Eagle Bancorp Montana, Inc. - Quarter Report: 2021 September (Form 10-Q)

ebmt20210930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

☐	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 ☒ 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 ☒ 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 ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	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 ☒

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	Nasdaq Global Market

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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

6,776,703 shares outstanding

As of October 29, 2021

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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PART I.	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Financial Condition as of September 30, 2021 and December 31, 2020	1

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020	3

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020	5

	Condensed Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	7

	Notes to the Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	43
Item 6.	Exhibits	43

Signatures		44

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Cautionary 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 current global COVID-19 pandemic;
●	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;

	●	the negative impacts and disruptions resulting from the continuing outbreak of the novel coronavirus, or COVID-19, and the steps taken by governmental and other authorities to contain, mitigate and combat the pandemic, on the economies and communities we serve, which may likely have an adverse impact on our credit portfolio, goodwill, stock price, borrowers and the economy as a whole both globally and domestically;
	●	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;

●

risks related to the concentration of our business in Montana, including risks associated with 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;

●

our ability to implement our growth strategy, including identifying and consummating suitable acquisitions, raising additional capital to finance such transactions, entering new markets, possible failures in realizing the anticipated benefits from such acquisitions and an inability of our personnel, systems and infrastructure to keep pace with such growth;

●

the effect of acquisitions we may make, if any, including, without limitation, the failure to achieve expected revenue growth and/or expense savings from such acquisitions, including our proposed acquisition of First Community Bancorp, Inc.;

●

risks related to the integration of any businesses we have acquired or expect to acquire, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, including our proposed acquisition of First Community Bancorp, Inc.;

●

potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;

●

political developments, uncertainties or instability;

	●	our ability to enter new markets successfully and capitalize on growth opportunities;
	●	the need to retain capital for strategic or regulatory reasons;
	●	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;

●

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;

●

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 Part II, Item 1A, “Risk Factors” and Part I, Item 2, “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, 2020, 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

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	September 30,		December 31,
	2021		2020
ASSETS:
Cash and due from banks	$	16,320	$	14,455
Interest-bearing deposits in banks		71,609		47,733
Federal funds sold		7,011		7,614
Total cash and cash equivalents		94,940		69,802

Securities available-for-sale		240,033		162,946
Federal Home Loan Bank ("FHLB") stock		1,702		2,060
Federal Reserve Bank ("FRB") stock		2,974		2,974
Mortgage loans held-for-sale, at fair value		42,059		54,615
Loans receivable, net of allowance for loan losses of $12,200 at September 30, 2021 and $11,600 at December 31, 2020		872,705		829,503
Accrued interest and dividends receivable		6,218		5,765
Mortgage servicing rights, net		12,941		10,105
Premises and equipment, net		66,537		58,762
Cash surrender value of life insurance, net		36,265		27,753
Goodwill		20,798		20,798
Core deposit intangible, net		1,919		2,343
Other assets		7,832		10,208

Total assets	$	1,406,923	$	1,257,634

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	September 30,			December 31,
	2021			2020
LIABILITIES:
Deposit accounts:
Noninterest-bearing	$	367,127		$	318,389
Interest-bearing		827,422			714,694
Total deposits		1,194,549			1,033,083

Accrued expenses and other liabilities		19,745			24,295
Deferred tax liability, net		1,256			457
FHLB advances and other borrowings		5,000			17,070
Other long-term debt:
Principal amount		30,155			30,155
Unamortized debt issuance costs		(305	)		(364	)
Total other long-term debt, net		29,850			29,791

Total liabilities		1,250,400			1,104,696

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 shares authorized; 7,110,833 shares issued; 6,776,703 and 6,775,447 shares outstanding at September 30, 2021, and December 31, 2020, respectively)		71			71
Additional paid-in capital		80,957			77,602
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")		(5,883	)		(145	)
Treasury stock, at cost (334,130 and 335,386 shares at September 30, 2021 and December 31, 2020, respectively)		(7,631	)		(4,423	)
Retained earnings		84,505			73,982
Accumulated other comprehensive income, net of tax		4,504			5,851
Total shareholders' equity		156,523			152,938

Total liabilities and shareholders' equity	$	1,406,923		$	1,257,634

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	11,619	$	11,340	$	33,660	$	33,832
Securities available-for-sale		1,094		874		2,989		2,853
FHLB and FRB dividends		62		95		194		284
Other interest income		32		30		90		134
Total interest and dividend income		12,807		12,339		36,933		37,103

INTEREST EXPENSE:
Deposits		350		779		1,118		3,063
FHLB advances and other borrowings		37		261		152		1,066
Other long-term debt		389		521		1,168		1,296
Total interest expense		776		1,561		2,438		5,425

NET INTEREST INCOME		12,031		10,778		34,495		31,678

Loan loss provision		255		854		576		2,751

NET INTEREST INCOME AFTER LOAN LOSS PROVISION		11,776		9,924		33,919		28,927

NONINTEREST INCOME:
Service charges on deposit accounts		318		282		884		814
Mortgage banking, net		11,665		13,305		33,360		31,596
Interchange and ATM fees		570		407		1,489		1,123
Appreciation in cash surrender value of life insurance		181		160		512		480
Net gain on sale of available-for-sale securities		11		-		11		1,068
Other noninterest income		608		817		1,798		1,892
Total noninterest income		13,353		14,971		38,054		36,973

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
NONINTEREST EXPENSE:
Salaries and employee benefits	$	12,262	$	11,325	$	37,093	$	28,274
Occupancy and equipment expense		1,665		1,280		4,746		3,677
Data processing		1,171		1,168		3,666		3,507
Advertising		326		208		850		624
Amortization of core deposit intangible		144		165		431		495
Loan costs		654		566		2,126		1,211
Federal Deposit Insurance Corporation ("FDIC") insurance premiums		81		75		243		147
Postage		93		76		302		260
Professional and examination fees		790		389		1,400		1,081
Acquisition costs		35		-		35		157
Other noninterest expense		1,579		1,093		4,158		4,893
Total noninterest expense		18,800		16,345		55,050		44,326

INCOME BEFORE PROVISION FOR INCOME TAXES		6,329		8,550		16,923		21,574

Provision for income taxes		1,583		2,170		4,231		5,532

NET INCOME	$	4,746	$	6,380	$	12,692	$	16,042

BASIC EARNINGS PER SHARE	$	0.73	$	0.94	$	1.90	$	2.36

DILUTED EARNINGS PER SHARE	$	0.73	$	0.94	$	1.89	$	2.35

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020

NET INCOME	$	4,746		$	6,380		$	12,692		$	16,042

OTHER ITEMS OF COMPREHENSIVE (LOSS) INCOME BEFORE TAX:
Change in fair value of securities available-for-sale		(578	)		1,263			(1,818	)		6,074
Reclassification for net realized gains on investment securities available-for-sale		(11	)		-			(11	)		(1,068	)
Total other comprehensive (loss) income		(589	)		1,263			(1,829	)		5,006

Income tax benefit (provision) related to securities available-for-sale		155			(332	)		482			(1,318	)

COMPREHENSIVE INCOME	$	4,312		$	7,311		$	11,345		$	19,730

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

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

Balance at July 1, 2021	$	-	$	71	$	80,820	$	(6,061	)	$	(7,631	)	$	80,607		$	4,938		$	152,744
Net income		-		-		-		-			-			4,746			-			4,746
Other comprehensive loss		-		-		-		-			-			-			(434	)		(434	)
Dividends paid ($0.1250 per share)		-		-		-		-			-			(848	)		-			(848	)
Stock compensation expense		-		-		90		-			-			-			-			90
ESOP shares allocated (9,831 shares)		-		-		47		178			-			-			-			225
Balance at September 30, 2021	$	-	$	71	$	80,957	$	(5,883	)	$	(7,631	)	$	84,505		$	4,504		$	156,523

Balance at July 1, 2020	$	-	$	71	$	77,506	$	(227	)	$	(3,664	)	$	63,757		$	4,086		$	141,529
Net income		-		-		-		-			-			6,380			-			6,380
Other comprehensive income		-		-		-		-			-			-			931			931
Dividends paid ($0.0975 per share)		-		-		-		-			-			(659	)		-			(659	)
Stock compensation expense		-		-		78		-			-			-			-			78
ESOP shares allocated (4,154 shares)		-		-		28		42			-			-			-			70
Treasury stock purchased (61,495 shares at $15.70 average cost per share)		-		-		-		-			(966	)		-			-			(966	)
Balance at September 30, 2020	$	-	$	71	$	77,612	$	(185	)	$	(4,630	)	$	69,478		$	5,017		$	147,363

Balance at January 1, 2021	$	-	$	71	$	77,602	$	(145	)	$	(4,423	)	$	73,982		$	5,851		$	152,938
Net income		-		-		-		-			-			12,692			-			12,692
Other comprehensive loss		-		-		-		-			-			-			(1,347	)		(1,347	)
Dividends paid ($0.3200 per share)		-		-		-		-			-			(2,169	)		-			(2,169	)
Stock compensation expense		-		-		270		-			-			-			-			270
ESOP shares allocated (18,139 shares)		-		-		156		262			-			-			-			418
Treasury stock purchased through tender offer (250,000 shares at $25.12 average cost per share)		-		-		-		-			(6,279	)		-			-			(6,279	)
Sale of shares to ESOP (251,256 shares at $23.88 average price per share)		-		-		2,929		(6,000	)		3,071			-			-			-
Balance at September 30, 2021	$	-	$	71	$	80,957	$	(5,883	)	$	(7,631	)	$	84,505		$	4,504		$	156,523

Balance at January 1, 2020	$	-	$	67	$	68,826	$	(311	)	$	(3,643	)	$	55,391		$	1,329		$	121,659
Net income		-		-		-		-			-			16,042			-			16,042
Other comprehensive income		-		-		-		-			-			-			3,688			3,688
Dividends paid ($0.2875 per share)		-		-		-		-			-			(1,955	)		-			(1,955	)
Stock issued in connection with Western Holding Company of Wolf Point acquisition		-		4		8,463		-			-			-			-			8,467
Stock compensation expense		-		-		226		-			-			-			-			226
ESOP shares allocated (12,462 shares)		-		-		97		126			-			-			-			223
Treasury stock purchased (62,776 shares at $15.73 average cost per share)		-		-		-		-			(987	)		-			-			(987	)
Balance at September 30, 2020	$	-	$	71	$	77,612	$	(185	)	$	(4,630	)	$	69,478		$	5,017		$	147,363

