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

ebmt20200331_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 March 31, 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

6,775,447 shares outstanding

As of April 30, 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 March 31, 2021 and December 31, 2020	1

	Condensed Consolidated Statements of Income for the three months ended March 31, 2021 and 2020	3

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020	5

	Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	40

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	42
Item 6.	Exhibits	42

Signatures		43

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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;

●

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;

●

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 Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 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)

	March 31,		December 31,
	2021		2020
ASSETS:
Cash and due from banks	$	17,199	$	14,455
Interest-bearing deposits in banks		87,165		47,733
Federal funds sold		6,859		7,614
Total cash and cash equivalents		111,223		69,802

Securities available-for-sale		180,276		162,946
Federal Home Loan Bank ("FHLB") stock		1,977		2,060
Federal Reserve Bank ("FRB") stock		2,974		2,974
Mortgage loans held-for-sale, at fair value		60,609		54,615
Loans receivable, net of allowance for loan losses of $11,900 at March 31, 2021 and $11,600 at December 31, 2020		817,439		829,503
Accrued interest and dividends receivable		5,451		5,765
Mortgage servicing rights, net		11,320		10,105
Premises and equipment, net		61,971		58,762
Cash surrender value of life insurance, net		27,911		27,753
Goodwill		20,798		20,798
Core deposit intangible, net		2,202		2,343
Deferred tax asset, net		154		-
Other assets		7,116		10,208

Total assets	$	1,311,421	$	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)

	March 31,			December 31,
	2021			2020
LIABILITIES:
Deposit accounts:
Noninterest-bearing	$	331,589		$	318,389
Interest-bearing		761,815			714,694
Total deposits		1,093,404			1,033,083

Accrued expenses and other liabilities		20,513			24,295
Deferred tax liability, net		-			457
FHLB advances and other borrowings		11,862			17,070
Other long-term debt:
Principal amount		30,155			30,155
Unamortized debt issuance costs		(344	)		(364	)
Total other long-term debt, net		29,811			29,791

Total liabilities		1,155,590			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; 6,775,447 shares outstanding at March 31, 2021 and December 31, 2020, respectively)		71			71
Additional paid-in capital		77,744			77,602
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")		(103	)		(145	)
Treasury stock, at cost		(4,423	)		(4,423	)
Retained earnings		78,586			73,982
Accumulated other comprehensive income, net of tax		3,956			5,851
Total shareholders' equity		155,831			152,938

Total liabilities and shareholders' equity	$	1,311,421		$	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
	March 31,
	2021			2020
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	11,029		$	11,432
Securities available-for-sale		877			1,027
FHLB and FRB dividends		69			94
Other interest income		26			78
Total interest and dividend income		12,001			12,631

INTEREST EXPENSE:
Deposits		402			1,339
FHLB advances and other borrowings		70			463
Other long-term debt		390			352
Total interest expense		862			2,154

NET INTEREST INCOME		11,139			10,477

Loan loss provision		299			670

NET INTEREST INCOME AFTER LOAN LOSS PROVISION		10,840			9,807

NONINTEREST INCOME:
Service charges on deposit accounts		273			316
Net gain on sale of mortgage loans		14,277			5,411
Mortgage banking, net		(2,514	)		1,602
Interchange and ATM fees		425			337
Appreciation in cash surrender value of life insurance		158			160
Other noninterest income		774			478
Total noninterest income	$	13,393		$	8,304

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
	March 31,
	2021		2020
NONINTEREST EXPENSE:
Salaries and employee benefits	$	12,086	$	7,682
Occupancy and equipment expense		1,430		1,209
Data processing		1,297		1,250
Advertising		273		249
Amortization		144		164
Loan costs		722		247
Federal Deposit Insurance Corporation ("FDIC") insurance premiums		81		69
Postage		95		98
Professional and examination fees		282		285
Acquisition costs		-		128
Other noninterest expense		803		1,467
Total noninterest expense		17,213		12,848

