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Eagle Bancorp Montana, Inc. - Quarter Report: 2015 March (Form 10-Q)

a51096080.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 March 31, 2015
 
[   ]
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.opportunitybank.com

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  
[   ] 
Accelerated filer 
[   ] 
Non-accelerated filer  
[   ] 
Smaller reporting company
[X] 
(Do not check if smaller
reporting company)
   
                                
Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act).   Yes [   ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
 
Common stock, par value $0.01 per share
3,822,981 shares outstanding
As of May 13, 2015

 
 

 
 
  EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES  
     
 
TABLE OF CONTENTS
 
 
     
PART I.
FINANCIAL INFORMATION
PAGE
Item1.
Financial Statements (Unaudited)
 
   
  1
   
  3
     
 
5
     
  6
     
  7
     
  9
     
31
     
41
     
42
 
 
 
 
43
43
43
44
44
44
44
 
 
45
 
Exhibit 10.1
   
     
Exhibit 31.1
   
 
Exhibit 31.2
   
 
Exhibit 32.1
   
 
101.INS XBRL
Instance Document
 
 
101.SCH XBRL
Taxonomy Extension Schema Document
 
 
101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF XBRL
Taxonomy Extension Definition Linkbase Document
 
 
101.LAB XBRL
Taxonomy Extension Label Linkbase Document
 
 
101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document
 

 
 

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Note Regarding Forward-Looking Statements

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

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

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

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

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

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.  For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the transition period from July 1, 2014 to December 31, 2014, any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC.  We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware.
 
 
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)


   
March 31,
   
December 31,
 
   
2015
   
2014
 
ASSETS:
           
Cash and due from banks
  $ 3,506     $ 11,889  
Interest-bearing deposits in banks
    1,244       613  
Total cash and cash equivalents
    4,750       12,502  
                 
Securities available-for-sale
    152,239       161,787  
Federal Home Loan Bank stock
    1,967       1,968  
Federal Reserve Bank stock
    641       641  
Investment in Eagle Bancorp Statutory Trust I
    155       155  
Mortgage loans held-for-sale
    17,021       17,587  
Loans receivable, net of deferred loan fees of $553 at March 31, 2015
               
and $486 at December 31, 2014 and allowance for loan losses of $2,625 at
         
    March 31, 2015 and $2,450 at December 31, 2014
    333,790       316,270  
Accrued interest and dividends receivable
    2,146       2,318  
Mortgage servicing rights, net
    4,271       4,115  
Premises and equipment, net
    19,694       19,964  
Cash surrender value of life insurance
    11,816       11,735  
Real estate and other repossessed assets acquired in settlement of loans, net
    642       637  
Goodwill
    7,034       7,034  
Core deposit intangible, net
    625       663  
Deferred tax asset, net
    798       1,467  
Other assets
    1,776       1,364  
                 
Total assets
  $ 559,365     $ 560,207  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
- 1 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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


   
March 31,
   
December 31,
 
   
2015
   
2014
 
LIABILITIES:
           
Deposit accounts:
           
Noninterest bearing
  $ 65,877     $ 60,507  
Interest bearing
    386,822       380,476  
     Total deposits
    452,699       440,983  
                 
Accrued expenses and other liabilities
    4,050       4,578  
Federal Home Loan Bank advances and other borrowings
    42,640       54,993  
Subordinated debentures
    5,155       5,155  
     Total liabilities
    504,544       505,709  
                 
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock (no par value; 1,000,000 shares authorized; no shares
               
issued or outstanding)
    -       -  
Common stock (par value $0.01 per share; 8,000,000 shares authorized;
               
4,083,127 shares issued; 3,822,981 and 3,878,781 shares outstanding
               
at March 31, 2015 and December 31, 2014, respectively)
    41       41  
Additional paid-in capital
    22,126       22,122  
Unallocated common stock held by Employee Stock Ownership Plan
    (1,099 )     (1,141 )
Treasury stock, at cost
    (2,810 )     (2,194 )
Retained earnings
    35,983       35,885  
Net accumulated other comprehensive income (loss)
    580       (215 )
     Total shareholders' equity
    54,821       54,498  
                 
     Total liabilities and shareholders' equity
  $ 559,365     $ 560,207  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
- 2 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

   
Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
INTEREST AND DIVIDEND INCOME:
           
Interest and fees on loans
  $ 3,962     $ 3,254  
Securities available-for-sale
    759       1,066  
Interest on deposits in banks
    3       1  
Total interest and dividend income
    4,724       4,321  
                 
INTEREST EXPENSE:
               
Deposits
    337       329  
Federal Home Loan Bank advances and other borrowings      143       152  
Subordinated debentures
    21       21  
Total interest expense
    501       502  
                 
NET INTEREST INCOME
    4,223       3,819  
                 
Loan loss provision
    322       128  
                 
NET INTEREST INCOME AFTER LOAN LOSS PROVISION
    3,901       3,691  
                 
NONINTEREST INCOME:
               
Service charges on deposit accounts
    223       226  
Net gain on sale of loans (includes $496 and $366 for the three
               
months ended March 31, 2015 and 2014, respectively, related
               
to accumulated other comprehensive earnings reclassification)
    1,631       836  
Mortgage loan servicing fees
    415       359  
Wealth management income
    185       119  
Net gain on sale of available-for-sale securities (includes $186 and $196
               
for the three months ended March 31, 2015 and 2014, respectively,
               
related to accumulated other comprehensive earnings reclassification)
    186       196  
Net loss on sale of real estate owned and other repossessed property
    (1 )     -  
Net loss on fair value hedge
    (93 )     (72 )
Other noninterest income
    336       459  
Total noninterest income
    2,882       2,123  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
- 3 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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


   
Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
NONINTEREST EXPENSE:
           
Salaries and employee benefits
    3,379       3,209  
Occupancy and equipment expense
    736       711  
Data processing
    509       458  
Advertising
    219       211  
Amortization of mortgage servicing rights
    217       132  
Amortization of core deposit intangible and tax credits     100       105  
Federal insurance premiums
    95       84  
Postage
    46       40  
Legal, accounting and examination fees
    156       111  
Consulting fees
    240       164  
Other noninterest expense
    664       474  
Total noninterest expense
    6,361       5,699  
                 
INCOME BEFORE INCOME TAXES
    422       115  
                 
Income tax expense (includes $547 and $1,291 for the three
               
months ended March 31, 2015 and 2014, respectively,
               
related to income tax expense from reclassification items)
    36       7  
                 
NET INCOME
  $ 386     $ 108  
                 
                 
BASIC EARNINGS PER SHARE
  $ 0.10     $ 0.03  
                 
DILUTED EARNINGS PER SHARE
  $ 0.10     $ 0.03  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC EPS)
    3,844,617       3,918,399  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED EPS)
    3,881,872       3,973,202  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
- 4 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Dollars in Thousands)
(Unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
             
NET INCOME
  $ 386     $ 108  
                 
OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS):
               
Change in fair value of investment securities
               
available for sale, before income taxes
    1,495       3,489  
Reclassification for realized gains and losses on investment
               
securities included in income, before income tax
    (186 )     (196 )
Change in fair value of derivatives designated as cash flow
               
hedges, before income taxes
    529       238  
Reclassification for realized gains on derivatives designated
               
as cash flow hedges, before income taxes
    (496 )     (366 )
Total other items of comprehensive income
    1,342       3,165  
                 
Income tax (expense) benefit related to:
               
Investment securities
    (534 )     (1,343 )
Derivatives designated as cash flow hedges
    (13 )     52  
      (547 )     (1,291 )
                 
COMPREHENSIVE INCOME
  $ 1,181     $ 1,982  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
- 5 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2015 and 2014
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)


                                       
ACCUMULATED
       
                     
 UNALLOCATED
         
OTHER
       
   
PREFERRED
 
COMMON
   
PAID-IN
   
ESOP
   
TREASURY
   
RETAINED
   
COMPREHENSIVE
 
   
STOCK
   
STOCK
   
CAPITAL
   
SHARES
   
STOCK
   
EARNINGS
   
(LOSS) INCOME
   
TOTAL
 
                                                 
Balance at December 31, 2013
  $ -     $ 41     $ 22,118     $ (1,307 )   $ (1,800 )   $ 34,422     $ (5,717 )   $ 47,757  
                                                                 
Net income
                                            108               108  
                                                                 
Other comprehensive income
                                                    1,874       1,874  
                                                                 
Dividends paid ($0.0725 per share)
                                            (284 )             (284 )
                                                                 
Employee Stock Ownership Plan                                                                
shares allocated or committed to be                                                                
released for allocation (4,154 shares)                     2       42                               44  
                                                                 
Balance at March 31, 2014
  $ -     $ 41     $ 22,120     $ (1,265 )   $ (1,800 )   $ 34,246     $ (3,843 )   $ 49,499  


