet disclosing the estimated fair value amounts of the acquired branches of Sterling assigned to the major consolidated asset and liability captions at the acquisition date (in thousands): 

 
ASSETS
 
     
Cash and cash equivalents
  $ 130,094  
Loans receivable
    41,323  
Premises and equipment
    2,980  
Goodwill and intangible assets
    7,921  
Other assets
    145  
         
Total assets
  $ 182,463  
         
LIABILITIES AND EQUITY
 
     
Deposits and accrued interst
  $ 182,463  
Equity
    -  
         
Total liabilities and equity
  $ 182,463  

We estimated the fair value for most loans to be acquired from Sterling by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms.  Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments.  Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.  To estimate the fair value of the remaining loans, we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral.  The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices.  We discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.  There will be no carryover of Sterling’s allowance for loan losses associated with the loans we acquired as the loans will be initially recorded at fair value.

Information about the Sterling loan portfolio that was acquired, at the acquisition date, is as follows (in thousands):

 
Contractually required principal and interest at acquisition
  $ 41,223  
Contractual cash flows not expected to be collected (nonaccretable discount)
    (769 )
         
Expected cash flows at acquisition
    40,454  
Interest component of expected cash flows (accretable discount)
    869  
         
Fair value of acquired loans
  $ 41,323  

The core deposit intangible asset that was recognized as part of the business combination was $1.0 million and will be amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The goodwill, which will not be amortized for financial statement purposes, will be deductible for tax purposes.

The fair value of savings and transaction deposit accounts acquired from Sterling was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  Certificates of deposit were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates.  The projected cash flows from maturing certificates were calculated based on contractual rates.  The fair value of the certificates of deposit was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity.
 
 
-34-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10. BUSINESS COMBINATION - continued

Direct costs related to the Sterling acquisition were expensed as incurred in the year ended June 30, 2013.  These acquisition and integration expenses included salaries and benefits, technology and communications, occupancy and equipment, professional services and other noninterest expenses.  For the three months ended September 30, 2013, and 2012, $0 and $477,000 of acquisition costs were incurred and expensed, respectively.

The following table presents an unaudited pro forma balance sheet of the Company as if the acquisition of the Sterling branches had occurred on June 30, 2012 (in thousands).  The pro forma balance sheet does not necessarily reflect the combined balance sheet that will result as of the closing of the branch acquisition of the Sterling branches.

 
ASSETS
 
Cash and cash equivalents
  $ 149,908  
Loans receivable
    215,159  
Premises and equipment
    18,541  
Goodwill and intangible assets
    7,921  
Investment securities
    89,277  
Other assets
    28,956  
         
Total assets
  $ 509,762  
         
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Deposits
  $ 402,452  
Other liabilities
    53,660  
Equity
    53,650  
         
Total liabilities and shareholders' equity
  $ 509,762  

Operations of the branches acquired have been included in the consolidated financial statements since December 1, 2012.  The Company does not consider these branches a separate reporting unit and does not track the amount of revenues and net income attributable to these branches since the acquisition.  As such, it is impracticable to determine such amounts for the three months ended September 30, 2013.
 
 
-35-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
NOTE 10. BUSINESS COMBINATION - continued

The following table presents unaudited pro forma results of operations for the three months ended September 30, 2013 and 2012 as if the acquisition of the Sterling branches had occurred on July 1, 2011 (in thousands).  This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset.  The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of the Sterling branches at July 1, 2011.  Cost savings are also not reflected in the unaudited pro forma amounts for the three months ended September 30, 2013 and 2012.
 
   
Three Months Ended
 
   
September 30,
 
   
2013
   
2012
 
             
Net interest income
  $ 3,458     $ 3,525  
Noninterest income
    3,098       1,917  
Noninterest expense
    5,853       4,789  
Net income1)
    667       489  
                 
Pro forma earnings per share1)
               
Basic
  $ 0.17     $ 0.13  
Diluted
    0.17       0.12  

 
1)
 
Significant assumptions utilized include the acquisition cost noted above, amortization/accretion of interest rate fair value adjustments, amortization of the core deposit intangible asset and a 25% effective tax rate for the three months ended September 30, 2012.