INCOME BEFORE PROVISION FOR INCOME TAXES		7,020		5,263

Provision for income taxes		1,755		1,336

NET INCOME	$	5,265	$	3,927

BASIC EARNINGS PER SHARE	$	0.78	$	0.58

DILUTED EARNINGS PER SHARE	$	0.78	$	0.57

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
	March 31,
	2021			2020

NET INCOME	$	5,265		$	3,927

OTHER ITEMS OF COMPREHENSIVE (LOSS) INCOME BEFORE TAX:
Change in fair value of securities available-for-sale		(2,572	)		205
Income tax benefit (provision) related to securities available-for-sale		677			(54	)

COMPREHENSIVE INCOME	$	3,370		$	4,078

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 Months Ended March 31, 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 January 1, 2021	$	-	$	71	$	77,602	$	(145	)	$	(4,423	)	$	73,982		$	5,851		$	152,938
Net income		-		-		-		-			-			5,265			-			5,265
Other comprehensive loss		-		-		-		-			-			-			(1,895	)		(1,895	)
Dividends paid ($0.0975 per share)		-		-		-		-			-			(661	)		-			(661	)
Stock compensation expense		-		-		90		-			-			-			-			90
ESOP shares allocated (4,154 shares)		-		-		52		42			-			-			-			94
Balance at March 31, 2021	$	-	$	71	$	77,744	$	(103	)	$	(4,423	)	$	78,586		$	3,956		$	155,831

Balance at January 1, 2020	$	-	$	67	$	68,826	$	(311	)	$	(3,643	)	$	55,391		$	1,329		$	121,659
Net income		-		-		-		-			-			3,927			-			3,927
Other comprehensive income		-		-		-		-			-			-			151			151
Dividends paid ($0.095 per share)		-		-		-		-			-			(648	)		-			(648	)
Stock issued in connection with Western Holding Company of Wolf Point acquisition		-		4		8,463		-			-			-			-			8,467
Stock compensation expense		-		-		70		-			-			-			-			70
ESOP shares allocated (4,154 shares)		-		-		40		42			-			-			-			82
Balance at March 31, 2020	$	-	$	71	$	77,399	$	(269	)	$	(3,643	)	$	58,670		$	1,480		$	133,708

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)

	Three Months Ended
	March 31,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,265		$	3,927
Adjustments to reconcile net income to net cash provided by operating activities:
Loan loss provision		299			670
(Recovery) impairment of mortgage servicing rights		(677	)		153
Depreciation		649			574
Net amortization of investment securities premiums and discounts		238			280
Amortization of mortgage servicing rights		994			511
Amortization of core deposit intangible and tax credits		144			164
Amortization of right-of-use assets		128			117
Compensation expense related to restricted stock awards		90			70
ESOP compensation expense for allocated shares		94			82
Deferred income tax provision (benefit)		66			(23	)
Net gain on sale of loans		(14,277	)		(5,411	)
Originations of loans held-for-sale		(267,168	)		(132,225	)
Proceeds from sales of loans held-for-sale		275,451			138,061
Net loss on sale of real estate owned and other repossessed assets		9			-
Net gain on sale/disposal of premises and equipment		-			(4	)
Net appreciation in cash surrender value of life insurance		(158	)		(160	)
Net change in:
Accrued interest and dividends receivable		314			256
Other assets		3,084			(6,042	)
Accrued expenses and other liabilities		(614	)		2,688
Net cash provided by operating activities		3,931			3,688

CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Maturities, principal payments and calls		2,355			4,106
Purchases		(25,663	)		(1,500	)
FHLB stock redeemed (purchased)		83			(263	)
Net cash received from acquisitions		-			5,044
Loan origination and principal collection, net		10,233			(371	)
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans		16			-
Purchases of premises and equipment, net		(3,986	)		(11,596	)
Net cash used in investing activities	$	(16,962	)	$	(4,580	)

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)