                                                 
Balance at December 31, 2014
  $ -     $ 41     $ 22,122     $ (1,141 )   $ (2,194 )   $ 35,885     $ (215 )   $ 54,498  
                                                                 
Net income
                                            386               386  
                                                                 
Other comprehensive income
                                                    795       795  
                                                                 
Dividends paid ($0.0750 per share)
                                            (288 )             (288 )
                                                                 
Employee Stock Ownership Plan                                                                
shares allocated or committed to                                                                
be released for allocation (4,154                                                                
shares)                     4       42                               46  
                                                                 
Treasury stock purchased                                                                
 (55,800 shares at $11.03 average                                                                
 cost per share)                                     (616 )                     (616 )
                                                                 
Balance at March 31, 2015
  $ -     $ 41     $ 22,126     $ (1,099 )   $ (2,810 )   $ 35,983     $ 580     $ 54,821  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
- 6 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 386     $ 108  
Adjustments to reconcile net income to net cash provided by operating activities:
         
Loan loss provision
    322       128  
Depreciation
    296       284  
Net amortization of investment securities premium and discounts
    533       684  
Amortization of mortgage servicing rights
    217       132  
Amortization of core deposit intangible and tax credits
    100       105  
Deferred income tax expense
    121       13  
Net gain on sale of loans
    (1,631 )     (836 )
Net gain on sale of available-for-sale securities
    (186 )     (196 )
Net loss on sale of real estate owned and other repossessed assets
    1       -  
Net loss on fair value hedge
    93       72  
Net loss on sale/disposal of premises and equipment
    -       11  
Net appreciation in cash surrender value of life insurance
    (81 )     (78 )
Net change in:
               
Accrued interest and dividends receivable
    172       169  
Loans held-for-sale
    2,230       6,011  
Other assets
    (473 )     (23 )
Accrued expenses and other liabilities
    (575 )     (44 )
Net cash provided by operating activities
    1,525       6,540  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Activity in available-for-sale securities:
               
Sales
    8,947       3,955  
Maturities, principal payments and calls
    2,612       4,174  
Purchases
    (1,049 )     (1,597 )
Federal Home Loan Bank stock redeemed
    1       18  
Loan origination and principal collection, net
    (18,224 )     (11,591 )
Proceeds from Bank owned life insurance
    -       109  
Proceeds from sale of real estate and other repossessed
               
assets acquired in settlement of loans
    3       2  
Insurance proceeds related to premises and equipment
    -       3  
Additions to premises and equipment
    (26 )     (798 )
Net cash used in investing activities
    (7,736 )     (5,725 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
- 7 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase in deposits
  $ 11,716     $ 6,561  
Net short-term payments on Federal Home Loan Bank and other borrowings
    (12,303 )     (4,806 )
Long-term advances from Federal Home Loan Bank and other borrowings
    5,000       -  
Payments on long-term Federal Home Loan Bank and other borrowings
    (5,050 )     (50 )
Dividends paid
    (288 )     (284 )
Purchase of treasury stock, at cost
    (616 )     -  
Net cash (used in) provided by financing activities
    (1,541 )     1,421  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (7,752 )     2,236  
                 
CASH AND CASH EQUIVALENTS, beginning of period
    12,502       7,055  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 4,750     $ 9,291  
                 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid during the period for interest
  $ 490     $ 485  
                 
Cash paid during the period for income taxes
  $ 27     $ -  
                 
NON-CASH INVESTING ACTIVITIES:
               
Increase in market value of securities available-for-sale
  $ 1,309     $ 3,293  
                 
Mortgage servicing rights recognized
  $ 373     $ 207  
                 
Loans transferred to real estate and other assets acquired in foreclosure
  $ 9     $ 51  
                 
Employee Stock Ownership Plan shares released
  $ 46     $ 44  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
- 8 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual reports.  However, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income and cash flows for the unaudited interim periods.

The results of operations for the three month period ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 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 six month transition period ended December 31, 2014.

Certain prior period amounts have been reclassified to conform to the presentation for 2015.  These reclassifications had no impact on net income or total shareholders’ equity.

The Company evaluated subsequent events for potential recognition and/or disclosure through May 13, 2015 the date the consolidated financial statements were issued.

NOTE 2. INVESTMENT SECURITIES

Investment securities are summarized as follows:

   
March 31, 2015
   
December 31, 2014
 
         
Gross
               
Gross
       
   
Amortized
   
Unrealized
   
Fair
   
Amortized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
(Losses)
   
Value
   
Cost
   
Gains
   
(Losses)
   
Value
 
   
(In Thousands)
 
Available-for-Sale:
                                               
U.S. government and
                                               
agency obligations
  $ 32,313     $ 44     $ (160 )   $ 32,197     $ 33,472     $ 42     $ (333 )   $ 33,181  
Municipal obligations
    63,844       1,200       (665 )     64,379       71,844       1,243       (1,202 )     71,885  
Corporate obligations
    5,993       17       (51 )     5,959       5,990       27       (12 )     6,005  
MBSs - government-backed
    21,668       119       (2 )     21,785       22,097       56       (189 )     21,964  
CMOs - government backed
    27,971       64       (116 )     27,919       29,243       26       (517 )     28,752  
Total
  $ 151,789     $ 1,444     $ (994 )   $ 152,239     $ 162,646     $ 1,394     $ (2,253 )   $ 161,787  
 
For the three months ended March 31, 2015 and 2014, net proceeds from sales of securities available-for-sale were $8,947,000 and $3,955,000, respectively.  For the three months ended March 31, 2015 and 2014, gross realized gains were $242,000 and $213,000, respectively and gross realized losses were $56,000 and $17,000, respectively.
 
- 9 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 2. INVESTMENT SECURITIES - continued

The amortized cost and fair value of securities at March 31, 2015 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
   
(In Thousands)
 
             
Due in one year or less
  $ 1,420     $ 1,428  
Due from one to five years
    3,726       3,761  
Due from five to ten years
    16,991       17,100  
Due after ten years
    80,013       80,246  
      102,150       102,535  
MBSs - government-backed
    21,668       21,785  
CMOs - government-backed
    27,971       27,919  
Total
  $ 151,789     $ 152,239  
 
Maturities of securities do not reflect repricing opportunities present in adjustable rate securities.

The Company’s investment securities that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months were as follows:

   
March 31, 2015
 
   
Less Than 12 Months
   
12 Months or Longer
 
         
Gross
   
Estimated
   
Gross
 
   
Fair
   
Unrealized
   
Market
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
 
   
(In Thousands)
 
U.S. government and agency
  $ 1,590     $ (28 )   $ 24,264     $ (132 )
Municipal obligations
    5,720       (32 )     24,890       (633 )
Corporate obligations
    1,988       (12 )     1,961       (39 )
MBSs and CMOs - government-backed
    1,953       (1 )     19,454       (117 )
Total
  $ 11,251     $ (73 )   $ 70,569     $ (921 )
                                 
   
December 31, 2014
 
   
Less Than 12 Months
   
12 Months or Longer
 
           
Gross
   
Estimated
   
Gross
 
   
Fair
   
Unrealized
   
Market
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
 
   
(In Thousands)
 
U.S. government and agency
  $ 1,611     $ (19 )   $ 27,733     $ (314 )
Municipal obligations
    2,330       (48 )     44,386       (1,154 )
Corporate obligations
    997       (2 )     1,990       (10 )
MBSs and CMOs - government-backed
    9,091       (68 )     35,333       (638 )
Total
  $ 14,029     $ (137 )   $ 109,442     $ (2,116 )
 
 
- 10 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 2. INVESTMENT SECURITIES - continued

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  As of March 31, 2015 and December 31, 2014, there were, respectively, 56 and 87 securities in an unrealized loss position and that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

At March 31, 2015, 45 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 1.44% from the Company’s amortized cost basis of these securities.  At December 31, 2014, 69 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 1.98% from the Company’s amortized cost basis of these securities.  These unrealized losses are principally due to changes in interest rates and credit spreads.  In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts' reports.  As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

At March 31, 2015, 4 corporate obligations had an unrealized loss of approximately 1.28% from the Company’s amortized cost basis of this security.  At December 31, 2014, 3 corporate obligations had an unrealized loss with aggregate depreciation of approximately 0.40% from the Company's cost basis.  This unrealized loss is principally due to changes in interest rates.  No credit issues have been identified that cause management to believe the declines in market value are other than temporary.  In analyzing the issuer's financial condition, management considers industry analysts' reports, financial performance and projected target prices of investment analysts within a one-year time frame.  As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.
 