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth information regarding the activity in accumulated other comprehensive income (loss) for the dates as indicated (in thousands):
 
 
         
Unrealized
       
   
Gains (Losses)
   
(Losses) Gains
       
   
on Derivatives
   
on Investment
       
   
Designated as
   
Securities
       
   
Cash Flow Hedges
   
Available for Sale
   
Total
 
                   
Balance, July 1, 2013
  $ 345     $ (3,729 )   $ (3,384 )
Other comprehensive income (loss),
                       
    before reclassifications and income taxes
    590       (2,058 )     (1,468 )
Amounts reclassified from accumulated other
                       
    comprehensive income (loss), before income taxes
    (582 )     (431 )     (1,013 )
Income tax (expense) benefit
    (3 )     1,014       1,011  
Total other comprehensive income (loss)
    5       (1,475 )     (1,470 )
Balance, September 30, 2013
  $ 350     $ (5,204 )   $ (4,854 )
                         
Balance, July 1, 2012
  $ 114     $ 2,159     $ 2,273  
Other comprehensive income,
                       
    before reclassifications and income taxes
    178       304       482  
Amounts reclassified from accumulated other
                       
    comprehensive income, before income taxes
    (192 )     (52 )     (244 )
Income tax benefit (expense)
    6       (103 )     (97 )
Total other comprehensive (loss) income
    (8 )     149       141  
Balance, September 30, 2012
  $ 106     $ 2,308     $ 2,414  
 
 
 
-36-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company’s primary activity is its ownership of its wholly owned subsidiary, American Federal Savings Bank (the “Bank”).  The Bank is a federally chartered savings bank, engaging in typical banking activities:  acquiring deposits from local markets and originating loans and investing in securities.  Recent federal legislation mandated that the consolidated regulatory functions of The Office of Thrift Supervision (“OTS”) over the Bank and the Company be transferred to two federal agencies and that the OTS be merged into the Office of the Comptroller of the Currency (the “OCC”).  Thus, as a result of the enactment in July of 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Federal Reserve Board (the “FRB”) became, as of July 21, 2011, the principal federal bank regulatory agency for the Company and the OCC the principal federal regulator for the Bank.  The Bank’s charter was not affected and the Bank continues to operate as a federal stock savings bank. Its deposits are insured by the Federal Deposit Insurance Corporation.  Because the Dodd-Frank Act did not eliminate the thrift charter under which the Bank has historically operated, the Bank’s traditional lending and investment activities have not been affected.  Further, to ensure regulatory continuity, the Dodd-Frank Act requires that the OCC designate a new Deputy Comptroller who will be responsible for the supervision and examination of federal savings associations.

The Bank’s primary component of earnings is its net interest margin (also called spread or margin), the difference between interest income and interest expense.  The net interest margin is managed by management (through the pricing of its products and by the types of products offered and kept in portfolio), and is affected by changes in market interest rates.  The Bank also generates noninterest income in the form of fee income and gain on sale of loans.

The Bank has a strong mortgage lending focus, with the majority of its loan originations represented by single-family residential mortgages.  The Bank has also successfully marketed home equity loans to its customers, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.).  In recent years the Bank has focused on adding commercial loans to its portfolio, both real estate and non-real estate.  The purpose of this diversification is to mitigate the Bank’s dependence on the residential mortgage market, as well as to improve its ability to manage its spread.  The Bank’s management recognizes the need for sources of fee income to complement its margin, and the Bank now maintains a significant loan servicing portfolio which generates income.   The gain on sale of loans also provides significant fee income in periods of high mortgage loan origination volumes.  Fee income is also supplemented with fees generated from the Bank’s deposit accounts, its mortgage banking business and its wealth management business.  The Bank has a high percentage of non-maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its spread.  Non-maturity deposits do not automatically reprice as interest rates rise, as do certificates of deposit.
 
 
For the past several years, management’s focus has been on improving the Bank’s core earnings.  Core earnings can be described as income before taxes, with the exclusion of gain on sale of loans and adjustments to the market value of the Bank’s loan servicing portfolio.  Management believes that the Bank will need to continue to focus on increasing net interest margin, other areas of fee income, and control of operating expenses to achieve earnings growth going forward.  Management’s strategy of growing the bank’s loan portfolio and deposit base is expected to help achieve these goals as follows:  loans typically earn higher rates of return than investments; a larger deposit base should yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs.  The biggest challenge to the strategy is funding the growth of the Bank’s balance sheet in an efficient manner.  Deposit growth will be difficult to maintain due to significant competition for deposits and it is likely that wholesale funding (which is usually more expensive than retail deposits) will be needed to supplement it.