	Three Months Ended
	March 31,
	2021			2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	60,321		$	(7,340	)
Net short-term advances from FHLB and other borrowings		-			7,910
Long-term advances from FHLB and other borrowings		-			10,000
Payments on long-term FHLB and other borrowings		(5,208	)		(14,175	)
Dividends paid		(661	)		(648	)
Net cash provided by (used in) financing activities		54,452			(4,253	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		41,421			(5,145	)

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

CASH AND CASH EQUIVALENTS, end of period	$	111,223		$	19,773


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	1,415		$	2,172
Cash paid during the period for income taxes		-			-

NONCASH INVESTING AND FINANCING ACTIVITIES:
(Decrease) increase in fair value of securities available-for-sale	$	(2,572	)	$	205
Mortgage servicing rights recognized		1,532			943
Loans transferred to real estate and other assets acquired in foreclosure		-			34
Stock issued in connection with acquisitions		-			8,467

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.

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 three-month period ended March 31, 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, Eagle Bancorp Statutory Trust I (the “Trust”) and WFS. All significant intercompany transactions and balances have been eliminated in consolidation.

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 March 31, 2021 for recognition and/or disclosure.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 months ended March 31, 2021, accretion of the loan discount was $49,000. The remaining accretable loan discount was $557,000 as of March 31, 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 during the three months ended March 31, 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 March 31, 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:

	March 31, 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	$	2,081	$	25	$	-		$	2,106	$	2,214	$	31	$	-		$	2,245
U.S. treasury obligations		22,550		482		-			23,032		5,153		504		-			5,657
Municipal obligations		93,965		4,085		(385	)		97,665		92,914		6,175		(1	)		99,088
Corporate obligations		10,572		179		(8	)		10,743		10,579		91		(7	)		10,663
Mortgage-backed securities		6,921		156		-			7,077		7,513		161		(5	)		7,669
Collateralized mortgage obligations		32,673		739		(35	)		33,377		30,339		852		(2	)		31,189
Asset-backed securities		6,145		131		-			6,276		6,293		142		-			6,435
Total	$	174,907	$	5,797	$	(428	)	$	180,276	$	155,005	$	7,956	$	(15	)	$	162,946

For the three months ended March 31, 2021 and 2020, there were no sales of available-for-sale securities. As a result, there were no associated gross gains or losses.

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.

	March 31, 2021
	Amortized		Fair
	Cost		Value
	(In Thousands)

Due in one year or less	$	5,287	$	5,345
Due from one to five years		13,224		13,774
Due from five to ten years		35,339		36,006
Due after ten years		81,463		84,697
		135,313		139,822
Mortgage-backed securities		6,921		7,077
Collateralized mortgage obligations		32,673		33,377
Total	$	174,907	$	180,276

As of March 31, 2021 and December 31, 2020, securities with a fair value of $21,129,000 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:

	March 31, 2021
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In Thousands)
Municipal obligations	$	16,498	$	(384	)	$	130	$	(1	)
Corporate obligations		1,992		(8	)		-		-
Mortgage-backed securities and collateralized mortgage obligations		5,153		(35	)		-		-
Total	$	23,643	$	(427	)	$	130	$	(1	)

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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)
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 three months ended March 31, 2021 or the year ended December 31, 2020. As of March 31, 2021 and December 31, 2020, there were, respectively, 22 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:

	March 31,			December 31,
	2021			2020
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	136,506		$	157,092
Commercial real estate		464,082			447,867

Other loans:
Home equity		53,270			56,563
Consumer		19,424			20,168
Commercial		158,598			161,451

Total		831,880			843,141

Deferred loan fees, net		(2,541	)		(2,038	)
Allowance for loan losses		(11,900	)		(11,600	)
Total loans, net	$	817,439		$	829,503