 At March 31, 2015, 7 mortgage backed and CMO securities had unrealized losses with aggregate depreciation of approximately 0.55% from the Company’s cost basis of these securities.  At December 31, 2014, 15 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of approximately 1.56% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market, changes in interest rates and credit spreads and uncertainty of future prepayment speeds. Management considers available evidence to assess whether it is more likely-than-not that all amounts due would not be collected. In such assessment, management considers the severity and duration of the impairment, the credit ratings of the security, the overall deal and payment structure, including the Company's position within the structure, underlying obligor, financial condition and near term prospects of the issuer, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates. There has been no disruption of the scheduled cash flows on any of the securities. Management’s analysis as of December 31, 2014 revealed no expected credit losses on the securities and therefore, declines are not deemed to be other than temporary.
 
 
- 11 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE

Loans receivable consisted of the following:

   
March 31,
   
December 31,
 
   
2015
   
2014
 
   
(In Thousands)
 
First mortgage loans:
           
  Residential mortgage (1-4 family)
  $ 104,546     $ 102,543  
  Commercial real estate
    131,110       117,627  
  Real estate construction
    8,711       8,002  
                 
Other loans:
               
  Home equity
    40,312       39,671  
  Consumer
    13,664       13,827  
  Commercial
    38,625       37,536  
                 
Total
    336,968       319,206  
                 
Allowance for loan losses
    (2,625 )     (2,450 )
Deferred loan fees, net
    (553 )     (486 )
Total loans, net
  $ 333,790     $ 316,270  

Within the commercial real estate loan category above, $12,489,000 and $12,612,000 was guaranteed by the United States Department of Agriculture Rural Development, at March 31, 2015 and December 31, 2014, respectively.  In addition, within the commercial loan category above, $3,628,000 and $3,704,000 were in loans originated through a syndication program where the business resides outside of Montana, at March 31, 2015, and December 31, 2014, respectively.

The following table includes information regarding nonperforming assets.

   
March 31,
   
December 31,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
             
Non-accrual loans
  $ 176     $ 962  
Accruing loans delinquent 90 days or more
    -       -  
Restructured loans, net
    47       48  
Total nonperforming loans
    223       1,010  
Real estate owned and other repossessed assets, net
    642       637  
Total nonperforming assets
  $ 865     $ 1,647  
                 
Total non-performing assets as a percentage of total assets
    0.15 %     0.29 %
                 
Allowance for loan losses
  $ 2,625     $ 2,450  
                 
Percent of allowance for loan losses to non-performing loans
    1,117.13 %     242.57 %
                 
Percent of allowance for loan losses to non-performing assets
    303.47 %     148.76 %
 
 
- 12 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued

Allowance for loan losses activity was as follows:

   
Three Months Ended
 
   
March 31, 2015
 
    Residential                                      
   
Mortgage
   
Commercial
   
Real Estate
   
Home
                   
   
(1-4 Family)
   
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Allowance for loan losses:
                                         
Beginning balance, January 1, 2015
  $ 684     $ 1,098     $ 35     $ 270     $ 46     $ 317     $ 2,450  
Charge-offs
    (137 )     -       -       -       (11 )     -       (148 )
Recoveries
    -       -       -       -       1       -       1  
Provision
    98       128       5       36       14       41       322  
Ending balance, March 31, 2015
  $ 645     $ 1,226     $ 40     $ 306     $ 50     $ 358     $ 2,625  
                                                         
Ending balance, March 31, 2015 allocated to
                                                 
loans individually evaluated for impairment
  $ -     $ -     $ -     $ -     $ 5     $ -     $ 5  
                                                         
Ending balance, March 31, 2015 allocated to
                                                 
loans collectively evaluated for impairment
  $ 645     $ 1,226     $ 40     $ 306     $ 45     $ 358     $ 2,620  
                                                         
Loans receivable:
                                                       
Ending balance, March 31, 2015
  $ 104,546     $ 131,110     $ 8,711     $ 40,312     $ 13,664     $ 38,625     $ 336,968  
                                                         
Ending balance, March 31, 2015 of loans
                                                 
individually evaluated for impairment
  $ 648     $ 332     $ -     $ 224     $ 53     $ 234     $ 1,491  
                                                         
Ending balance, March 31, 2015 of loans
                                                 
collectively evaluated for impairment
  $ 103,898     $ 130,778     $ 8,711     $ 40,088     $ 13,611     $ 38,391     $ 335,477  
 
 
- 13 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued

   
Three Months Ended
 
   
March 31, 2014
 
    Residential                                      
   
Mortgage
   
Commercial
   
Real Estate
   
Home
                   
   
(1-4 Family)
   
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Allowance for loan losses:
                                         
Beginning balance, January 1, 2014
  $ 463     $ 914     $ 25     $ 324     $ 51     $ 343     $ 2,120  
Charge-offs
    -       (21 )     -       -       (53 )     -       (74 )
Recoveries
    -       -       -       -       1       -       1  
Provision
    8       23       2       1       45       49       128  
Ending balance, March 31, 2014
  $ 471     $ 916     $ 27     $ 325     $ 44     $ 392     $ 2,175  
                                                         
Ending balance, March 31, 2014 allocated to
                                                 
loans individually evaluated for impairment
  $ -     $ -     $ -     $ 68     $ 24     $ 144     $ 236  
                                                         
Ending balance, March 31, 2014 allocated to
                                                 
loans collectively evaluated for impairment
  $ 471     $ 916     $ 27     $ 257     $ 20     $ 248     $ 1,939  
                                                         
Loans receivable:
                                                       
Ending balance, March 31, 2014
  $ 88,507     $ 89,896     $ 5,050     $ 35,952     $ 12,299     $ 29,477     $ 261,181  
                                                         
Ending balance, March 31, 2014 of loans
                                                 
individually evaluated for impairment
  $ 303     $ 130     $ -     $ 247     $ 130     $ 290     $ 1,100  
                                                         
Ending balance, March 31, 2014 of loans
                                                 
collectively evaluated for impairment
  $ 88,204     $ 89,766     $ 5,050     $ 35,705     $ 12,169     $ 29,187     $ 260,081  
 
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 affected in the future.
 
 
- 14 -

 
 
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.

Internal classification of the loan portfolio was as follows:

   
March 31, 2015
 
   
Residential
                                     
   
Mortgage
   
Commercial
   
Real Estate
   
Home
                   
   
(1-4 Family)
   
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Grade:
                                         
Pass
  $ 103,898     $ 130,778     $ 8,711     $ 40,088     $ 13,611     $ 38,391     $ 335,477  
Special mention
    -       -       -       -       -       -       -  
Substandard
    648       332       -       224       41       234       1,479  
Doubtful
    -       -       -       -       7       -       7  
Loss
    -       -       -       -       5       -       5  
     Total
  $ 104,546     $ 131,110     $ 8,711     $ 40,312     $ 13,664     $ 38,625     $ 336,968  
                                                         
Credit risk profile based on payment activity
                                                 
Performing
  $ 104,496     $ 131,110     $ 8,711     $ 40,217     $ 13,642     $ 38,569     $ 336,745  
Restructured loans
    -       -       -       47       -       -       47  
Nonperforming
    50       -       -       48       22       56       176  
     Total
  $ 104,546     $ 131,110     $ 8,711     $ 40,312     $ 13,664     $ 38,625     $ 336,968  
 
   
December 31, 2014
 
   
Residential
                                   
   
Mortgage
   
Commercial
   
Home
                   
   
(1-4 Family)
 
Real Estate
   
Construction
   
Equity
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Grade:
                                         
Pass
  $ 101,072     $ 117,627     $ 8,002     $ 39,343     $ 13,772     $ 37,307     $ 317,123  
Special mention
    -       -       -       -       -       -       -  
Substandard
    1,331       -       -       328       41       229       1,929  
Doubtful
    -       -       -       -       7       -       7  
Loss
    140       -       -       -       7       -       147  
     Total
  $ 102,543     $ 117,627     $ 8,002     $ 39,671     $ 13,827     $ 37,536     $ 319,206  
                                                         
Credit risk profile based on payment activity
                                               
Performing
  $ 101,722     $ 117,627     $ 8,002     $ 39,575     $ 13,811     $ 37,459     $ 318,196  
Restructured loans
    -       -       -       48       -       -       48  
Nonperforming
    821       -       -       48       16       77       962  
     Total
  $ 102,543     $ 117,627     $ 8,002     $ 39,671     $ 13,827     $ 37,536     $ 319,206  
 
 
- 15 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued

The following tables include information regarding delinquencies within the loan portfolio.