The level and movement of interest rates impacts the Bank’s earnings as well.  The Federal Reserve’s Federal Open Market Committee (“FOMC”) did not change the federal funds target rate which remained at 0.25% during the three months ended September 30, 2013.

Acquisition of Sterling Savings Bank Branches

From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. In this connection, on June 29, 2012, the Bank entered into a definitive agreement with Sterling Savings Bank, a Washington state-chartered bank, to acquire Sterling’s banking operations in the state of Montana, including seven branch locations, certain deposit liabilities, loans and other assets and liabilities associated with such branch locations.   As a result of this acquisition, which closed on November 30, 2012, the Bank acquired approximately $182.5 million in additional assets, including approximately $41.3 million of pass-rated performing loans and assumed $181.6 million in new deposits.  The Bank expects that the increase in its branch network as a result of the Sterling branch  acquisition will substantially  increase its loan origination volume and, due to the substantial increase in deposits, fee income.  In addition, the acquisition of the branches is expected to increase certain of the Bank’s expenses, including salaries and employee benefits and occupancy and equipment expense.  The Bank received approximately $130.1 million in cash in the transaction, which may not be able to be immediately used to fund loans. While a substantial amount of the cash has been invested in securities, it may require additional time to deploy all of the proceeds to fund loans. The Company anticipates that the Sterling acquisition will be accretive to earnings per share in the first year after the acquisition.  However, the size of the acquisition may cause integration challenges that could delay or reduce the expected benefits of the acquisition.
 
 
-37-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview - continued

Acquisition of Sterling Savings Bank Branches - continued
 
The branch acquisition complements the Bank’s existing growth strategy by expanding into the southern Montana market and more than doubling the Bank’s retail branch network from six to 13 locations.  Of the seven acquired branches six are in new markets for the Bank, including two in Missoula, one in Billings, and one each in Hamilton, Livingston and Big Timber. The seventh is in Bozeman where the Bank already has a presence.  After the acquisition, the Bank became the sixth largest Montana-based banking institution.

In addition, the transaction also strengthens the Bank’s mortgage origination franchise and adds a wealth management business headquartered in Bozeman, Montana.  The addition of Sterling’s Montana mortgage banking unit will double the Bank’s mortgage banking business.  This increase in the mortgage banking business and the addition of a wealth management business is expected to increase the Bank’s noninterest income and further the Bank’s strategy to increase fee income to complement its margin.

Financial Condition

Comparisons of financial condition in this section are between September 30, 2013 and June 30, 2013.

Total assets at September 30, 2013 were $513.86 million, an increase of $3.33 million, or 0.7%, from $510.53 million at June 30, 2013.  Loans receivable increased by $18.67 million, or 8.7%, to $233.35 million at September 30, 2013, from $214.68 million at June 30, 2013.  Residential mortgage loans increased by $5.56 million, commercial real estate loans increased by $5.00 million and commercial loans increased by $5.15 million.  These were the largest increases among the various loan types.  Home equity, consumer loans, and construction loans increased more moderately.  Total loan originations were $97.72 million for the three months ended September 30, 2013, with single family mortgages accounting for $71.81 million of the total.  Home equity and construction loan originations totaled $2.70 million and $4.55 million, respectively, for the same period. Commercial real estate and land loan originations totaled $12.39 million.  Consumer loans originated totaled $2.68 million.  Commercial loans originated totaled $3.59 million, with $2.90 million originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale decreased $90,000, to $20.72 million at September 30, 2013 from $20.81 million at June 30, 2013.

Total cash and cash equivalents increased by $965,000, and securities available-for-sale decreased $17.13 million.  Though most security categories decreased during the period, the largest decrease was in the collateralized mortgage obligation category, dropping $8.53 million, or 17.9%.

Deposits increased $10.53 million, or 2.5%, to $428.28 million at September 30, 2013 from $417.75 million at June 30, 2013. Growth occurred across most deposit products with the exception of time certificates of deposits which decreased slightly during the period.  Management attributes the organic increase in deposits to increased marketing of checking accounts as well as customers’ preference for placing funds in secure, federally insured accounts.

The ability of the Bank to continue to grow its retail deposit base during the period enabled the Bank to decrease wholesale funding during the period.  Advances from the Federal Home Loan Bank and other borrowings decreased $6.39 million, or 18.3%, to $28.47 million at September 30, 2013 from $34.86 million at June 30, 2013.

