Eagle Bancorp Montana, Inc. - Quarter Report: 2019 September (Form 10-Q)

ebmt20190630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

[ ]	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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]	Accelerated filer [X]
Non-accelerated filer [ ]	Smaller reporting company [X]
	Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock par value $0.01 per share	EBMT	The Nasdaq Stock Market LLC

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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

6,423,033 shares outstanding

As of November 6, 2019

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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PART I.	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition as of September, 2019 and December 31, 2018	1

	Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018	3

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018	5

	Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2019 and 2018	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	7

	Notes to the Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	45

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47

Signatures		48

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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 the management of Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”) and Opportunity Bank of Montana (“OBMT” or the “Bank”), Eagle’s wholly-owned subsidiary, 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 the Company’s 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;

●	local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities;

●	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;

●	our ability to attract deposits and other sources of funding or liquidity;

●	changes or volatility in the securities markets;

●	political developments, uncertainties or instability;

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

●	our ability to successfully perform due diligence and integrate acquired businesses including our recent acquisition of Big Muddy Bancorp, Inc. and our proposed acquisition of Western Holding Company of Wolf Point;

●	changes in consumer spending, borrowing and savings habits;

●	our ability to continue to increase and manage our commercial and residential real estate, multi-family and commercial business loans;

●	possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;

●	the level of future deposit insurance premium assessments;

●

the costs or effects of mergers, acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits, including any anticipated cost savings or synergies, associated with any such mergers, acquisitions or dispositions, including the recent merger of The State Bank of Townsend with and into Opportunity Bank of Montana and our proposed acquisition of Western Holding Company of Wolf Point;

●	our ability to develop and maintain secure and reliable information technology systems, effectively defend ourselves against cyberattacks, or recover from breaches to our cybersecurity infrastructure;

●	the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates;

●	the possibility of goodwill impairment charges in the future;

●	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 year ended December 31, 2018, 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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	September 30,		December 31,
	2019		2018
ASSETS:
Cash and due from banks	$	9,697	$	10,144
Interest bearing deposits in banks		3,589		1,057
Total cash and cash equivalents		13,286		11,201

Securities available-for-sale, at fair value		136,383		142,165
Federal Home Loan Bank ("FHLB") stock		4,167		5,011
Federal Reserve Bank ("FRB") stock		2,526		2,033
Investment in Eagle Bancorp Statutory Trust I		155		155
Mortgage loans held-for-sale, at fair value		24,913		7,318
Loans receivable, net of deferred loan fees of $1,156 at September 30, 2019 and $1,098 at December 31, 2018 and allowance for loan losses of $8,200 at September 30, 2019 and $6,600 at December 31, 2018		745,369		610,333
Accrued interest and dividends receivable		5,318		3,479
Mortgage servicing rights, net		8,218		7,100
Premises and equipment, net		38,628		29,343
Cash surrender value of life insurance, net		23,460		20,545
Real estate and other repossessed assets acquired in settlement of loans, net		91		107
Goodwill		15,710		12,124
Core deposit intangible, net		2,961		1,498
Deferred tax asset, net		-		1,190
Other assets		1,036		301

Total assets	$	1,022,221	$	853,903

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	September 30,			December 31,
	2019			2018
LIABILITIES:
Deposit accounts:
Noninterest bearing	$	199,086		$	142,788
Interest bearing		590,375			483,823
Total deposits		789,461			626,611

Accrued expenses and other liabilities		10,266			5,388
Deferred tax liability, net		420			-
FHLB advances and other borrowings		76,699			102,222
Other long-term debt:
Principal amount		25,155			25,155
Unamortized debt issuance costs		(230	)		(279	)
Total other long-term debt, net		24,925			24,876

Total liabilities		901,771			759,097

SHAREHOLDERS' EQUITY:
Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; no shares issued or outstanding)		-			-
Common stock (par value $0.01 per share; 20,000,000 and 8,000,000 shares authorized; 6,714,983 and 5,718,942 shares issued; 6,403,693 and 5,477,652 shares outstanding at September 30, 2019 and December 31, 2018, respectively)		67			57
Additional paid-in capital		68,894			52,051
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")		(352	)		(477	)
Treasury stock, at cost		(3,850	)		(2,640	)
Retained earnings		53,664			46,926
Accumulated other comprehensive income (loss), net of tax		2,027			(1,111	)
Total shareholders' equity		120,450			94,806

Total liabilities and shareholders' equity	$	1,022,221		$	853,903

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019			2018
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	10,731	$	7,701		$	31,378		$	22,435
Securities available-for-sale		916		1,036			2,802			3,046
FHLB and FRB dividends		107		80			297			233
Interest on deposits in banks		19		5			50			40
Other interest income		-		3			5			4
Total interest and dividend income		11,773		8,825			34,532			25,758

INTEREST EXPENSE:
Deposits		1,022		534			2,733			1,454
FHLB advances and other borrowings		692		453			1,942			1,105
Other long-term debt		360		361			1,089			1,065
Total interest expense		2,074		1,348			5,764			3,624

NET INTEREST INCOME		9,699		7,477			28,768			22,134

Loan loss provision		694		194			1,995			720

NET INTEREST INCOME AFTER LOAN LOSS PROVISION		9,005		7,283			26,773			21,414

NONINTEREST INCOME:
Service charges on deposit accounts		329		241			882			681
Net gain on sale of loans		5,492		2,290			11,451			5,449
Mortgage banking		1,390		279			2,477			792
Wealth management income		11		130			258			409
Interchange and ATM fees		364		270			977			766
Appreciation in cash surrender value of life insurance		254		166			571			436
Net (loss) gain on sale of available-for-sale securities		-		(23	)		49			(113	)
Net loss on sale of real estate owned and other repossessed property		-		-			(18	)		(57	)
Net gain on sale/disposal of premises and equipment		438		9			438			9
Other noninterest income		142		103			532			246
Total noninterest income		8,420		3,465			17,617			8,618

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019			2018		2019		2018
NONINTEREST EXPENSE:
Salaries and employee benefits	$	7,555		$	5,123	$	20,057	$	15,493
Occupancy and equipment expense		1,152			880		3,229		2,543
Data processing		933			866		2,715		2,176
Advertising		320			295		800		871
Amortization		254			182		761		519
Loan costs		242			154		554		469
Federal insurance premiums		(36	)		65		79		203
Postage		90			58		237		192
Legal, accounting and examination fees		182			121		692		447
Consulting fees		-			23		75		65
Acquisition costs		517			222		1,693		587
Other noninterest expense		1,015			767		2,826		2,149
Total noninterest expense		12,224			8,756		33,718		25,714

INCOME BEFORE PROVISION FOR INCOME TAXES		5,201			1,992		10,672		4,318

Income tax provision		1,096			360		2,137		780

NET INCOME	$	4,105		$	1,632	$	8,535	$	3,538

BASIC EARNINGS PER SHARE	$	0.64		$	0.30	$	1.33	$	0.65

DILUTED EARNINGS PER SHARE	$	0.63		$	0.30	$	1.32	$	0.65

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING		6,403,693			5,460,452		6,420,711		5,411,356

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		6,425,380			5,524,912		6,442,934		5,475,816

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018

NET INCOME	$	4,105		$	1,632		$	8,535		$	3,538

OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS) BEFORE TAX:
Change in fair value of investment securities available-for-sale		1,166			(1,237	)		4,617			(4,036	)
Reclassification for net realized losses (gains) on investment securities included in income		-			23			(49	)		113
Change in fair value of loans held-for-sale		-			234			296			898
Reclassification for net realized gains on loans held-for-sale		-			(402	)		(605	)		(989	)
Total other items of comprehensive income (loss)		1,166			(1,382	)		4,259			(4,014	)

Income tax (provision) benefit related to:
Investment securities		(307	)		320			(1,203	)		1,040
Loans held-for-sale		-			44			82			24
Total income tax (provision) benefit		(307	)		364			(1,121	)		1,064

COMPREHENSIVE INCOME	$	4,964		$	614		$	11,673		$	588

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three and Nine Months Ended September 30, 2019 and 2018

(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			INCOME (LOSS)			TOTAL

Balance at July, 1 2019	$	-	$	67	$	68,535	$	(393	)	$	(3,850	)	$	50,167		$	1,168		$	115,694
Net income		-		-		-		-			-			4,105			-			4,105
Other comprehensive income		-		-		-		-			-			-			859			859
Dividends paid ($0.095 per share)		-		-		-		-			-			(608	)		-			(608	)
Stock compensation expense		-		-		330		-			-			-			-			330
ESOP shares allocated (4,154 shares)		-		-		29		41			-			-			-			70
Balance at September 30, 2019	$	-	$	67	$	68,894	$	(352	)	$	(3,850	)	$	53,664		$	2,027		$	120,450

Balance at July, 1 2018	$	-	$	57	$	51,890	$	(559	)	$	(2,826	)	$	44,862		$	(1,619	)	$	91,805
Net income		-		-		-		-			-			1,632			-			1,632
Other comprehensive loss		-		-		-		-			-			-			(1,018	)		(1,018	)
Dividends paid ($0.0925 per share)		-		-		-		-			-			(505	)		-			(505	)
ESOP shares allocated (4,154 shares)		-		-		37		41			-			-			-			78
Balance at September 30, 2018	$	-	$	57	$	51,927	$	(518	)	$	(2,826	)	$	45,989		$	(2,637	)	$	91,992

Balance at January 1, 2019	$	-	$	57	$	52,051	$	(477	)	$	(2,640	)	$	46,926		$	(1,111	)	$	94,806
Net income		-		-		-		-			-			8,535			-			8,535
Other comprehensive income		-		-		-		-			-			-			3,138			3,138
Dividends paid		-		-		-		-			-			(1,797	)		-			(1,797	)
Stock issued in connection with Big Muddy Bancorp, Inc. acquisition		-		10		16,425		-			-			-			-			16,435
Stock compensation expense		-		-		330		-			-			-			-			330
ESOP shares allocated (12,462 shares)		-		-		88		125			-			-			-			213
Treasury stock purchased (70,000 shares at $17.29 average cost per share)		-		-		-		-			(1,210	)		-			-			(1,210	)
Balance at September 30, 2019	$	-	$	67	$	68,894	$	(352	)	$	(3,850	)	$	53,664		$	2,027		$	120,450

Balance at January 1, 2018	$	-	$	53	$	42,780	$	(643	)	$	(2,826	)	$	43,939		$	313		$	83,616
Net income		-		-		-		-			-			3,538			-			3,538
Other comprehensive loss		-		-		-		-			-			-			(2,950	)		(2,950	)
Dividends paid		-		-		-		-			-			(1,488	)		-			(1,488	)
Stock issued in connection with TwinCo, Inc. acquisition		-		4		9,026		-			-			-			-			9,030
ESOP shares allocated (12,462 shares)		-		-		121		125			-			-			-			246
Balance at September 30, 2018	$	-	$	57	$	51,927	$	(518	)	$	(2,826	)	$	45,989		$	(2,637	)	$	91,992