Within the commercial real estate loan category above, $10,882,000 and $11,084,000 was guaranteed by the United States Department of Agriculture Rural Development at March 31, 2021 and December 31, 2020, respectively. Also within the loan categories above, $6,137,000 and $6,533,000 was guaranteed by the United States Department of Agriculture Farm Service Agency at March 31, 2021 and December 31, 2020, respectively. In addition, within the commercial loan category above, $30,303,000 and $29,581,000 was guaranteed by the Small Business Administration ("SBA") under their Payroll Protection Program ("PPP") at March 31, 2021 and December 31, 2020, respectively. Deferred loan fees, net includes $1,318,000 and $613,000 of remaining deferred fees related to the PPP at March 31, 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, January 1, 2021	$	1,506	$	6,951		$	515	$	364		$	2,264		$	11,600
Charge-offs		-		(10	)		-		(2	)		(6	)		(18	)
Recoveries		-		2			-		4			13			19
Provision		36		188			6		3			66			299
Ending balance, March 31, 2021	$	1,542	$	7,131		$	521	$	369		$	2,337		$	11,900

Ending balance, March 31, 2021 allocated to loans individually evaluated for impairment	$	296	$	-		$	-	$	-		$	40		$	336

Ending balance, March 31, 2021 allocated to loans collectively evaluated for impairment	$	1,246	$	7,131		$	521	$	369		$	2,297		$	11,564

Loans receivable:
Ending balance, March 31, 2021	$	136,506	$	464,082		$	53,270	$	19,424		$	158,598		$	831,880

Ending balance, March 31, 2021 of loans individually evaluated for impairment	$	1,532	$	4,282		$	109	$	145		$	1,952		$	8,020

Ending balance, March 31, 2021 of loans collectively evaluated for impairment	$	134,974	$	459,800		$	53,161	$	19,279		$	156,646		$	823,860

	Residential		Commercial			Home
	1-4 Family		Real Estate			Equity		Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, January 1, 2020	$	1,301	$	4,826		$	477	$	284		$	1,712		$	8,600
Charge-offs		-		(18	)		-		(8	)		(10	)		(36	)
Recoveries		-		6			-		8			2			16
Provision		-		400			-		70			200			670
Ending balance, March 31, 2020	$	1,301	$	5,214		$	477	$	354		$	1,904		$	9,250

Ending balance, March 31, 2020 allocated to loans individually evaluated for impairment	$	-	$	-		$	-	$	-		$	74		$	74

Ending balance, March 31, 2020 allocated to loans collectively evaluated for impairment	$	1,301	$	5,214		$	477	$	354		$	1,830		$	9,176

Loans receivable:
Ending balance, March 31, 2020	$	160,047	$	455,620		$	57,752	$	19,924		$	129,876		$	823,219

Ending balance, March 31, 2020 of loans individually evaluated for impairment	$	1,074	$	2,115		$	136	$	179		$	1,489		$	4,993

Ending balance, March 31, 2020 of loans collectively evaluated for impairment	$	158,973	$	453,505		$	57,616	$	19,745		$	128,387		$	818,226

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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:

	March 31, 2021
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	99,620	$	279	$	850	$	199	$	-	$	100,948
Residential 1-4 family construction		35,221		-		337		-		-		35,558
Commercial real estate		322,547		4,909		2,316		-		-		329,772
Commercial construction and development		66,718		-		-		-		-		66,718
Farmland		64,929		109		2,507		47		-		67,592
Other loans:
Home equity		52,890		271		109		-		-		53,270
Consumer		19,235		-		189		-		-		19,424
Commercial		107,300		965		691		-		-		108,956
Agricultural		47,901		143		1,532		66		-		49,642
Total	$	816,361	$	6,676	$	8,531	$	312	$	-	$	831,880

	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.

	March 31, 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	$	1,634	$	-	$	1,634	$	675	$	98,639	$	100,948
Residential 1-4 family construction		487		-		487		337		34,734		35,558
Commercial real estate		3		-		3		668		329,101		329,772
Commercial construction and development		-		-		-		-		66,718		66,718
Farmland		661		147		808		1,866		64,918		67,592
Other loans:
Home equity		912		-		912		109		52,249		53,270
Consumer		41		-		41		145		19,238		19,424
Commercial		674		-		674		546		107,736		108,956
Agricultural		156		464		620		1,327		47,695		49,642
Total	$	4,568	$	611	$	5,179	$	5,673	$	821,028	$	831,880

	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.

