Eagle Bancorp Montana, Inc. - Quarter Report: 2012 December (Form 10-Q)

a50560327.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 December 31, 2012

o	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 o

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 o

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 o	Accelerated filer o
	Non-accelerated filer o	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 o 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 February 14, 2013

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	PAGE

Item1.	Financial Statements

	Consolidated Statements of Financial Condition as of December 31, 2012 (unaudited) and June 30, 2012	1

	Consolidated Statements of Income for the three and six months ended December 31, 2012 and 2011 (unaudited)	3

	Consolidated Statements of Comprehensive Earnings for the six months ended December 31, 2012 and 2011 (unaudited)	5

	Consolidated Statements of Changes in Stockholders' Equity for the six months ended December 31, 2012 and 2011 (unaudited)	6

	Consolidated Statements of Cash Flows for the six months ended December 31, 2012 and 2011 (unaudited)	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	46

Signatures		47

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 in the securities markets;

●	our ability to enter new markets successfully and capitalize on growth opportunities;

●	our ability to successfully integrate acquired entities, if any;

●	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, 2012, 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)

	December 31,		June 30,
	2012		2012
	(Unaudited)		(Audited)
ASSETS
Cash and due from banks	$	8,076	$	3,534
Interest-bearing deposits with banks		1,136		16,280
Federal funds sold		16,949		-
Total cash and cash equivalents		26,161		19,814

Securities available-for-sale,at market value		205,561		89,277
Federal Home Loan Bank stock, at cost		1,967		2,003
Investment in Eagle Bancorp Statutory Trust I		155		155
Mortgage loans held-for-sale		15,085		10,613

Loans receivable, net of deferred loan expenses and allowance for loan losses of $1,825 at December 31, 2012 and $1,625 at June 30, 2012		214,000		173,839
Accrued interest and dividends receivable		1,954		1,371
Mortgage servicing rights, net		2,360		2,218
Premises and equipment, net		19,207		15,561
Cash surrender value of life insurance		9,322		9,172

Real estate & other repossessed assets acquired in settlement of loans, net of allowance for losses		1,174		2,361
Goodwill		6,890		-
Core deposit intangible		1,018		-
Other assets		3,267		915

Total assets	$	508,121	$	327,299

See accompanying notes to consolidated financial statements.

-1-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)

(Dollars in Thousands, Except for Per Share Data)

	December 31,			June 30,
	2012			2012
	(Unaudited)			(Audited)
LIABILITIES
Deposit accounts:
Noninterest bearing	$	53,465		$	23,425
Interest bearing		361,260			196,564
Total deposits		414,725			219,989

Accrued expenses and other liabilities		5,337			5,809
Federal funds purchased		-			-
FHLB advances and other borrowings		29,461			42,696
Subordinated debentures		5,155			5,155
Total liabilities		454,678			273,649


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, and 3,878,971 shares oustanding at December 31, 2012 and June 30, 2012, respectively)		41			41
Additional paid-in capital		22,103			22,112

Unallocated common stock held by employee stock ownership plan ("ESOP")		(1,473	)		(1,556	)
Treasury stock, at cost		(1,993	)		(2,210	)
Retained earnings		32,818			32,990
Accumulated other comprehensive income		1,947			2,273
Total equity		53,443			53,650

Total liabilities and equity	$	508,121		$	327,299

See accompanying notes to consolidated financial statements.

-2-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
	(Unaudited)						(Unaudited)
Interest and Dividend Income:
Interest and fees on loans	$	2,753		$	2,830		$	5,304		$	5,605
Securities available-for-sale		735			827			1,404			1,699
Interest on deposits with banks		11			3			16			9
Total interest and dividend income		3,499			3,660			6,724			7,313

Interest Expense:
Deposits		333			273			581			562
FHLB advances & other borrowings		230			532			524			1,115
Subordinated debentures		23			23			47			45
Total interest expense		586			828			1,152			1,722

Net Interest Income		2,913			2,832			5,572			5,591
Loan loss provision		187			325			422			583
Net interest income after loan loss provision		2,726			2,507			5,150			5,008

Noninterest income:
Service charges on deposit accounts		184			180			350			370
Net gain on sale of loans		962			403			1,774			639
Mortgage loan servicing fees		247			224			481			452
Net gain on sale of available for sale securities		245			109			312			166
Net loss on sale of OREO		(6	)		-			(23	)		-
Net gain (loss) on fair value hedge FASB ASC 815		28			(44	)		65			(374	)
Other		257			203			533			391
Total noninterest income		1,917			1,075			3,492			1,644

See accompanying notes to consolidated financial statements.

-3-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2012			2011		2012		2011
	(Unaudited)					(Unaudited)
Noninterest expense:
Salaries and employee benefits		2,131			1,203		3,572		2,370
Occupancy and equipment expense		508			339		850		682
Data processing		193			135		340		286
Advertising		218			131		419		262
Amortization of mortgage servicing rights		221			174		408		267
Amortization of core deposit intangible and tax credits		48			-		48		-
Federal insurance premiums		43			56		92		86
Postage		37			38		63		63
Legal, accounting, and examination fees		122			120		213		192
Consulting fees		35			308		61		395
Acquisition costs		731			-		1,208		-
Provision for valuation loss on OREO		30			-		98		-
Other		469			376		849		732
Total noninterest expense		4,786			2,880		8,221		5,335

(Loss) Income before provision for income taxes		(143	)		702		421		1,317

Provision (benefit) for income taxes		(103	)		215		39		402

Net (loss) income	$	(40	)	$	487	$	382	$	915


Basic earnings per common share	$	(0.01	)	$	0.13	$	0.10	$	0.25

Diluted earnings per common share	$	(0.01	)	$	0.12	$	0.10	$	0.23

Weighted average shares outstanding (basic eps)		3,741,815			3,723,268		3,733,302		3,731,439

Weighted average shares outstanding (diluted eps)		3,933,114			3,916,496		3,931,030		3,914,411

See accompanying notes to consolidated financial statements.

-4-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(Dollars in Thousands)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
	(Unaudited)						(Unaudited)

NET EARNINGS	$	(40	)	$	487		$	382		$	915

OTHER ITEMS OF COMPREHENSIVE EARNINGS:

Change in unrealized gain(loss) on investment securities available for sale, before income taxes		(787	)		(301	)		(481	)		1,004

Reclassification adjustment for realized gains on investment securities included in net earnings, before income tax		(220	)		(109	)		(272	)		(166	)

Change in fair value of derivatives designated as cash flow hedges, before income taxes		396			144			395			144

Reclassification adjustment for realized gains on derivatives designated as cash flow hedges, before income taxes		(179	)		(62	)		(192	)		(18	)
Total other items of comprehensive earnings		(790	)		(328	)		(550	)		964


Income tax (expense) benefit related to other items of comprehensive earnings		323			98			224			(289	)

COMPREHENSIVE EARNINGS	$	(507	)	$	257		$	56		$	1,590

See accompanying notes to consolidated financial statements.