   
March 31, 2015
 
                                 
Recorded
 
         
90 Days
                     
Investment
 
   
30-89 Days
   
and
   
Total
         
Total
   
>90 Days and
 
   
Past Due
   
Greater
   
Past Due
   
Current
   
Loans
   
Still Accruing
 
   
(In Thousands)
 
Residential mortgage (1-4 family)
  $ 630     $ 50     $ 680     $ 103,866     $ 104,546     $ -  
Commercial real estate
    1,159       -       1,159       129,951       131,110       -  
Real estate construction
    -       -       -       8,711       8,711       -  
Home equity
    301       48       349       39,963       40,312       -  
Consumer
    162       22       184       13,480       13,664       -  
Commercial
    210       56       266       38,359       38,625       -  
     Total
  $ 2,462     $ 176     $ 2,638     $ 334,330     $ 336,968     $ -  
 
   
December 31, 2014
 
                                 
Recorded
 
         
90 Days
                     
Investment
 
   
30-89 Days
   
and
   
Total
         
Total
   
>90 Days and
 
   
Past Due
   
Greater
   
Past Due
   
Current
   
Loans
   
Still Accruing
 
   
(In Thousands)
 
Residential mortgage (1-4 family)
  $ 203     $ 821     $ 1,024     $ 101,519     $ 102,543     $ -  
Commercial real estate
    131       -       131       117,496       117,627       -  
Real estate construction
    -       -       -       8,002       8,002       -  
Home equity
    303       48       351       39,320       39,671       -  
Consumer
    258       16       274       13,553       13,827       -  
Commercial
    331       77       408       37,128       37,536       -  
     Total
  $ 1,226     $ 962     $ 2,188     $ 317,018     $ 319,206     $ -  
 
 
- 16 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued

The following tables include information regarding impaired loans.

   
March 31, 2015
 
         
Unpaid
         
Interest
   
Average
 
   
Recorded
   
Principal
   
Related
   
Income
   
Recorded
 
   
Investment
   
Balance
   
Allowance
   
Recognized
   
Investment
 
   
(In Thousands)
 
With no related allowance:
                             
Residential mortgage (1-4 family)
  $ 648     $ 648     $ -     $ 6     $ 649  
Commercial real estate
    332       332       -       4       166  
Construction
    -       -       -       -       -  
Home equity
    224       288       -       2       276  
Consumer
    48       81       -       1       48  
Commercial
    234       264       -       2       232  
                                         
With a related allowance:
                                       
Residential mortgage (1-4 family)
    -       -       -       -       411  
Commercial real estate
    -       -       -       -       -  
Construction
    -       -       -       -       -  
Home equity
    -       -       -       -       -  
Consumer
    5       5       5       -       6  
Commercial
    -       -       -       -       -  
                                         
Total:
                                       
Residential mortgage (1-4 family)
    648       648       -       6       1,060  
Commercial real estate
    332       332       -       4       166  
Construction
    -       -       -       -       -  
Home equity
    224       288       -       2       276  
Consumer
    53       86       5       1       54  
Commercial
    234       264       -       2       232  
     Total
  $ 1,491     $ 1,618     $ 5     $ 15     $ 1,788  
 
 
 
- 17 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3. LOANS RECEIVABLE - continued

   
December 31, 2014
 
         
Unpaid
         
Interest
   
Average
 
   
Recorded
   
Principal
   
Related
   
Income
   
Recorded
 
   
Investment
   
Balance
   
Allowance
   
Recognized
   
Investment
 
   
(In Thousands)
 
With no related allowance:
                             
Residential mortgage (1-4 family)
  $ 650     $ 650     $ -     $ 14     $ 655  
Commercial real estate
    -       -       -       -       140  
Construction
    -       -       -       2       -  
Home equity
    328       392       -       6       293  
Consumer
    48       82       -       2       65  
Commercial
    229       259       -       9       265  
                                         
With a related allowance:
                                       
Residential mortgage (1-4 family)
    821       821       140       -       411  
Commercial real estate
    -       -       -       -       -  
Construction
    -       -       -       -       -  
Home equity
    -       -       -       -       16  
Consumer
    7       7       7       -       14  
Commercial
    -       -       -       -       8  
                                         
Total:
                                       
Residential mortgage (1-4 family)
    1,471       1,471       140       14       1,066  
Commercial real estate
    -       -       -       -       140  
Construction
    -       -       -       2       -  
Home equity
    328       392       -       6       309  
Consumer
    55       89       7       2       79  
Commercial
    229       259       -       9       273  
     Total
  $ 2,083     $ 2,211     $ 147     $ 33     $ 1,867  
 
 
- 18 -

 
 
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 that fiscal year starting 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 March 31, 2015, 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 $47,000 (310-40-65-1(b)), and there was no allowance for credit losses associated with these receivables, on the basis of a current evaluation of loss (310-40-65-1(b)).  There was $34,000 charged-off at the time of restructure related to these receivables.

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

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

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

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

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

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

 
- 19 -

 
 
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.

   
March 31, 2015
 
   
Accrual
   
Non-Accrual
   
Total
 
   
Status
   
Status
   
Modification
 
   
(In Thousands)
 
Residential mortgage (1-4 family)
  $ -     $ -     $ -  
Commercial real estate
    -       -       -  
Real estate construction
    -       -       -  
Home equity
    47       -       47  
Consumer
    -       -       -  
Commercial
    -       -       -  
Total
  $ 47     $ -     $ 47  
                         
   
December 31, 2014
 
   
Accrual
   
Non-Accrual
   
Total
 
   
Status
   
Status
   
Modification
 
   
(In Thousands)
 
Residential mortgage (1-4 family)
  $ -     $ -     $ -  
Commercial real estate
    -       -       -  
Real estate construction
    -       -       -  
Home equity
    48       -       48  
Consumer
    -       -       -  
Commercial
    -       -       -  
Total
  $ 48     $ -     $ 48  

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.

During the three months ended March 31, 2015 and 2014, there were no new restructured loans.

There were no loans modified as a troubled debt restructured loan within the previous three months for which there was a payment default during the three months ended March 31, 2015.

A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.  As of March 31, 2015 and December 31, 2014, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures.

 
- 20 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5. DEPOSITS
 
Deposits are summarized as follows:

   
March 31,
   
December 31,
 
   
2015
   
2014
 
   
(In Thousands)
 
             
Noninterest checking
  $ 65,877     $ 60,507  
Interest-bearing checking
    76,498       76,367  
Savings
    66,513       62,455  
Money market
    94,445       91,431  
Time certificates of deposit
    149,366       150,223  
Total
  $ 452,699     $ 440,983  

NOTE 6. EARNINGS PER SHARE

Basic earnings per share for the three months ended March 31, 2015 was computed using 3,844,617 weighted average shares outstanding. Basic earnings per share for the three months ended March 31, 2014 was computed using 3,918,399 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 3,881,872 for the three months ended March 31, 2015 and 3,973,202 for the three months ended March 31, 2014.
 
 
NOTE 7. DIVIDENDS AND STOCK REPURCHASE PROGRAM
 
For the six month transition period from July 1, 2014 through December 31, 2014, Eagle paid dividends of $0.075 per share each quarter.  A dividend of $0.075 per share was declared on January 22, 2015, and paid March 6, 2015 to shareholders of record on February 13, 2015.  A dividend of $0.075 per share was declared on April 23, 2015, payable on June 6, 2015 to shareholders of record on May 13, 2015.

On July 1, 2013, the Company announced that its Board of Directors authorized a common stock repurchase program for 150,000 shares of common stock, effective July 1, 2013.  The Company did not purchase any shares of our common stock during the fiscal year ended June 30, 2014.  The repurchase program expired on June 30, 2014.

On July 1, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 200,000 shares of its common stock. Under the plan, shares may be purchased by the company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations.  The Company has purchased 110,800 shares of its common stock.  The repurchase program expires on June 30, 2015.
 
 
- 21 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table includes information regarding the activity in accumulated other comprehensive income (loss).

         
Unrealized
       
   
Gains (Losses)
   
(Losses) Gains
       
   
on Derivatives
   
on Investment
       
   
Designated as
   
Securities
       
   
Cash Flow Hedges
   
Available for Sale
   
Total
 
                   
Balance, January 1, 2015
  $ 294     $ (509 )   $ (215 )
Other comprehensive income before,
                       
    reclassifications and income taxes
    529       1,495       2,024  
Amounts reclassified from accumulated other
                       
    comprehensive income (loss), before income taxes
    (496 )     (186 )     (682 )
Income tax expense
    (13 )     (534 )     (547 )
Total other comprehensive income
    20       775       795  
Balance, March 31, 2015
  $ 314     $ 266     $ 580  
                         
Balance, January 1, 2014
  $ 217     $ (5,934 )   $ (5,717 )
Other comprehensive income (loss),
                       
    before reclassifications and income taxes
    238       3,489       3,727  
Amounts reclassified from accumulated other
                       
    comprehensive income (loss), before income taxes
    (366 )     (196 )     (562 )
Income tax benefit
    52       (1,343 )     (1,291 )
Total other comprehensive loss
    (76 )     1,950       1,874  
Balance, March 31, 2014
  $ 141     $ (3,984 )   $ (3,843 )
 
NOTE 9. DERIVATIVES AND HEDGING ACTIVITIES

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

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

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.
 