	March 31, 2021
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	1,195	$	1,262	$	296
Residential 1-4 family construction		337		387		-
Commercial real estate		2,416		2,483		-
Commercial construction and development		-		-		-
Farmland		1,866		1,898		-
Other loans:
Home equity		109		136		-
Consumer		145		163		-
Commercial		546		668		-
Agricultural		1,406		2,007		40
Total	$	8,020	$	9,004	$	336

	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
	March 31,
	2021		2020
	Average Recorded Investment
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	1,199	$	677
Residential 1-4 family construction		337		337
Commercial real estate		2,340		777
Commercial construction and development		25		72
Farmland		2,056		763
Other loans:
Home equity		110		117
Consumer		148		167
Commercial		542		766
Agricultural		1,554		641
Total	$	8,311	$	4,317

Interest income recognized on impaired loans for the three months ended March 31, 2021 and 2020 is considered insignificant. Interest payments received on a cash basis related to impaired loans were $384,000 and $327,000 for March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021 and December 31, 2020, there were troubled debt restructured (“TDR”) loans of $1,843,000 and $1,824,000, respectively.

During the three months ended March 31, 2021, there was one new TDR loan. The recorded investment for the commercial real estate loan at time of restructure was $115,000. No charge-offs were incurred and the loan is on accrual status.

During the three months ended March 31, 2020, there was one new TDR loan. The recorded investment for the commercial construction and development loan at time of restructure was $94,000. The loan was paid off during the three months ended March 31, 2021.

There were no loans modified as TDR's that defaulted during the three months ended March 31, 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 March 31, 2021, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in troubled debt restructures.

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 TDR's 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 32 qualified borrowers. As of March 31, 2021, loan modifications for 41 borrowers with modified loans under the provisions of the CARES Act represented $27,831,000 in loans. As of December 31, 2020, loan modifications for 40 borrowers represented $28,994,000 in loans.

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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 $1,555,573,000 and $1,473,971,000 at March 31, 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 $937,000 and $739,000 for the three months ended March 31, 2021 and 2020, respectively. 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 $17,858,000 and $15,853,000 at March 31, 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
	March 31,
	2021			2020
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	10,897		$	8,739
Mortgage servicing rights capitalized		1,532			943
Amortization of mortgage servicing rights		(994	)		(511	)
Ending balance	$	11,435		$	9,171
Valuation allowance:
Beginning balance		(792	)		-
Recovery (impairment) of mortgage servicing rights		677			(153	)
Ending balance		(115	)		(153	)
Mortgage servicing rights, net	$	11,320		$	9,018

Impairment expense on mortgage servicing rights was recorded during the year ended December 31, 2020, as a result of faster than expected prepayment speed assumptions. However, a recovery of $677,000 was recorded for the three months ended March 31, 2021. 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 $11,837,000 and $10,105,000 at March 31, 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:

	March 31,		December 31,
	2021		2020
Key assumptions:
Discount rate		12 %		12%
Prepayment speed range		182-279%		221-328%
Weighted average prepayment speed		224%		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:

	March 31,		December 31,
	2021		2020
	(In Thousands)

Noninterest checking	$	331,589	$	318,389
Interest-bearing checking		174,840		160,614
Savings		197,748		179,868
Money market		224,107		202,407
Time certificates of deposit		165,120		171,805
Total	$	1,093,404	$	1,033,083

Time certificates of deposits include $495,000 related to fixed rate brokered CDs at March 31, 2021 and December 31, 2020.