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,692		$	16,042
Adjustments to reconcile net income to net cash provided by operating activities:
Loan loss provision		576			2,751
(Recovery) impairment of servicing rights		(702	)		878
Depreciation		2,137			1,813
Net amortization of investment securities premiums and discounts		874			749
Amortization of mortgage servicing rights		2,881			2,476
Amortization of right-of-use assets		457			347
Amortization of core deposit intangible		431			495
Compensation expense related to restricted stock awards		270			226
ESOP compensation expense for allocated shares		418			223
Deferred income tax provision		1,281			22
Net gain on sale of loans		(36,261	)		(24,432	)
Originations of loans held-for-sale		(814,854	)		(636,767	)
Proceeds from sales of loans held-for-sale		863,671			645,327
Net gain on sale of available-for-sale securities		(11	)		(1,068	)
Net loss on sale of real estate owned and other repossessed assets		-			9
Net gain on sale/disposal of premises and equipment		(70	)		(4	)
Net appreciation in cash surrender value of life insurance		(512	)		(480	)
Net change in:
Accrued interest and dividends receivable		(453	)		(1,030	)
Other assets		1,707			(7,807	)
Accrued expenses and other liabilities		(1,710	)		3,936
Net cash provided by operating activities		32,822			3,706

CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		3,910			18,149
Maturities, principal payments and calls		8,906			32,553
Purchases		(95,762	)		(40,145	)
FHLB stock redeemed		358			2,081
FRB stock purchased		-			(373	)
Net cash received from acquisitions		-			5,044
Loan origination and principal collection, net		(48,901	)		(30,040	)
Purchases of bank owned life insurance		(8,000	)		(845	)
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans		16			28
Proceeds from sale of premises and equipment		1,379			13
Purchases of premises and equipment, net		(10,538	)		(15,693	)
Net cash used in investing activities		(148,632	)		(29,228	)

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2021			2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	161,466		$	102,765
Net short-term advances from FRB Payroll Protection Program Loan Funding facility		-			23,786
Net short-term payments to FHLB and other borrowings		-			(27,000	)
Long-term advances from FHLB and other borrowings		-			10,000
Payments on long-term FHLB and other borrowings		(12,070	)		(37,859	)
Proceeds from issuance of subordinated debentures		-			15,000
Repayment of subordinated debentures		-			(10,000	)
Payments for debt issuance costs		-			(335	)
Purchase of treasury stock		(6,279	)		(987	)
Dividends paid		(2,169	)		(1,955	)
Net cash provided by financing activities		140,948			73,415

NET INCREASE IN CASH AND CASH EQUIVALENTS		25,138			47,893

CASH AND CASH EQUIVALENTS, beginning of period		69,802			24,918

CASH AND CASH EQUIVALENTS, end of period	$	94,940		$	72,811


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	3,052		$	5,652
Cash paid during the period for income taxes		3,940			5,200

NONCASH INVESTING AND FINANCING ACTIVITIES:
(Decrease) increase in fair value of securities available-for-sale	$	(1,829	)	$	5,006
Mortgage servicing rights recognized		5,015			4,133
Right-of-use assets obtained in exchange for lease liabilities		1,140			104
Loans transferred to real estate and other assets acquired in foreclosure		108			37
Stock issued in connection with acquisitions		-			8,467
Sale of shares from Eagle to ESOP in exchange for loan		6,000			-

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 condensed consolidated financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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”), formerly American Federal Savings Bank (“AFSB”). 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.

In September 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. On January 31, 2018, TwinCo merged with and into Eagle, with Eagle continuing as the surviving corporation. Ruby Valley Bank operated two branches in Madison County, Montana.

In August 2018, the Company 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.

In August 2019, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Western Holding Company of Wolf Point (“WHC”), a Montana corporation, and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point, a Montana chartered commercial bank (“WB”). The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, WHC would merge with and into Eagle, with Eagle continuing as the surviving corporation. The merger closed on January 1, 2020. WB operated one branch in Wolf Point, Montana. In addition, Western Financial Services, Inc. ("WFS") was acquired through the WHC merger. WFS facilitates deferred payment contracts for Bank customers that produce agricultural products.

The Bank currently has 23 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 names Dutton State Bank, Farmers State Bank of Denton and The State Bank of Townsend.

Recent Events

During 2021, the Bank established a subsidiary, Opportunity Housing Fund, LLC (“OHF”), to invest in Low-Income Housing Tax Credit (“LIHTC”) projects. OHF is owned 100% by OBMT. The LIHTC program is designed to encourage capital investment in construction and rehabilitation of low-income housing. Tax credits are allowable over a 10-year period. During the three months ended September 30, 2021, OHF made initial investments in two LIHTC projects. The Company has elected to apply the proportional amortization method of accounting for investments in LIHTC projects. The proportional amortization method allows the investor to amortize the cost of the investment in proportion to the tax credits and the amortization is recognized as a component of income tax expense. Investments in LIHTC projects are included in other assets on the statement of financial condition and totaled $935,000 as of September 30, 2021.

The Company completed a modified "Dutch auction" tender offer (the "Tender Offer") in June 2021. The Company accepted for purchase 250,000 shares of its common stock at a price of $24.00 per share. The aggregate purchase price for the shares purchased in the Tender Offer was approximately $6,279,000, including fees and expenses related to the Tender Offer. Therefore, the total price including fees and expenses was $25.12 per share.

The Company sold 251,256 shares of common stock to the Employee Stock Ownership Plan ("ESOP") at a price of $23.88 per share in June 2021. The shares were purchased from Eagle by the ESOP in exchange for a loan totaling $6,000,000. The loan has a ten-year term and bears interest at 3.00%. The shares held by the ESOP will be used for allocations to employees of the Company over a ten-year period.

Basis of Financial Statement Presentation and Use of Estimates

The accompanying unaudited condensed 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 condensed 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, 2020, as filed with the SEC on March 10, 2021. 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.

The results of operations for the nine-month period ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or any other period. In preparing condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated statement of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the fair value of financial instruments, the valuation of goodwill and deferred tax assets and liabilities.

Principles of Consolidation

The condensed consolidated financial statements include Eagle, the Bank, OHF, Eagle Bancorp Statutory Trust I (the “Trust”) and WFS. All significant intercompany transactions and balances have been eliminated in consolidation.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Reclassifications

Certain prior period amounts were reclassified to conform to the presentation for 2021. These reclassifications had no impact on net income or shareholders’ equity.

Subsequent Events

The Company has evaluated events and transactions subsequent to September 30, 2021 for recognition and/or disclosure.

On October 1, 2021, Eagle announced that it had reached an agreement to acquire First Community Bancorp, Inc., a Montana corporation (“FCB”) and its wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. The agreement provides that, upon the terms and subject to the conditions set forth in the agreement, FCB will merge with and into Eagle, with Eagle continuing as the surviving corporation. The transaction is subject to the approvals of bank regulatory agencies, the shareholders of Eagle and FCB and other customary closing conditions. The acquisition is expected to close during the fourth quarter of 2021.

NOTE 2. MERGERS AND ACQUISITIONS

Effective January 1, 2020, Eagle completed its previously announced merger with WHC. At the effective time of the Merger, WHC merged with and into Eagle, with Eagle continuing as the surviving corporation. The acquisition closed after receipt of approvals from regulatory authorities, approval of WHC shareholders and the satisfaction of other closing conditions. The total consideration paid was $14,967,000 and included cash consideration of $6,500,000 and common stock issued of $8,467,000.

This transaction was accounted for under the acquisition method of accounting.

All of the assets acquired and liabilities assumed were recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combinations were expensed as incurred. Determining the fair value of assets and liabilities is a complicated process involving significant judgement regarding methods and assumptions used to calculate estimated fair values. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The goodwill recorded is not deductible for federal income tax purposes.

The following table summarizes the fair values of the assets acquired and liabilities assumed, consideration paid and the resulting goodwill.

	WHC
	January 1,
	2020
	(In Thousands)
Assets acquired:
Cash and cash equivalents	$	11,544
Securities available-for-sale		43,710
Loans receivable		43,424
Premises and equipment		740
Cash surrender value of life insurance		2,131
Core deposit intangible		208
Other assets		1,874
Total assets acquired	$	103,631

Liabilities assumed:
Deposits	$	86,572
Accrued expenses and other liabilities		4,554
Other borrowings		2,500
Total liabilities assumed	$	93,626

Net assets acquired	$	10,005

Consideration paid:
Cash	$	6,500
Common stock issued (395,850 shares)		8,467
Total consideration paid	$	14,967

Goodwill resulting from acquisition	$	4,962

Goodwill recorded for the WHC acquisition during the three months ended March 31, 2020 was $4,962,000.

WHC investments were written up $425,000 to fair value on the date of acquisition based on market prices obtained from an independent third party.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. MERGERS AND ACQUISITIONS – continued

For 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 loan 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 accretable discount on WHC acquired loans was $1,166,000 as of January 1, 2020. During the year ended December 31, 2020, accretion of the loan discount was $560,000. During the three and nine months ended September 30, 2021, accretion of the loan discount was $42,000 and $149,000, respectively. The remaining accretable loan discount was $457,000 as of September 30, 2021. One impaired loan was acquired through the WHC acquisition with an insignificant balance as of January 1, 2020.

Fair value adjustments of $590,000 were recorded for WHC related to premises and equipment. The Company used independent third party appraisals in the determination of the fair value of acquired assets.

Core deposit intangible assets of $208,000 were recorded for WHC and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years from date of acquisition. For acquisitions, 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 acquisition were expensed as incurred. There were no acquisition costs recorded related to the WHC acquisition during the three and nine months ended September 30, 2021. The Company recorded acquisition costs related to WHC of $157,000 during the year ended December 31, 2020. Acquisition costs included professional fees and data processing expenses incurred related to the acquisitions.