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,535		$	3,538
Adjustments to reconcile net income to net cash provided by operating activities:
Loan loss provision		1,995			720
Depreciation		1,308			923
Net amortization of investment securities premium and discounts		704			950
Amortization of mortgage servicing rights		1,113			906
Amortization of right of use assets		354			-
Amortization of core deposit intangible and tax credits		761			519
Compensation expense related to restricted stock awards		330			-
ESOP compensation expense for allocated shares		213			246
Deferred income tax provision		417			516
Net gain on sale of loans		(11,451	)		(5,449	)
Net (gain) loss on sale of available-for-sale securities		(49	)		113
Net loss on sale of real estate owned and other repossessed assets		18			57
Net gain on sale/disposal of premises and equipment		(438	)		(9	)
Net appreciation in cash surrender value of life insurance		(572	)		(346	)
Net change in:
Accrued interest and dividends receivable		(583	)		(630	)
Loans held-for-sale		(6,454	)		5,560
Other assets		(571	)		258
Accrued expenses and other liabilities		741			1,241
Net cash (used in) provided by operating activities		(3,629	)		9,113

CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		53,257			46,058
Maturities, principal payments and calls		9,998			8,763
Purchases		(51,464	)		(45,970	)
FHLB stock redeemed (purchased)		1,108			(420	)
FRB stock purchased		(493	)		(568	)
Net cash received (paid) for acquisitions		6,901			(4,243	)
Loan origination and principal collection, net		(50,189	)		(29,828	)
Proceeds from bank owned life insurance		519			205
Purchases of bank owned life insurance		-			(5,600	)
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans		352			150
Proceeds from sale of premises and equipment		2,500			9
Purchases of premises and equipment		(8,389	)		(5,960	)
Net cash used in investing activities		(35,900	)		(37,404	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2019			2018
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	70,144		$	18,548
Net short-term (payments) advances on FHLB and other borrowings		(29,687	)		39,417
Long-term advances from FHLB and other borrowings		33,000			-
Payments on long-term FHLB and other borrowings		(28,836	)		(26,655	)
Purchase of treasury stock		(1,210	)		-
Dividends paid		(1,797	)		(1,488	)
Net cash provided by financing activities		41,614			29,822

NET INCREASE IN CASH AND CASH EQUIVALENTS		2,085			1,531

CASH AND CASH EQUIVALENTS, beginning of period		11,201			7,437

CASH AND CASH EQUIVALENTS, end of period	$	13,286		$	8,968


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	5,245		$	3,523
Cash paid during the period for income taxes	$	1,131		$	355

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase (decrease) in market value of securities available-for-sale	$	4,568		$	(3,923	)
Mortgage servicing rights recognized	$	2,231		$	1,275
Right of use assets obtained in exchange for lease liabilities	$	2,374		$	-
Loans transferred to real estate and other assets acquired in foreclosure	$	131		$	4
Stock issued in connection with acquisitions	$	16,435		$	9,030

See Note 2. Mergers and Acquisitions for additional information related to assets acquired and liabilities assumed in acquisitions.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”), is a Delaware corporation that holds 100% of the capital stock of Opportunity Bank of Montana (“OBMT” or the “Bank”). The Bank was founded in 1922 as a Montana-chartered building and loan association and has conducted operations and maintained its administrative office in Helena, Montana since that time. In 1975, the Bank adopted a federal thrift charter and in October 2014 converted to a Montana chartered commercial bank and became a member bank in the Federal Reserve System.

On September 5, 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, Inc. ("TwinCo"), a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire 100% of TwinCo’s equity voting interests. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated two branches in Madison County, Montana.

On August 21, 2018, Eagle entered into an Agreement and Plan of Merger with Big Muddy Bancorp, Inc. (“BMB”), a Montana corporation and BMB’s wholly-owned subsidiary, The State Bank of Townsend (“SBOT”), a Montana chartered commercial bank to acquire 100% of BMB’s equity voting interests. On January 1, 2019, BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. SBOT operated four branches in Townsend, Dutton, Denton and Choteau, Montana.

On August 8, 2019, Eagle and OBMT, entered into an Agreement and Plan of Merger with Western Holding Company of Wolf Point, a Montana corporation (“WHC”), and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point, a Montana chartered commercial bank (“WB”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, WHC will merge with and into Eagle, with Eagle continuing as the surviving corporation. The deal is expected to close during the fourth quarter of 2019.

The Bank currently has 22 full service branches. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. The Bank also operates certain branches under the brand names Dutton State Bank, Farmers State Bank of Denton and The State Bank of Townsend.

Principles of Consolidation

The consolidated financial statements include Eagle, the Bank, Eagle Bancorp Statutory Trust I (the “Trust”) and AFSB NMTC Investment Fund, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.

Consolidated Financial Statement Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2018, as filed with the SEC on March 12, 2019. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

Certain prior period amounts were reclassified to conform to the presentation for 2019. These reclassifications had no impact on net income or shareholders’ equity.

The results of operations for the nine-month period ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or any other period.

The Company has evaluated events and transactions subsequent to September 30, 2019 for recognition and/or disclosure.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. MERGERS AND ACQUISITIONS

Effective January 1, 2019, Eagle completed its previously announced merger with BMB, pursuant to an Agreement and Plan of Merger, dated as of August 21, 2018, by and among Eagle, Opportunity Bank of Montana, BMB and BMB’s wholly-owned subsidiary, SBOT, a Montana chartered commercial bank. BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. SBOT operated four branches in Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities throughout the state. The acquisition closed after receipt of approvals from regulatory authorities, approval of BMB shareholders and the satisfaction of other closing conditions. The total consideration paid was $16,436,000 and included cash consideration of $1,000 and common stock issued of $16,435,000.

On September 5, 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire 100% of TwinCo’s equity voting interests. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated two branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. The acquisition closed January 31, 2018, after receipt of approvals from regulatory authorities, approval of TwinCo shareholders and the satisfaction of other closing conditions. The total consideration paid was $18,930,000 and included cash consideration of $9,900,000 and common stock issued of $9,030,000.

These transactions were accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations. In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value of the consideration given or the fair value of the asset (or net assets) acquired, whichever is more clearly evident and, thus, a more reliable measure.

Under FASB ASC 805, all of the assets acquired and liabilities assumed in a business combination are recognized at acquisition at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Goodwill recorded in the acquisitions was accounted for in accordance with the authoritative business combination guidance. Accordingly, goodwill will not be amortized, but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes.

The assets acquired and liabilities assumed were recorded on the consolidated statement of financial condition at estimated fair value on acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed, consideration paid and the resulting goodwill.

	BMB		TwinCo
	January 1,		January 31,
	2019		2018
	(In Thousands)
Assets acquired:
Cash and cash equivalents	$	6,902	$	5,657
Investment securities		2,096		30,728
Loans		89,204		55,057
Premises and equipment		2,246		1,605
Cash surrender value of life insurance		2,862		-
Other real estate owned		223		135
Core deposit intangible		1,988		1,609
Other assets		1,995		1,258
Total assets acquired	$	107,516	$	96,049

Liabilities assumed:
Deposits	$	92,706	$	82,190
Accrued expenses and other liabilities		1,960		19
Total liabilities assumed	$	94,666	$	82,209

Net assets acquired	$	12,850	$	13,840

Consideration paid:
Cash	$	1	$	9,900
Common stock issued (996,041 shares BMB and 446,774 shares TwinCo)		16,435		9,030
Total consideration paid	$	16,436	$	18,930

Goodwill resulting from acquisition	$	3,586	$	5,090

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. MERGERS AND ACQUISITIONS – continued

For both the BMB and TwinCo acquisitions, the fair value analysis of the loan portfolios resulted in a valuation adjustment for each loan based on an amortization schedule of expected cash flow. Individual amortization schedules were used for each loan over a certain amount and those with specifically identified loss exposure. The remainder of the loans were grouped by type and risk rating into loan pools (based on loans type, fixed or variable interest rate, revolving or term payments and risk rating). Yield inputs for the amortization schedules included contractual interest rates, estimated prepayment speeds, liquidity adjustments and market yields. Credit inputs for the amortization schedules included probability of payment default, loss given default rates and individually identified loss exposure.

The total discount on BMB acquired loans was $2,813,000 as of January 1, 2019. During the nine months ended September 30, 2019, accretion of the loan discount was $1,163,000. The remaining loan discount was $1,650,000 as of September 30, 2019.

The total discount on TwinCo acquired loans was $1,834,000 as of January 31, 2018. During the nine months ended September 30, 2019, accretion of the loan discount was $184,000. During the year ended December 31, 2018, accretion of the loan discount was $589,000. The remaining loan discount was $1,061,000 as of September 30, 2019.

Four impaired loans were acquired through the BMB acquisition with a net balance of $556,000 as of January 1, 2019. The balance of the loans as of September 30, 2019 was $187,000. Two impaired loans were acquired through the TwinCo acquisition with a balance of $1,188,000 as of January 31, 2018. The balance of the loans as of September 30, 2019 was $1,066,000. Acquired impaired loans are considered immaterial for separate disclosure in Note 4. Loans Receivable.

Core deposit intangible assets of $1,988,000 were recorded for BMB and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years. Core deposit intangible assets of $1,609,000 were recorded for TwinCo and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years.

For both the BMB and TwinCo acquisition, the core deposit intangible value is a function of the difference between the cost of the acquired core deposits and the alternative cost of funds. These cash flow streams were discounted to present value. The fair value of other deposit accounts acquired were valued by estimating future cash flows to be received or paid from individual or homogenous groups of assets and liabilities and then discounting those cash flows to a present value using rates of return that were available in financial markets for similar financial instruments on or near the acquisition date.

Direct costs related to the acquisitions were expensed as incurred. The Company recorded acquisition costs related to BMB of $5,000 during the quarter ended June 30, 2019, $1,171,000 during the quarter ended March 31, 2019 and $804,000 during the year ended December 31, 2018. The Company recorded total acquisition costs related to the TwinCo acquisition of $1,041,000, of which $365,000 was recognized during the year ended December 31, 2018. Acquisition costs included legal and professional fees and data processing expenses incurred related to the acquisitions.

Operations of BMB have been included in the consolidated financial statements since January 1, 2019. The Company does not consider BMB a separate reporting segment and does not track the amount of revenues and net income attributable to BMB since acquisition. As such, it is impracticable to determine such amounts for the period from January 1, 2019 through September 30, 2019.

Operations of TwinCo have been included in the consolidated financial statements since February 1, 2018. The Company does not consider TwinCo a separate reporting segment and does not track the amount of revenues and net income attributable to TwinCo since acquisition. As such, it is impracticable to determine such amounts for the period from February 1, 2018 through September 30, 2019.

The accompanying consolidated statements of income include the results of operations of the BMB acquired entity since the January 1, 2019 acquisition date. The following table presents unaudited pro forma results of operations for the three and nine months ended September 30, 2018 as if the acquisition had occurred on January 1, 2018. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of BMB on January 1, 2018. Cost savings are also not reflected in the unaudited pro forma amounts for the three and nine months ended September 30, 2018.