NOTE 7. OTHER LONG-TERM DEBT

Other long-term debt consisted of the following:

	March 31, 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	$	(37	)	$	10,000	$	(48	)
Subordinated debentures fixed at 5.50% to floating, due 2030		15,000		(307	)		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	$	(344	)	$	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 1.61% and 1.66% as of March 31, 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, January 1, 2021	$	5,851
Other comprehensive loss, before reclassifications and income taxes		(2,572	)
Income tax benefit		677
Total other comprehensive loss		(1,895	)
Balance, March 31, 2021	$	3,956

Balance, January 1, 2020	$	1,329
Other comprehensive income, before reclassifications and income taxes		205
Income tax provision		(54	)
Total other comprehensive income		151
Balance, March 31, 2020	$	1,480

NOTE 9. EARNINGS PER SHARE

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

	Three Months Ended
	March 31,
	2021		2020
	(Dollars in Thousands, Except Per Share Data)

Basic weighted average shares outstanding		6,775,447		6,818,883
Dilutive effect of stock compensation		13,232		12,042
Diluted weighted average shares outstanding		6,788,679		6,830,925

Net income available to common shareholders	$	5,265	$	3,927

Basic earnings per share	$	0.78	$	0.58

Diluted earnings per share	$	0.78	$	0.57

There were no anti-dilutive shares at March 31, 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:

	March 31, 2021						December 31, 2020
	Notional		Fair Value				Notional		Fair Value
	Amount		Asset		Liability		Amount		Asset		Liability
	(In Thousands)
Interest rate lock commitments	$	236,369	$	1,887	$	-	$	227,977	$	6,017	$	-
Forward TBA mortgage-backed securities		164,000		1,790		-		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 losses of $1,283,000 were recorded for the three months ended March 31, 2021 compared to net gains of $1,247,000 for the three months ended March 31, 2020.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

	March 31, 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	$	-	$	2,106	$	-	$	2,106
U.S. treasury obligations		23,032		-		-		23,032
Municipal obligations		-		97,665		-		97,665
Corporate obligations		-		10,743		-		10,743
Mortgage-backed securities		-		7,077		-		7,077
Collateralized mortgage obligations		-		33,377		-		33,377
Asset-backed securities		-		6,276		-		6,276
Loans held-for-sale		-		60,609		-		60,609
Interest rate lock commitments		-		-		1,887		1,887
Forward TBA mortgage-backed securities		-		1,790		-		1,790

	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:

	March 31, 2021
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans	$	-	$	-	$	-	$	-
Mortgage servicing rights		-		-		11,837		11,837

	December 31, 2020
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans	$	-	$	-	$	728	$	728
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%
Mortgage servicing rights	Discounted cash flows	Discount rate	10-15%
		Prepayment speeds	150-350%
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 three months ended March 31, 2021.

	Three Months Ended
	March 31,
	2021			2020
	Interest Rate Lock Commitments
	(In Thousands)
Beginning balance	$	6,017		$	554
Purchases and issuances		738			5,797
Sales and settlements		(4,868	)		(1,900	)
Ending balance	$	1,887		$	4,451
Net change in unrealized gains relating to items held at end of period	$	(4,130	)	$	3,897

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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.

	March 31, 2021
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	111,223	$	-	$	-	$	111,223	$	111,223
FHLB stock		1,977		-		-		1,977		1,977
FRB stock		2,974		-		-		2,974		2,974
Loans receivable, gross		-		-		837,384		837,384		829,339
Accrued interest and dividends receivable		5,451		-		-		5,451		5,451
Mortgage servicing rights		-		-		11,837		11,837		11,320
Financial liabilities:
Non-maturing interest-bearing deposits		-		596,695		-		596,695		596,695
Noninterest-bearing deposits		331,589		-		-		331,589		331,589
Time certificates of deposit		-		-		165,632		165,632		165,120
Accrued expenses and other liabilities		20,513		-		-		20,513		20,513
FHLB advances and other borrowings		-		-		11,955		11,955		11,862
Other long-term debt		-		-		29,408		29,408		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 three months ended March 31, 2021. The rate reductions add continued pressure on loan yields.