Operations of acquired entities have been included in the condensed consolidated financial statements since date of acquisition. The Company does not consider them as separate reporting segments and does not track the amount of revenues and net income attributable since acquisition. As such, it is impracticable to determine such amounts for the period from acquisition date through September 30, 2021. The accompanying condensed consolidated statements of income include the results of operations of WHC since the January 1, 2020 acquisition date.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES

The amortized cost and fair values of securities, together with unrealized gains and losses, were as follows:

	September 30, 2021									December 31, 2020
			Gross									Gross
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
	(In Thousands)
Available-for-Sale:
U.S. government obligations	$	1,748	$	20	$	-		$	1,768	$	2,214	$	31	$	-		$	2,245
U.S. treasury obligations		33,148		615		(12	)		33,751		5,153		504		-			5,657
Municipal obligations		113,975		5,000		(114	)		118,861		92,914		6,175		(1	)		99,088
Corporate obligations		10,558		158		-			10,716		10,579		91		(7	)		10,663
Mortgage-backed securities		15,585		165		(50	)		15,700		7,513		161		(5	)		7,669
Collateralized mortgage obligations		53,117		602		(397	)		53,322		30,339		852		(2	)		31,189
Asset-backed securities		5,790		125		-			5,915		6,293		142		-			6,435
Total	$	233,921	$	6,685	$	(573	)	$	240,033	$	155,005	$	7,956	$	(15	)	$	162,946

Proceeds from sale 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,
	2021		2020		2021		2020
	(In Thousands)

Proceeds from sale of available-for-sale securities	$	3,910	$	-	$	3,910	$	18,149

Gross realized gain on sale of available-for-sale securities		11	$	-		11		1,068
Gross realized loss on sale of available-for-sale securities		-		-		-		-
Net realized gain on sale of available-for-sale securities	$	11	$	-	$	11	$	1,068

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, 2021
	Amortized		Fair
	Cost		Value
	(In Thousands)

Due in one year or less	$	3,308	$	3,329
Due from one to five years		13,623		14,102
Due from five to ten years		47,815		48,703
Due after ten years		100,473		104,877
		165,219		171,011
Mortgage-backed securities		15,585		15,700
Collateralized mortgage obligations		53,117		53,322
Total	$	233,921	$	240,033

As of September 30, 2021 and December 31, 2020, securities with a fair value of $22,259,000 and $19,716,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

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, 2021
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In Thousands)
U.S. treasury obligations	$	10,533	$	(12	)	$	-	$	-
Municipal obligations		8,962		(114	)		-		-
Corporate obligations		-		-			-		-
Mortgage-backed securities and collateralized mortgage obligations		33,706		(439	)		1,413		(8	)
Total	$	53,201	$	(565	)	$	1,413	$	(8	)

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES – continued

	December 31, 2020
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In Thousands)
U.S. treasury obligations	$	-	$	-		$	-	$	-
Municipal obligations		282		(1	)		-		-
Corporate obligations		4,243		(7	)		-		-
Mortgage-backed securities and collateralized mortgage obligations		3,180		(2	)		1,501		(5	)
Total	$	7,705	$	(10	)	$	1,501	$	(5	)

Unrealized losses associated with investments are believed to be caused by 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. 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, 2021 or the year ended December 31, 2020. As of September 30, 2021 and December 31, 2020, there were, respectively, 25 and 8 securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

NOTE 4. LOANS RECEIVABLE

Loans receivable consisted of the following:

	September 30,			December 31,
	2021			2020
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	142,921		$	157,092
Commercial real estate		522,953			447,867

Other loans:
Home equity		52,990			56,563
Consumer		18,940			20,168
Commercial		149,199			161,451

Total		887,003			843,141

Deferred loan fees, net		(2,098	)		(2,038	)
Allowance for loan losses		(12,200	)		(11,600	)
Total loans, net	$	872,705		$	829,503

Within the commercial real estate loan category above, $10,459,000 and $11,084,000 was guaranteed by the United States Department of Agriculture Rural Development at September 30, 2021 and December 31, 2020, respectively. Also within the loan categories above, $5,644,000 and $6,533,000 was guaranteed by the United States Department of Agriculture Farm Service Agency at September 30, 2021 and December 31, 2020, respectively. In addition, within the commercial loan category above, $8,464,000 and $29,581,000 was guaranteed by the Small Business Administration ("SBA") under their Payroll Protection Program ("PPP") at September 30, 2021 and December 31, 2020, respectively. Deferred loan fees, net includes $605,000 and $613,000 of remaining deferred fees related to the PPP at September 30, 2021 and December 31, 2020, respectively.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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, 2021	$	1,544	$	7,127		$	522	$	363		$	2,344		$	11,900
Charge-offs		-		-			-		(4	)		-			(4	)
Recoveries		-		6			-		1			42			49
Provision		26		155			8		3			63			255
Ending balance, September 30, 2021	$	1,570	$	7,288		$	530	$	363		$	2,449		$	12,200

Allowance for loan losses:
Beginning balance, January 1, 2021	$	1,506	$	6,951		$	515	$	364		$	2,264		$	11,600
Charge-offs		-		(35	)		-		(14	)		(6	)		(55	)
Recoveries		-		15			-		7			57			79
Provision		64		357			15		6			134			576
Ending balance, September 30, 2021	$	1,570	$	7,288		$	530	$	363		$	2,449		$	12,200

Ending balance, September 30, 2021 allocated to loans individually evaluated for impairment	$	199	$	-		$	-	$	-		$	109		$	308

Ending balance, September 30, 2021 allocated to loans collectively evaluated for impairment	$	1,371	$	7,288		$	530	$	363		$	2,340		$	11,892

Loans receivable:
Ending balance, September 30, 2021	$	142,921	$	522,953		$	52,990	$	18,940		$	149,199		$	887,003

Ending balance, September 30, 2021 of loans individually evaluated for impairment	$	1,122	$	4,341		$	121	$	78		$	2,111		$	7,773

Ending balance, September 30, 2021 of loans collectively evaluated for impairment	$	141,799	$	518,612		$	52,869	$	18,862		$	147,088		$	879,230

	Residential		Commercial			Home
	1-4 Family		Real Estate			Equity		Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, July 1, 2020	$	1,369	$	6,096		$	491	$	371		$	2,173		$	10,500
Charge-offs		-		-			-		(14	)		(67	)		(81	)
Recoveries		-		2			-		2			23			27
Provision		92		623			13		9			117			854
Ending balance, September 30, 2020	$	1,461	$	6,721		$	504	$	368		$	2,246		$	11,300

Allowance for loan losses:
Beginning balance, January 1, 2020	$	1,301	$	4,826		$	477	$	284		$	1,712		$	8,600
Charge-offs		-		(18	)		-		(25	)		(85	)		(128	)
Recoveries		-		10			-		13			54			77
Provision		160		1,903			27		96			565			2,751
Ending balance, September 30, 2020	$	1,461	$	6,721		$	504	$	368		$	2,246		$	11,300

Ending balance, September 30, 2020 allocated to loans individually evaluated for impairment	$	296	$	-		$	-	$	-		$	-		$	296

Ending balance, September 30, 2020 allocated to loans collectively evaluated for impairment	$	1,165	$	6,721		$	504	$	368		$	2,246		$	11,004

Loans receivable:
Ending balance, September 30, 2020	$	152,835	$	432,473		$	61,460	$	20,694		$	183,611		$	851,073

Ending balance, September 30, 2020 of loans individually evaluated for impairment	$	1,128	$	3,998		$	115	$	163		$	2,118		$	7,522

Ending balance, September 30, 2020 of loans collectively evaluated for impairment	$	151,707	$	428,475		$	61,345	$	20,531		$	181,493		$	843,551

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

Internal classification of the loan portfolio was as follows:

	September 30, 2021
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	98,560	$	219	$	469	$	199	$	-	$	99,447
Residential 1-4 family construction		43,137		-		337		-		-		43,474
Commercial real estate		374,699		3,200		2,172		-		-		380,071
Commercial construction and development		78,058		-		-		-		-		78,058
Farmland		62,410		276		2,091		47		-		64,824
Other loans:
Home equity		52,559		264		167		-		-		52,990
Consumer		18,861		-		79		-		-		18,940
Commercial		94,057		954		543		-		-		95,554
Agricultural		51,691		387		1,512		55		-		53,645
Total	$	874,032	$	5,300	$	7,370	$	301	$	-	$	887,003

	December 31, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	109,746	$	-	$	857		199	$	-	$	110,802
Residential 1-4 family construction		45,953		-		337		-		-		46,290
Commercial real estate		311,756		2,568		2,344		-		-		316,668
Commercial construction and development		65,231		14		36		-		-		65,281
Farmland		63,565		136		2,164		53		-		65,918
Other loans:
Home equity		56,177		274		112		-		-		56,563
Consumer		20,017		-		151		-		-		20,168
Commercial		107,810		829		570		-		-		109,209
Agricultural		50,371		355		1,395		121		-		52,242
Total	$	830,626	$	4,176	$	7,966	$	373	$	-	$	843,141

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

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

	September 30, 2021
	Loans Past Due and Still Accruing
			90 Days
	30-89 Days		and				Nonaccrual		Current		Total
	Past Due		Greater		Total		Loans		Loans		Loans
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	2	$	-	$	2	$	785	$	98,660	$	99,447
Residential 1-4 family construction		-		-		-		337		43,137		43,474
Commercial real estate		241		-		241		507		379,323		380,071
Commercial construction and development		-		-		-		-		78,058		78,058
Farmland		38		-		38		2,273		62,513		64,824
Other loans:
Home equity		-		-		-		121		52,869		52,990
Consumer		67		-		67		78		18,795		18,940
Commercial		31		34		65		534		94,955		95,554
Agricultural		-		-		-		1,498		52,147		53,645
Total	$	379	$	34	$	413	$	6,133	$	880,457	$	887,003

	December 31, 2020
	Loans Past Due and Still Accruing
			90 Days
	30-89 Days		and				Nonaccrual		Current		Total
	Past Due		Greater		Total		Loans		Loans		Loans
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	693	$	34	$	727	$	684	$	109,391	$	110,802
Residential 1-4 family construction		853		170		1,023		337		44,930		46,290
Commercial real estate		274		-		274		631		315,763		316,668
Commercial construction and development		-		-		-		36		65,245		65,281
Farmland		179		-		179		2,245		63,494		65,918
Other loans:
Home equity		53		-		53		111		56,399		56,563
Consumer		72		-		72		151		19,945		20,168
Commercial		553		6		559		537		108,113		109,209
Agricultural		71		182		253		1,542		50,447		52,242
Total	$	2,748	$	392	$	3,140	$	6,274	$	833,727	$	843,141

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

The following tables include information regarding impaired loans.

	September 30, 2021
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	785	$	867	$	199
Residential 1-4 family construction		337		387		-
Commercial real estate		2,068		2,116		-
Commercial construction and development		-		-		-
Farmland		2,273		2,333		-
Other loans:
Home equity		121		150		-
Consumer		78		87		-
Commercial		534		658		-
Agricultural		1,577		2,162		109
Total	$	7,773	$	8,760	$	308

	December 31, 2020
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	1,204	$	1,267	$	296
Residential 1-4 family construction		337		387		-
Commercial real estate		2,264		2,328		-
Commercial construction and development		50		50		-
Farmland		2,245		2,262		-
Other loans:
Home equity		111		136		-
Consumer		151		171		-
Commercial		537		664		-
Agricultural		1,702		2,268		54
Total	$	8,601	$	9,533	$	350

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	Average Recorded Investment				Average Recorded Investment
	(In Thousands)				(In Thousands)
Real estate loans:
Residential 1-4 family	$	715	$	860	$	994	$	704
Residential 1-4 family construction		337		337		337		337
Commercial real estate		2,239		2,561		2,166		1,565
Commercial construction and development		-		54		25		32
Farmland		2,125		1,345		2,259		956
Other loans:
Home equity		126		153		116		107
Consumer		78		181		114		160
Commercial		536		731		536		746
Agricultural		1,366		1,470		1,640		975
Total	$	7,522	$	7,692	$	8,187	$	5,582

Interest income recognized on impaired loans for the three and nine months ended September 30, 2021 and 2020 is considered insignificant. Interest payments received on a cash basis related to impaired loans were $407,000 and $327,000 for September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021 and December 31, 2020, there were troubled debt restructured (“TDR”) loans of $2,116,000 and $1,824,000, respectively.