Total stockholders’ equity decreased $1.04 million or 2.1%, to $48.19 million at September 30, 2013 from $49.23 million at June 30, 2013.  This was a result of a decrease in accumulated other comprehensive income of $1.47 million mainly due to a decrease in net unrealized gains on securities available-for-sale and dividends paid of $283,000, partially offset by net income of $667,000.
 
 
-38-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Results of Operations for the Three Months Ended September 30, 2013 and 2012

Net Income.  Eagle’s net income for the quarter was $667,000 versus $422,000 of net income for the three months ended September 30, 2012.  The increase of $245,000, or 58.1%, was due to increases in net interest income of $958,000 and noninterest income of $1.52 million, and reductions in provision for loan losses of $76,000 and income tax expense of $106,000.  These were partially offset by an increase in noninterest expense of $2.42 million.   The increase in noninterest income resulted from an increase in home mortgage refinancing activity, resulting in increased gain on sale of loans.  The increase was also attributable to an increase in the gain on sale of available-for-sale securities of $364,000. The provision for loan losses decreased $76,000 from the prior period due to improved credit indicators such as delinquencies.  Eagle’s tax provision was $106,000 lower in the current period.  This reduction in tax expense is primarily attributable to a new market tax credit project that was initiated during the previous year.  This project resulted in the Company receiving $2.9 million in federal new markets tax credits that can be used over the next seven years.  Basic earnings per share were $0.17 for the current period, and $0.11 per share for the prior comparable period.

Net Interest Income.  Net interest income increased to $3.62 million for the quarter ended September 30, 2013, from $2.66 million for the previous year’s quarter.  This increase of $958,000 was the result of an increase in interest and dividend income of $916,000 and by a decrease in interest expense of $42,000.

Interest and Dividend Income.  Total interest and dividend income was $4.14 million for the quarter ended September 30, 2013, compared to $3.23 million for the quarter ended September 30, 2012, an increase of $916,000, or 28.4%.  Interest and fees on loans increased to $3.12 million for the three months ended September 30, 2013 from $2.55 million for the same period ended September 30, 2012.  This increase of $570,000, or 22.3%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended September 30, 2013.  The average interest rate earned on loans receivable decreased by 54 basis points, from 5.64% to 5.10%.  Average balances for loans receivable, net, including loans held for sale, for the quarter ended September 30, 2013 were $244.57 million, compared to $180.78 million for the prior year period.  This represents an increase of $63.79 million, or 35.29%.  Interest and dividends on investment securities available-for-sale (AFS) increased by $350,000 for the quarter ended September 30, 2013 from $669,000 for the same quarter last year.  Average balances on investments increased to $210.77 million for the quarter ended September 30, 2013, from $91.56 million for the quarter ended September 30, 2012.  The average interest rate earned on investments decreased to 1.93% from 2.92%.  Interest on deposits with banks decreased to $1,000 from $5,000, due to a decrease in average balances partially offset by an increase in the average rates.  Average balances on deposits with banks decreased to $1.49 million for the quarter ended September 30, 2013, compared to $11.93 million for the quarter ended September 30, 2012 and the average rates on such deposits with banks increased from 0.17% at September 30, 2012 to 0.27% at September 30, 2013.

Interest Expense.  Total interest expense declined in the quarter to $524,000 from $566,000 for the quarter ended September 30, 2012, a decrease of $42,000, or 7.4%.  The decrease was attributable to decreases in interest on borrowings while interest on deposits increased.  The average rates on deposits, which includes non-interest bearing deposits, decreased from 45 basis points to 30 basis points, but this was offset by the growth in average deposit balances. This increase in average balances is the result of both the Sterling branch acquisition and organic growth.  The organic growth was likely the result of the Bank’s customers continuing to opt for the safety of federally insured deposits, notwithstanding historically low rates on such deposits, over the risks and uncertainty of the capital markets.  The average balances increased from $219.52 million to $422.30 million, an increase of $202.78 million.  All account types experienced some decrease in average rates.  Money market accounts declined one basis point to 12 basis points down from 13 basis points.  Interest bearing checking account rates declined one basis point to 4 basis points down from 5 basis points.  Savings account rates declined to 0.05% from 0.10%, and certificates of deposit rates decreased from 1.10% to 0.72%.  Because of the increase in retail funding due to deposit growth average balances in borrowings decreased to $40.34 million for the quarter ended September 30, 2013, compared to $40.92 million for the same quarter in the previous year.  The average rate paid, along with the decrease in average borrowing balances, resulted in a decrease in interest paid on borrowings to $203,000 for the quarter ended September 30, 2013 versus $294,000 paid in the previous year’s quarter.  The average rate paid on borrowings decreased from 3.11% last year to 2.02% for the quarter ended September 30, 2013.  The average rate paid on all interest-bearing liabilities decreased 44 basis points from the quarter ended September 30, 2012 to the quarter ended September 30, 2013.