	Three Months Ended		Nine Months Ended
	September 30, 2018		September 30, 2018
	(Dollars in Thousands, Except Per Share Data)
Pro forma net income⁽¹⁾
Net interest income after loan loss provision	$	8,458	$	24,940
Noninterest income		3,681		9,266
Noninterest expense		9,864		29,040
Income before provision for income taxes		2,275		5,166
Income tax provision		455		1,033
Net income	$	1,820	$	4,133

Pro forma earnings per share⁽¹⁾
Basic earnings per share	$	0.33	$	0.76
Diluted earnings per share	$	0.33	$	0.75

Basic weighted average shares outstanding		5,460,452		5,411,356
Diluted weighted average shares outstanding		5,524,912		5,475,816

⁽¹⁾Significant assumptions utilized include the acquisition cost noted above and a 20.00% effective tax rate.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

	September 30, 2019									December 31, 2018
			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	$	13,817	$	312	$	-		$	14,129	$	9,333	$	58	$	(44	)	$	9,347
Municipal obligations		51,253		2,103		(1	)		53,355		69,024		244		(990	)		68,278
Corporate obligations		11,385		43		(25	)		11,403		11,411		8		(300	)		11,119
Mortgage-backed securities		11,670		67		(50	)		11,687		19,635		86		(373	)		19,348
Collateralized mortgage obligations		35,340		572		(89	)		35,823		24,229		6		(360	)		23,875
Asset-backed securities		10,167		-		(181	)		9,986		10,350		6		(158	)		10,198
Total	$	133,632	$	3,097	$	(346	)	$	136,383	$	143,982	$	408	$	(2,225	)	$	142,165

Proceeds from sales of available-for-sale securities and the associated gross realized gains and losses were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019			2018
	(In Thousands)

Proceeds from sale of available-for-sale securities	$	-	$	978		$	53,257		$	46,058

Gross realized gain on sale of available-for-sale securities	$	-	$	-		$	549		$	191
Gross realized loss on sale of available-for-sale securities		-		(23	)		(500	)		(304	)
Net realized gain (loss) on sale of available-for-sale securities	$	-	$	(23	)	$	49		$	(113	)

The amortized cost and fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2019
	Amortized		Fair
	Cost		Value
	(In Thousands)

Due in one year or less	$	9,626	$	9,640
Due from one to five years		13,036		13,108
Due from five to ten years		9,201		9,589
Due after ten years		54,759		56,536
		86,622		88,873
Mortgage-backed securities		11,670		11,687
Collateralized mortgage obligations		35,340		35,823
Total	$	133,632	$	136,383

Maturities of securities do not reflect repricing opportunities present in adjustable rate securities.

As of September 30, 2019 and December 31, 2018 securities with a fair value of $19,180,000 and $21,408,000, respectively were pledged to secure public deposits and for other purposes required or permitted by law.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES - continued

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

	September 30, 2019
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In Thousands)
U.S. government and agency	$	-	$	-		$	-	$	-
Municipal obligations		1,091		(1	)		-		-
Corporate obligations		-		-			2,975		(25	)
Mortgage-backed securities and collateralized mortgage obligations		10,017		(27	)		8,382		(112	)
Asset-backed securities		4,837		(82	)		5,149		(99	)
Total	$	15,945	$	(110	)	$	16,506	$	(236	)

	December 31, 2018
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses

U.S. government and agency	$	-	$	-		$	3,385	$	(44	)
Municipal obligations		17,887		(140	)		32,712		(850	)
Corporate obligations		2,890		(110	)		7,220		(190	)
Mortgage-backed securities and collateralized mortgage obligations		5,575		(98	)		22,559		(635	)
Asset-backed securities		8,200		(158	)		-		-
Total	$	34,552	$	(506	)	$	65,876	$	(1,719	)

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. The unrealized losses associated with these investments are believed to be caused by changing market conditions, primarily spreads related to U.S. treasuries, that are considered to be temporary and the Company does not intend to sell the securities, and it is not likely to be required to sell these securities prior to maturity. Based on the Company’s evaluation of these securities, no other-than-temporary impairment was recorded for the nine months ended September 30, 2019, or 2018. As of September 30, 2019 and December 31, 2018, there were, respectively, 22 and 108 securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

As of September 30, 2019, 2 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 0.09% from the Company’s amortized cost basis of these securities. At December 31, 2018, 74 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 1.88% from the Company’s amortized cost basis of these securities. As of September 30, 2019, 3 corporate obligations had unrealized losses of approximately 0.83% from the Company’s amortized cost basis of these securities. At December 31, 2018, 11 corporate obligations had an unrealized loss with aggregate depreciation of approximately 2.88% from the Company's amortized cost basis of these securities. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

As of September 30, 2019, 12 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses with aggregate depreciation of approximately 0.75% from the Company’s amortized cost basis of these securities. At December 31, 2018, 19 MBSs and CMOs had unrealized losses with aggregate depreciation of approximately 2.54% from the Company’s amortized cost basis of these securities. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

As of September 30, 2019, 5 asset-backed securities (“ABSs”) had unrealized losses with aggregate depreciation of approximately 1.78% from the Company’s amortized cost basis of these securities. At December 31, 2018, 4 ABSs had unrealized losses with aggregate depreciation of approximately 1.89% from the Company’s amortized cost basis of these securities. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE

Loans receivable consisted of the following:

	September 30,			December 31,
	2019			2018
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	143,067		$	144,107
Commercial real estate		416,157			328,438

Other loans:
Home equity		56,537			52,159
Consumer		19,012			16,565
Commercial		119,952			76,762

Total		754,725			618,031

Deferred loan fees, net		(1,156	)		(1,098	)
Allowance for loan losses		(8,200	)		(6,600	)
Total loans, net	$	745,369		$	610,333

Within the commercial real estate loan category, $11,969,000 and $12,476,000 was guaranteed by the United States Department of Agriculture Rural Development, at September 30, 2019 and December 31, 2018, respectively. The commercial real estate category includes $5,937,000 and $2,575,000 of loans guaranteed by the United States Department of Agriculture Farm Service Agency at September 30, 2019 and December 31, 2018, respectively. The commercial category also includes $1,802,000 and $1,303,000 of loans guaranteed by the United States Department of Agriculture Farm Service Agency at September 30, 2019 and December 31, 2018, respectively. The United States Department of Agriculture Farm Service Agency guaranteed loans have increased as a result of recent acquisitions.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

Allowance for loan losses activity was as follows:

	Residential		Commercial			Home
	1-4 Family		Real Estate			Equity			Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, July, 1 2019	$	1,301	$	4,276		$	477		$	224		$	1,472		$	7,750
Charge-offs		-		-			-			(44	)		(208	)		(252	)
Recoveries		-		4			-			3			1			8
Provision		-		380			-			44			270			694
Ending balance, September 30, 2019	$	1,301	$	4,660		$	477		$	227		$	1,535		$	8,200

Allowance for loan losses:
Beginning balance, January 1, 2019	$	1,301	$	3,593		$	477		$	190		$	1,039		$	6,600
Charge-offs		-		(20	)		(75	)		(57	)		(305	)		(457	)
Recoveries		-		13			-			18			31			62
Provision		-		1,074			75			76			770			1,995
Ending balance, September 30, 2019	$	1,301	$	4,660		$	477		$	227		$	1,535		$	8,200

Ending balance, September 30, 2019 allocated to loans individually evaluated for impairment	$	-	$	-		$	-		$	-		$	-		$	-

Ending balance, September 30, 2019 allocated to loans collectively evaluated for impairment	$	1,301	$	4,660		$	477		$	227		$	1,535		$	8,200

Loans receivable:
Ending balance, September 30, 2019	$	143,067	$	416,157		$	56,537		$	19,012		$	119,952		$	754,725

Ending balance, September 30, 2019 of loans individually evaluated for impairment	$	795	$	1,370		$	99		$	142		$	1,305		$	3,711

Ending balance, September 30, 2019 of loans collectively evaluated for impairment	$	142,272	$	414,787		$	56,438		$	18,870		$	118,647		$	751,014

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

	Residential		Commercial		Home
	1-4 Family		Real Estate		Equity			Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, July, 1 2018	$	1,301	$	3,230	$	427		$	185		$	1,007		$	6,150
Charge-offs		-		-		-			(14	)		-			(14	)
Recoveries		-		7		-			12			1			20
Provision		-		164		-			-			30			194
Ending balance, September 30, 2018	$	1,301	$	3,401	$	427		$	183		$	1,038		$	6,350

Allowance for loan losses:
Beginning balance, January 1, 2018	$	1,301	$	2,778	$	506		$	225		$	940		$	5,750
Charge-offs		-		-		(80	)		(64	)		(24	)		(168	)
Recoveries		-		14		1			22			11			48
Provision		-		609		-			-			111			720
Ending balance, September 30, 2018	$	1,301	$	3,401	$	427		$	183		$	1,038		$	6,350

Ending balance, September 30, 2018 allocated to loans individually evaluated for impairment	$	-	$	-	$	-		$	-		$	-		$	-

Ending balance, September 30, 2018 allocated to loans collectively evaluated for impairment	$	1,301	$	3,401	$	427		$	183		$	1,038		$	6,350

Loans receivable:
Ending balance, September 30, 2018	$	144,972	$	303,660	$	53,342		$	16,491		$	79,256		$	597,721

Ending balance, September 30, 2018 of loans individually evaluated for impairment	$	564	$	514	$	228		$	137		$	113		$	1,556

Ending balance, September 30, 2018 of loans collectively evaluated for impairment	$	144,408	$	303,146	$	53,114		$	16,354		$	79,143		$	596,165

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

Internal classification of the loan portfolio was as follows:

	September 30, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	109,268	$	-	$	1,023	$	-	$	-	$	110,291
Residential 1-4 family construction		32,439		-		337		-		-		32,776
Commercial real estate		313,594		1,647		2,413		175		-		317,829
Commercial construction and development		51,647		-		-		-		-		51,647
Farmland		46,342		109		172		58		-		46,681
Other loans:
Home equity		56,438		-		99		-		-		56,537
Consumer		18,832		-		180		-		-		19,012
Commercial		71,848		378		770		63		-		73,059
Agricultural		45,706		138		570		479		-		46,893
Total	$	746,114	$	2,272	$	5,564	$	775	$	-	$	754,725

	December 31, 2018
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	116,065	$	-	$	874	$	-	$	-	$	116,939
Residential 1-4 family construction		26,533		-		635		-		-		27,168
Commercial real estate		252,731		1,731		2,322		-		-		256,784
Commercial construction and development		41,726		-		13		-		-		41,739
Farmland		29,915		-		-		-		-		29,915
Other loans:
Home equity		51,668		-		491		-		-		52,159
Consumer		16,394		-		171		-		-		16,565
Commercial		57,778		950		244		81		-		59,053
Agricultural		17,305		-		404		-		-		17,709
Total	$	610,115	$	2,681	$	5,154	$	81	$	-	$	618,031