 
- 22 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
NOTE 9. DERIVATIVES AND HEDGING ACTIVITIES - continued

The hedged fixed rate loan had an original maturity of 20 years and was not callable.  This loan was hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount, maturity, and fixed rate coupons. The swap is not callable. At December 31, 2014, the loan had an outstanding principal balance of $10,641,000 and the interest rate swap had a notional value of $10,673,000.

At December 31, 2014, the interest rate swap on the fixed-rate loan was ineffective.  The Bank recorded a loss of $317,000 in noninterest income during the quarter ended December 31, 2014 related to the ineffectiveness.  The interest rate swap was terminated during the quarter ended March 31, 2015.  The Bank recorded a loss of $93,000 in noninterest income during the quarter ended March 31, 2015 related to the swap termination.  The loan fair value adjustment of $138,000 at March 31, 2015 will be amortized over the remaining life of the loan which matures September 1, 2030.
 
   
Effect of Derivative Instruments on Statement of Financial Condition
 
   
Fair Value of Derivative Instruments
 
                                                 
   
Asset Derivatives
   
Liabilities Derivatives
 
   
March 31, 2015
   
December 31, 2014
   
March 31, 2015
   
December 31, 2014
 
   
Balance
         
Balance
         
Balance
         
Balance
       
   
Sheet
   
Fair
   
Sheet
   
Fair
   
Sheet
   
Fair
   
Sheet
   
Fair
 
   
Location
   
Value
   
Location
   
Value
   
Location
   
Value
   
Location
   
Value
 
   
(In Thousands)
 
Derivatives designated
                                               
as hedging instruments
                                               
under ASC 815
                                     
Other
       
   Interest rate contracts
    n/a     $ -       n/a     $ -       n/a     $ -    
Liabilities
    $ 579  
                                                               
Change in fair value of
                                                             
financial instrument being
                                                             
hedged under ASC 815
                                                             
   Interest rate contracts
 
Loans
    $ 138    
Loans
    $ 138       n/a     $ -       n/a     $ -  
                                                                 
   
Effect of Derivative Instruments on Statement of Income
 
   
For the three Months Ended March 31, 2015 and 2014
 
   
(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
              2015       2014  
   
Interest rate contracts
           
Noninterest income
            $ (93 )   $ (72 )
 
Derivative loan commitments – Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held-for-sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates.  If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.  The notional amount of interest rate lock commitments was $29,253,000 and $12,276,000 at March 31, 2015 and December 31, 2014, respectively.

The Company has no other off-balance-sheet arrangements or transactions with unconsolidated, special purpose entities that would expose the Company to liability that is not reflected on the face of the financial statements.
 
 
- 23 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10. 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.
 
 
- 24 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10. FAIR VALUE DISCLOSURES – continued
 
Loans Held-for-Sale – These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds based on sales contracts and commitments and are considered Level 2 inputs.

Repossessed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans.  The value is based upon primary third party appraisals, less costs to sell.  The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.  Such discounts are typically significant and result in Level 3 classification of the inputs for determining fair value.  Repossessed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on same or similar factors above.

Loan Subject to Fair Value Hedge – The Company previously had one loan that was carried at fair value subject to a fair value hedge.  Fair value was determined utilizing valuation models that considered the scheduled cash flows through anticipated maturity and was considered a Level 2 input.  The interest rate swap was terminated during the quarter ended March 31, 2015.  See Note 9 – Derivatives and Hedging Activities for more information.
 
 Derivative financial instruments – Fair values for interest rate swap agreements were based upon the amounts required to settle the contracts.  These instruments were valued using Level 3 inputs utilizing valuation models that considered: (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 utilized counterparties’ valuations to assess the reasonableness of its prices and valuation techniques, there was not sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.  The interest rate swap was terminated during the quarter ended March 31, 2015.  See Note 9 – Derivatives and Hedging Activities for more information.
 
 
- 25 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10. FAIR VALUE DISCLOSURES - continued
 
The ollowing tables summarize financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
 
   
March 31, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
 
   
Inputs
   
Inputs
   
Inputs
   
Value
 
   
(In Thousands)
 
Financial Assets:
                       
Available-for-sale securities
                       
U.S. government and agency
  $ -     $ 32,197     $ -     $ 32,197  
Municipal obligations
    -       64,379       -       64,379  
Corporate obligations
    -       5,959       -       5,959  
MBSs - government-backed
    -       21,785       -       21,785  
CMOs - government backed
    -       27,919       -       27,919  
Loans held-for-sale
    -       17,021       -       17,021  
                                 
   
December 31, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
 
   
Inputs
   
Inputs
   
Inputs
   
Value
 
   
(In Thousands)
 
Financial Assets:
                               
Available-for-sale securities
                               
U.S. government and agency
  $ -     $ 33,181     $ -     $ 33,181  
Municipal obligations
    -       71,885       -       71,885  
Corporate obligations
    -       6,005       -       6,005  
MBSs - government-backed
    -       21,964       -       21,964  
CMOs - government backed
    -       28,752       -       28,752  
Loans held-for-sale
    -       17,587       -       17,587  
Financial Liability:
                               
Derivative financial instruments
    -       579       -       579  
 
 
- 26 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10. FAIR VALUE DISCLOSURES - continued
 
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
   
March 31, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
 
   
Inputs
   
Inputs
   
Inputs
   
Value
 
   
(In Thousands)
 
Impaired loans
  $ -     $ -     $ 1,486     $ 1,486  
Repossessed assets
    -       -       642       642  
                                 
   
December 31, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
 
   
Inputs
   
Inputs
   
Inputs
   
Value
 
   
(In Thousands)
 
Impaired loans
  $ -     $ -     $ 1,936     $ 1,936  
Repossessed assets
    -       -       637       637  

During the quarter ended March 31, 2015, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $1,491,000 were reduced by specific valuation allowance allocations totaling $5,000 to a total reported fair value of $1,486,000 based on collateral valuations utilizing Level 3 valuation inputs.

During the six months ended December 31, 2014, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $2,083,000 were reduced by specific valuation allowance allocations totaling $147,000 to a total reported fair value of $1,936,000 based on collateral valuations utilizing Level 3 valuation inputs.

The following table represents the Banks’s Level 3 financial assets and liabilities, the valuation techniques used to measure the fair value of those financial assets and liabilities, and the significant unobservable inputs and the ranges of values for those inputs.
 
   
Fair Value at
       
Principal
 
Significant
 
Range of
 
   
March 31,
   
December 31,
 
Valuation
 
Unobservable
 
Signficant Input
 
Instrument
 
2015
   
2014
 
Technique
 
Inputs
 
Values
 
(Dollars In Thousands)
 
                         
             
Appraisal of
 
Appraisal
     
Impaired loans
  $ 1,486     $ 1,936  
collateral (1)
 
adjustments
    10-30 %
                               
                 
Appraisal of
 
Liquidation
       
Repossessed Assets
  $ 642     $ 637  
collateral (1)(3)
 
expenses (2)
    10-30 %
 
 
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less associated allowance.
 
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
 
(3) Includes qualitative adjustments by management and estimated liquidation expenses.
 
 
 
- 27 -

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

FASB ASC Topic 825 requires disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value.  Below is a table that summarizes the fair market values of all financial instruments of the Company at March 31, 2015 and December 31, 2014, 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.
 
   
March 31, 2015
 
                     
Total
       
   
Level 1
   
Level 2
   
Level 3
   
Estimated
   
Carrying
 
   
Inputs
   
Inputs
   
Inputs
   
Fair Value
   
Amount
 
   
(In Thousands)
 
Financial Assets:
                             
Cash and cash equivalents
  $ 4,750     $ -     $ -     $ 4,750     $ 4,750  
Federal Home Loan Bank stock
    1,967       -       -       1,967       1,967  
Federal Reserve Bank stock
    641       -       -       641       641  
Loans receivable, net
    -       -       339,116       339,116       332,304  
Accrued interest and dividends
                                       
receivable
    2,146       -       -       2,146       2,146  
Mortgage servicing rights
    -       -       5,341       5,341       4,271  
Cash surrender value of life insurance
    11,816       -       -       11,816       11,816  
Financial Liabilities:
                                       
Non-maturing interest bearing deposits
    -       237,456       -       237,456       237,456  
Non-interest bearing deposits
    65,877       -       -       65,877       65,877  
Time certificates of deposit
    -       -       149,978       149,978       149,366  
Accrued expenses and other liabilities
    4,050       -       -       4,050       4,050  
   Federal Home Loan Bank advances
                                 
and other borrowings
    -       -       42,875       42,875       42,640  
Subordinated debentures
    -       -       4,319       4,319       5,155  
Off-balance-sheet instruments
    -                                  
Forward loan sales commitments
    -       -       -       -       -  
Commitments to extend credit
    -       -       -       -       -  
Rate lock commitments
    -       -       -       -       -  
 