Provision for Loan Losses.  Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by management of the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank, national and local economic conditions, and past due loans in portfolio.  The Bank’s policies require a review of assets on a quarterly basis.  The Bank classifies loans as well as other assets if warranted.  While the Bank believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary.  The Bank recorded $159,000 in provision for loan losses for the quarter ended September 30, 2013 and $235,000 in the quarter ended September 30, 2012.  This decrease from 2012 was based on an analysis of a variety of factors including delinquencies within the loan portfolio.  Total nonperforming loans, including restructured loans, net decreased from $2.29 million at September 30, 2012 to $959,000 at September 30, 2013. The Bank currently has $496,000 in foreclosed real estate property and other repossessed property.
 
 
 
-39-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Results of Operations for the Three Months Ended September 30, 2013 and 2012 – continued
 
Noninterest Income. Due to the continued historic low long term interest rates, the Bank continued to experience significant refinancing activity in residential real estate as well as benefiting from operating the mortgage banking activities resulting from the Sterling acquisition which augmented our existing mortgage lending.  This increased activity had a significant effect on the amount of noninterest income with total noninterest income increasing to $3.10 million for the quarter ended September 30, 2013, from $1.58 million for the quarter ended September 30, 2012, an increase of $1.52 million or 96.2%.  Of this amount, net gain on sale of loans increased to $1.59 million for the quarter ended September 30, 2013 from $812,000 for the quarter ended September 30, 2012.   During this period, $71.81 million of 1-4 family mortgage loans were originated compared to $40.52 million in the quarter ended September 30, 2012.  In addition, $63.67 million of mortgage loans were sold during the period compared to $42.67 million sold in the quarter ended September 30, 2012, an increase of $21.0 million.  The gain on sale of securities also contributed to the increase in noninterest income.  Gain on sale of securities increased to $431,000 from the prior period’s amount of $67,000.

Noninterest Expense.  Noninterest expense was $5.85 million for the quarter ended September 30, 2013, and $3.44 million for the quarter ended September 30, 2012.  The primary cause of this increase was the increase in salaries and employee benefits of $1.90 million resulting from the increase in staff from the Sterling acquisition.  The valuation losses on OREO were zero compared to $68,000 in the same period last year.  This decrease was due to stabilizing values in the Company’s foreclosed properties.    Consulting fees increased from $26,000 to $86,000 due to a couple of special projects currently underway.  Amortization of core deposit intangible and tax credits expense was $109,000 compared to zero for the prior period.  This amortization expense relates to the equity investment in the new markets tax credit project, which will be amortized over the life of these federal tax credits, and the amortization of the core deposit intangible.  Occupancy and equipment expense, data processing, advertising, and federal insurance premiums all increased as the result of the Sterling acquisition and now operating a larger entity.  Acquisition costs fell from $477,000 for the previous period to zero as the acquisition was fully completed by the third quarter of fiscal year 2013.
 
Income Tax Expense. Our income tax expense was $36,000 for the quarter ended September 30, 2013, compared to $142,000 for the quarter ended September 30, 2012.  The effective tax rate for the quarter ended September 30, 2013 was 5.12% and was 25.17% for the quarter ended September 30, 2012.  Though pretax income is higher in the current period the percent of tax free municipal bond income and Bank owned life insurance income to total income increased.  Likewise, the deductibility of goodwill that resulted from the acquisition, for tax purposes has helped to reduce the effective tax rate.  The effective tax rate was furthered reduced by new markets tax credits that were first taken during the second quarter of fiscal year 2013.   The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The federal tax credit benefits were $95,000 for the quarter ended September 30, 2013.
 
Liquidity, Interest Rate Sensitivity and Capital Resources

The Bank is required to maintain minimum levels of liquid assets as defined by the Office of the Comptroller of the Currency (“OCC”) regulations.  The OCC has eliminated the statutory requirement based upon a percentage of deposits and short-term borrowings.  The OCC states that the liquidity requirement is retained for safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages.  For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined.  In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets.  “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Seattle.  The Bank exceeded those minimum ratios as of both September 30, 2013 and September 30, 2012.
 