During the three months ended September 30, 2021, there were two new TDR loans. The recorded investments for both farmland loans at the time of restructure were $391,000 and $70,000. No charge-offs were incurred and the loans are on nonaccrual status. During the nine months ended September 30, 2021 there were three new TDR loans. The recorded investments for the two farmland loans at time of restructure as stated above were $391,000 and $70,000. The recorded investment for the commercial real estate loan at time of restructure during the first quarter of 2021 was $115,000. The commercial real estate loan was paid off during the three months ended September 30, 2021.

During the three months ended September 30, 2020, there were no new TDR loans. During the nine months ended September 30, 2020, there were three new TDR loans. The recorded investments at the time of restructure were $94,000 for a commercial construction and development loan, $1,633,000 for a commercial real estate loan, and $160,000 for an agricultural loan. The commercial construction and development loan was paid off during the nine months ended September 30, 2021. No charge-offs were incurred for the remaining loans and they are on accrual status. The recorded investments for the remaining loans at September 30, 2021 were $1,561,000 and $79,000, respectively.

There were no loans modified as TDRs that defaulted during the three and nine months ended September 30, 2021 where the default occurred within 12 months of restructuring. A default for purposes of this disclosure is a TDR 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, 2021, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in TDRs.

The Company has offered borrowers accommodations due to the impact from COVID-19, including 90-day deferrals, interest only payments and forbearances, which are not considered TDRs as they met the criteria established in the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). In addition, the Montana Board of Investments ("MBOI") offered 12-months of interest payment assistance to qualified borrowers. As of September 30, 2021, remaining loan modifications for five nonresidential borrowers represented $98,000 in loans. As of December 31, 2020, loan modifications for 40 borrowers represented $28,994,000.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. MORTGAGE SERVICING RIGHTS

The Company is servicing mortgage loans for the benefit of others which are not included in the condensed consolidated statements of financial condition and have unpaid principal balances of $1,748,096,000 and $1,473,971,000 at September 30, 2021 and December 31, 2020, respectively. 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 $1,060,000 and $815,000 for the three months ended September 30, 2021 and 2020, respectively. Mortgage loan servicing fees were $2,984,000 and $2,320,000 for the nine months ended September 30, 2021 and 2020.These fees, net of amortization, are included in mortgage banking, net which is a component of noninterest income on the condensed consolidated statements of income.

Custodial balances maintained in connection with the foregoing loan servicing are included in noninterest checking deposits and were $20,947,000 and $15,853,000 at September 30, 2021 and December 31, 2020, respectively.

The following table is a summary of activity in mortgage servicing rights:

	As of or For the
	Three Months Ended
	September 30,
	2021			2020
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	12,232		$	9,550
Mortgage servicing rights capitalized		1,662			1,700
Amortization of mortgage servicing rights		(863	)		(854	)
Ending balance	$	13,031		$	10,396
Valuation allowance:
Beginning balance	$	(104	)	$	(1,216	)
Recovery of mortgage servicing rights		14			338
Ending balance	$	(90	)	$	(878	)
Mortgage servicing rights, net	$	12,941		$	9,518

	As of or For the
	Nine Months Ended
	September 30,
	2021			2020
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	10,897		$	8,739
Mortgage servicing rights capitalized		5,015			4,133
Amortization of mortgage servicing rights		(2,881	)		(2,476	)
Ending balance		13,031			10,396
Valuation allowance:
Beginning balance		(792	)		-
Recovery (impairment) of mortgage servicing rights		702			(878	)
Ending balance		(90	)		(878	)
Mortgage servicing rights, net	$	12,941		$	9,518

Impairment expense on mortgage servicing rights of $878,000 was recorded during the nine months ended September 30, 2020, as a result of faster than expected prepayment speed assumptions. However, a recovery of $702,000 was recorded during the nine months ended September 30, 2021. In addition, recoveries of $14,000 and $338,000 were recorded for the three months ended September 30, 2021 and 2020, respectively. Recovery (impairment) of servicing rights is included in other noninterest expense on the condensed consolidated statements of income.

The fair values of these rights were $13,666,000 and $10,105,000 at September 30, 2021 and December 31, 2020, respectively. The fair value of servicing rights was determined at loan level, depending on the interest rate and term of the specific loan, using the following valuation assumptions:

	September 30,			December 31,
	2021			2020
Key assumptions:
Discount rate		12	%		12	%
Prepayment speed range		192-272	%		221-328	%
Weighted average prepayment speed		214	%		281	%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. DEPOSITS

Deposits are summarized as follows:

	September 30,		December 31,
	2021		2020
	(In Thousands)

Noninterest checking	$	367,127	$	318,389
Interest-bearing checking		198,130		160,614
Savings		213,895		179,868
Money market		261,866		202,407
Time certificates of deposit		153,531		171,805
Total	$	1,194,549	$	1,033,083

Time certificates of deposit ("CDs") include$0 and $495,000 related to fixed rate brokered CDs at September 30, 2021 and December 31, 2020.

NOTE 7. OTHER LONG-TERM DEBT

Other long-term debt consisted of the following:

	September 30, 2021					December 31, 2020
			Unamortized					Unamortized
			Debt					Debt
	Principal		Issuance			Principal		Issuance
	Amount		Costs			Amount		Costs
	(In Thousands)

Senior notes fixed at 5.75%, due 2022	$	10,000	$	(15	)	$	10,000	$	(48	)
Subordinated debentures fixed at 5.50% to floating, due 2030		15,000		(290	)		15,000		(316	)
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035		5,155		-			5,155		-
Total other long-term debt	$	30,155	$	(305	)	$	30,155	$	(364	)

In June 2020, the Company completed the issuance of $15,000,000 in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction to certain qualified institutional accredited investors. The notes will bear interest at an annual fixed rate of 5.50% payable semi-annually. Starting July 1, 2025, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be three-month term Secured Overnight Financing Rate ("SOFR") plus a spread of 509.0 basis points, payable quarterly. The notes are subject to redemption at the option of the Company on or after July 1, 2025. The subordinated debentures qualify as Tier 2 capital for regulatory capital purposes.

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 had an annual fixed interest rate of 6.75% and interest was paid quarterly through redemption. The notes were subject to redemption at the option of the Company on or after June 19, 2020. The notes were redeemed on July 10, 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 three-month LIBOR plus 1.42%, making the rate 1.55% and 1.66% as of September 30, 2021 and December 31, 2020, 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. The subordinated debentures qualify as Tier 1 capital for regulatory purposes.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

	Unrealized
	Gains (Losses)
	on Securities
	Available-for-Sale
	(In Thousands)
Balance at July 1, 2021	$	4,938
Other comprehensive loss, before reclassifications and income taxes		(578	)
Amounts reclassified from accumulated other comprehensive income, before income taxes		(11	)
Income tax benefit		155
Total other comprehensive loss		(434	)
Balance at September 30, 2021	$	4,504

Balance at July 1, 2020	$	4,086
Other comprehensive income, before reclassifications and income taxes		1,263
Amounts reclassified from accumulated other comprehensive income, before income taxes		-
Income tax provision		(332	)
Total other comprehensive income		931
Balance at September 30, 2020	$	5,017

Balance at January 1, 2021	$	5,851
Other comprehensive loss, before reclassifications and income taxes		(1,818	)
Amounts reclassified from accumulated other comprehensive income, before income taxes		(11	)
Income tax benefit		482
Total other comprehensive loss		(1,347	)
Balance at September 30, 2021	$	4,504

Balance at January 1, 2020	$	1,329
Other comprehensive income, before reclassifications and income taxes		6,074
Amounts reclassified from accumulated other comprehensive income, before income taxes		(1,068	)
Income tax provision		(1,318	)
Total other comprehensive income		3,688
Balance at September 30, 2020	$	5,017

NOTE 9. EARNINGS PER SHARE

The computations of basic and diluted earnings per share are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
		(Dollars in Thousands, Except Per Share Data)

Basic weighted average shares outstanding		6,525,509		6,776,417		6,691,256		6,804,495
Dilutive effect of stock compensation		18,535		37,322		18,120		29,434
Diluted weighted average shares outstanding		6,544,044		6,813,739		6,709,376		6,833,929

Net income available to common shareholders	$	4,746	$	6,380	$	12,692	$	16,042

Basic earnings per share	$	0.73	$	0.94	$	1.90	$	2.36

Diluted earnings per share	$	0.73	$	0.94	$	1.89	$	2.35

There were no anti-dilutive shares at September 30, 2021 and December 31, 2020.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES

The Company enters into commitments to originate and sell mortgage loans. The Bank uses derivatives to hedge the risk of changes in fair values of interest rate lock commitments and mortgage loans held-for-sale. An optimal amount of mortgage loans are sold directly into bulk commitments with investors at the time an interest rate is locked, other loans are sold on an individual best efforts basis at the time an interest rate is locked, and the remaining balance of locked loans are hedged using To-Be-Announced (“TBA”) mortgage-backed securities or bulk mandatory forward loan sale commitments.

Derivatives are accounted for as free-standing or economic derivatives and are measured at fair value. Derivatives are recorded as either other assets or other liabilities on the condensed consolidated statements of condition.

Derivatives are summarized as follows:

	September 30, 2021						December 31, 2020
	Notional		Fair Value				Notional		Fair Value
	Amount		Asset		Liability		Amount		Asset		Liability
	(In Thousands)
Interest rate lock commitments	$	125,318	$	2,328	$	-	$	227,977	$	6,017	$	-
Forward TBA mortgage-backed securities		101,000		680		-		180,000		-		1,056

Changes in the fair value of the derivatives are recorded in mortgage banking, net within noninterest income on the condensed consolidated statements of income. Net gains of $373,000 were recorded for the three months ended September 30, 2021 compared to net gains of $2,961,000 for the three months ended September 30, 2020. Net losses of $1,953,000 were recorded for the nine months ended September 30, 2021 compared to net gains of $6,363,000 for the nine months ended September 30, 2020.

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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 fair value hierarchy is 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 judgment 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 at the reporting date, is set forth below.

Available-for-Sale Securities – Securities classified as available-for-sale are reported at fair value utilizing Level 1 (nationally recognized securities exchanges) and Level 2 inputs. For level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include but is not limited to 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.

Loans Held-for-Sale – These loans are reported at fair value. Fair value is determined based on expected proceeds based on committed sales contracts and commitments of similar loans if not already committed and are considered Level 2 inputs.

Derivative Instruments – The fair value of the interest rate lock commitments, forward TBA mortgage-backed securities and mandatory forward commitments are estimated using quoted or published market prices for similar instruments and 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 forward TBA mortgage-backed securities and mandatory forward commitments are considered Level 2 inputs.