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

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

	September 30, 2019
	Loans Past Due and Still Accruing
			90 Days
	30-89 Days		and				Non-Accrual		Current		Total
	Past Due		Greater		Total		Loans		Loans		Loans
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	264	$	-	$	264	$	458	$	109,569	$	110,291
Residential 1-4 family construction		-		-		-		337		32,439		32,776
Commercial real estate		838		-		838		894		316,097		317,829
Commercial construction and development		191		-		191		-		51,456		51,647
Farmland		243		-		243		476		45,962		46,681
Other loans:
Home equity		467		-		467		99		55,971		56,537
Consumer		121		-		121		142		18,749		19,012
Commercial		346		-		346		794		71,919		73,059
Agricultural		20		-		20		511		46,362		46,893
Total	$	2,490	$	-	$	2,490	$	3,711	$	748,524	$	754,725

	December 31, 2018
	Loans Past Due and Still Accruing
			90 Days
	30-89 Days		and				Non-Accrual		Current		Total
	Past Due		Greater		Total		Loans		Loans		Loans
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	381	$	130	$	511	$	253	$	116,175	$	116,939
Residential 1-4 family construction		118		-		118		634		26,416		27,168
Commercial real estate		975		1,347		2,322		432		254,030		256,784
Commercial construction and development		9		-		9		13		41,717		41,739
Farmland		-		-		-		-		29,915		29,915
Other loans:
Home equity		39		-		39		491		51,629		52,159
Consumer		135		-		135		127		16,303		16,565
Commercial		284		-		284		308		58,461		59,053
Agricultural		91		-		91		32		17,586		17,709
Total	$	2,032	$	1,477	$	3,509	$	2,290	$	612,232	$	618,031

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

The following tables include information regarding impaired loans.

	September 30, 2019
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	458	$	494	$	-
Residential 1-4 family construction		337		387		-
Commercial real estate		894		1,059		-
Commercial construction and development		-		-		-
Farmland		476		513		-
Other loans:
Home equity		99		115		-
Consumer		142		154		-
Commercial		794		915		-
Agricultural		511		768		-
Total	$	3,711	$	4,405	$	-

	December 31, 2018
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
Real estate loans:
Residential 1-4 family	$	253	$	277	$	-
Residential 1-4 family construction		634		684		-
Commercial real estate		432		527		-
Commercial construction and development		13		26		-
Farmland		-		-		-
Other loans:
Home equity		491		522		-
Consumer		127		181		-
Commercial		308		310		-
Agricultural		32		32		-
Total	$	2,290	$	2,559	$	-

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	Average Recorded Investment
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	401	$	232	$	355	$	351
Residential 1-4 family construction		337		337		486		169
Commercial real estate		787		521		663		257
Commercial construction and development		-		-		7		-
Farmland		476		-		238		-
Other loans:		-
Home equity		149		217		295		235
Consumer		137		119		134		145
Commercial		768		102		551		110
Agricultural		615		-		272		-
Total	$	3,670	$	1,528	$	3,001	$	1,267

Interest income recognized on impaired loans for the three and nine months ended September 30, 2019 and 2018 is considered insignificant.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. TROUBLED DEBT RESTRUCTURINGS

A TDR loan is a loan in which the Bank grants a concession to the borrower that it would not otherwise consider, for reasons related to a borrower's financial difficulties. The loan terms which have been modified or restructured due to a borrower's financial difficulty, include but are not limited to a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals and rewrites or a combination of these modification methods.

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.

During the year ended December 31, 2018, there was one new restructured loan. The recorded investment at time of restructure was $23,000 and no charge-off was incurred. The loan is a home equity loan and is on non-accrual status. The recorded investment was $20,000 at September 30, 2019 and $22,000 at December 31, 2018.

There were no loans modified as a troubled debt restructured loan that defaulted during the quarter ended September 30, 2019 where the default occurred within 12 months of restructuring. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.

As of September 30, 2019, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. MORTGAGE SERVICING RIGHTS

The Company is servicing mortgage loans for the benefit of others totaling $1,112,454,000 and $964,967,000 at September 30, 2019 and December 31, 2018, respectively and are carried at lower of cost or market. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Mortgage loan servicing fees were $671,000 and $575,000 for the three months ended September 30, 2019 and 2018, respectively. Mortgage loan servicing fees were $1,918,000 and $1,698,000 for the nine months ended September 30, 2019 and 2018, respectively. These fees, net of amortization, are included mortgage banking which is a component of noninterest income on the consolidated statement of income.

Custodial balances maintained in connection with the foregoing loan servicing, and included in noninterest checking deposits, were $11,971,000 and $5,618,000 at September 30, 2019 and December 31, 2018, respectively.

The following tables are a summary of activity in mortgage servicing rights:

	As of or For the
	Three Months Ended
	September 30,
	2019			2018
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	7,666		$	6,716
Mortgage servicing rights capitalized		1,030			527
Amortization of mortgage servicing rights		(478	)		(296	)
Ending balance	$	8,218		$	6,947

	As of or For the
	Nine Months Ended
	September 30,
	2019			2018
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	7,100		$	6,578
Mortgage servicing rights capitalized		2,231			1,275
Amortization of mortgage servicing rights		(1,113	)		(906	)
Ending balance	$	8,218		$	6,947

The fair values of these rights were $8,924,000 and $8,700,000 at September 30, 2019 and December 31, 2018, respectively. The fair value of servicing rights was determined at loan level using a discount rate of 12.00% for all investor types. Prepayment speeds ranged from 110.00% to 258.00% PSA (Public Securities Association prepayment model) at September 30, 2019, depending on the interest rate and term of the specific loan. Prepayment speeds ranged from 83.00% to 226.00% PSA at December 31, 2018. The weighted average prepayment speed was 176.00% PSA and 119.00% PSA at September 30, 2019 and December 31, 2018, respectively.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7. DEPOSITS

Deposits are summarized as follows:

	September 30,		December 31,
	2019		2018
	(In Thousands)

Noninterest checking	$	199,086	$	142,788
Interest bearing checking		111,215		105,115
Savings		124,587		108,234
Money market		124,764		108,050
Time certificates of deposit		229,809		162,424
Total	$	789,461	$	626,611

Time certificates of deposits include $10,180,000 and $0 related to fixed rate brokered CDs at September 30, 2019 and December 31, 2018, respectively. In addition, time certificates of deposits include $16,000,000 and $0 related to fixed rate brokered certificates through the Certificate of Deposit Account Registry Service (“CDARS”) at September 30, 2019 and December 31, 2018, respectively.

NOTE 8. OTHER LONG-TERM DEBT

Other long-term debt consisted of the following:

	September 30, 2019					December 31, 2018
			Unamortized					Unamortized
			Debt					Debt
	Principal		Issuance			Principal		Issuance
	Amount		Costs			Amount		Costs
	(In Thousands)

Senior notes fixed at 5.75%, due 2022	$	10,000	$	(103	)	$	10,000	$	(136	)
Subordinated debentures fixed at 6.75%, due 2025		10,000		(127	)		10,000		(143	)
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035		5,155		-			5,155		-
Total other long-term debt	$	25,155	$	(230	)	$	25,155	$	(279	)

In February 2017, the Company completed the issuance, through a private placement, of $10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. The interest will be paid semi-annually through maturity date. The notes are not subject to redemption at the option of the Company.

In June 2015, the Company completed the issuance of $10,000,000 in aggregate principal amount of subordinated notes due in 2025 in a private placement transaction to an institutional accredited investor. The notes will bear interest at an annual fixed rate of 6.75% and interest will be paid quarterly through maturity date or earlier redemption. The notes are subject to redemption at the option of the bank on or after June 19, 2020.

In September 2005, the Company completed the private placement of $5,155,000 in subordinated debentures to the Trust. The Trust funded the purchase of the subordinated debentures through the sale of trust preferred securities to First Tennessee Bank, N.A. with a liquidation value of $5,155,000. Using interest payments made by the Company on the debentures, the Trust began paying quarterly dividends to preferred security holders in December 2005. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred securities was fixed at 6.02% until December 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 3.505% and 4.228% as of September 30, 2019 and December 31, 2018, respectively. Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date.

For the three months ended September 30, 2019 and 2018, interest expense on other long-term debt was $360,000 and $361,000, respectively. For the nine months ended September 30, 2019 and 2018, interest expense on other long-term debt was $1,089,000 and $1,065,000, respectively.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9. EARNINGS PER SHARE

Basic earnings per share for the three months ended September 30, 2019 was computed using 6,403,693 weighted average shares outstanding. Basic earnings per share for the three months ended September 30, 2018 was computed using 5,460,452 weighted average shares outstanding. Diluted earnings per share was computed using the treasury stock method. The weighted average shares outstanding for the diluted earnings per share calculations was 6,425,380 for the three months ended September 30, 2019 and 5,524,912 for the three months ended September 30, 2018. There were no antidilutive shares for the three months ended September 30, 2019 or 2018.

Basic earnings per share for the nine months ended September 30, 2019 was computed using 6,420,711 weighted average shares outstanding. Basic earnings per share for the nine months ended September 30, 2018 was computed using 5,411,356 weighted average shares outstanding. Diluted earnings per share was computed using the treasury stock method. The weighted average shares outstanding for the diluted earnings per share calculations was 6,442,934 for the nine months ended September 30, 2019 and 5,475,816 for the nine months ended September 30, 2018. There were no antidilutive shares for the nine months ended September 30, 2019 or 2018.

NOTE 10. DIVIDENDS AND STOCK REPURCHASE PROGRAM

For the year ended December 31, 2018, Eagle paid dividends of $0.09 per share for the quarters ended March 31 and June 30, 2018. Eagle paid dividends of $0.0925 per share for the quarters ended September 30 and December 31, 2018. A dividend of $0.0925 per share was declared on January 24, 2019 and paid on March 1, 2019 to shareholders of record on February 8, 2019. A dividend of $0.0925 per share was declared on April 18, 2019 and paid on June 7, 2019 to shareholders of record on May 17, 2019. A dividend of $0.095 per share was declared on July 18, 2019 and paid on September 6, 2019 to shareholders of record on August 16, 2019. A dividend of $0.095 per share was declared on October 17, 2019, payable on December 6, 2019 to shareholders of record on November 15, 2019.

On July 18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the three months ended September 30, 2019. The plan expires on July 18, 2020.

On July 19, 2018, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2018. However, during the first quarter of 2019, 42,000 shares were purchased at an average price of $17.43 per share. In addition, 28,000 shares were purchased during the second quarter of 2019 at an average price of $17.09 per share. The plan expired on July 19, 2019.