-5-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

For the Six Months Ended December 31, 2012 and 2011

(Dollars in Thousands, Except for Per Share Data)

					ADDITIONAL											ACCUMULATED
					UNALLOCATED											OTHER
	PREFERRED		COMMON		PAID-IN		ESOP			TREASURY			RETAINED			COMPREHENSIVE
	STOCK		STOCK		CAPITAL		SHARES			STOCK			EARNINGS			INCOME(LOSS)		TOTAL

Balance, June 30, 2011	$	-	$	41	$	22,110	$	(1,722	)	$	(1,796	)	$	31,918		$	1,934	$	52,485

Net income														915					915
Other comprehensive income																	675		675

Total comprehensive income																			1,590

Dividends paid ($0.07125 per share)														(555	)				(555	)

Treasury stock purchased											(414	)							(414	)

ESOP shares allocated or committed to be released for allocation (8,308 shares)						2		83											85

Balance, December 31, 2011	$	-	$	41	$	22,112	$	(1,639	)	$	(2,210	)	$	32,278		$	2,609	$	53,191

Balance, June 30, 2012	$	-	$	41	$	22,112		$	(1,556	)	$	(2,210	)	$	32,990		$	2,273		$	53,650

Net income															382						382
Other comprehensive income																		(326	)		(326	)

Total comprehensive income																					56

Dividends paid ($0.07125 per share)															(554	)					(554	)

Treasury stock reissued						(11	)					217									206

ESOP shares allocated or committed to be released for allocation (8,308 shares)						2			83												85

Balance, December 31, 2012	$	-	$	41	$	22,103		$	(1,473	)	$	(1,993	)	$	32,818		$	1,947		$	53,443

See accompanying notes to consolidated financial statements.

-6-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands, Except for Per Share Data)

	Six Months Ended
	December 31,
	2012			2011
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	382		$	915
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		422			583
Provision for OREO valuation losses		98			-
Depreciation		401			384
Net amortization of marketable securities premium and discounts		438			196
Amortization of capitalized mortgage servicing rights		408			267
Amortization expense		48			-
Gain on sale of loans		(1,774	)		(639	)
Net realized gain on sale of available-for-sale securities		(312	)		(166	)
Increase in cash surrender value of life insurance		(150	)		(132	)
Loss on sale of OREO		23			-
(Gain)/loss fair value hedge, FASB ASC 815		(65	)		374
Change in assets and liabilities:
(Increase) decrease in assets:
Accrued interest and dividends receivable		(583	)		74
Loans held-for-sale		(2,495	)		(6,848	)
Other assets		(2,252	)		427
Increase (decrease) in liabilities:
Accrued expenses and other liabilities		105			621
Net cash used in operating activities		(5,306	)		(3,944	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities:
Investment securities available-for-sale		(136,976	)		(2,681	)
Proceeds from maturities, calls and principal payments:
Investment securities available-for-sale		11,474			5,488
Purchase of bank owned life insurance		-			(2,000	)
Proceeds from sale of securities available-for-sale		8,338			3,023
FHLB stock redeemed		36			-
Cash received in acquisition of Sterling Bank branches, net of cash paid		130,094			-
Net decrease (increase) in loan receivable, excludes transfers to real estate acquired in settlement of loans		(282	)		1,273
Proceeds from the sale of real estate and other repossessed property acquired in the settlement of loans		1,247			-
Purchase of property and equipment		(762	)		(71	)
Net cash provided by investing activities		13,169			5,032

See accompanying notes to consolidated financial statements.

-7-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands, Except for Per Share Data)

	Six Months Ended
	December 31,
	2012			2011
	(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in checking and savings accounts	$	12,273		$	5,974
Payments on FHLB advances and other borrowings		(13,235	)		(7,100	)
Purchase of Treasury Stock		-			(414	)
Dividends paid		(554	)		(555	)
Net cash (used in) provided by financing activities		(1,516	)		(2,095	)

Net increase (decrease) in cash		6,347			(1,007	)

CASH AND CASH EQUIVALENTS, beginning of period		19,814			9,540

CASH AND CASH EQUIVALENTS, end of period	$	26,161		$	8,533


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	1,240		$	1,761

Cash paid during the period for income taxes	$	372		$	208

NON-CASH INVESTING ACTIVITIES:
Increase (decrease) in market value of securities available-for-sale	$	753		$	(838	)

Mortgage servicing rights capitalized	$	540		$	245

ESOP shares released	$	85		$	85

Loans transferred to real estate and other assets acquired in foreclosure	$	468		$	836

Treasury shares reissued for compensation	$	206		$	-

See accompanying notes to 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 six month period ended December 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2013 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, 2012.

The Company evaluated subsequent events for potential recognition and/or disclosure through February 14, 2013 the date the consolidated financial statements were issued.

On April 5, 2010, the Company completed its second-step conversion from the partially-public mutual holding company structure to the fully publicly-owned stock holding company structure. As part of that transaction it also completed a related offering of its common stock. As a result of the conversion and offering, the Company became the stock holding company for American Federal Savings Bank, and Eagle Financial MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 million. Concurrent with the completion of the offering, shares of Eagle Bancorp common stock owned by the public were exchanged. Stockholders of Eagle Bancorp received 3.800 shares of the Company's common stock for each share of Eagle Bancorp common stock that they owned immediately prior to completion of the transaction. Accordingly, as of April 5, 2010, the Company had 8,000,000 shares of common stock authorized and 4,083,127 issued and outstanding.