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral or using a discounted cash flow if the loan is not collateral dependent. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

Real Estate and Other Repossessed Assets – Fair values are determined 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 and are considered Level 3 inputs for determining fair value. Repossessed assets are reviewed and evaluated periodically for additional impairment and adjusted accordingly.

Mortgage Servicing Rights – The fair value of mortgage servicing rights are estimated using net present value of expected cash flows based on a third party model that incorporates industry assumptions and is adjusted for factors such as prepayment speeds and are considered Level 3 inputs.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

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

	September 30, 2021
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities:
U.S. government obligations	$	-	$	1,768	$	-	$	1,768
U.S. treasury obligations		33,751		-		-		33,751
Municipal obligations		-		118,861		-		118,861
Corporate obligations		-		10,716		-		10,716
Mortgage-backed securities		-		15,700		-		15,700
Collateralized mortgage obligations		-		53,322		-		53,322
Asset-backed securities		-		5,915		-		5,915
Loans held-for-sale		-		42,059		-		42,059
Interest rate lock commitments		-		-		2,328		2,328
Forward TBA mortgage-backed securities		-		680		-		680

	December 31, 2020
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities:
U.S. government obligations	$	-	$	2,245	$	-	$	2,245
U.S. treasury obligations		5,657		-		-		5,657
Municipal obligations		-		99,088		-		99,088
Corporate obligations		-		10,663		-		10,663
Mortgage-backed securities		-		7,669		-		7,669
Collateralized mortgage obligations		-		31,189		-		31,189
Asset-backed securities		-		6,435		-		6,435
Loans held-for-sale		-		54,615		-		54,615
Interest rate lock commitments		-		-		6,017		6,017
Financial liabilities:
Forward TBA mortgage-backed securities		-		1,056		-		1,056

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS – 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, 2021
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans	$	-	$	-	$	71	$	71
Real estate and other repossessed assets		-		-		117		117
Mortgage servicing rights		-		-		13,666		13,666

	December 31, 2020
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans	$	-	$	-	$	728	$	728
Real estate and other repossessed assets		-		-		-		-
Mortgage servicing rights		-		-		10,105		10,105

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.

	Principal	Significant	Range of
	Valuation	Unobservable	Significant Input
Instrument	Technique	Inputs	Values

Impaired loans	Fair value of underlying collateral	Discount applied to the obtained appraisal	10 - 30%
Real estate and other repossessed assets	Fair value of collateral	Discount applied to the obtained appraisal	10 - 30%
Mortgage servicing rights	Discounted cash flows	Discount rate	10 - 15%
		Prepayment speeds	180 - 330%
Interest rate lock commitments	Internal pricing model	Pull-through expectations	85 - 95%

The following tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the nine months ended September 30, 2021.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
	Interest Rate Lock Commitments						Interest Rate Lock Commitments
	(In Thousands)						(In Thousands)
Beginning balance	$	2,949		$	5,501		$	6,017		$	554
Purchases and issuances		(5,710	)		8,360			(17,596	)		21,061
Sales and settlements		5,089			(6,713	)		13,907			(14,467	)
Ending balance	$	2,328		$	7,148		$	2,328		$	7,148
Net change in unrealized gains relating to items held at end of period	$	(621	)	$	1,647		$	(3,689	)	$	6,594

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

The tables below summarize the estimated fair values of financial instruments of the Company, whether or not recognized at fair value on the condensed 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, 2021
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	94,940	$	-	$	-	$	94,940	$	94,940
FHLB stock		1,702		-		-		1,702		1,702
FRB stock		2,974		-		-		2,974		2,974
Loans receivable, gross		-		-		892,161		892,161		884,905
Accrued interest and dividends receivable		6,218		-		-		6,218		6,218
Mortgage servicing rights		-		-		13,666		13,666		12,941
Financial liabilities:
Non-maturing interest-bearing deposits		-		673,891		-		673,891		673,891
Noninterest-bearing deposits		367,127		-		-		367,127		367,127
Time certificates of deposit		-		-		153,823		153,823		153,531
Accrued expenses and other liabilities		19,745		-		-		19,745		19,745
FHLB advances and other borrowings		-		-		5,023		5,023		5,000
Other long-term debt		-		-		29,371		29,371		30,155

	December 31, 2020
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	69,802	$	-	$	-	$	69,802	$	69,802
FHLB stock		2,060		-		-		2,060		2,060
FRB stock		2,974		-		-		2,974		2,974
Loans receivable, gross		-		-		847,579		847,579		841,103
Accrued interest and dividends receivable		5,765		-		-		5,765		5,765
Mortgage servicing rights		-		-		10,105		10,105		10,105
Financial liabilities:
Non-maturing interest-bearing deposits		-		542,889		-		542,889		542,889
Noninterest-bearing deposits		318,389		-		-		318,389		318,389
Time certificates of deposit		-		-		172,561		172,561		171,805
Accrued expenses and other liabilities		23,239		-		-		23,239		23,239
FHLB advances and other borrowings		-		-		17,217		17,217		17,070
Other long-term debt		-		-		29,414		29,414		30,155

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) to remove disclosure requirements that no longer are considered cost beneficial, modify/clarify specific requirements of certain disclosures and add disclosure requirements identified as relevant. The amendment became effective for the Company on January 1, 2020 and did not have a significant impact on the condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

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 condensed 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 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 is effective for the Company on January 1, 2023 and adoption of the standard is being evaluated to assess the impact on the Company’s condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as SOFR. The guidance was effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating this guidance to determine the date of adoption and the potential impact.

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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. 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.). 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 our ability to manage our interest rate 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 deposit accounts. The Bank has a high percentage of non-maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its spread. Non-maturity deposits and certificates of deposits do not automatically reprice as interest rates rise. Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity.

Management continues to focus on improving the Bank’s 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 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 statement of financial condition 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 1.75% to 0.25% during the year ended December 31, 2020. The rate remained at 0.25% during the nine months ended September 30, 2021. The rate reductions add continued pressure on loan yields.

Recent Events

Low-Income Housing Tax Credit Projects

During 2021, The Bank established a subsidiary, Opportunity Housing Fund, LLC (“OHF”), to invest in Low-Income Housing Tax Credit (“LIHTC”) projects. The LIHTC program is designed to encourage capital investment in construction and rehabilitation of low-income housing. Tax credits are allowable over a 10-year period. During the three months ended September 30, 2021, OHF made initial investments in two LIHTC projects. Investments in LIHTC projects are included in other assets on the statement of financial condition and totaled $935,000 as of September 30, 2021.

Tender Offer

The Company completed a modified "Dutch auction" tender offer (the "Tender Offer") in June 2021. The Company accepted for purchase 250,000 shares of its common stock at a price of $24.00 per share. The aggregate purchase price for the shares purchased in the Tender Offer was approximately $6.28 million, including fees and expenses related to the Tender Offer. Therefore, the total price including fees and expenses was $25.12 per share.

The Company sold 251,256 shares of common stock to the Employee Stock Ownership Plan ("ESOP") at a price of $23.88 per share in June 2021. The shares were purchased from Eagle by the ESOP in exchange for a loan totaling $6.00 million. The loan has a ten-year term and bears interest at 3.00%. The shares held by the ESOP will be used for allocations to employees of the Company over a ten-year period.

COVID-19

The Company’s performance for the third quarter of 2021 extended the momentum from the previous quarters of 2021, generating solid earnings supported by net interest income growth and higher loan production. However, the Company continues to see the impact of the COVID-19 pandemic and its consequences on our Montana communities. The Bank remains focused on supporting our customers, communities and employees while prudently managing risk. The Bank is also still closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been impacted.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Recent Events– continued

COVID-19 – continued

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) providing economic relief for the country, including the $349 billion Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) to fund short-term loans for small businesses. In April 2020, additional funding was approved for the PPP. Eagle began taking loan applications from its small business clients immediately after the program was implemented, and as of the close of the program, had helped 764 borrowers receive $45.71 million in SBA PPP loans. The Bank has processed applications for PPP loan forgiveness for customers, with 748 loans representing $45.21 million now paid in full. The remaining 16 PPP loans represent $496,000.

On December 27, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law, providing new COVID-19 stimulus relief, and it included $284 billion allocated for another round of PPP lending, extending the program to March 31, 2021. On March 31, 2021, the program was extended to May 31, 2021. The program offered new PPP loans for companies that did not receive a PPP loan in 2020, and also “second draw” loans targeted at hard-hit businesses that have already spent their initial PPP proceeds. As of the close of the program, Eagle supported 646 borrowers in receiving $19.51 million in new PPP funding. The Bank has processed applications for PPP loan forgiveness for customers, with 389 loans representing $11.26 million now paid in full. The remaining 257 PPP loans represent $8.25 million.

While all industries have and may continue to experience adverse impacts as a result of the COVID-19 pandemic, we had exposures in the following impacted industries, as a percentage of gross loans excluding loans held-for-sale and PPP loans as of September 30, 2021: hotels and lodging (5.4%), health and social assistance (3.8%), bars and restaurants (2.8%), casinos (0.9%) and nursing homes (0.5%). The Bank continues to reach out to specific borrowers to assess the risks and understand their needs.

The Bank has offered multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. In addition, the Montana Board of Investments ("MBOI") offered 12-months of interest payment assistance to qualified borrowers. As of September 30, 2021, remaining loan modifications for five nonresidential borrowers represented $98,000 in loans, or 0.01% of gross loans excluding loans held-for-sale, compared to 40 borrowers representing $29.00 million, or 3.5% of gross loans excluding loans held-for-sale, as of December 31, 2020. The Bank qualified approximately 32 borrowers for the MBOI program representing $27.25 million in loans, of which all have aged out of the program as of September 30, 2021. Only one loan in the hotel and lodging industry was approved in the MBOI loan program and was considered a troubled debt restructured (“TDR”) loan as of December 31, 2020, prior to aging out of the program. No other loans that had been modified related to COVID-19 were reported as TDR’s due to the CARES Act exemption. As of September 30, 2021, there remain approximately 11 forbearances approved for residential mortgage loans, of which all are sold and serviced. Utilization of credit lines were 76.4% at September 30, 2021 compared to 82.7% at December 31, 2020, which has declined slightly compared with historical usage rates.

Our fee income could still be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, early withdrawal fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.

As of September 30, 2021, our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from our subsidiary Bank to service our debt. If our capital deteriorates such that our subsidiary Bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.

While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

As of December 31, 2020, our goodwill was not impaired. COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a noncash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. As of September 30, 2021 we had goodwill of $20.80 million.