 
- 28 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10. FAIR VALUE DISCLOSURES – continued
 
   
December 31, 2014
 
                     
Total
       
   
Level 1
   
Level 2
   
Level 3
   
Estimated
   
Carrying
 
   
Inputs
   
Inputs
   
Inputs
   
Fair Value
   
Amount
 
   
(In Thousands)
 
Financial Assets:
                             
Cash and cash equivalents
  $ 12,502     $ -     $ -     $ 12,502     $ 12,502  
Federal Home Loan Bank stock
    1,968       -       -       1,968       1,968  
Federal Reserve Bank stock
    641       -       -       641       641  
Loans receivable, net
    -       -       321,312       321,312       314,334  
Accrued interest and dividends
                                       
receivable
    2,318       -       -       2,318       2,318  
Mortgage servicing rights
    -       -       5,168       5,168       4,115  
Cash surrender value of life insurance
    11,735       -       -       11,735       11,735  
Financial Liabilities:
                                       
Non-maturing interest bearing deposits
    -       230,253       -       230,253       230,253  
Non-interest bearing deposits
    60,507       -       -       60,507       60,507  
Time certificates of deposit
    -       -       151,004       151,004       150,223  
Accrued expenses and other liabilities
    4,578       -       -       4,578       4,578  
Federal Home Loan Bank advances
   and other borrowings
    -       -       55,273       55,273       54,993  
Subordinated debentures
                    3,854       3,854       5,155  
Off-balance-sheet instruments
                                       
Forward loan sales commitments
    -       -       -       -       -  
Commitments to extend credit
    -       -       -       -       -  
Rate lock commitments
    -       -       -       -       -  

The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments.  However, the Form 10-K for the six month transition period ended December 31, 2014 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 and FRB – The fair value of stock approximates redemption value.

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

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

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

Mortgage servicing rights – the fair value of servicing rights was determined using discount rates ranging from approximately 10.00% to 12.00%, prepayment speeds ranging from approximately 100.00% to 385.00% PSA, depending on stratification of the specific right.  The fair value was also adjusted for the effect of potential past dues and foreclosures.
 
 
- 29 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10. FAIR VALUE DISCLOSURES - continued

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

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 March 31, 2015 and December 31, 2014, respectively if the borrowings repriced according to their stated terms.

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

NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update No. 2014-9, Revenue from Contracts with Customers (Topic 606).  This guidance is a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard will be effective in the first quarter of 2017 and is not expected to have a significant impact to the Company’s financial statements.

In 2015, the FASB amended its authoritative guidance related to debt issuance costs.  The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability.  However, the recognition and measurement guidance related to debt issuance costs is not affected by this amendment.  The amendment is effective for annual and interim reporting periods beginning after December 15, 2015 and is to be applied on a retrospective basis.  Early adoption is permitted.  The Company does not expect this guidance to have a significant impact on the Company’s consolidated financial statements.

 
- 30 -

 
 
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, Opportunity Bank of Montana (the “Bank”).  The Bank engages in typical banking activities:  acquiring deposits from local markets and originating loans and investing in securities.  Its deposits are insured by the Federal Deposit Insurance Corporation.  The Bank’s primary component of earnings is its net interest margin (also called spread or margin), the difference between interest income and interest expense.  The net interest margin is managed by management (through the pricing of its products and by the types of products offered and kept in portfolio), and is affected by changes in market interest rates.  The Bank also generates noninterest income in the form of fee income and gain on sale of loans.

The Bank has a strong mortgage lending focus, with a large portion of its loan originations represented by single-family residential mortgages.  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.  We have made significant progress in this initiative.  The purpose of this diversification is to mitigate the Bank’s dependence on the residential mortgage market, as well as to improve its ability to manage its spread.  The investment portfolio grew substantially with the Sterling branch acquisition in December 2012.  As such, management is also focused on decreasing the investment portfolio as a percentage of total assets and offsetting this with growth in the loan portfolio.  The Bank’s management recognizes that fee income will also enable it to be less dependent on specialized lending and it now maintains a significant loan serviced portfolio which provides a steady source of fee income.  Fee income is also supplemented with fees generated from the Bank’s deposit accounts.  The Bank has a high percentage of non-maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its spread.  Non-maturity deposits and certificates of deposits do not automatically reprice as interest rates rise.  Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes.  Such income will be adversely affected in periods of lower mortgage activity.
 
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.  Though deposit growth for the previous year was steady, it may become more difficult to maintain due to significant competition and possible reduced customer demand for deposits as customers may shift into other asset classes.
 
The level and movement of interest rates impacts the Bank’s earnings as well.  The Federal Reserve’s Federal Open Market Committee (“FOMC”) did not change the federal funds target rate which remained at 0.25% during the three months ended March 31, 2015.

From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. In this regard, the Bank has experienced an increase in mortgage loan originations due to the Sterling branch acquisition.  Deposit fee income has also increased due to the increase in the number of accounts.  The addition of the wealth management division from the acquisition has also increased noninterest income.  Operating expenses, primarily salaries and employee benefits also increased as a result of the acquisition. The Bank is currently undergoing a core conversion that is expected to be completed in the third quarter of this year.  Future cost savings are anticipated due to the core conversion.
 
 
- 31 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Comparisons of financial condition in this section are between March 31, 2015 and December 31, 2014.

Total assets at March 31, 2015 were $559.37 million, a slight decrease of $842,000, or 0.2%, from $560.21 million at December 31, 2014.  Loans receivable increased by $17.52 million, or 5.5%, to $333.79 million at March 31, 2015, from $316.27 million at December 31, 2014.  Commercial real estate loans increased by $13.48 million, residential mortgage loans increased by $2.00 million and commercial loans increased by $1.09 million.  Construction loans and home equity loans also increased, while consumer loans decreased slightly.  Total loan originations were $88.30 million for the three months ended March 31, 2015, with single family mortgages accounting for $57.60 million of the total.  Commercial real estate and land loan originations totaled $21.62 million.

Balance Sheet Details

Cash and Cash Equivalents and Investment Securities

The following table summarizes investment securities:
 
   
March 31,
   
December 31,
 
   
2015
   
2014
 
           Percentage            Percentage  
     Fair Value     of Total     Fair Value     of Total  
    (Dollars in Thousands)  
                         
Securities available-for-sale:
                       
  U.S. government and agency
  $ 32,197       20.63 %   $ 33,181       20.11 %
  Municipal obligations
    64,379       41.23 %     71,885       43.57 %
  Corporate obligations
    5,959       3.82 %     6,005       3.64 %
  MBSs - government-backed
    21,785       13.96 %     21,964       13.31 %
  CMOs - government-backed
    27,919       17.89 %     28,752       17.42 %
                                 
Total securities available-for-sale
    152,239       97.53 %     161,787       98.05 %
                                 
                                 
Interest-bearing deposits
    1,244       0.80 %     613       0.37 %
                                 
FHLB capital stock, at cost
    1,967       1.26 %     1,968       1.19 %
                                 
FRB capital stock, at cost
    641       0.41 %     641       0.39 %
                                 
Total
  $ 156,091       100.00 %   $ 165,009       100.00 %
 
Total cash and cash equivalents decreased by $7.75 million and securities available-for-sale decreased $9.55 million or 5.9%. All categories of available-for-sale securities decreased during the period.  The largest decrease during the period was in municipal obligations which decreased $7.51 million due to sales activity.
 
 
- 32 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Financial Condition – continued

Lending Activities

The following table includes the composition of the Bank’s loan portfolio by loan category:
 
   
March 31,
   
December 31,
 
   
2015
   
2014
 
   
Amount
   
Percent of Total
   
Amount
   
Percent of Total
 
   
(Dollars in thousands)
 
Real estate loans:
                       
Residential mortgage
                       
(1-4 family) (1)
  $ 104,546       31.03 %   $ 102,543       32.12 %
Commercial real estate
    131,110       38.91 %     117,627       36.85 %
Real estate construction
    8,711       2.59 %     8,002       2.51 %
Total real estate loans
    244,367       72.53 %     228,172       71.48 %
                                 
Other loans:
                               
Home equity
    40,312       11.96 %     39,671       12.43 %
Consumer
    13,664       4.05 %     13,827       4.33 %
Commercial
    38,625       11.46 %     37,536       11.76 %
Total other loans
    92,601       27.47 %     91,034       28.52 %
                                 
Total loans
    336,968       100.00 %     319,206       100.00 %
                                 
Deferred loan fees
    553               486          
Allowance for loan losses
    2,625               2,450          
                                 
Total loans, net
  $ 333,790             $ 316,270          
                                 
(1) Excludes loans held for sale.
                         

Home equity and construction loan originations totaled $3.04 million and $0.19 million, respectively, for the same period. Consumer loans originated totaled $1.69 million.  Commercial loans originated totaled $4.16 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale decreased $566,000, to $17.02 million at March 31, 2015 from $17.59 million at December 31, 2014.