NOTE 2. INVESTMENT SECURITIES

Investment securities are summarized as follows:

(Dollars in thousands)

	December 31, 2012									June 30, 2012
	(Unaudited)									(Audited)
			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	$	41,421	$	417	$	(143	)	$	41,695	$	20,557	$	508	$	(10	)	$	21,055
Municipal obligations		73,396		3,076		(692	)		75,780		39,332		2,835		(107	)		42,060
Corporate obligations		3,946		162		-			4,108		3,937		82		(74	)		3,945

Mortgage-backed securities - government backed		20,849		88		(27	)		20,910		6,791		56		-			6,847
CMOs - private label		-		-		-			-		210		-		(41	)		169
CMOs - government backed		63,059		353		(344	)		63,068		14,807		416		(22	)		15,201

Total	$	202,671	$	4,096	$	(1,206	)	$	205,561	$	85,634	$	3,897	$	(254	)	$	89,277

-9-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. INVESTMENT SECURITIES - continued

The following table discloses, as of December 31, 2012 and June 30, 2012, 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:

	December 31, 2012
	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	$	7,309	$	142	$	184	$	1
Corporate obligations		-		-		-		-
Municipal obligations		28,379		648		569		44
CMOs - private label		-		-		-		-
Mortgage-backed and CMOs		36,730		362		644		9

Total	$	72,418	$	1,152	$	1,397	$	54

	June 30, 2012
	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	$	1,751	$	8	$	341	$	2
Corporate obligations		-		-		884		74
Municipal obligations		1,760		2		1,402		105
CMOs - private label		-		-		168		41
Mortgage-backed & CMOs		2,514		22		-		-

Total	$	6,025	$	32	$	2,795	$	222

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 December 31, 2012 and June 30, 2012, 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 December 31, 2012 and June 30, 2012, there were, respectively, 58 and 25 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 December 31, 2012, 7 U.S. government and agency obligations had unrealized losses with aggregate depreciation of less than 1.87% 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 December 31, 2012, 35 municipal obligations had unrealized losses with aggregate depreciation of less than 2.39% 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 December 31, 2012, no corporate obligation had an unrealized loss.

At December 31, 2012, 16 mortgage backed and CMO securities had unrealized losses with aggregate depreciation of less than 0.99% 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 December 31, 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:

	December 31,			June 30,
	2012			2012
	(Unaudited)			(Audited)
	(In thousands)
First mortgage loans:
Residential mortgage (1-4 family)	$	67,414		$	61,671
Commercial real estate		82,484			64,672
Real estate construction		1,750			1,455

Other loans:
Home equity		37,850			23,709
Consumer		11,086			8,778
Commercial		15,353			15,343

Total		215,937			175,628

Less: Allowance for loan losses		(1,825	)		(1,625	)
Add: Deferred loan expenses		(112	)		(164	)

Total	$	214,000		$	173,839

Within the commercial real estate loan category above, $21,332,000 and $21,610,000 was guaranteed by the United States Department of Agriculture Rural Development, at December 31, 2012 and June 30, 2012, respectively.

The following is a summary of changes in the allowance for loan losses:

	Six Months			Six Months			Twelve Months
	Ended			Ended			Ended
	December 31,			December 31,			June 30,
	2012			2011			2012
	(Unaudited)			(Unaudited)			(Audited)
	(In thousands)

Balance, beginning of period	$	1,625		$	1,800		$	1,800
Provision charged to operations		422			583			1,101
Charge-offs		(282	)		(887	)		(1,296	)
Recoveries		60			4			20

Balance, end of period	$	1,825		$	1,500		$	1,625

-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.

	December 31,			June 30,
	2012			2012
	(Unaudited)			(Audited)
	(Dollars in Thousands)

Non-accrual loans	$	1,200		$	1,814
Accruing loans delinquent 90 days or more		-			-
Restructured loans, net		304			1,404
Total nonperforming loans		1,504			3,218
Real estate owned and other repossessed assets, net		1,174			2,361
Total	$	2,678		$	5,579

Total non-performing assets as a percentage of total assets		0.53	%		1.70	%

Allowance for loan losses	$	1,825		$	1,625

Percent of allowance for loan losses to non-performing loans		121.3	%		50.5	%

Percent of allowance for loan losses to non-performing assets		68.1	%		29.1	%

-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 (dollars in thousands):

	Six Months Ended
	December 31, 2012
	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		(73	)		(35	)				(148	)		(25	)		(1	)		(282	)
Recoveries													5			55			60
Provision		68			168			3		158			18			7			422
Ending balance, December 31, 2012	$	398		$	905		$	13	$	166		$	76		$	267		$	1,825

Ending balance allocated to loans individually evaluated for impairment	$	-		$	-		$	-	$	33		$	10		$	-		$	43

Ending balance allocated to loans collectively evaluated for impairment	$	398		$	905		$	13	$	133		$	66		$	267		$	1,782

Loans receivable:
Ending balance December 31, 2012	$	67,414		$	82,484		$	1,750	$	37,850		$	11,086		$	15,353		$	215,937

Ending balance of loans individually evaluated for impairment December 31, 2012	$	464		$	737		$	-	$	552		$	97		$	175		$	2,025

Ending balance of loans collectively evaluated for impairment December 31, 2012	$	66,950		$	81,747		$	1,750	$	37,298		$	10,989		$	15,178		$	213,912

-14-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. LOANS RECEIVABLE - continued

	Six Months Ended
	December 31, 2011
	1-4 Family			Commercial					Home
	Real Estate			Real Estate			Construction		Equity			Consumer			Commercial			Total
Allowance for credit losses:
Beginning balance, June 30, 2011	$	369		$	652		$	18	$	481		$	57		$	223		$	1,800
Charge-offs		(125	)		(214	)		-		(351	)		(15	)		(182	)		(887	)
Recoveries		-			-			-		-			4			-			4
Provision		52			139			227		63			28			74			583
Ending balance, December 31, 2011	$	296		$	577		$	245	$	193		$	74		$	115		$	1,500


Ending balance allocated to loans individually evaluated for impairment	$	-		$	65		$	240	$	-		$	11		$	16		$	332

Ending balance allocated to loans collectively evaluated for impairment	$	296		$	512		$	5	$	193		$	63		$	99		$	1,168

Loans receivable:
Ending balance December 31, 2011	$	64,963		$	68,170		$	3,572	$	25,912		$	9,107		$	12,461		$	184,185

Ending balance of loans individually evaluated for impairment December 31, 2011	$	997		$	275		$	721	$	336		$	125		$	1,638		$	4,092

Ending balance of loans collectively evaluated for impairment December 31, 2011	$	63,966		$	67,895		$	2,851	$	25,576		$	8,982		$	10,823		$	180,093

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 (dollars in thousands):

	December 31, 2012
	1-4 Family		Commercial				Home
	Real Estate		Real Estate		Construction		Equity		Consumer		Commercial		Total
Grade:
Pass	$	66,950	$	81,747	$	1,750	$	37,299	$	10,989	$	15,177	$	213,912
Special mention												55		55
Substandard		464		737				477		76		121		1,875
Doubtful								41		11				52
Loss								33		10				43
Total	$	67,414	$	82,484	$	1,750	$	37,850	$	11,086	$	15,353	$	215,937