The State of Montana ended their phased approach to reopening and lifted the state-wide mask mandate on February 12, 2021. On March 22, 2021, all of our lobbies opened while still requiring everyone to practice necessary safeguards. As of May 7, 2021, masks were no longer required for the Bank's branches, customers or vendors. The Company remains committed to assisting our customers and communities as the vaccine rollout continues and COVID-19 restrictions lift in Montana. Management is encouraging its employees to receive the COVID-19 vaccine.

Acquisitions

The Bank has used growth through mergers or acquisition in addition to its strategy of organic growth. In January 2020, Eagle acquired Western Holding Company of Wolf Point ("WHC"), a Montana corporation, and WHC's wholly-owned subsidiary, Western Bank of Wolf Point ("WB"), a Montana chartered commercial bank. In the transaction, Eagle acquired one retail bank branch in Wolf Point, Montana.

On October 1, 2021, Eagle announced that it had reached an agreement to acquire First Community Bancorp, Inc., a Montana corporation (“FCB”) and its wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. The agreement provides that, upon the terms and subject to the conditions set forth in the agreement, FCB will merge with and into Eagle, with Eagle continuing as the surviving corporation. Upon completion of the transaction, Eagle will have an additional $374 million of assets, $307 million of deposits and $220 million in gross loans, based on June 30, 2021 information. Headquartered in Glasgow, Montana, FCB currently operates nine branches and two mortgage loan production offices. The transaction is subject to the approvals of bank regulatory agencies, the shareholders of Eagle and FCB and other customary closing conditions. The acquisition is expected to close during the fourth quarter of 2021.

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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, 2021 and December 31, 2020.

Total assets were $1.41 billion at September 30, 2021, an increase of $149.29 million, or 11.9% from $1.26 billion at December 31, 2020. Securities available-for-sale increased by $77.08 million from December 31, 2020. Loans receivable, net increased by $43.21 million from December 31, 2020. In addition, interest-bearing deposits in banks increased $23.88 million from December 31, 2020. Total liabilities were $1.25 billion at September 30, 2021, an increase of $145.70 million, or 13.2%, from $1.10 billion at December 31, 2020. The increase was largely due to an increase in deposits, partially offset by a reduction in FHLB advances and other borrowings. Total deposits increased by $161.47 million from December 31, 2020. However, FHLB advances and other borrowings decreased $12.07 million from December 31, 2020. Total shareholders’ equityincreased by $3.58 million or 2.3% from December 31, 2020.

Financial Condition Details

Investment Activities

The following table summarizes investment activities:

	September 30,					December 31,
	2021					2020
	Fair Value		Percentage of Total			Fair Value		Percentage of Total
	(Dollars in Thousands)
Securities available-for-sale:
U.S. government obligations	$	1,768		0.74	%	$	2,245		1.38	%
U.S. treasury obligations		33,751		14.06			5,657		3.47
Municipal obligations		118,861		49.53			99,088		60.81
Corporate obligations		10,716		4.46			10,663		6.54
Mortgage-backed securities		15,700		6.54			7,669		4.71
Collateralized mortgage obligations		53,322		22.21			31,189		19.14
Asset-backed securities		5,915		2.46			6,435		3.95
Total securities available-for-sale	$	240,033		100.00	%	$	162,946		100.00	%

Securities available-for-sale were $240.03 million at September 30, 2021, an increaseof $77.08 million, or 47.3%, from $162.95 million at December 31, 2020. The increase was largely driven by purchase activity due to excess liquidity levels.

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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,
	2021						2020
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Real estate loans:
Residential 1-4 family ⁽¹⁾	$	99,447			11.21	%	$	110,802			13.14	%
Residential 1-4 family construction		43,474			4.90			46,290			5.49
Total residential 1-4 family		142,921			16.11			157,092			18.63

Commercial real estate		380,071			42.85			316,668			37.56
Commercial construction and development		78,058			8.80			65,281			7.74
Farmland		64,824			7.31			65,918			7.82
Total commercial real estate		522,953			58.96			447,867			53.12

Total real estate loans		665,874			75.07			604,959			71.75

Other loans:
Home equity		52,990			5.97			56,563			6.71
Consumer		18,940			2.14			20,168			2.39

Commercial		95,554			10.77			109,209			12.95
Agricultural		53,645			6.05			52,242			6.20
Total commercial loans		149,199			16.82			161,451			19.15

Total other loans		221,129			24.93			238,182			28.25

Total loans		887,003			100.00	%		843,141			100.00	%

Deferred loan fees		(2,098	)					(2,038	)
Allowance for loan losses		(12,200	)					(11,600	)
Total loans, net	$	872,705					$	829,503

⁽¹⁾

Excludes loans held-for-sale.

Loans receivable, net increased $43.21 million, or 5.2%, to $872.71 million at September 30, 2021 from $829.50 million at December 31, 2020. The increase was impacted by an increase in total commercial real estate loans of $75.08 million. However, this was partially offset by decreases in total residential loans of $14.17 million, total commercial loans of $12.25 million, home equity loans of $3.57 million and consumer loans of $1.23 million.

Total loan originations were $1.15 billion for the nine months ended September 30, 2021. Total residential 1-4 family originations were $877.07 million, which includes $814.86 million of loans held-for-sale originations. Total commercial real estate originations were $175.99 million. Total commercial originations were $77.12 million which includes $19.51 million of SBA PPP loans. Home equity loan originations totaled $16.57 million. Consumer loan originations totaled $6.63 million. Loans held-for-sale decreased by $12.56 million to $42.06 million at September 30, 2021 from $54.62 million at December 31, 2020.

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, 2021 there was $117,000 of real estate owned and other repossessed property. As of December 31, 2020, there was $25,000 of real estate owned and other repossessed property.

The State of Montana placed a freeze on foreclosures on March 28, 2020. Subsequently it released the freeze effective May 24, 2020 with the exception of continued protection for those individuals deemed vulnerable to the coronavirus. The Federal foreclosure moratorium that began March 18, 2020 was extended to June 30, 2021. However, the Bank has had minimal impact due to foreclosures affected by these freezes.

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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,
	2021			2020
	(Dollars in Thousands)
Nonaccrual loans
Real estate loans:
Residential 1-4 family	$	785		$	684
Residential 1-4 family construction		337			337
Commercial real estate		507			631
Commercial construction and development		-			36
Farmland		1,812			2,245
Other loans:
Home equity		106			94
Consumer		78			151
Commercial		534			537
Agricultural		1,498			1,542
Accruing loans delinquent 90 days or more
Real estate loans:
Residential 1-4 family		-			34
Residential 1-4 family construction		-			170
Other loans:
Commercial		34			6
Agricultural		-			182
Restructured loans:
Real estate loans:
Commercial real estate		1,561			1,633
Commercial construction and development		-			14
Farmland		461			-
Other loans:
Home equity		15			17
Agricultural		79			160
Total nonperforming loans		7,807			8,473
Real estate owned and other repossessed property, net		117			25
Total nonperforming assets	$	7,924		$	8,498

Total nonperforming loans to total loans		0.88	%		1.00	%
Total nonperforming loans to total assets		0.55	%		0.67	%
Total allowance for loan loss to nonperforming loans		156.27	%		136.91	%
Total nonperforming assets to total assets		0.56	%		0.68	%

Nonaccrual loans as of September 30, 2021 and December 31, 2020 include $782,000 and $1.28 million, respectively of acquired loans that deteriorated subsequent to the acquisition date.

As of September 30, 2021, loan modifications for five borrowers represented $98,000 in loans compared to 40 borrowers representing $29.00 million as of December 31, 2020. As of September 30, 2021 there are approximately 11 forbearances remaining for residential mortgage loans, of which 11 are sold and serviced.

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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,
	2021					2020
			Percent					Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Noninterest checking	$	367,127		30.73	%	$	318,389		30.82	%
Interest-bearing checking		198,130		16.59			160,614		15.55
Savings		213,895		17.91			179,868		17.41
Money market		261,866		21.92			202,407		19.59
Total		1,041,018		87.15			861,278		83.37
Certificates of deposit accounts:
IRA certificates		25,601		2.14			24,693		2.39
Brokered certificates		-		0.00			495		0.05
Other certificates		127,930		10.71			146,617		14.19
Total certificates of deposit		153,531		12.85			171,805		16.63
Total deposits	$	1,194,549		100.00	%	$	1,033,083		100.00	%

Deposits increased by $161.47 million, or 15.6%, to $1.19 billion at September 30, 2021 from $1.03 billion at December 31, 2020. Money market increased by $59.46 million, noninterest checking increased by $48.74 million, interest-bearing checking increased by $37.52 million, and savings increased by $34.03 million. However, certificates of deposit decreased by $18.27 million. The decrease in time certificates of deposit was driven by a decrease in other certificates of $18.69 million. Due to the continued low interest rate environment, some depositors have been compelled to move funds from other certificates to non-maturity deposits upon maturity.

The following table summarizes borrowing activity:

	September 30,					December 31,
	2021					2020
	Net		Percent			Net		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
FHLB advances and other borrowings	$	5,000		14.35	%	$	17,070		36.43	%
Other long-term debt:
Senior notes fixed at 5.75%, due 2022		9,985		28.65			9,952		21.23
Subordinated debentures fixed at 5.50% to floating, due 2030		14,710		42.21			14,684		31.34
Subordinated debentures variable, due 2035		5,155		14.79			5,155		11.00
Total other long-term debt		29,850		85.65			29,791		63.57
Total borrowings	$	34,850		100.00	%	$	46,861		100.00	%

Total borrowings decreased by $12.01 million, or 25.6% to $34.85 million at September 30, 2021 from $46.86 million at December 31, 2020. This decrease is largely due to a decrease in FHLB advances and other borrowings of $12.07 million due to maturities.

Shareholders’ Equity

Total shareholders’ equity increased slightly by $3.58 million, or 2.3%, to $156.52 million at September 30, 2021 from $152.94 million at December 31, 2020. The increase was impacted by net income of $12.69 million. This increase was partially offset due to treasury stock purchased through the tender offer for $6.28 million, dividends paid of $2.17 million and other comprehensive loss of $1.35 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 financial condition items, as well as, interest and dividends and average yields related to the average balances. All average balances are daily average balances. Nonaccrual 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.