On July 20, 2017, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. No shares were purchased under this plan. The plan expired on July 20, 2018.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

				Unrealized
	Unrealized			(Losses) Gains
	Gains (Losses)			on Investment
	on Loans			Securities
	Held-for-Sale			Available-for-Sale			Total
				(In Thousands)
Balance, January 1, 2019	$	227		$	(1,338	)	$	(1,111	)
Other comprehensive income, before reclassifications and income taxes		296			3,451			3,747
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes		(605	)		(49	)		(654	)
Income tax benefit (provision)		82			(896	)		(814	)
Total other comprehensive (loss) income		(227	)		2,506			2,279
Balance, June 30, 2019		-			1,168			1,168
Other comprehensive income, before reclassifications and income taxes		-			1,166			1,166
Amounts reclassified from accumulated other comprehensive income, before income taxes		-			-			-
Income tax provision		-			(307	)		(307	)
Total other comprehensive income		-			859			859
Balance, September 30, 2019	$	-		$	2,027		$	2,027

Balance, January 1, 2018	$	234		$	79		$	313
Other comprehensive income (loss), before reclassifications and income taxes		664			(2,799	)		(2,135	)
Amounts reclassified from accumulated other comprehensive income, before income taxes		(587	)		90			(497	)
Income tax (provision) benefit		(20	)		720			700
Total other comprehensive income (loss)		57			(1,989	)		(1,932	)
Balance, June 30, 2018		291			(1,910	)		(1,619	)
Other comprehensive income (loss), before reclassifications and income taxes		234			(1,237	)		(1,003	)
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes		(402	)		23			(379	)
Income tax benefit		44			320			364
Total other comprehensive loss		(124	)		(894	)		(1,018	)
Balance, September 30, 2018	$	167		$	(2,804	)	$	(2,637	)

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. DERIVATIVES AND HEDGING ACTIVITIES

The company enters into mandatory and best efforts interest rate lock commitments to finance mortgage loans. Outstanding 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. The Company also enters into forward To-Be-Announced ("TBA") mortgage-backed securities to hedge against price or interest rate movements on loan commitments. These forward TBA mortgage-backed securities are accounted for as free-standing or economic derivatives and are measured at fair value. The derivatives are recorded as either other assets or other liabilities on the consolidated statements of condition and the changes in the fair value of the derivatives are recorded in noninterest income on the consolidated statements of income. A net gain of $1,393,000 was recorded in noninterest income for the three months ended September 30, 2019, and a net gain of $864,000 was recorded in noninterest income for the nine months ended September 30, 2019.

Derivatives are summarized as follows:

	September 30, 2019						December 31, 2018
	Notional		Fair Value				Notional		Fair Value
	Amount		Asset		Liability		Amount		Asset		Liability
	(In Thousands)
Interest rate lock commitments	$	70,490	$	812	$	-	$	18,745	$	-	$	-
Forward TBA mortgage-backed securities		77,000		52		-		16,000		-		-

NOTE 13. FAIR VALUE DISCLOSURES

Assets and liabilities that are measured at fair value are grouped in three levels within the fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

The levels are as follows:

Level 1 Inputs – Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 Inputs – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3 Inputs – Valuations are based on unobservable inputs that may include significant management judgement and estimation.

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.

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.

Loans Held-for-Sale – These loans are reported at fair value. Fair value is determined based on expected proceeds from sales contracts and commitments and are considered Level 2 inputs.

Derivative Instruments – The fair value of the interest rate lock commitments and forward TBA mortgage-backed securities are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. Interest rate lock commitments are considered Level 3 inputs and the forward TBA mortgage-backed securities are considered Level 2 inputs.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. FAIR VALUE DISCLOSURES – continued

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.

Real Estate and Other 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 primarily on 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.

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

	September 30, 2019
	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	$	-	$	14,129	$	-	$	14,129
Municipal obligations		-		53,355		-		53,355
Corporate obligations		-		11,403		-		11,403
Mortgage-backed securities		-		11,687		-		11,687
Collateralized mortgage obligations		-		35,823		-		35,823
Asset-backed securities		-		9,986		-		9,986
Loans held-for-sale		-		24,913		-		24,913
Interest rate lock commitments		-		-		812		812
Forward TBA mortgage-backed securities		-		52		-		52

	December 31, 2018
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency	$	-	$	9,347	$	-	$	9,347
Municipal obligations		-		68,278		-		68,278
Corporate obligations		-		11,119		-		11,119
Mortgage-backed securities		-		19,348		-		19,348
Collateralized mortgage obligations		-		23,875		-		23,875
Asset-backed securities		-		10,198		-		10,198
Loans held-for-sale		-		7,318		-		7,318
Interest rate lock commitments		-		-		-		-
Forward TBA mortgage-backed securities		-		-		-		-

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. FAIR VALUE DISCLOSURES - continued

Certain financial assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent, real estate and other repossessed assets and mortgage servicing rights.

The following table summarizes financial assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods presented:

September 30, 2019

Level 1

Level 2

Level 3

Total Fair

Inputs

Value

(In Thousands)

Real estate and other repossessed assets

	December 31, 2018
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Real estate and other repossessed assets	$	-	$	-	$	107	$	107

As of September 30, 2019, impaired loans with a carrying value of $3,711,000 were not reduced by specific valuation allowance allocations and therefore resulted in a total reported value of $3,711,000.

As of December 31, 2018, impaired loans with a carrying value of $2,290,000 were not reduced by specific valuation allowance allocations and therefore resulted in a total reported value of $2,290,000.

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

September 30,

December 31,

Valuation

Unobservable

Signficant Input

Instrument

2019

2018

Technique

Inputs

Values

(Dollars In Thousands)

Real estate and other repossessed assets

107

Appraisal of collateral

Liquidation expenses

10-30%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. FAIR VALUE DISCLOSURES - continued

The tables below summarize the estimated fair values of financial instruments of the Company at September 30, 2019 and December 31, 2018, whether or not recognized at fair value on the consolidated statements of condition. The tables are followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.

	September 30, 2019
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	13,286	$	-	$	-	$	13,286	$	13,286
FHLB stock		4,167		-		-		4,167		4,167
FRB stock		2,526		-		-		2,526		2,526
Loans receivable, net		-		-		747,382		747,382		745,369
Accrued interest and dividends receivable		5,318		-		-		5,318		5,318
Mortgage servicing rights		-		-		8,924		8,924		8,218
Financial liabilities:
Non-maturing interest bearing deposits		-		360,566		-		360,566		360,566
Noninterest bearing deposits		199,086		-		-		199,086		199,086
Time certificates of deposit		-		-		229,648		229,648		229,809
Accrued expenses and other liabilities		10,266		-		-		10,266		10,266
FHLB advances and other borrowings		-		-		76,799		76,799		76,699
Other long-term debt		-		-		24,828		24,828		25,155

	December 31, 2018
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	11,201	$	-	$	-	$	11,201	$	11,201
FHLB stock		5,011		-		-		5,011		5,011
FRB stock		2,033		-		-		2,033		2,033
Loans receivable, net		-		-		603,361		603,361		608,043
Accrued interest and dividends receivable		3,479		-		-		3,479		3,479
Mortgage servicing rights		-		-		8,670		8,670		7,100
Financial liabilities:
Non-maturing interest bearing deposits		-		321,399		-		321,399		321,399
Noninterest bearing deposits		142,788		-		-		142,788		142,788
Time certificates of deposit		-		-		160,735		160,735		162,424
Accrued expenses and other liabilities		5,388		-		-		5,388		5,388
FHLB advances and other borrowings		-		-		101,885		101,885		102,222
Other long-term debt		-		-		24,002		24,002		25,155

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. FAIR VALUE DISCLOSURES – continued

The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments. However, the Form 10-K for the year ended December 31, 2018 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 of Des Moines 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.

Mortgage Servicing Rights – the fair value of servicing rights was determined at loan level using a discount rate of 12.00% for all investor types and prepayment speeds ranging from 110.00% to 258.00% PSA (Public Securities Association prepayment model), depending on the interest rate and term of the specific loan. The weighted average prepayment speed was 176.00% PSA.

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/Other Borrowings and Other Long-Term Debt – The fair value of the Company’s advances and debentures are estimated using discounted cash flow analysis based on the interest rate that would be effective September 30, 2019 and December 31, 2018, respectively if the borrowings repriced according to their stated terms.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) intended to improve financial reporting regarding leasing transactions. The new standard affects all companies and organizations that lease assets. The standard requires organizations to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases if the lease terms are more than 12 months. The guidance also requires qualitative and quantitative disclosures providing additional information about the amounts recorded in the financial statements. The amendments in this update were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and was adopted by the Company in the first quarter of 2019. The adoption of the standard did not have a significant impact on our consolidated financial statements. The Company’s operating leases primarily relate to branch locations. We currently lease six locations that are full-service branches and one mortgage lending branch. The leases expire on various dates through 2028. As a result of adopting the lease standard on January 1, 2019, the Company recorded right of use assets of $2,374,000 and corresponding lease liabilities. The right of use assets are included in premises and equipment, net and the lease liabilities are included in accrued expenses and other liabilities on the consolidated statement of financial condition.

In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the standard amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

In October 2019, the FASB amended the effective date of the standard. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).

The Company believes the amendments in this update will have an impact on the Company’s consolidated financial statements and is continuing to evaluate the significance of that impact, even though the adoption date has been deferred. In that regard, we have established a working group under the direction of our Chief Financial Officer and Chief Credit Officer. The group is composed of individuals from the finance and credit administration areas of the Company. We are currently developing an implementation plan, including assessment of processes, segmentation of the loan portfolio and identifying and adding data fields necessary for analysis. The adoption of this standard is likely to result in an increase in the allowance for loan and lease losses as a result of changing from an “incurred loss” model to an “expected loss” model. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20) to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this standard in the first quarter of 2019 did not have a significant impact on our consolidated financial statements, as we typically do not invest in these types of securities.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

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

Overview

The Company’s primary business activity is the ownership of its wholly owned subsidiary, Opportunity Bank of Montana (the “Bank”). The Bank is a Montana chartered commercial bank that focuses on both consumer and commercial lending. It engages in typical banking activities: acquiring deposits from local markets and originating loans and investing in securities. Its deposits are insured by the Federal Deposit Insurance Corporation. Federal insurance premiums are included in noninterest expense on the consolidated statement of income and included a credit for the three months ended September 30, 2019. The Bank’s primary component of earnings is its net interest margin (also called spread or margin), the difference between interest income and interest expense. The net interest margin is managed by management (through the pricing of its products and by the types of products offered and kept in portfolio), and is affected by changes in market interest rates. The Bank also generates noninterest income in the form of fee income and gain on sale of loans.

The Bank has a strong mortgage lending focus, with a large portion of its loan originations represented by single-family residential mortgages, which has enabled it to successfully market home equity loans, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). In recent years, the Bank has also focused on adding commercial loans to its portfolio, both real estate and non-real estate. We have made significant progress in this initiative. The purpose of this diversification is to mitigate the Bank’s dependence on the residential mortgage market, as well as to improve its ability to manage its spread. Recent acquisitions have added to our agricultural loans, which generally have shorter maturities and nominally higher interest rates. This has provided additional interest income and improved interest rate sensitivity. 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.

The Company previously offered wealth management services through financial advisors employed by the Bank. Income from wealth management services was included in noninterest income on the consolidated statement of income. The company discontinued its wealth management services during July of 2019.