Credit Risk Profile Based on Payment Activity

Performing	$	67,365	$	82,148	$	1,750	$	37,488	$	11,034	$	14,648	$	214,433
Restructured loans				304										304
Nonperforming		49		32				362		52		705		1,200
Total	$	67,414	$	82,484	$	1,750	$	37,850	$	11,086	$	15,353	$	215,937

	June 30, 2012
	1-4 Family		Commercial				Home
	Real Estate		Real Estate		Construction		Equity		Consumer		Commercial		Total
Grade:
Pass	$	60,748	$	63,839	$	1,455	$	23,319	$	8,685	$	13,846	$	171,892
Special mention		-		51		-		-		-		5		56
Substandard		923		782		-		242		76		1,492		3,515
Doubtful		-		-		-		148		15		-		163
Loss		-		-		-		-		2		-		2
Total	$	61,671	$	64,672	$	1,455	$	23,709	$	8,778	$	15,343	$	175,628

Credit Risk Profile Based on Payment Activity

Performing	$	61,011	$	63,749	$	1,455	$	23,444	$	8,742	$	14,009	$	172,410
Restructured loans		-		90		-		-		-		1,314		1,404
Nonperforming		660		833		-		265		36		20		1,814
Total	$	61,671	$	64,672	$	1,455	$	23,709	$	8,778	$	15,343	$	175,628

-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 (dollars in thousands):

	December 31, 2012
											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	$	357	$	49	$	406	$	67,008	$	67,414	$	-
Commercial real estate		171		737		908		81,576		82,484		-
Construction		-		-		-		1,750		1,750		-
Home equity		363		328		691		37,159		37,850		-
Consumer		287		45		332		10,754		11,086		-
Commercial		198		-		198		15,155		15,353		-
Total	$	1,376	$	1,159	$	2,535	$	213,402	$	215,937	$	-

	June 30, 2012
											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	$	613	$	501	$	1,114	$	60,557	$	61,671	$	-
Commercial real estate		-		91		91		64,581		64,672		-
Construction		-		-		-		1,455		1,455		-
Home equity		362		227		589		23,120		23,709		-
Consumer		221		37		258		8,520		8,778		-
Commerical		171		747		918		14,425		15,343		-
Total	$	1,367	$	1,603	$	2,970	$	172,658	$	175,628	$	-

-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 (dollars in thousands):

	December 31, 2012
			Unpaid				Interest		Average
	Recorded		Principal		Related		Income		Recorded
	Investment		Balance		Allowance		Recognized		Investment

With no related allowance:
1-4 Family	$	-	$	-	$	-	$	-	$	-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Consumer		-		-		-		-		-
Commercial		-		-		-		-		-

With a related allowance:
1-4 Family		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		33		33		33		-		33
Consumer		10		10		10		-		10
Commercial		-		-		-		-		-

Total:
1-4 Family		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		33		33		33		-		33
Consumer		10		10		10		-		10
Commercial		-		-		-		-		-
Total	$	43	$	43	$	43	$	-	$	43

-18-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. LOANS RECEIVABLE - continued

	June 30, 2012
			Unpaid				Interest		Average
	Recorded		Principal		Related		Income		Recorded
	Investment		Balance		Allowance		Recognized		Investment

With no related allowance:
1-4 Family	$	-	$	-	$	-	$	-	$	-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Consumer		-		-		-		-		-
Commerical		-		-		-		-		-

With a related allowance:
1-4 Family		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Consumer		2		2		2		-		2
Commerical		-		-		-		-		-

Total:
1-4 Family		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Consumer		2		2		2		-		2
Commerical		-		-		-		-		-
Total	$	2	$	2	$	2	$	-	$	2

-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 December 31, 2012, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $337,000 (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 $33,000 (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 December 31, 2012 and June 30, 2012:

	December 31, 2012
	Accrual		Non-Accrual		Total
	Status		Status		Modification

Residential Mortgage (1-4 family)		-		-		-
Commercial Real Estate		304		-		304
Real estate construction		-		-		-
Home equity		-		-		-
Consumer		-		-		-
Commercial		-		-		-
Total	$	304	$	-	$	304

	June 30, 2012
	Accrual		Non-Accrual		Total
	Status		Status		Modification

Residential Mortgage (1-4 family)		-		-		-
Commercial Real Estate		90		-		90
Real estate construction		-		-		-
Home equity		-		-		-
Consumer		-		-		-
Commercial		-		1,314		1,314
Total	$	90	$	1,314	$	1,404

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 six months ended December 31, 2012:

	Six Months Ended
	December 31, 2012
	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		-		-		-		-		243		243
Real estate construction		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Total	$	-	$	-	$	-	$	-	$	243	$	243

	Six Months ended
	December 31, 2012
	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		-		-		-		-		217		217
Real estate construction		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Total	$	-	$	-	$	-	$	-	$	217	$	217

-22-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. TROUBLE DEBT RESTRUCTURINGS - continued

	Six months ended
	December 31, 2011
	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		131		-		-		-		-		131
Real estate construction		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Total	$	131	$	-	$	-	$	-	$	-	$	131

	Six months ended
	December 31, 2011
	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		123		-		-		-		-		123
Real estate construction		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Total	$	123	$	-	$	-	$	-	$	-	$	123

There were no loans modified as a troubled debt restructured loan within the previous 6 months and for which there was a payment default during the six months ended December 31, 2012. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. As of December 31, 2012 and June 30, 2012, 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 (dollars in thousands):

	December 31,		June 30,
	2012		2012
	(Unaudited)		(Audited)

Noninterest checking	$	53,465	$	23,425
Interest-bearing checking		63,607		46,125
Savings		50,360		40,591
Money market		88,369		28,489
Time certificates of deposit		158,924		81,359
Total	$	414,725	$	219,989

NOTE 6. EARNINGS PER SHARE

Basic earnings per share for the six months ended December 31, 2012 was computed using 3,733,302 weighted average shares outstanding. Basic earnings per share for the six months ended December 31, 2011 was computed using 3,731,439 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 3,931,030 for the six months ended December 31, 2012 and 3,914,411 for the six months ended December 31, 2011.