	Three Months Ended September 30,
	2021							2020
	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:
Securities available-for-sale	$	233,882	$	1,094		1.86	%	$	163,102	$	874		2.13	%
FHLB and FRB stock		4,812		62		5.11			6,299		95		5.98
Loans receivable⁽¹⁾		926,748		11,619		4.97			902,543		11,340		4.98
Other earning assets		68,058		32		0.19			43,662		30		0.27
Total interest-earning assets		1,233,500		12,807		4.12			1,115,606		12,339		4.39
Noninterest-earning assets		148,686							129,312
Total assets	$	1,382,186						$	1,244,918

Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts:
Checking	$	197,245	$	12		0.02	%	$	157,542	$	13		0.03	%
Savings		204,223		30		0.06			160,118		33		0.08
Money market		254,019		146		0.23			176,276		102		0.23
Certificates of deposit		155,006		162		0.41			200,527		631		1.25
Advances from FHLB and other borrowings including long-term debt		38,022		426		4.45			108,427		782		2.86
Total interest-bearing liabilities		848,515		776		0.36			802,890		1,561		0.77
Noninterest checking		353,486							276,580
Other noninterest-bearing liabilities		23,107							21,840
Total liabilities		1,225,108							1,101,310

Total equity		157,078							143,608

Total liabilities and equity	$	1,382,186						$	1,244,918
Net interest income/interest rate spread⁽²⁾			$	12,031		3.76	%			$	10,778		3.62	%

Net interest margin⁽³⁾						3.87	%						3.83	%
Total interest-earning assets to interest-bearing liabilities						145.37	%						138.95	%

⁽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,
	2021							2020
	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:
Securities available-for-sale	$	200,392	$	2,989		1.99	%	$	168,170	$	2,853		2.26	%
FHLB and FRB stock		4,880		194		5.32			6,934		284		5.46
Loans receivable⁽¹⁾		905,478		33,660		4.97			870,114		33,832		5.18
Other earning assets		77,264		90		0.16			34,309		134		0.52
Total interest-earning assets		1,188,014		36,933		4.16			1,079,527		37,103		4.58	%
Noninterest-earning assets		143,974							124,192
Total assets	$	1,331,988						$	1,203,719

Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts:
Checking	$	185,496	$	34		0.02	%	$	147,054	$	47		0.04	%
Savings		193,943		86		0.06			149,129		118		0.11
Money market		234,188		381		0.22			160,477		362		0.30
Certificates of deposit		161,521		617		0.51			224,251		2,536		1.51
Advances from FHLB and other borrowings including long-term debt		40,703		1,320		4.34			115,861		2,362		2.72
Total interest-bearing liabilities		815,851		2,438		0.40			796,772		5,425		0.91	%
Noninterest checking		337,961							250,132
Other noninterest-bearing liabilities		21,560							18,935
Total liabilities		1,175,372							1,065,839

Total equity		156,616							137,880

Total liabilities and equity	$	1,331,988						$	1,203,719
Net interest income/interest rate spread⁽²⁾			$	34,495		3.76	%			$	31,678		3.67	%

Net interest margin⁽³⁾						3.88	%						3.91	%
Total interest-earning assets to interest-bearing liabilities						145.62	%						135.49	%

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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

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.

	Three Months Ended September 30,
	2021									2020
				Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest-earning assets:
Securities available-for-sale	$	379		$	(159	)	$	220		$	191		$	(233	)	$	(42	)
FHLB and FRB stock		(22	)		(11	)		(33	)		(24	)		12			(12	)
Loans receivable⁽¹⁾		304			(25	)		279			1,690			(1,081	)		609
Other earning assets		17			(15	)		2			179			(168	)		11
Total interest-earning assets		678			(210	)		468			2,036			(1,470	)		566

Interest-bearing liabilities:
Checking, savings and money market accounts		57			(17	)		40			61			(57	)		4
Certificates of deposit		(143	)		(326	)		(469	)		(52	)		(195	)		(247	)
Advances from FHLB and other borrowings including long-term debt		(508	)		152			(356	)		(215	)		(55	)		(270	)
Total interest-bearing liabilities		(594	)		(191	)		(785	)		(206	)		(307	)		(513	)

Change in net interest income	$	1,272		$	(19	)	$	1,253		$	2,242		$	(1,163	)	$	1,079

	Nine Months Ended September 30,
	2021									2020
				Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest earning assets:
Securities available-for-sale	$	547		$	(411	)	$	136		$	624		$	(573	)	$	51
FHLB and FRB stock		(84	)		(6	)		(90	)		(25	)		12			(13	)
Loans receivable⁽¹⁾		1,374			(1,546	)		(172	)		4,854			(2,400	)		2,454
Other earning assets		168			(212	)		(44	)		419			(340	)		79
Total interest earning assets		2,005			(2,175	)		(170	)		5,872			(3,301	)		2,571

Interest bearing liabilities:
Savings, money market and checking accounts		214			(240	)		(26	)		121			7			128
Certificates of deposit		(710	)		(1,209	)		(1,919	)		214			(12	)		202
Advances from FHLB and other borrowings including long-term debt		(1,532	)		490			(1,042	)		(351	)		(318	)		(669	)
Total interest bearing liabilities		(2,028	)		(959	)		(2,987	)		(16	)		(323	)		(339	)

Change in net interest income	$	4,033		$	(1,216	)	$	2,817		$	5,888		$	(2,978	)	$	2,910

⁽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

Results of Operations for the Three Months Ended September 30, 2021 and 2020

Net Income. Eagle’s net income for the three months ended September 30, 2021 was $4.75 million compared to $6.38 million for the three months ended September 30, 2020. The decrease of $1.63 million was largely due to an increase in noninterest expense of $2.45 million and a decrease in noninterest income of $1.62 million. These changes were partially offset by an increase in net interest income after loan loss provision of $1.86 million and a decrease in provision for income taxes of $587,000. Basic and diluted earnings per share were both $0.73 for the current period. Basic and diluted earnings per share were both $0.94 for the prior year comparable period.

Net Interest Income. Net interest income increased to $12.03 million for the three months ended September 30, 2021, from $10.78 million for the same quarter in the prior year. The increase of $1.25 million, or 11.6%, was the result of a decrease in interest expense of $785,000 and an increase in interest and dividend income of $468,000.

Interest and Dividend Income. Interest and dividend income was $12.81 million for the three months ended September 30, 2021 compared to $12.34 million for the three months ended September 30, 2020. Interest and fees on loans increased slightly to $11.62 million for the three months ended September 30, 2021 from $11.34 million for the three months ended September 30, 2020. This increase of $279,000, or 2.5%, was largely due to an increase in the average balance of loans for the quarter ended September 30, 2021. Average balances for loans receivable, including loans held-for-sale, for the three months ended September 30, 2021 were $926.75 million, compared to $902.54 million for the prior year period. This represents an increase of $24.21 million, or 2.7%. The average interest rate earned on loans receivable decreased slightly by 1 basis point, from 4.98% for the three months ended September 30, 2020 to 4.97% for the current period. Interest accretion on purchased loans was $94,000 for the three months ended September 30, 2021 which resulted in a 3 basis point increase in net interest margin compared to $468,000 for the three months ended September 30, 2020 which resulted in a 17 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $220,000, or 25.2% period over period. Average balances for investments increased to $233.88 million for the three months ended September 30, 2021, from $163.10 million for the three months ended September 30, 2020. Investments have increased in the current period due to excess liquidity. However, average interest rates earned on investments decreased to 1.86% for the three months ended September 30, 2021 from 2.13% for the three months ended September 30, 2020.

Interest Expense. Total interest expense was $776,000 for the three months ended September 30, 2021 compared to $1.56 million for the three months ended September 30, 2020. The decrease of $785,000, or 50.3%, was due to a decrease in interest expense on deposits of $429,000, as well as a net decrease in interest expense on total borrowings of $356,000. The overall average rate on total deposits was 0.12% for the three months ended September 30, 2021 compared to 0.32% for the three months ended September 30, 2020. However, the average balance for total deposits was $1.16 billion for three months ended September 30, 2021 compared to $971.04 million for the three months ended September 30, 2020. Deposit balances have been impacted by PPP funding and economic stimulus. Due to the continued low interest rate environment though, some depositors have moved funds from certificates of deposit to other non-maturity deposit accounts that earn lower yields. The average balance for total borrowings decreased from $108.43 million for the three months ended September 30, 2020 to $38.02 million for the three months ended September 30, 2021 due to increased liquidity levels. However, the average rate paid on total borrowings increased from 2.86% for the three months ended September 30, 2020, to 4.45% for the three months ended September 30, 2021. The increase in the average rate paid is due to the change in the mix of the outstanding borrowings.

Loan Loss Provision. Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the review of assets on a quarterly basis. The Bank classifies loans 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. Using this methodology, the Bank recorded $255,000 in loan loss provisions for the three months ended September 30, 2021. Management made the decision that due to the strength of the local economy, in conjunction with loan activity, no additional loan loss provision was necessary in the three months ended September 30, 2021 when considering the COVID-19 pandemic. Loan loss provisions were $854,000 for the three months ended September 30, 2020, which included $404,000 related to the potential impact of Covid-19. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. However, if the economic forecast worsens relative to the assumptions we utilized, our allowance for credit losses will increase accordingly in future periods.

Noninterest Income. Total noninterest income was $13.35 million for the three months ended September 30, 2021, compared to $14.97 million for the three months ended September 30, 2020. The decrease of $1.62 million was primarily driven by a decrease in mortgage banking, net of $1.64 million. Mortgage banking, net includes net gain on sale of mortgage loans which increased $402,000 compared to the same period in the prior year. During the three months ended September 30, 2021, $270.84 million residential mortgage loans were sold compared to $266.76 million in the same period in the prior year. Mortgage banking, net also includes the impact of changes in fair value of loans held-for-sale and derivatives. The net change in fair value of loans held-for-sale and derivatives was a loss of $35,000 for the three months ended September 30, 2021 compared to a gain of $2.24 million for the same period in the prior year.

Noninterest Expense. Noninterest expense was $18.80 million for the three months ended September 30, 2021 compared to $16.35 million for the three months ended September 30, 2020. The increase of $2.45 million, or 15.0%, was impacted by an increase in salaries and employee benefits expense of $937,000 due to increased staff levels.

Provision for Income Taxes. Provision for income taxes was $1.58 million for the three months ended September 30, 2021, compared to $2.17 million for the three months ended September 30, 2020 due to decreased income before provision for income taxes. The effective tax rate for the three months ended September 30, 2021 was 25.0% compared to 25.4% for the three months ended September 30, 2020.

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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

Results of Operations for the Nine Months Ended September 30, 2021 and 2020

Net Income. Eagle’s net income for the nine months ended September 30, 2021 was $12.69 million compared to $16.04 million for the nine months ended September 30, 2020. The decrease of $3.35 million was impacted by an increase in noninterest expense of $10.72 million. This increase was partially offset by an increase in net interest income after loan loss provision of $4.99 million, an increase in noninterest income of $1.08 million and decrease in provision for income taxes of $1.30 million. Basic and diluted earnings per share were $1.90 and $1.89 for the current period, respectively. Basic earnings per share was $2.36 and diluted earnings per share was $2.35 for the prior period.

Net Interest Income. Net interest income increased to $34.50 million for the nine months ended September 30, 2021, from $31.68 million for the same period in the prior year. The increase of $2.82 million, or 8.9%, was primarily the result of a decrease in interest expense of $2.99 million.