Management continues to focus on improving the Bank’s earnings. Management believes the Bank needs to continue to concentrate on increasing net interest margin, other areas of fee income and control of operating expenses to achieve earnings growth going forward. Management’s strategy of growing the bank’s loan portfolio and deposit base is expected to help achieve these goals as follows: loans typically earn higher rates of return than investments; a larger deposit base should yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to the strategy is funding the growth of the Bank’s balance sheet in an efficient manner. Though deposit growth has been steady, it may become more difficult to maintain due to significant competition and possible reduced customer demand for deposits as customers may shift into other asset classes.

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee changed the federal funds target rate from 1.50% to 2.50% during the year ended December 31, 2018. The rate decreased from 2.50% to 2.00% during the nine months ended September 30, 2019.

From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. On September 5, 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire 100% of TwinCo’s equity voting interests. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated 2 branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. The acquisition closed January 31, 2018, after receipt of approvals from regulatory authorities, approval of TwinCo shareholders and the satisfaction of other closing conditions. The total consideration paid was $18.93 million and included cash consideration of $9.90 million and common stock issued of $9.03 million.

Effective January 1, 2019, Eagle completed its previously announced merger with Big Muddy Bancorp, Inc. (“BMB”), pursuant to an Agreement and Plan of Merger, dated as of August 21, 2018, by and among Eagle, Opportunity Bank of Montana, BMB and BMB’s wholly-owned subsidiary, The State Bank of Townsend, a Montana chartered commercial bank. At the effective time of the Merger, BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. The State Bank of Townsend operated four branches in Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities, throughout the state. The acquisition closed after receipt of approvals from regulatory authorities, approval of BMB shareholders and the satisfaction of other closing conditions. The total consideration paid was $16.44 million and it was primarily related to common stock issued.

On August 8, 2019, Eagle and OBMT, entered into an Agreement and Plan of Merger with Western Holding Company of Wolf Point, a Montana corporation (“WHC”), and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point, a Montana chartered commercial bank (“WB”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, WHC will merge with and into Eagle, with Eagle continuing as the surviving corporation. Upon completion of the transaction, Eagle will have an additional $100 million in assets, $77 million in deposits, and $41 million in gross loans, based on June 30, 2019 information. The deal is expected to close during the fourth quarter of 2019.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition

Comparisons of financial condition in this section are between September 30, 2019 and December 31, 2018.

Total assets were $1.02 billion at September 30, 2019, an increase of $168.32 million, or 19.70%, from $853.90 million at December 31, 2018. The increase was largely due to the change in loans receivable which was impacted by the acquisition of BMB. Loans receivable increased by $135.04 million, or 22.1%, to $745.37 million at September 30, 2019, from $610.33 million at December 31, 2018. Total liabilities were $901.77 million at September 30, 2019, an increase of $142.67 million, or 18.8%, from $759.10 million at December 31, 2018. The increase was mainly due to an increase in deposits which was impacted by the BMB acquisition. Total deposits increased by $162.85 million, or 26.0%, to $789.46 million at September 30, 2019, from $626.61 million at December 31, 2018.

Balance Sheet Details

Investment Activities

The following table summarizes investment activities:

	September 30,					December 31,
	2019					2018
	Fair Value		Percentage of Total			Fair Value		Percentage of Total
	(Dollars in Thousands)
Securities available-for-sale:
U.S. government and agency	$	14,129		9.63	%	$	9,347		6.22	%
Municipal obligations		53,355		36.38	%		68,278		45.44	%
Corporate obligations		11,403		7.77	%		11,119		7.40	%
Mortgage-backed securities		11,687		7.97	%		19,348		12.88	%
Collateralized mortgage obligations		35,823		24.43	%		23,875		15.89	%
Asset-backed securities		9,986		6.81	%		10,198		6.79	%
Total securities available-for-sale		136,383		92.99	%		142,165		94.62	%

Interest bearing deposits, at cost		3,589		2.45	%		1,057		0.70	%
Federal Home Loan Bank ("FHLB") capital stock, at cost		4,167		2.84	%		5,011		3.33	%
Federal Reserve Bank ("FRB") capital stock, at cost		2,526		1.72	%		2,033		1.35	%
Total	$	146,665		100.00	%	$	150,266		100.00	%

Securities available-for-sale were $136.38 million at September 30, 2019, a decrease of $5.79 million, or 4.1%, from $142.17 million at December 31, 2018. The largest decrease in securities available-for-sale was in municipal obligations which decreased by $14.92 million largely due to sales activity. This decrease was partially offset by an increase in collateralized mortgage obligations of $11.94 million largely due to purchase activity.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Lending Activities

The following table includes the composition of the Bank’s loan portfolio by loan category:

	September 30,						December 31,
	2019						2018
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Real estate loans:
Residential 1-4 family ⁽¹⁾	$	110,291			14.61	%	$	116,939			18.92	%
Residential 1-4 family construction		32,776			4.34	%		27,168			4.40	%
Total residential 1-4 family		143,067			18.95	%		144,107			23.32	%

Commercial real estate		317,829			42.12	%		256,784			41.54	%
Commercial construction and development		51,647			6.84	%		41,739			6.75	%
Farmland		46,681			6.19	%		29,915			4.84	%
Total commercial real estate		416,157			55.15	%		328,438			53.13	%

Total real estate loans		559,224			74.10	%		472,545			76.45	%

Other loans:
Home equity		56,537			7.49	%		52,159			8.44	%
Consumer		19,012			2.52	%		16,565			2.68	%

Commercial		73,059			9.68	%		59,053			9.56	%
Agricultural		46,893			6.21	%		17,709			2.87	%
Total commercial loans		119,952			15.89	%		76,762			12.43	%

Total other loans		195,501			25.90	%		145,486			23.55	%

Total loans		754,725			100.00	%		618,031			100.00	%

Deferred loan fees		(1,156	)					(1,098	)
Allowance for loan losses		(8,200	)					(6,600	)
Total loans, net	$	745,369					$	610,333

⁽¹⁾

Excludes loans held-for-sale.

Loans receivable, net increased $135.04 million to $745.37 million at September 30, 2019 due to the BMB acquisition as well as organic growth. The BMB acquisition included $89.20 million of acquired loans. Excluding acquired loans, loans receivable increased by $45.83 million. Including acquired loans, total commercial real estate loans increased $87.72 million, total commercial loans increased $43.19 million, home equity loans increased $4.38 million, consumer loans increased $2.44 million and total residential loans decreased $1.04 million. Total loan originations were $542.68 million for the nine months ended September 30, 2019, with total residential 1-4 family accounting for $383.11 million of the total. Total commercial real estate originations were $84.68 million. Total commercial and home equity loan originations totaled $49.48 million and $17.48 million, respectively, for the same period. Consumer loan originations totaled $7.93 million. Loans held-for-sale increased by $17.59 million, to $24.91 million at September 30, 2019 from $7.32 million at December 31, 2018.

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

For mortgage loans and home equity loans, if the borrower is unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions. If a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until such time as it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial recording of any loss is charged to the allowance for loan losses. Subsequent write-downs are recorded as a charge to operations. As of September 30, 2019, the Bank had $91,000 of real estate owned.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Lending Activities– continued

The following table sets forth information regarding nonperforming assets:

	September 30,			December 31,
	2019			2018
	(Dollars in Thousands)
Non-accrual loans
Real estate loans:
Residential 1-4 family	$	458		$	253
Residential 1-4 family construction		337			634
Commercial real estate		894			432
Commercial construction and development		-			13
Farmland		476			-
Other loans:
Home equity		79			469
Consumer		142			127
Commercial		794			308
Agricultural		511			32
Accruing loans delinquent 90 days or more
Real estate loans:
Residential 1-4 family		-			130
Commercial real estate		-			1,347
Restructured loans:
Other loans:
Home equity		20			22
Total nonperforming loans		3,711			3,767
Real estate owned and other repossed property, net		91			107
Total nonperforming assets	$	3,802		$	3,874

Total nonperforming loans to total loans		0.49	%		0.61	%
Total nonperforming loans to total assets		0.36	%		0.44	%
Total allowance for loan loss to nonperforming loans		220.96	%		175.21	%
Total nonperforming assets to total assets		0.37	%		0.45	%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

	September 30,					December 31,
	2019					2018
			Percent					Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Noninterest checking	$	199,086		25.22	%	$	142,788		22.79	%
Interest bearing checking		111,215		14.09	%		105,115		16.78	%
Savings		124,587		15.78	%		108,234		17.27	%
Money market		124,764		15.80	%		108,050		17.24	%
Total		559,652		70.89	%		464,187		74.08	%
Certificates of deposit accounts:
IRA certificates		26,167		3.31	%		28,198		4.50	%
Brokered certificates		10,180		1.29	%		-		0.00	%
Other certificates		193,462		24.51	%		134,226		21.42	%
Total certificates of deposit		229,809		29.11	%		162,424		25.92	%
Total deposits	$	789,461		100.00	%	$	626,611		100.00	%

Deposits increased by $162.85 million, or 26.0%, to $789.46 million at September 30, 2019 from $626.61 million at December 31, 2018. The increase was largely due to increased deposits as a result of the BMB acquisition. Excluding acquired deposits, total deposits increased by $70.14 million. Including acquired deposits, certificates of deposit increased by $67.39 million, noninterest checking increased by $56.30 million, money market increased by $16.71 million, savings increased by $16.35 million, and interest bearing checking increased by $6.10 million. As indicated in the table above, the increase in time certificates of deposit was impacted by $10.18 million of fixed rate brokered CDs. In addition, other certificates include an increase from year-end of $16.00 million related to fixed rate brokered certificates obtained through the Certificate of Deposit Account Registry Service (“CDARS”).

The following table summarizes borrowing activity:

	September 30,					December 31,
	2019					2018
	Net		Percent			Net		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
FHLB advances and other borrowings	$	76,699		75.47	%	$	102,222		80.43	%
Other long-term debt:
Senior notes fixed at 5.75%, due 2022		9,897		9.74	%		9,864		7.76	%
Subordinated debentures fixed at 6.75%, due 2025		9,873		9.72	%		9,857		7.76	%
Subordinated debentures variable, due 2035		5,155		5.07	%		5,155		4.05	%
Total other long-term debt		24,925		24.53	%		24,876		19.57	%
Total borrowings		101,624		100.00	%		127,098		100.00	%

FHLB advances and other borrowings decreased by $25.52 million, or 25.0%, to $76.70 million at September 30, 2019 from $102.22 million at December 31, 2018. The decrease is due in part to utilizing brokered CDs and CDARS as other borrowing sources.

Shareholders’ Equity

Total shareholders’ equity increased $25.64 million, or 27.0%, to $120.45 million at September 30, 2019 from $94.81 million at December 31, 2018. This was primarily the result of stock issued in connection with the BMB acquisition of $16.44 million. The increase was also due to net income of $8.54 million and other comprehensive income of $3.14 million. These increases were slightly offset by dividends paid of $1.80 million and treasury stock purchased for $1.21 million.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Analysis of Net Interest Income

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

The following table includes average balances for balance sheet items, as well as, interest and dividends and average yields related to the average balances. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income or expense.