NOTE 7. DIVIDENDS AND STOCK REPURCHASE PROGRAM

For the fiscal year July 1, 2012 through June 30, 2013, Eagle has paid dividends of $0.07125 per share each quarter. A dividend of $0.07125 per share was declared on January 24, 2013, payable March 1, 2013 to stockholders of record on February 8, 2013.

On April 26, 2011, the Company announced that its Board of Directors authorized a common stock repurchase program for 204,156 shares of common stock, effective April 27, 2011. The program was intended to be implemented through purchases made from time to time in the open market or through private transactions. The program terminated on December 27, 2011 with its final purchase of shares within the program.

On April 21, 2011, the Company entered into a pre-arranged Rule 10b5-1 written trading plan (“the Trading Plan”) with a broker to facilitate the repurchase of its shares of common stock, in conformity with the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. A broker selected by the Company had the authority under the terms and limitations specified in the Trading Plan to repurchase shares on the Company’s behalf in accordance with the terms of the Trading Plan. The Trading Plan facilitated the Company’s share repurchase program, went into effect on April 27, 2011 and was completed on December 27, 2011. The Trading Plan enabled the Company to continue to repurchase shares without suspension for self-imposed trading blackout periods. The shares repurchased under the Trading Plan were in accordance with and subject to the limitations of the stock repurchase program.

After the expiration of the current Trading Plan, the Company may from time to time enter into subsequent trading plans under Rule 10b5-1 to facilitate the repurchase of its common stock pursuant to its share repurchase program. Information regarding share repurchases will be available in the Company’s periodic reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission as required by the applicable rules of the Exchange Act.

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. The derivatives and hedging accounting guidance (FASB ASC 815-10) requires that the Company recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with this guidance, the Company designates the interest rate swap on this fixed-rate loan as a fair value hedge.

-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 December 31, 2012, and June 30, 2012, the loan had an outstanding principal balance of $11,372,000, and $11,536,000 and the interest rate swap had a notional value of $11,372,000, and $11,536,000, respectively.

Effect of Derivative Instruments on Statement of Financial Condition

Fair Value of Derivative Instruments

Asset Derivatives

Liabilities Derivatives

(In Thousands)

December 31, 2012

June 30, 2012

December 31, 2012

June 30, 2012

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

Interest rate contracts

Liabilities

913

Liabilities

1,054

Change in fair value of

financial instrument being

hedged under ASC 815

Interest rate contracts

Loans

760

Loans

836

Effect of Derivative Instruments on Statement of Income

For the Six Months Ended December 31, 2012 and 2011

(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

2012

2011

Interest rate contracts

Noninterest income

(374

)

-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 December 31, 2012 and June 30, 2012, 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

	December 31, 2012
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
Financial Assets:
Available for sale securities
U.S. Government and agency	$	-	$	41,695	$	-	$	41,695
Municipal obligations		-		75,780		-		75,780
Corporate obligations		-		4,108		-		4,108
Mortgage backed securities government backed		-		20,910		-		20,910
Private lable CMOs		-		-		-		-
CMOs - government backed		-		63,068		-		63,068
Loan subject to fair value hedge		-		-		12,132		12,132
Loans held-for-sale		-		15,085		-		15,085
Financial Liability:
Derivative financial instruments		-		-		913		913

	June 30, 2012
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
Financial Assets:
Available for sale securities
U.S. Government and agency	$	-		21,055	$	-	$	21,055
Municipal obligations		-		42,060		-		42,060
Corporate obligations		-		3,945		-		3,945
Mortgage-backed securitiesgovernment backed		-		6,847		-		6,847
Private lable CMOs		-		169		-		169
CMOs - government backed		-		15,201		-		15,201
Loan subject to fair value hedge		-		-		12,372		12,372
Loans held-for-sale		-		10,613		-		10,613
Derivative financial instruments		-		-		1,054		1,054

The following tables presents, for the six months ended December 31, 2012 and 2011, the changes in Level 3 assets and liabilities 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, 2012			Income			Settlements, net			December 31, 2012
	(In thousands)
Financial Assets (Liability):
Loan subject to fair value hedge	$	12,372		$	(76	)	$	(164	)	$	12,132
Derivative financial instruments		(1,054	)		141			-			(913	)

-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, 2011		Income			Settlements, net			December 31, 2011
	(In thousands)
Financial Assets (Liability):
Loan subject to fair value hedge	$	11,405	$	1,079		$	(156	)	$	12,328
Derivative financial instruments		650		(1,453	)		-			(803	)

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 December 31, 2012 and June 30, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

	December 31, 2012
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
Impaired loans	$	-	$	-	$	-	$	-
Repossessed assets		-		1,174		-		1,174

	June 30, 2012
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
Impaired loans	$	-	$	-	$	-	$	-
Repossessed assets		-		2,361		-		2,361

During the quarter ended December 31, 2012, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $43,000 were reduced by specific valuation allowance allocations totaling $43,000 to a total reported fair value of $0 based on collateral valuations utilizing Level 3 valuation inputs.

Those financial instruments subject to FASB ASC Topic 825 are required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. Below is a table that summarizes the fair market values of all financial instruments of the Company at December 31, 2012 and

June 30, 2012, 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.

-29-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9. FAIR VALUE DISCLOSURES – continued

(Dollars in Thousands)	December 31, 2012
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
Financial Assets:
Cash and cash equivalents	$	26,161	$	-	$	-	$	26,161	$	26,161
FHLB stock		-		-		1,967		1,967		1,967
Loans receivable, net		-		-		222,132		222,132		214,000
Accrued interest on dividends receivable		1,954		-		-		1,954		1,954
Mortage servicing rights		-		-		2,360		2,360		2,360
Cash surrender value of
life insurance		-		-		9,322		9,322		9,322
Financial Liabilities:
Deposits		255,801		-		-		255,801		255,801
Time certificates of deposit		-		-		160,831		160,831		158,924
Accrued expenses and other liabilities		5,337		-		-		5,337		5,337
Advances from the FHLB & other borrowings		-		-		30,622		30,622		29,461
Subordinated debentures		-		-		3,865		3,865		5,155
Off-balance-sheet instruments
Forward loan sales commitments		-		-		-		-		-
Commitments to extend credit		-		-		-		-		-
Rate lock commitments		-		-		-		-		-

	June 30, 2012
Financial Assets:
Cash and cash equivalents	$	19,814	$	-	$	-	$	19,814	$	19,814
FHLB stock		-		-		2,003		2,003		2,003
Loans receivable, net		-		-		183,830		183,830		173,839
Accrued interest on dividends receivable		1,371		-		-		1,371		1,371
Mortage servicing rights		-		-		2,424		2,424		2,218
Cash surrender value of
life insurance		-		-		9,172		9,172		9,172
Financial Liabilities:
Deposits		138,630		-		-		138,630		138,630
Time certificates of deposit		-		-		82,613		82,613		81,359
Accrued expenses and other liabilities		5,809		-		-		5,809		5,809
Advances from the FHLB & other borrowings		-		-		44,310		44,310		42,696
Subordinated debentures						4,196		4,196		5,155
Off-balance-sheet instruments
Forward loan sales commitments		-		-		-		-		-
Commitments to extend credit		-		-		-		-		-
Rate lock commitments		-		-		-		-		-

-30-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9. FAIR VALUE DISCLOSURES - continued

The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments. However, the 2012 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.