Interest and Dividend Income. Interest and dividend income was $36.93 million for the nine months ended September 30, 2021, compared to $37.10 million for the nine months ended September 30, 2020, a decrease of $170,000. Interest and fees on loans decreased to $33.66 million for the nine months ended September 30, 2021 from $33.83 million for the nine months ended September 30, 2020. This slight decrease of $172,000, or 0.5%, was due to a decrease in the average yield of loans, largely offset by an increase in the average balance of loans. The average interest rate earned on loans receivable decreased by 21 basis points, from 5.18% to 4.97%. Interest accretion on purchased loans was $408,000 for the nine months ended September 30, 2021 which resulted in a 4 basis point increase in net interest margin compared to $1.38 million for the nine months ended September 30, 2020 which resulted in a 17 basis point increase in net interest margin. Average balances for loans receivable, including loans held-for-sale, for the nine months ended September 30, 2021 were $905.48 million, compared to $870.11 million for the prior year period. This represents an increase of $35.37 million, or 4.1% and was impacted by organic growth and PPP funding. Interest on investment securities available-for-sale increased by $136,000, or 4.8% period over period. Average balances for investments increased to $200.39 million for the nine months ended September 30, 2021, from $168.17 million for the nine months ended September 30, 2020. Investments have increased in the current period due to excess liquidity. However, average interest rates earned on investments decreased to 1.99% for the nine months ended September 30, 2021 from 2.26% for the nine months ended September 30, 2020.

Interest Expense. Total interest expense was $2.44 million for the nine months ended September 30, 2021 compared to $5.43 million for the nine months ended September 30, 2020. The decrease of $2.99 million, or 55.1%, was due to a decrease of $1.94 million in interest expense on deposits and a net decrease of $1.05 million in interest expense on total borrowings. The overall average rate on total deposits was 0.13% for the nine months ended September 30, 2021 compared to 0.44% for the nine months ended September 30, 2020. However, the average balance for total deposits was $1.11 billion for nine months ended September 30, 2021 compared to $931.04 million for the nine months ended September 30, 2020. This increase was impacted by PPP funding and economic stimulus. Due to the continued low interest rate environment though, some depositors have moved funds from certificates of deposit to other non-maturity deposit accounts that earn lower yields. The average balance for total borrowings decreased from $115.86 million for the nine months ended September 30, 2020 to $40.70 million for the nine months ended September 30, 2021. However, the average rate paid on total borrowings increased from 2.72% for the nine months ended September 30, 2020, to 4.34% for the nine months ended September 30, 2021. The increase in the average rate paid is due to the change in the mix of the outstanding borrowings.

Loan Loss Provision. Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the review of assets on a quarterly basis. The Bank classifies loans 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. Using this methodology, the Bank recorded $576,000 in loan loss provisions for the nine months ended September 30, 2021. Management made the decision that due to the strength of the local economy, in conjunction with loan credit quality, no additional loan loss provision was necessary in the nine months ended September 30, 2021 when considering the COVID-19 pandemic. Loan loss provisions were $2.75 million for the nine months ended September 30, 2020, which included $1.40 million related to the potential impact of COVID-19. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. However, if the economic outlook worsens relative to the assumptions we utilized, our allowance for loan losses will increase accordingly in future periods. Total nonperforming loans, including restructured loans, net, was $7.81 million at September 30, 2021 compared to $8.47 million at December 31, 2020. The Bank had $117,000 in other real estate owned and other repossessed assets at September 30, 2021 compared to $25,000 at December 31, 2020.

Noninterest Income. Total noninterest income was $38.05 million for the nine months ended September 30, 2021, compared to $36.97 million for the nine months ended September 30, 2020. The increase of $1.08 million, or 2.9%, is largely due to an increase in mortgage banking, net of $1.76 million for the nine months ended September 30, 2021. Mortgage banking, net includes net gain on sale of mortgage loans which increased $11.83 million compared to the same period in the prior year. During the nine months ended September 30, 2021, $823.41 million residential mortgage loans were sold compared to $621.11 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the nine months ended September 30, 2021 was 4.40% compared to 3.93% for the nine months ended September 30, 2020. Mortgage banking, net also includes the impact of changes fair value of loans held-for-sale and derivatives. The net change in fair value of loans held-for-sale and derivatives was a loss of $3.00 million for the nine months ended September 30, 2021 compared to a gain of $7.32 million for the same period in the prior year. The prior period also included a gain on sale of available-for-sale securities of $1.07 million compared to $11,000 in the current period.

Noninterest Expense. Noninterest expense was $55.05 million for the nine months ended September 30, 2021 compared to $44.33 million for the nine months ended September 30, 2020. The increase of $10.72 million, or 24.2%, was largely driven by increased salaries and employee benefits expense of $8.82 million. The increase in salaries expense is due in part to higher commission-based compensation related to mortgage loan growth, as well as overall increased staff levels. In addition, occupancy and equipment expense increased $1.07 million due to office expansion and the corresponding depreciation and amortization expense, as well as utilization and maintenance costs.

Provision for Income Taxes. Provision for income taxes was $4.23 million for the nine months ended September 30, 2021, compared to $5.53 million for the nine months ended September 30, 2020 due to decreased income before provision for income taxes. The effective tax rate for the nine months ended September 30, 2021 was 25.0% compared to 25.6% for the nine months ended September 30, 2020.

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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

Liquidity and Capital Resources

Liquidity

The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and FRB regulations. The liquidity requirement is retained for safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Des Moines. The Bank exceeded those minimum ratiosas of September 30, 2021 and December 31, 2020.

The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Des Moines and other borrowings. Scheduled repayments of loans and mortgage-backed 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 and demand deposit withdrawals. In addition, the Bank uses liquidity resources for investment purposes, to meet operating expenses and capital expenditures, and maintain adequate liquidity levels.

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 Eagle’s commitments to make loans and management’s assessment of Eagle’s ability to generate funds.

Through the nine months ended September 30, 2021, liquidity levels remained strong, as a result of PPP loan payoffs and deposit growth. A portion of the excess funds was deployed into investment securities.

Capital Resources

As of September 30, 2021, 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 25.6% compared to an increase of 15.0% at December 31, 2020. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

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, 2021. The Bank's Tier I leverage ratio decreased slightly from 11.72% as of December 31, 2020 to 11.25%as of September 30, 2021, compared to a regulatory requirement of 4.00%. The Bank’s total capital, Tier 1 capital and common equity Tier 1 capital leverage ratios were 15.83%, 14.65% and 14.65%, respectively, compared to regulatory requirements of 10.50%, 8.50% and 7.00%, respectively. All of these ratios with the exception of the Tier 1 leverage ratio include the capital conservation buffer of 2.50%. The Bank’s capital position helps to mitigate its interest rate risk exposure.

	September 30, 2021
	(Unaudited)
	Dollar		% of
	Amount		Assets
	(Dollars in Thousands)
Total risk-based capital to risk weighted assets:
Actual capital level	$	163,492		15.83	%
Minimum required for capital adequacy purposes		108,438		10.50
Excess capital	$	55,054		5.33	%

Tier I capital to risk weighted assets:
Actual capital level	$	151,292		14.65	%
Minimum required for capital adequacy purposes		87,783		8.50
Excess capital	$	63,509		6.15	%

Common equity tier I capital to risk weighted assets:
Actual capital level	$	151,292		14.65	%
Minimum required for capital adequacy purposes		72,292		7.00
Excess capital	$	79,000		7.65	%

Tier I capital to adjusted total average assets:
Actual capital level	$	151,292		11.25	%
Minimum required for capital adequacy purposes		53,775		4.00
Excess capital	$	97,517		7.25	%

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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

Impact of Inflation and Changing Prices

Our condensed consolidated financial statements and the accompanying notes, which are found in Part I, Item 1, 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.

Interest Rate Risk

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

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

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

The Bank has established acceptable levels of interest rate risk as follows for an instantaneous and permanent shock in rates: 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, 2021		Policy
(Basis Points)	Year 1	Year 2	Limits

+200	6.7%	11.0%	-15.0%
-100	-3.0%	-7.8%	-10.0%

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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, 2021, 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 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 and any subsequently filed Quarterly Reports on Form 10-Q.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sale of Securities

The Company sold 251,256 shares of common stock to the Employee Stock Ownership Plan at a price of $23.88 per share on June 23, 2021 pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Exchange Act of 1934, as amended. The shares were purchased from Eagle by the ESOP in exchange for a loan totaling $6.00 million. The loan has a ten-year term and bears interest at 3.00%.

Tender Offer

On May 20, 2021, the Company's Board of Directors (the "Board") authorized a modified "Dutch auction" tender offer (the "Tender Offer") to purchase up to $6.00 million of its shares of common stock, at a price not greater than $26.25 per share nor less than $24.00 per share. The Tender Offer expired on June 22, 2021. The Company accepted for purchase 250,000 shares of its common stock at a price of $24.00 per share on June 23, 2021. The aggregate purchase price for the shares purchased in the Tender Offer was approximately $6.28 million, including fees and expenses related to the Tender Offer. Therefore, the total price including fees and expenses was $25.12 per share.

Stock Repurchase Program

On July 22, 2021, Eagle's 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. However, no shares were purchased during the third quarter of 2021. The plan expires on July 22, 2022.

On July 23, 2020, Eagle's 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 repurchases depended upon market conditions and other corporate considerations. During the third quarter of 2020, 41,337 shares were purchased under this plan at an average price of $15.75 per share. However, no shares were purchased during the fourth quarter of 2020 or during 2021. The plan expired on July 23, 2021.

On July 18, 2019, 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 repurchases depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2019 or the first quarter of 2020. However, during the second quarter of 2020, 1,281 shares were purchased at an average price of $16.95 per share. In addition, during the third quarter of 2020, 20,158 shares were purchased at an average price of $15.60 per share. The plan expired on July 18, 2020.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION - continued

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibit Number	Description

2.1	Agreement and Plan of Merger, dated as of September 30, 2021, by and among Eagle Bancorp Montana, Inc., Opportunity Bank of Montana, First Community Bancorp, Inc. and First Community Bank (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on October 1, 2021).

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).

10.1	Salary Continuation Agreement between Opportunity Bank of Montana and Alana Binde (filed herewith).

10.2	Second Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Dale Field, dated August 20, 2021 (filed herewith).

10.3	Second Amendment to the Salary Continuation Agreement between Opportunity Bank of Montana and Peter J. Johnson dated August 20, 2021 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on August 24, 2021).

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	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)⁽¹⁾

101.SCH	Inline XBRL Taxonomy Extension Schema Document⁽¹⁾

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document⁽¹⁾

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document⁽¹⁾

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document⁽¹⁾

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document⁽¹⁾

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

⁽¹⁾These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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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 4, 2021	By:	/s/ Peter J. Johnson
		Peter J. Johnson
		President/CEO



Date: November 4, 2021	By:	/s/ Laura F. Clark
		Laura F. Clark
		Executive Vice President/CFO/COO

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