Nonperforming Assets.  Generally, our collection procedures provide that when a loan is 15 or more days delinquent, the borrower is sent a past due notice.  If the loan becomes 30 days delinquent, the borrower is sent a written delinquency notice requiring payment.  If the delinquency continues, subsequent efforts are made to contact the delinquent borrower, including face to face meetings and counseling to resolve the delinquency.  All collection actions are undertaken with the objective of compliance with the Fair Debt Collection Act.

For mortgage loans and home equity loans, if the borrower is unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions.  If a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt.  Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until such time as it is sold or otherwise disposed of.  When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs.  The initial recording of any loss is charged to the allowance for loan losses.  As of March 31, 2015, the Bank had $619,000 of real estate owned.
 
 
- 33 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Financial Condition – continued

The following table sets forth information regarding nonperforming assets:
 
   
March 31,
   
December 31,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
Non-accrual loans
           
Real estate loans:
           
Residential mortgage (1-4 family)
  $ 50     $ 821  
Other loans:
               
Home equity
    48       48  
Consumer
    22       16  
Commercial
    56       77  
Accruing loans delinquent 90 days or more
    -       -  
Restructured loans:
               
Commercial real estate
    -       -  
Home equity
    47       48  
Total nonperforming loans
    223       1,010  
Real estate owned and other repossed property, net
    642       637  
Total nonperforming assets
  $ 865     $ 1,647  
                 
Total nonperforming loans to total loans
    0.07 %     0.32 %
Total nonperforming loans to total assets
    0.04 %     0.18 %
Total allowance for loan loss to nonperforming loans
    1,117.13 %     242.57 %
Total nonperforming assets to total assets
    0.15 %     0.29 %
 
Non-accrual loans decreased in the quarter ended March 31, 2015 due to one residential loan paid off via a short sale.
 
- 34 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Financial Condition – continued

Deposits and Other Sources of Funds

The following table includes deposit accounts and the associated weighted average interest rates for each category of deposits:
 
   
March 31,
   
December 31,
 
   
2015
   
2014
 
                         
         
Percent
         
Percent
 
   
Amount
   
of Total
   
Amount
   
of Total
 
   
(Dollars in Thousands)
 
Noninterest checking
  $ 65,877       14.55 %   $ 60,507       13.72 %
Interest bearing checking
    76,498       16.90 %     76,367       17.32 %
Savings
    66,513       14.69 %     62,455       14.16 %
Money market accounts
    94,445       20.87 %     91,431       20.73 %
    Total
    303,333       67.01 %     290,760       65.93 %
Certificates of deposit accounts:
                               
   IRA certificates
    34,263       7.57 %     34,216       7.76 %
   Brokered certificates
    4,195       0.93 %     4,195       0.95 %
   Other certificates
    110,908       24.49 %     111,812       25.36 %
Total certificates of deposit
    149,366       32.99 %     150,223       34.07 %
    Total deposits
  $ 452,699       100.00 %   $ 440,983       100.00 %

[Missing Graphic Reference]

Deposits.  Deposits increased $11.72 million, or 2.7%, to $452.70 million at March 31, 2015 from $440.98 million at December 31, 2014. Growth occurred across deposit products with the exception of time certificates of deposits which decreased slightly during the period.  Management attributes the continued organic increase in deposits to increased marketing of checking accounts as well as customers’ preference for placing funds in secure, federally insured accounts.

Borrowings.  Advances from the FHLB and other borrowings decreased $12.35 million, or 22.5%, to $42.64 million at March 31, 2015 from $54.99 million at December 31, 2014.  The decrease is primarily due to decreases in other short-term borrowings.  Other short-term borrowings were paid off with proceeds from securities sales and deposit inflows.

Shareholders’ Equity

Total shareholders’ equity increased $323,000, or 0.6%, to $54.82 million at March 31, 2015 from $54.50 million at December 31, 2014.  This was a result of an increase in accumulated other comprehensive income of $795,000 mainly due to an increase in net unrealized gains on securities available-for-sale and net income of $386,000, partially offset by treasury stock purchased of $616,000 and dividends paid of $288,000.

Analysis of Net Interest Income

The Bank’s earnings have historically depended primarily upon net interest income, which is the difference between interest income earned on loans and investments and interest paid on deposits and any borrowed funds.  It is the single largest component of Eagle’s operating income.  Net interest income is affected by (i) the difference between rates of interest earned on loans and investments and rates paid on interest-bearing deposits and borrowings (the “interest rate spread”) and (ii) the relative amounts of loans and investments and interest-bearing deposits and borrowings.
 
 
- 35 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Analysis of Net Interest Income – continued

The following table includes average balances for balance sheet items, as well as, interest and dividends and average yields related to the average balances.  All average balances are daily average balances.  Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.  The yields include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income or expense.
 
   
For the Three Months Ended March 31,
 
         
2015
               
2014
       
   
Average
   
Interest
         
Average
   
Interest
       
   
Daily
   
and
   
Yield/
   
Daily
   
and
   
Yield/
 
   
Balance
   
Dividends
   
Cost(3)
   
Balance
   
Dividends
   
Cost(3)
 
   
(Dollars in Thousands)
 
Assets:
                                   
  Interest-earning assets:
                                   
     FHLB and FRB stock
  $ 2,609     $ -       0.00 %   $ 1,892     $ -       0.00 %
     Loans receivable, net
    339,007       3,962       4.68 %     262,579       3,254       4.96 %
     Investment securities
    157,505       759       1.93 %     196,387       1,066       2.17 %
     Interest-bearing deposits with banks
    4,774       3       0.23 %     3,937       1       0.09 %
Total interest-earning assets
    503,895       4,724       3.75 %     464,795       4,321       3.72 %
Noninterest-earning assets
    47,086                       47,600                  
Total assets
  $ 550,981                     $ 512,395                  
                                                 
Liabilities and equity:
                                               
  Interest-bearing liabilities:
                                               
     Deposit accounts:
                                               
       Money market
  $ 93,277     $ 25       0.11 %   $ 91,942     $ 29       0.13 %
       Savings
    64,228       7       0.04 %     60,237       8       0.05 %
       Checking
    75,470       6       0.03 %     68,616       7       0.04 %
       Certificates of deposit
    149,319       299       0.80 %     155,457       285       0.73 %
Advances from FHLB and other borrowings
                                         
     including subordinated debt
    47,697       164       1.38 %     29,801       173       2.33 %
Total interest-bearing liabilities
    429,991       501       0.47 %     406,053       502       0.49 %
Non-interest checking
    63,360                       56,888                  
Other noninterest-bearing liabilities
    2,782                       436                  
Total liabilities
    496,133                       463,377                  
                                                 
Total equity
    54,847                       49,018                  
                                                 
Total liabilities and equity
  $ 550,980                     $ 512,395                  
Net interest income/interest rate spread(1)
    $ 4,223       3.28 %           $ 3,819       3.22 %
                                                 
Net interest margin(2)
                    3.35 %                     3.29 %
Total interest-earning assets to interest-bearing liabilities
      117.19 %                     114.47 %
 
(1)
Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(2)
Net interest margin represents income before the provision for loan losses divided by average interest-earning assets.
(3)
For purposes of this table, tax exempt income is not calculated on a tax equivalent basis.
 

 
- 36 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume multiplied by the old rate; (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume, which have been allocated proportionately to the change due to volume and the change due to rate.
 
   
For the Three Months Ended March 31,
 
         
2015
               
2014
       
         
Due to
               
Due to
       
   
Volume
   
Rate
   
Net
   
Volume
   
Rate
   
Net
 
   
(In Thousands)
 
Interest earning assets:
                                   
  Loans receivable, net
  $ 947     $ (239 )   $ 708     $ 423     $ (181 )   $ 242  
  Investment securities
    (211 )     (96 )     (307 )     (114 )     93       (21 )
  Interest-bearing
                                               
     deposits with banks
    -       2       2       (4 )     (5 )     (9 )
  Other earning assets
    -       -       -       -       -       -  
Total interest earning assets
    736       (333 )     403       305       (93 )     212  
                                                 
Interest-bearing liabilities:
                                               
  Savings, money market and
                                               
    checking accounts
    2       (8 )     (6 )     3       (6 )     (3 )
  Certificates of deposit
    (11 )     25       14       (4 )     31       27  
Advances from FHLB and other borrowings
                                         
    including subordinated debentures
    104       (113 )     (9 )     (28 )     (29 )     (57 )
Total interest-bearing liabilities
    95       (96 )     (1 )     (29 )     (4 )     (33 )
                                                 
Change in net interest income
  $ 641     $ (237 )   $ 404     $ 334     $ (89 )   $ 245  
 
Results of Operations for the Three Months Ended March 31, 2015 and 2014

Net Income.  Eagle’s net income for the quarter was $386,000 compared to $108,000 of net income for the three months ended March 31, 2014.  The increase of $278,000, or 257.4%, was primarily due to increases in net interest income after loan loss provision of $210,000 and increases in noninterest income of $759,000, partially offset by increases in noninterest expense of $662,000.  Basic and diluted earnings per share were $0.10 for the current period and $0.03 per share for the prior year comparable period.