Cash surrender value of life insurance – The carrying amount for cash surrender value of life insurance approximates fair value as policies are recorded at redemption value.

Mortgage servicing rights – The fair value of servicing rights was determined using discount rates ranging from 9.0% to 20.0%, prepayment speeds ranging from 140% to 324% PSA, depending on stratification of the specific right. The fair value was also adjusted for the 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 December 31, 2012 and June 30, 2012, 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.

-31-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

Fair value adjustments and related goodwill were recorded in the statement of financial condition of the Company. 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		41,320
Premises and equipment		2,980
Goodwill and intangible assets		7,921
Other assets		148

Total assets	$	182,463

LIABILITIES AND EQUITY

Deposits and accrued interst	$	182,463
Equity		-

Total liabilities and equity	$	182,463

-32-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10. BUSINESS COMBINATION - continued

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 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)		866

Fair value of acquired loans	$	41,320

The core deposit intangible asset that was recognized as part of the business combination was $1.1 million and will be amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The goodwill, which will not be amortized for financial statement purposes, will be deductible for tax purposes.

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

Direct costs related to the Sterling acquisition will be expensed as incurred in the year ended June 30, 2013. These acquisition and integration expenses will include salaries and benefits, technology and communications, occupancy and equipment, professional services and other noninterest expenses. For the three and six months ended December 31, 2012, $731,000 and $1.21 million 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.

-33-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10. BUSINESS COMBINATION - continued

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 and six months ended December 31, 2012.

The following table presents unaudited pro forma results of operations for the three and six months ended December 31, 2012 and 2011 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 and six months ended December 31, 2012 and 2011.

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2012		2011		2012		2011

Net interest income	$	3,684	$	3,700	$	7,209	$	7,394
Noninterest income		2,259		1,417		4,176		2,328
Noninterest expense		4,894		4,454		8,691		8,228
Net income1)		854		458		2,087		1,048

Pro forma earnings per share1)
Basic	$	0.23	$	0.12	$	0.56	$	0.28
Diluted		0.22		0.12		0.53		0.27

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.

-34-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. RECENTLY ISSUED PRONOUNCEMENTS

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. Upon completion of the acquisition of Sterling Bank’s Montana branches the Company has recorded goodwill and has adopted the provisions of this pronouncement.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update require entities to report significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income. For all other amounts an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments are effective during the interim and annual periods beginning after December 15, 2012. The Company does not anticipate that the adoption of this guidance will have a significant impact on the consolidated financial statements.

-35-

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 remain 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 should not be 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 loans 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. 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 six months ended December 31, 2012.

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

-36-

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

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.

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 December 31, 2012 and June 30, 2012.

Total assets at December 31, 2012 were $508.12 million, an increase of $180.82 million, or 55.25%, from $327.30 million at June 30, 2012. This increase in assets was primarily attributable to the acquisition of the Sterling branches. The increase in total assets was mostly due to an increase in securities available for sale.

Loans receivable increased by $40.16 million, or 23.10%, to $214.0 million at December 31, 2012, from $173.84 million at June 30, 2012. Of the increase, $41.20 million was the result of the Sterling branch acquisition which increased the balances across all the different loan types. Excluding the Sterling branch acquisition, loans receivable decreased by approximately $1.04 million. Commercial real estate loans increased by $17.81 million, or 27.54%. This was the most increase among the various loan types. Residential mortgages, home equity, consumer loans, and construction loans increased more moderately. All were affected by the Sterling branch acquisition. Total loan originations were $114.18 million for the six months ended December 31, 2012, with single family mortgages accounting for $89.48 million of the total. Home equity and construction loan originations totaled $5.11 million and $3.53 million, respectively, for the same period. Commercial real estate and land loan originations totaled $9.60 million. Consumer and commercial loans originated totaled $3.64 million and $2.82 million, respectively. Loans held-for-sale increased to $15.09 million at December 31, 2012 from $10.61 million at June 30, 2012.

Total cash and cash equivalents increased by $6.35 million, and securities available-for-sale increased $116.28 million.

Deposits increased $194.74 million, or 88.52%, to $414.73 million at December 31, 2012 from $219.99 million at June 30, 2012. Growth occurred across all deposit products. Of the increase $181.6 million was attributable to the Sterling branch acquisition. Excluding the Sterling branch acquisition, deposits increased by $13.14 million, or 5.97%. Management attributes this 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 wholesale funding to decrease during the period. Advances from the Federal Home Loan Bank and other borrowings decreased $13.24 million, or 31.0%, to $29.46 million from $42.70 million at June 30, 2012.

Total shareholders’ equity decreased $207,000 or 0.39%, to $53.44 million at December 31, 2012 from $53.65 million at June 30, 2012. This was a result of a decrease in accumulated other comprehensive income of $326,000 (mainly due to an decrease in net unrealized gains on securities available-for-sale) and dividends paid of $554,000, partially offset by net income of $382,000.

-37-

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 December 31, 2012 and 2011

Net Income. The quarter’s results were characterized by a significant increase in gain on sale of loans driven by robust refinancing activity largely offset by acquisition costs associated with the purchase of the seven Sterling Savings Bank branches located in Montana. Eagle’s net loss for the quarter was $40,000 versus $487,000 of net income for the three months ended December 31, 2011. The decrease of $527,000, or 108.21%, was due principally to an increase in noninterest expense of $1.91 million partially offset by an increase in noninterest income of $842,000. The increase in noninterest income resulted from an increase in home mortgage refinancing activity, resulting in increased gain on sale of loans. The provision for loan losses decreased $138,000 from the prior period. Eagle’s tax provision was $318,000 lower in the current quarter. This reduction, in addition to the lower earnings, is primarily attributable to a new market tax credit project that was initiated during the quarter. 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 a loss of $.01 for the current period, and income of $.13 per share for the prior comparable period.