 
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 Federal Home Loan Bank of Seattle 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.
 
 
-40-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Liquidity, Interest Rate Sensitivity and Capital Resources - continued
 
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.

At August 31, 2013, the Bank’s measure, as internally determined, of sensitivity to interest rate movements, as measured by a 200 basis point rise in interest rates scenario, decreased the economic value of equity (“EVE”) by 17.2%.  The Bank is well within the guidelines set forth by the Board of Directors for interest rate risk sensitivity.  The Bank’s tier I core capital ratio, as measured under OCC rules, decreased from 13.86% as of September 30, 2012 to 8.62% as of September 30, 2013.  The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

As of September 30, 2013, the Bank’s regulatory capital was in excess of all applicable regulatory requirements.  At September 30, 2013, the Bank’s tangible, core, and risk-based capital ratios amounted to 8.62%, 8.62%, and 15.60%, respectively, compared to regulatory requirements of 1.50%, 3.00%, and 8.00%, respectively.  See the following table (dollars in thousands):

 
 
   
At September 30, 2013
 
   
(Unaudited)
 
   
Dollar
   
% of
 
   
Amount
   
Assets
 
Tangible capital:
           
Capital level
  $ 43,773       8.62  
Requirement
    7,620       1.50  
Excess
    36,153       7.12  
                 
Core capital:
               
Capital level
    43,773       8.62  
Requirement
    15,240       3.00  
Excess
    28,533       5.62  
                 
Risk-based capital:
               
Capital level
    45,773       15.60  
Requirement
    23,480       8.00  
Excess
    22,293       7.60  
 
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.
 
 
-41-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

This item has been omitted based on Eagle’s status as a smaller reporting company.
 
 
 
-42-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
CONTROLS AND PROCEDURES

 
Item 4.  Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of September 30, 2013, our disclosure controls and procedures were effective.  During the last fiscal quarter, there were no changes in the Company’s internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
 
-43-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
Part II - OTHER INFORMATION
 

Item 1.      Legal Proceedings.
 
Neither the Company nor the Bank is involved in any pending legal proceeding other than non-material legal proceedings occurring in the ordinary course of business.
 
Item 1A.     Risk Factors.
 
There have not been any material changes in the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form  10-K for the fiscal year ended June 30, 2013.
 
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds.
 
On April 26, 2011, the Company announced that its Board of Directors authorized a common stock repurchase program for 204,156 shares of common stock, effective April 27, 2011.  The program was intended to be implemented through purchases made from time to time in the open market or through private transactions.  The program was scheduled to terminate on April 19, 2012.  All of the 204,156 shares were purchased by December 27, 2011.

On July 1, 2013, the Company announced its Board of Directors has approved a stock repurchase program for the shares of the Company’s common stock.  Pursuant to the program, Eagle may acquire up to 150,000 shares of its common stock, subject to market conditions, on the open market or in privately negotiated transactions.  The repurchase program expires on June 30, 2014.

 
 
-44-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

 
Part II - OTHER INFORMATION (CONTINUED)
 
 

Item 3.      Defaults Upon Senior Securities.
 
Not applicable.
 
Item 4.      Mine Safety Disclosures
 
Not applicable
 
Item 5.      Other Information.
 
None.
 
Item 6.      Exhibits.

 
31.1 Certification by Peter J. Johnson, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

31.2 Certification by Clint J. Morrison, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

32.1 Certification by Peter J. Johnson, Chief Executive Officer, and Clint J. Morrison, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL                                Instance Document

101.SCH XBRL                                Taxonomy Extension Schema Document

101.CAL XBRL                                Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL                                Taxonomy Extension Definition Linkbase Document

101.LAB XBRL                                Taxonomy Extension Label Linkbase Document

101.PRE XBRL                                Taxonomy Extension Presentation Linkbase Document



 
-45-

 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
     
 
EAGLE BANCORP MONTANA, INC.
 
  
 
  
 
  
Date:   November 13, 2013
By:  
/s/ Peter J. Johnson
 
Peter J. Johnson
 
President/CEO
     
   
 
  
 
  
 
  
Date:   November 13, 2013
By:  
/s/ Clint J. Morrison
 
Clint J. Morrison
 
Senior Vice President/CFO
 
 
-46-