Net Interest Income.  Net interest income increased to $4.22 million for the quarter ended March 31, 2015, from $3.82 million for the previous year’s quarter.  This increase of $404,000 was primarily the result of an increase in interest and dividend income.

Interest and Dividend Income.  Interest and dividend income was $4.72 million for the quarter ended March 31, 2015, compared to $4.32 million for the quarter ended March 31, 2014, an increase of $403,000, or 9.3%.  Interest and fees on loans increased to $3.96 million for the three months ended March 31, 2015 from $3.25 million for the same period ended March 31, 2014.  This increase of $708,000, or 21.8%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended March 31, 2015.  Average balances for loans receivable, net, including loans held-for-sale, for the quarter ended March 31, 2015 were $339.01 million, compared to $262.58 million for the prior year period.  This represents an increase of $76.43 million, or 29.1%.  The average interest rate earned on loans receivable decreased by 28 basis points, from 4.96% to 4.68%.  Interest and dividends on investment securities available-for-sale decreased by $307,000 or 28.8% for the quarter ended March 31, 2015.  Average interest rates earned on investments decreased to 1.93% from 2.17%.  Average balances for investments decreased to $157.51 million for the quarter ended March 31, 2015, from $196.39 million for the quarter ended March 31, 2014.
 
 
- 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 March 31, 2015 and 2014 – continued

Interest Expense.  Total interest expense for the quarter was $501,000 which is comparable to total interest expense of $502,000 for the quarter ended March 31, 2014.  The slight decrease was attributable to decreases in interest on borrowings offset by increases in interest on deposits.  Although the average borrowing balance increased, the average rate paid decreased resulting in a decrease in interest paid on borrowings to $164,000 for the quarter ended March 31, 2015 compared to $173,000 paid in the previous year’s quarter.  The average rate paid on borrowings decreased from 2.34% last year to 1.38% for the quarter ended March 31, 2015.  The slight increase in interest on deposits is due to higher overall average balances for interest-bearing deposits.  The overall average rate on interest-bearing deposits was consistent with the previous year’s quarter.

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 the portfolio.  The Bank’s policies require a review of assets on a quarterly basis.  The Bank classifies loans as well as other assets if warranted.  While 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 $322,000 in provision for loan losses for the quarter ended March 31, 2015 and $128,000 in the quarter ended March 31, 2014.  The provision for loan losses has been increased to keep pace with solid loan production that is fueling loan growth.  Total nonperforming loans, including restructured loans, was $223,000 at March 31, 2015.  The Bank currently has $642,000 in foreclosed real estate property and other repossessed property.

Noninterest Income. Total noninterest income increased to $2.88 million for the quarter ended March 31, 2015, from $2.12 million for the quarter ended March 31, 2014, an increase of $759,000 or 35.8%.  The increase is primarily due to increases in net gain on sale of loans which increased to $1.63 million for the quarter ended March 31, 2015 from $836,000.

Noninterest Expense.  Noninterest expense was $6.36 million for the quarter ended March 31, 2015 compared to $5.70 million for the quarter ended March 31, 2014.  The increase is primarily due to increased salaries and employee benefits expenses of $170,000 and increased consulting fees, legal, accounting and examination fees and data processing fees.  The increased salaries expense is due higher mortgage commissions for the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014.  Amortization of mortgage servicing fees also increased.

Income Tax Expense.  Our income tax expense was $36,000 for the quarter ended March 31, 2015, compared to $7,000 for the quarter ended March 31, 2014.  The effective tax rate for the quarter ended March 31, 2015 was 8.53% compared to 6.09% for the quarter ended March 31, 2014.  Tax free municipal bond income and Bank owned life insurance income contributed to the lower effective tax rates for the periods.  In addition, the deductibility of goodwill that resulted from the Sterling branch acquisition, for tax purposes has helped to reduce the effective tax rate.  The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period and are estimated to be $95,000 per quarter depending on Eagle’s taxable income level.

Liquidity, Interest Rate Sensitivity and Capital Resources

The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and FRB regulations.  The liquidity requirement is retained for safety and soundness purposes, and 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 March 31, 2015 and December 31, 2014.
 
 
- 38 -

 
 
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

The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed and collateralized mortgage obligation securities, maturities of investments, funds provided from operations, and advances from the FHLB of 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 February 28, 2015 (the most recent report available), the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200 basis point rise in interest rates scenario, decreased the economic value of equity (“EVE”) by 9.8%.  The Bank is well within the guidelines set forth by the Board of Directors for interest rate risk sensitivity.

Beginning January 1, 2015, community banking organizations became subject to a new regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III). The new rule establishes a new regulatory capital framework that incorporates revisions to the Basel capital framework, strengthens the definition of regulatory capital, increases risk-based capital requirements, and amends the methodologies for determining risk-weighted assets. These changes are expected to increase the amount of capital required by community banking organizations.  Basel III includes a multiyear transition period from January 1, 2015 through December 31, 2019.

Eagle’s tier I core capital ratio, as measured under State of Montana and FRB rules, decreased slightly from 9.41% as of December 31, 2014 to 9.39% as of March 31, 2015.  Eagle’s strong capital position helps to mitigate its interest rate risk exposure.

As of March 31, 2015, Eagle’s regulatory capital was in excess of all applicable regulatory requirements.  At March 31, 2015, Eagle’s tangible, core, and risk-based capital ratios amounted to 9.39%, 9.39% and 14.68%, respectively, compared to regulatory requirements of 1.50%, 3.00%, and 8.00%, respectively.
 
   
At March 31, 2015
 
   
(Unaudited)
 
   
Dollar
   
% of
 
   
Amount
   
Assets
 
   
(Dollars in Thousands)
 
Tangible capital:
           
Capital level
  $ 51,905       9.39 %
Requirement
    8,291       1.50  
Excess
  $ 43,614       7.89 %
                 
Core capital:
               
Capital level
  $ 51,905       9.39 %
Requirement
    16,582       3.00  
Excess
  $ 35,323       6.39 %
                 
Risk-based capital:
               
Capital level
  $ 54,530       14.68 %
Requirement
    29,711       8.00  
Excess
  $ 24,819       6.68 %
 
 
- 39 -

 
 
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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.
 
 
- 40 -

 
 
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.
 
 
- 41 -

 
 
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 March 31, 2015, our disclosure controls and procedures were effective.  During the last 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.
 
 
- 42 -

 
 
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 six month transition period ended December 31, 2014.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
On July 1, 2013, the Company announced that its Board of Directors authorized a common stock repurchase program for 150,000 shares of common stock, effective July 1, 2013. The program was intended to be implemented through purchases made from time to time in the open market or through private transactions. The Company did not purchase any shares of our common stock during the fiscal year ended June 30, 2014. The repurchase program expired on June 30, 2014.

On July 1, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 200,000 shares of its common stock.  Under the plan, shares may be purchased by the company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations.  During the six month transition period ended December 31, 2014, 55,000 shares were purchased at an average price of $10.66 per share.  The repurchase program expires on June 30, 2015.

The following table summarizes the Company’s purchase of its common stock for the three months ended March 31, 2015.
 
               
Total Number
   
Maximum
 
               
of Shares
   
Number of
 
               
Purchased
   
Shares that
 
   
Total
         
as Part of
   
May Yet Be
 
   
Number of
   
Average
   
Publicly
   
Purchased
 
   
Shares
   
Price Paid
   
Announced Plans
   
Under the Plans
 
   
Purchased
   
Per Share
   
or Programs
   
or Programs
 
                         
January 1, 2015 through January 31, 2015
    -     $ -       -       145,000  
                                 
February 1, 2015 through February 28, 2015
    55,800       11.03       55,800       89,200  
                                 
March 1, 2015 through March 31, 2015
    -       -       -       89,200  
                                 
Total
    55,800     $ 11.03       55,800          

 
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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.

None.

Item 6.
 
10.1  Employment Agreement among Eagle Bancorp Montana, Inc., Opportunity Bank of Montana and Peter J. Johnson (Incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed April 29, 2015).

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 Laura F. Clark, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

32.1 Certification by Peter J. Johnson, Chief Executive Officer, and Laura F. Clark, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
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 
 
 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
 

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:   May 13, 2015
By:  
/s/ Peter J. Johnson
 
Peter J. Johnson
 
President/CEO
     
   
 
  
 
Date:   May 13, 2015
By:  
/s/ Laura F. Clark
 
Laura F. Clark
 
Senior Vice President/CFO
 
 
 
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