Net Interest Income. Net interest income increased to $2.91 million for the quarter ended December 31, 2012, from $2.83 million for the previous year’s quarter. This increase of $81,000 was the result of a decrease in interest and dividend income of $161,000 offset by a decrease in interest expense of $242,000.

Interest and Dividend Income. Total interest and dividend income was $3.50 million for the quarter ended December 31, 2012, compared to $3.66 million for the quarter ended December 31, 2011, a decrease of $161,000, or 4.40%. Interest and fees on loans decreased to $2.75 million for the three months ended December 31, 2012 from $2.83 million for the same period ended December 31, 2011. This decrease of $77,000, or 2.72%, was due to both the decrease in the average yield on loans and average balances of loans for the quarter ended December 31, 2012. The average interest rate earned on loans receivable decreased by 16 basis points, from 5.90% to 5.74%. Average balances for loans receivable, net, including loans held for sale, for the quarter ended December 31, 2012 were $191.70 million, compared to $191.73 million for the prior year period. This represents a decrease of $26,000, or 0.01%. Interest and dividends on investment securities available-for-sale (AFS) decreased by $92,000 for the quarter ended December 31, 2012 from $827,000 for the same quarter last year. Average balances on investments increased to $126.85 million for the quarter ended December 31, 2012, from $100.59 million for the quarter ended December 31, 2011. The average interest rate earned on investments decreased to 2.32% from 3.29%. Interest on deposits with banks increased to $11,000 from $3,000, due to an increase in average balances partially offset by a decrease in the average rates. Average balances on deposits with banks increased to $25.94 million for the quarter ended December 31, 2012, compared to $3.42 million for the quarter ended December 31, 2011and the average rates on such deposits with banks decreased from 0.35% at December 31, 2011 to 0.17% at December 31, 2012.

Interest Expense. Total interest expense declined significantly in the quarter to $586,000 from $828,000 for the quarter ended December 31, 2011, a decrease of $242,000, or 29.22%. The decrease was attributable to decreases in interest on borrowings while interest on deposits increased. The average rates on deposits, including non-interest bearing deposits, did decrease from 51 basis points to 46 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 $212.34 million to $287.33 million, an increase of $74.99 million. Some account types did experience some increase in average rates, due to balances in higher rate tiers. Money market accounts, increased 1 basis point. Interest bearing checking account rates increased from 0.05% to 0.06%, savings account rates declined to .09% from 0.10%, and certificates of deposit rates decreased from 1.20% to 1.13%. Because of the increase in retail funding due to deposit growth average balances in borrowings decreased significantly to $36.86 million for the quarter ended December 31, 2012, compared to $62.32 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 $230,000 for the quarter ended December 31, 2012 versus $532,000 paid in the previous year’s quarter. The average rate paid on borrowings decreased from 3.56% last year to 2.75% for the quarter ended December 31, 2012. The average rate paid on all interest-bearing liabilities decreased 49 basis points from the quarter ended December 31, 2011 to the quarter ended December 31, 2012.

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 $187,000 in provision for loan losses for the quarter ended December 31, 2012 and $325,000 in the quarter ended December 31, 2011. This decrease from 2011 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 $3.58 million at

-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 December 31, 2012 and 2011 - continued

December 31, 2011 to $1.50 million at December 31, 2012. The Bank currently has $1.17 million in foreclosed real estate property and other repossessed property with a net book value of $1.17 million.

Noninterest Income. Due to declines in long term interest rates, the Bank again experienced significant refinancing activity in residential real estate. As long-term rates continued to push to historically low levels, refinance activity in the current quarter grew and exceeded the level reached in the prior year’s period. This increased activity had a significant effect on the amount of non-interest income with total noninterest income increasing to $1.92 million for the quarter ended December 31, 2012, from $1.08 million for the quarter ended December 31, 2011, an increase of $842,000 or 78.33%. Of this amount, net gain on sale of loans increased to $962,000 for the quarter ended December 31, 2012 from $403,000 for the quarter ended December 31, 2011. During this period, $48.96 million 1-4 family mortgage loans were originated compared to $31.38 million in the quarter ended December 31, 2011. In addition, $41.94 million of mortgage loans were sold during the period compared to $24.61 million sold in the quarter ended December 31, 2011, an increase of $17.33 million. The gain on fair value hedge-FASB ASC 815 also contributed to the increase in noninterest income. Gain on fair value hedge-FASB ASC 815 increased to $28,000 from the prior period’s loss amount of $44,000.

Noninterest Expense. Noninterest expense was $4.79 million for the quarter ended December 31, 2012, and $2.88 million for the quarter ended December 31, 2011. The primary cause of this increase is the $731,000 in acquisition costs that incurred this period, while the prior period had none. We anticipate most, if not all of the acquisition costs related to the Sterling branch acquisition to be completed in the third quarter of this fiscal year 2013. The provision for valuation loss on OREO increased to $30,000 from $0 for the comparable period last year. This increase was due to decline in values in some of the Company’s foreclosed properties. Amortization of mortgage servicing rights increased from $174,000 to $221,000, an increase of $47,000. Salaries and employee benefits increased $928,000 which is due to increased staff in both preparation for the acquisition of the Sterling branches and those Sterling employees joining the Company on December 1, 2012. Also, this quarter’s amount includes $222,000 in nonrecurring compensation costs associated with the acquisition. A portion of these costs will be in the third quarter, but not continuing thereafter. Consulting fees decreased from $308,000 down to $35,000 as the prior year period included consulting services related to a possible acquisition which did not come to fruition. Amortization expense increased to $48,000 for $0 in the prior year period. The 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. Other expense categories showed relatively minor changes.

Income Tax Expense. Our income tax benefit was $103,000 for the quarter ended December 31, 2012, compared to $215,000 of an income tax expense for the quarter ended December 31, 2011. The effective tax rate for the quarter ended December 31, 2012 was -72.03% and was 30.63% for the quarter ended December 31, 2011.

Results of Operations for the Six Months Ended December 31, 2012 and 2011

Net Income. Eagle’s net income was $382,000 and $915,000 for the six months ended December 31, 2012 and 2011, respectively. The decrease of $533,000, or 58.25%, was due to a decrease in net interest income of $19,000 and increase in noninterest expense of $2.89 million partially offset by an increase in noninterest income of $1.85 million and a decrease in the provision for loan losses of $161,000. The tax provision was $363,000 lower in the current period. Basic earnings per share declined to $0.10 for the current period, compared to $0.25 for the previous year’s period.