	For the Three Months Ended September 30,
	2019							2018
	Average		Interest					Average		Interest
	Daily		and		Yield/			Daily		and		Yield/
	Balance		Dividends		Cost⁽⁴⁾			Balance		Dividends		Cost⁽⁴⁾
	(Dollars in Thousands)
Assets:
Interest earning assets:
Investment securities	$	134,980	$	916		2.69	%	$	151,750	$	1,036		2.71	%
FHLB and FRB stock		8,049		107		5.27	%		6,473		80		4.90	%
Loans receivable⁽¹⁾		779,770		10,731		5.46	%		591,441		7,701		5.17	%
Other earning assets		4,188		19		1.80	%		1,020		8		3.11	%
Total interest earning assets		926,987		11,773		5.04	%		750,684		8,825		4.66	%
Noninterest earning assets		100,911							80,191
Total assets	$	1,027,898						$	830,875

Liabilities and equity:
Interest bearing liabilities:
Deposit accounts:
Checking	$	114,820	$	11		0.04	%	$	105,060	$	8		0.03	%
Savings		119,555		24		0.08	%		104,884		14		0.05	%
Money market		121,588		109		0.36	%		104,421		51		0.19	%
Certificates of deposit		213,073		878		1.63	%		162,877		461		1.12	%
Advances from FHLB and other borrowings including long-term debt		136,306		1,052		3.06	%		114,438		814		2.82	%
Total interest bearing liabilities		705,342		2,074		1.17	%		591,680		1,348		0.90	%
Noninterest checking		188,291							138,302
Other noninterest bearing liabilities		15,753							8,215
Total liabilities		909,386							738,197

Total equity		118,512							92,678

Total liabilities and equity	$	1,027,898						$	830,875
Net interest income/interest rate spread⁽²⁾			$	9,699		3.87	%			$	7,477		3.76	%

Net interest margin⁽³⁾						4.15	%						3.95	%
Total interest earning assets to interest bearing liabilities						131.42	%						126.87	%

⁽¹⁾	Includes loans held-for-sale.

⁽²⁾	Interest rate spread represents the difference between the average yield on interest earning assets and the average rate on interest bearing liabilities.

⁽³⁾	Net interest margin represents income before the provision for loan losses divided by average interest earning assets.

⁽⁴⁾	For purposes of this table, tax exempt income is not calculated on a tax equivalent basis.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Analysis of Net Interest Income – continued

	For the Nine Months Ended September 30,
	2019							2018
	Average		Interest					Average		Interest
	Daily		and		Yield/			Daily		and		Yield/
	Balance		Dividends		Cost⁽⁴⁾			Balance		Dividends		Cost⁽⁴⁾
	(Dollars in Thousands)
Assets:
Interest earning assets:
Investment securities	$	137,533	$	2,802		2.72	%	$	152,580	$	3,046		2.67	%
FHLB and FRB stock		7,582		297		5.24	%		6,166		233		5.05	%
Loans receivable⁽¹⁾		753,541		31,378		5.57	%		583,274		22,435		5.14	%
Other earning assets		3,984		55		1.85	%		3,450		44		1.70	%
Total interest earning assets		902,640		34,532		5.11	%		745,470		25,758		4.62	%
Noninterest earning assets		95,835							78,356
Total assets	$	998,475						$	823,826

Liabilities and equity:
Interest bearing liabilities:
Deposit accounts:
Checking	$	115,549	$	33		0.04	%	$	107,412	$	27		0.03	%
Savings		118,972		61		0.07	%		103,325		40		0.05	%
Money market		121,907		305		0.33	%		107,280		156		0.19	%
Certificates of deposit		205,396		2,334		1.52	%		164,010		1,231		1.00	%
Advances from FHLB and other borrowings including long-term debt		131,011		3,031		3.09	%		108,484		2,170		2.67	%
Total interest bearing liabilities		692,835		5,764		1.11	%		590,511		3,624		0.82	%
Noninterest checking		179,539							132,773
Other noninterest bearing liabilities		12,487							9,603
Total liabilities		884,861							732,887

Total equity		113,614							90,939

Total liabilities and equity	$	998,475						$	823,826
Net interest income/interest rate spread⁽²⁾			$	28,768		4.00	%			$	22,134		3.80	%

Net interest margin⁽³⁾						4.26	%						3.97	%
Total interest earning assets to interest bearing liabilities						130.28	%						126.24	%

⁽¹⁾	Includes loans held-for-sale.

⁽²⁾	Interest rate spread represents the difference between the average yield on interest earning assets and the average rate on interest bearing liabilities.

⁽³⁾	Net interest margin represents income before the provision for loan losses divided by average interest earning assets.

⁽⁴⁾	For purposes of this table, tax exempt income is not calculated on a tax equivalent basis.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis

The following tables present 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 September 30,
	2019									2018
				Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest earning assets:
Investment securities	$	(114	)	$	(6	)	$	(120	)	$	169		$	174		$	343
FHLB and FRB stock		19			8			27			10			22			32
Loans receivable⁽¹⁾		2,452			578			3,030			881			342			1,223
Other earning assets		25			(14	)		11			5			(2	)		3
Total interest earning assets		2,382			566			2,948			1,065			536			1,601

Interest bearing liabilities:
Savings, money market and checking accounts		11			60			71			11			7			18
Certificates of deposit		142			275			417			28			102			130
Advances from FHLB and other borrowings including long-term debt		156			82			238			(22	)		157			135
Total interest bearing liabilities		309			417			726			17			266			283

Change in net interest income	$	2,073		$	149		$	2,222		$	1,048		$	270		$	1,318

⁽¹⁾	Includes loans held-for-sale.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis – continued

	For the Nine Months Ended September 30,
	2019								2018
				Due to							Due to
	Volume			Rate		Net			Volume		Rate		Net
	(In Thousands)
Interest earning assets:
Investment securities	$	(300	)	$	56	$	(244	)	$	458	$	452	$	910
FHLB and FRB stock		54			10		64			31		78		109
Loans receivable⁽¹⁾		6,549			2,394		8,943			2,926		1,287		4,213
Other earning assets		7			4		11			13		24		37
Total interest earning assets		6,310			2,464		8,774			3,428		1,841		5,269

Interest bearing liabilities:
Savings, money market and checking accounts		29			147		176			27		48		75
Certificates of deposit		311			792		1,103			59		178		237
Advances from FHLB and other borrowings including long-term debt		451			410		861			3		342		345
Total interest bearing liabilities		791			1,349		2,140			89		568		657

Change in net interest income	$	5,519		$	1,115	$	6,634		$	3,339	$	1,273	$	4,612

⁽¹⁾	Includes loans held-for-sale.

Results of Operations for the Three Months Ended September 30, 2019 and 2018

Net Income. Eagle’s net income for the three months ended September 30, 2019 was $4.11 million compared to $1.63 million for the three months ended September 30, 2018. The increase of $2.48 million was due to an increase in net interest income after loan loss provision of $1.73 million and an increase in noninterest income of $4.95 million, offset by an increase in noninterest expense of $3.46 million and an increase in income tax provision of $736,000. Basic earnings per share was $0.64 and diluted earnings per share was both $0.63 for the current period. Basic and diluted earnings per share were both $0.30 for the prior year comparable period.

Net Interest Income. Net interest income increased to $9.70 million for the three months ended September 30, 2019, from $7.48 million for the same quarter in the prior year. This increase of $2.22 million, or 29.7%, was the result of an increase in interest and dividend income of $2.94 million, partially offset by an increase in interest expense of $726,000.

Interest and Dividend Income. Interest and dividend income was $11.77 million for the three months ended September 30, 2019, compared to $8.83 million for the three months ended September 30, 2018, an increase of $2.94 million, or 33.3%. Interest and fees on loans increased to $10.73 million for the three months ended September 30, 2019 from $7.70 million for the three months ended September 30, 2018. This increase of $3.03 million, or 39.4%, was due to an increase in the average balance of loans, as well as, an increase in the average yield of loans for the quarter ended September 30, 2019. Average balances for loans receivable, including loans held-for-sale, for the three months ended September 30, 2019 were $779.77 million, compared to $591.44 million for the prior year period. This represents an increase of $188.33 million, or 31.8% and was impacted by the BMB acquisition. The average interest rate earned on loans receivable increased by 29 basis points, from 5.17% to 5.46%. Interest and fees on loans also includes $289,000 related to accretion of the loan purchase discount for the BMB and TwinCo acquisitions. Interest and dividends on investment securities available-for-sale decreased by $120,000, or 11.6% period over period. Average balances for investments decreased to $134.98 million for the three months ended September 30, 2019, from $151.75 million for the three months ended September 30, 2018. Average interest rates earned on investments decreased slightly to 2.69% for the three months ended September 30, 2019 from 2.71% for the three months ended September 30, 2018.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Three Months Ended September 30, 2019 and 2018 – continued

Interest Expense. Total interest expense was $2.07 million for the three months ended September 30, 2019 compared to $1.35 million for the three months ended September 30, 2018. The increase of $726,000 or 53.9% was due to an increase in interest expense on deposits, as well as an increase in total borrowings. The average balance for total deposits was $757.33 million for three months ended September 30, 2019 compared to $615.54 million for the three months ended September 30, 2018. This increase was impacted by the BMB acquisition. The overall average rate on total deposits was 0.54% for the three months ended September 30, 2019 compared to 0.34% for the three months ended September 30, 2018. The average balance for total borrowings increased from $114.44 million for the three months ended September 30, 2018 to $136.31 million for the three months ended September 30, 2019. The average rate paid on total borrowings also increased from 2.82% for the three months ended September 30, 2018, to 3.06% for the three months ended September 30, 2019.

Loan Loss Provision. Loan loss provisions are charged to earnings to maintain total allowance for loan losses at a level considered adequate by management of the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank and past due loans in the portfolio. The Bank’s policies require review of assets on a quarterly basis. The Bank classifies loans as well as other assets if warranted. While management believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. The Bank recorded $694,000 in provision for loan losses for the three months ended September 30, 2019 and $194,000 for the three months ended September 30, 2018. Management believes the level of total allowances is adequate.

Noninterest Income. Total noninterest income was $8.42 million for the three months ended September 30, 2019, compared to $3.47 million for the three months ended September 30, 2018. The increase of $4.95 million is largely due to an increase in net gain on sale of loans which increased to $5.49 million for the three months ended September 30, 2019 from $2.29 million for the three months ended September 30, 2018. This increase was impacted by increased mortgage originations and higher margins on mortgage loans sold.

Noninterest Expense. Noninterest expense was $12.22 million for the three months ended September 30, 2019 compared to $8.76 million for the three months ended September 30, 2018. The increase of $3.46 million or 39.5% is largely due to increased salaries and employee benefits expense of $2.44 million. The increase is due in part to higher commission-based compensation related to the continued loan growth, additional mortgage lenders hired in the past year and staff hired related to compliance with mortgage rules. Salaries and employee benefits expense was also impacted by the addition of staff related to the BMB acquisition.