Net Interest Income. Net interest income decreased to $5.57 million for the six months ended December 31, 2012, from $5.59 million for the previous year’s period. This decrease of $19,000 was the result of a decrease in interest and dividend income of $589,000, partially offset by a decrease in interest expense of $570,000.

Interest and Dividend Income. Total interest and dividend income was $6.72 million for the six months ended December 31, 2012, compared to $7.31 million for the six months ended December 31, 2011, representing a decrease of $589,000, or 8.05%. Interest and fees on loans decreased to $5.30 million for the six months ended December 31, 2012 from $5.61 million for the same period ended December 31, 2011. Average balances for loans receivable, net, for the six months ended December 31, 2012 were $186.24 million, compared to $189.69 million for the previous year an decrease of $3.44 million, or 1.82%. The average interest rate earned on loans receivable decreased by 21 basis points, from 5.91% to 5.70%. Interest and dividends on investment securities available-for-sale (AFS) decreased slightly to $1.40 million for the six months ended December 31, 2012 from $1.70 million for the same period last year. Average balances on investments increased to $108.74 million for the six months ended December 31, 2012, compared to $101.73 million for the six months ended December 31, 2011. The average interest rate earned on investments decreased to 2.58% from 3.34%. Interest on deposits with banks increased to $16,000 for the six months ended December 31, 2012, compared to $9,000

-39-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations for the Six Months Ended December 31, 2012 and 2011 - continued

for the six months ended December 31, 2011. The average balance on deposits with banks increased from $6.19 million up to $18.94 million while the average rate earned dropped from 0.26% to 0.17%.

Interest Expense. Total interest expense decreased to $1.15 million for the six months ended December 31, 2012, from $1.72 million for the six months ended December 31, 2011, a decrease of $570,000, or 33.10%, primarily due to decreases in interest paid on FHLB Advances and other borrowings. Interest on deposits increased to $581,000 for the six months ended December 31, 2012, from $562,000 for the six months ended December 31, 2011. This increase of $19,000, or 3.38%, was the result of a 7 basis point decrease in average rates paid on deposit accounts offset by increases in average balances. Interest bearing checking accounts also decreased to an average rate paid of 0.05% from 0.06%, while money market accounts increased to 0.14% from 0.13%. Certificates of deposits and savings accounts average rates both decreased for the six month period ended December 31, 2012-- one basis point for savings accounts and 69 basis points for certificates of deposits. Average balances in interest-bearing deposit accounts increased to $222.65 million for the six months ended December 31, 2012, compared to $191.11 million for the same period in the previous year. A decrease in the average balance of borrowings, in addition to a decrease in the average rate paid, resulted in a decrease in interest paid on borrowings to $524,000 versus $1.12 million paid in the same period ended December 31, 2011. The average rate paid on borrowings decreased from 3.63% last year to 2.94% this year. The average rate paid on liabilities decreased 0.47% from the six months ended December 31, 2011 to the six months ended December 31, 2012.

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 its 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 took $422,000 in provision for loan losses for the six months ended December 31, 2012 versus $583,000 in the six months ended December 31, 2011. This decrease from 2011 was based on an analysis of a variety of factors including delinquencies within the loan portfolio. Total real estate and other assets acquired in settlement of loans, net of allowance for losses decreased from $2.36 million at June 30, 2012 to $1.17 million at December 31, 2012.

Noninterest Income. Total noninterest income increased to $3.49 million for the six months ended December 31, 2012, from $1.64 million for the six months ended December 31, 2011, an increase of $1.85 million or 112.41%. This increase stemmed from an increase in refinancing activity and resulted in an increase of $1.14 million in net gain on sale of loans to $1.77 million for the six months ended December 31, 2012 from $639,000 for the six months ended December 31, 2011. Also, a net loss on the fair value hedge was $374,000 for the six months ended December 31, 2011, while it was a net gain of $65,000 for the six month period ended December 31, 2011, a swing of $439,000. Though the hedge is considered to be effective, a portion does run through noninterest income.

Noninterest Expense. Noninterest expense increased by $2.89 million or 54.10% to $8.22 million for the six months ended December 31, 2012, from $5.34 million for the six months ended December 31, 2011. This increase was primarily due to $1.21 million in acquisition costs incurred related to the acquisition of the Montana Sterling branches discussed above. The provision for valuation loss on OREO increased to $98,000 from $0 for the comparable period last year. This increase was due to decline in values in some of the Company’s foreclosed properties. The increase in the amortization of mortgage servicing rights resulted from an increase in refinance activity that occurred during the period compared to the previous period. Consulting fees decreased to $61,000 from $337,000 for the prior period. A significant portion of the amount in the prior period related the exploration of potential acquisition opportunity which did not come to fruition. Other expense categories which showed changes were the result of operating the larger Company with its 13 branch network compared to its previous network of only 6 branches.

Income Tax Expense. Eagle’s income tax expense was $39,000 for the six months ended December 31, 2012, compared to $402,000 for the six months ended December 31, 2011. The effective tax rate for the six months ended December 31, 2012 was 9.26% and was 30.52% for the six months ended December 31, 2011.

-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

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 December 31, 2012 and December 31, 2011.

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.

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 December 31, 2012, 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 8.7%. 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 13.19% as of December 31, 2011 to 8.46% as of December 31, 2012. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

-41-

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

As of December 31, 2012, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. At December 31, 2012, the Bank’s tangible, core, and risk-based capital ratios amounted to 8.46%, 8.46%, and 15.90%, respectively, compared to regulatory requirements of 1.50%, 3.00%, and 8.00%, respectively. See the following table (amounts in thousands):

	At December 31, 2012
	(Unaudited)
	Dollar		% of
	Amount		Assets
Tangible capital:
Capital level	$	41,592		8.46
Requirement		7,374		1.50
Excess		34,218		6.96

Core capital:
Capital level		41,592		8.46
Requirement		14,748		3.00
Excess		26,844		5.46

Risk-based capital:
Capital level		43,417		15.90
Requirement		21,840		8.00
Excess		21,577		7.90

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.

-42-

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.

-43-

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 December 31, 2012, 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.

-44-

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, 2012.

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.

-45-

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

-46-

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: February 14, 2013	By:	/s/ Peter J. Johnson
		Peter J. Johnson
		President/CEO



Date: February 14, 2013	By:	/s/ Clint J. Morrison
		Clint J. Morrison
		Senior Vice President/CFO

-47-