Income Tax Provision. Income tax provision was $1.10 million for the three months ended September 30, 2019, compared to $360,000 for the three months ended September 30, 2018. The effective tax rate for the three months ended September 30, 2019 was 21.1% compared to 18.1% for the three months ended September 30, 2018.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Nine Months Ended September 30, 2019 and 2018

Net Income. Eagle’s net income for the nine months ended September 30, 2019 was $8.54 million compared to $3.54 million for the nine months ended September 30, 2018. The increase of $5.00 million was due to an increase in net interest income after loan loss provision of $5.36 million and an increase in noninterest income of $9.00 million, offset by an increase in noninterest expense of $8.01 million and an increase in income tax provision of $1.35 million. Basic earnings per share was $1.33 and diluted earnings per share was $1.32 for the current year period. Basic and diluted earnings per share were both $0.65 for the prior year period.

Net Interest Income. Net interest income increased to $28.77 million for the nine months ended September 30, 2019, from $22.13 million for the previous year’s nine-month period. This increase of $6.64 million, or 30.0%, was the result of an increase in interest and dividend income of $8.77 million, partially offset by an increase in interest expense of $2.14 million.

Interest and Dividend Income. Interest and dividend income was $34.53 million for the nine months ended September 30, 2019, compared to $25.76 million for the nine months ended September 30, 2018, an increase of $8.77 million, or 34.0%. Interest and fees on loans increased to $31.38 million for the nine months ended September 30, 2019 from $22.44 million for the same period ended September 30, 2018. This increase of $8.94 million, or 39.8%, was due to an increase in the average balance of loans, as well as, an increase in the average yield on loans. Average balances for loans receivable, including loans held-for-sale, for the nine months ended September 30, 2019 were $753.54 million, compared to $583.27 million for the prior year period. This represents an increase of $170.27 million, or 29.2% and was impacted by the BMB acquisition. The average interest rate earned on loans receivable increased by 43 basis points, from 5.14% to 5.57%. Interest and fees on loans also includes $1.35 million related to accretion of the loan purchase discount for the BMB and TwinCo acquisitions. Interest and dividends on investment securities available-for-sale decreased $244,000, or 8.0% period over period. Average balances for investments decreased to $137.53 million for the nine months ended September 30, 2019, from $152.58 million for the nine months ended September 30, 2018. However, average interest rates earned on investments increased to 2.72% for the nine months ended September 30, 2019 from 2.67% for the nine months ended September 30, 2018.

Interest Expense. Total interest expense for the nine months ended September 30, 2019 was $5.76 million compared to $3.62 million for the nine months ended September 30, 2018. The increase of $2.14 million was due to an increase in interest expense on deposits, as well as an increase in total borrowings. Interest expense on deposits increased $1.28 million for the nine months ended September 30, 2019 compared to the same period in the prior year. The increase is due to higher overall average balances for total deposits which increased from $614.80 million for the nine months ended September 30, 2018 to $741.36 million for the nine months ended September 30, 2019. This increase was impacted by the BMB acquisition. The overall average rate on total deposits was also increased to 0.49% for the nine months ended September 30, 2019 compared to 0.32% for the prior period. Interest expense on total borrowings increased $861,000 for the nine months ended September 30, 2019 compared to the same period in the prior year. The average borrowing balance increased from $108.48 million for the nine months ended September 30, 2018 to $131.01 million for the nine months ended September 30, 2019. The average rate paid increased from 2.67% for the nine months ended September 30, 2018, to 3.09% for the nine months ended September 30, 2019.

Loan Loss Provision. Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by management of the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank and past due loans in the portfolio. The Bank’s policies require a review of assets on a quarterly basis. The Bank classifies loans as well as other assets if warranted. While management believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. The Bank recorded $2.00 million in loan loss provisions for the nine months ended September 30, 2019 and $720,000 for the nine months ended September 30, 2018. Management believes the level of total allowances is adequate. Total nonperforming loans was $3.71 million at September 30, 2019 compared to $3.77 million at December 31, 2018. The Bank has $91,000 in other real estate owned and other repossessed assets at September 30, 2019 compared to $107,000 at December 31, 2018.

Noninterest Income. Total noninterest income increased to $17.62 million for the nine months ended September 30, 2019, from $8.62 million for the nine months ended September 30, 2018, an increase of $9.00 million or 104.4%. The increase is largely due to an increase in net gain on sale of loans which increased to $11.45 million for the nine months ended September 30, 2019 from $5.45 million for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, $329.05 million mortgage loans were sold compared to $205.06 million in the same period in the prior year. In addition, the gross margin on sale of mortgage loans for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 increased from 2.66% to 3.48%.

Noninterest Expense. Noninterest expense was $33.72 million for the nine months ended September 30, 2019 compared to $25.71 million for the nine months ended September 30, 2018. The increase of $8.01 million, or 31.2%, is largely due to increased salaries and employee benefits expense of $4.57 million. The increase in salaries expense is due in part to higher commission-based compensation related to the continued loan growth and additional staff related to compliance with mortgage rules. Salaries and employee benefits expense was also impacted by the addition of staff related to the BMB acquisition. In addition, acquisition costs increased $1.10 million compared to prior year.

Income Tax Provision. Income tax provision was $2.14 million for the nine months ended September 30, 2019, compared to $780,000 for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 was 20.0% compared to 18.1% for the nine months ended September 30, 2018.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

Liquidity

The Bank is required to maintain minimum levels of liquid assets as defined in the regulations of the Montana Division of Banking and Financial Institutions 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 FHLB. The Bank exceeded those minimum ratios as of both September 30, 2019 and December 31, 2018.

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 FHLB and other borrowings. Scheduled repayments of loans and mortgage-backed and collateralized mortgage obligation securities and maturities of investment securities are generally predictable. However, other sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity and meet operating expenses.

Liquidity may be adversely affected by unexpected deposit outflows, higher interest rates paid by competitors and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on commitments to make loans and management’s assessment of the Bank’s ability to generate funds.

Capital Resources

As of September 30, 2019, the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200 basis point rise in interest rates scenario, increased the economic value of equity (“EVE”) by 12.9% compared to an increase of 2.3% at December 31, 2018. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

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

The Banks’s Tier I leverage ratio, as measured under State of Montana and FRB rules, decreased slightly from 11.22% as of December 31, 2018 to 11.21% as of September 30, 2019. The Bank’s capital position helps to mitigate its interest rate risk exposure.

As of September 30, 2019, the Bank’s regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed “well capitalized” pursuant to State of Montana and FRB rules. As of September 30, 2019, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 15.70%, 14.62%, 14.62% and 11.21%, respectively, compared to regulatory requirements of 10.50%, 8.50%, 7.00% and 4.00%, respectively. All of these ratios with the exception of the Tier 1 leverage ratio include the capital conservation buffer of 2.50% phased-in beginning January 1, 2019.

	September 30, 2019
	(Unaudited)
	Dollar		% of
	Amount		Assets
	(Dollars in Thousands)
Total risk-based capital to risk weighted assets:
Actual capital level	$	119,898		15.70	%
Minimum required for capital adequacy Basel III phase-in schedule		80,202		10.50	%
Excess capital	$	39,696		5.20	%

Tier I capital to risk weighted assets:
Actual capital level	$	111,698		14.62	%
Minimum required for capital adequacy Basel III phase-in schedule		64,925		8.50	%
Excess capital	$	46,773		6.12	%

Common equity tier I capital to risk weighted assets:
Actual capital level	$	111,698		14.62	%
Minimum required for capital adequacy Basel III phase-in schedule		53,468		7.00	%
Excess capital	$	58,230		7.62	%

Tier I capital to adjusted total average assets:
Actual capital level	$	111,698		11.21	%
Minimum required for capital adequacy Basel III phase-in schedule		39,847		4.00	%
Excess capital	$	71,851		7.21	%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Interest Rate Risk

Interest rate risk is the potential for loss of future earnings resulting from adverse changes in the level of interest rates. Interest rate risk results from several factors and could have a significant impact on the Company’s net interest income, which is the Company primary source of income. Net interest income is affected by changes in interest rates, the relationship between rates on interest bearing assets and liabilities, the impact of interest fluctuations on asset prepayments and the mix of interest bearing assets and liabilities.

Although interest rate risk is inherent in the banking industry, banks are expected to have sound risk management practices in place to measure, monitor and control interest rate exposures. The objective of interest rate risk management is to contain the risks associated with interest rate fluctuations. The process involves identification and management of the sensitivity of net interest income to changing interest rates.

The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability committee, which is governed by policies established by the Company’s Board that are reviewed and approved annually. The Board delegates responsibility for carrying out the asset/liability management policies to the Bank’s asset/liability committee. In this capacity, the asset/liability committee develops guidelines and strategies impacting the Company’s asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. The Company’s goal of its asset and liability management practices is to maintain or increase the level of net interest income within an acceptable level of interest rate risk. Our asset and liability policy and strategies are expected to continue as described so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years.

The Bank has established acceptable levels of interest rate risk for an instantaneous and permanent shock in rates as follows: Projected net interest income over the next twelve months (i.e. year-1) and the subsequent twelve months (i.e. year-2) will not be reduced by more than 15.0% given an immediate increase in interest rates of up to 200 basis points or by more than 10.0% given an immediate decrease in interest rates of up to 100 basis points.

The following table includes the Bank’s net interest income sensitivity analysis.


Changes in Market	Rate Sensitivity
Interest Rates	As of September 30, 2019						Policy
(Basis Points)	Year 1			Year 2			Limits

+200		1.50	%		3.70	%		-15.00	%
-100		-2.70	%		-4.20	%		-10.00	%

Impact of Inflation and Changing Prices

Our financial statements and the accompanying notes have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Interest rates have a greater impact on our performance than do the general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONTROLS AND PROCEDURES

Item 4. Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of September 30, 2019, 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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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 year ended December 31, 2018.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On July 19, 2018, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2018. During the first quarter of 2019, 42,000 shares were purchased at an average price of $17.43 per share. In addition, 28,000 shares were purchased during the second quarter of 2019 at an average price of $17.09 per share. The plan expired on July 19, 2019.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION (CONTINUED)

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibit Number	Description


2.1	Agreement and Plan of Merger, dated as of August 8, 2019, by and among Eagle Bancorp Montana, Inc., Opportunity Bank of Montana, Western Holding Company of Wolf Point and Western Bank of Wolf Point (incorporated herein by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on August 9, 2019).

3.1	Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc. (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on February 23, 2010).

3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation. (incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form 10-Q filed on May 9, 2019).

3.3	Bylaws of Eagle Bancorp Montana, Inc., amended as of August 20, 2015 (incorporated by reference to 3.1 of our Current Report on Form 8-K filed on August 25, 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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	EAGLE BANCORP MONTANA, INC.

Date: November 6, 2019	By:	/s/ Peter J. Johnson
		Peter J. Johnson
		President/CEO



Date: November 6, 2019	By:	/s/ Laura F. Clark
		Laura F. Clark
		Executive Vice President/CFO/COO

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