Recent Events

COVID-19

The Company’s performance for the first quarter of 2021 was strong due to higher mortgage banking operations, as a result of a historically low interest rate environment and substantial gains from loan sales. However, the Company also continues to see the impact of the COVID-19 pandemic and its consequences on our Montana communities. The Bank is focused on supporting our customers, communities and employees while prudently managing risk. The Bank is 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 customers receive $45.71 million in SBA PPP loans. The Bank has processed applications for PPP loan forgiveness for customers, with 576 loans representing $30.20 million now paid in full. The remaining 188 PPP loans represent $15.23 million.

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 offers 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. During the first quarter of 2021, Eagle supported 446 borrowers receiving $15.23 million in new PPP funding.

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 March 31, 2021: hotels and lodging (4.4%), health and social assistance (3.0%), bars and restaurants (3.0%), casinos (1.2%) 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 March 31, 2021, loan modifications for 41 nonresidential borrowers represented $27.83 million in loans, or 3.4% 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 32 borrowers for the MBOI program representing $27.25 million in loans, which are included in modification totals. 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 March 31, 2021 and December 31, 2020. No other loans that had been modified related to COVID-19 were reported as TDR’s due to the CARES Act exemption. As of March 31, 2021, there remain approximately 26 forbearances approved for residential mortgage loans, of which 24 are sold and serviced. Utilization of credit lines were 81.6% at the end of the first quarter compared to 82.7% at the end of the fourth quarter, which aligns with historical usage rates.

Our fee income could 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 March 31, 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 further and sustained 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. At March 31, 2021 we had goodwill of $20.80 million.

The Company is committed to assisting our customers and communities in this time of need, and as we start to reopen. The State of Montana ended their phased approach to reopening and lifted the state-wide mask mandate on February 12, 2021. However, counties are able to make their own health orders and require residents to wear masks. On March 22, 2021, all of our lobbies opened while still requiring everyone to practice necessary safeguards. Management is encouraging its employees to receive the COVID-19 vaccine upon availability.

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.

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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 March 31, 2021 and December 31, 2020.

Total assets were $1.31 billion at March 31, 2021, an increase of $53.79 million, or 4.3% from $1.26 billion at December 31, 2020. The increase was largely due to an increase in interest-bearing deposits in banks and securities available-for sale, partially offset by a decrease in loans receivable, net. Interest-bearing deposits increased by $39.44 million from December 31, 2020 and has been impacted by PPP loan payoffs and deposit growth. Securities available-for-sale increased by $17.33 million from December 31, 2020. Loans receivable, net decreased by $12.06 million from December 31, 2020. Total liabilities were $1.16 billion at March 31, 2021, an increase of $50.89 million, or 4.6%, 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 $60.32 million from December 31, 2020. However, FHLB advances and other borrowings decreased $5.21 million from December 31, 2020. Total shareholders’ equity increased by $2.89 million from December 31, 2020.

Financial Condition Details

Investment Activities

The following table summarizes investment activities:

	March 31,					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	$	2,106		1.17	%	$	2,245		1.38	%
U.S. treasury obligations		23,032		12.78			5,657		3.47
Municipal obligations		97,665		54.17			99,088		60.81
Corporate obligations		10,743		5.96			10,663		6.54
Mortgage-backed securities		7,077		3.93			7,669		4.71
Collateralized mortgage obligations		33,377		18.51			31,189		19.14
Asset-backed securities		6,276		3.48			6,435		3.95
Total securities available-for-sale	$	180,276		100.00	%	$	162,946		100.00	%

Securities available-for-sale were $180.28 million at March 31, 2021, an increase of $17.33 million, or 10.6%, from $162.95 million at December 31, 2020. The increase was largely due to $25.66 million in purchases, including $17.39 million of U.S. treasury obligations. The purchases were slightly offset by principal payments.

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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:

	March 31,						December 31,
	2021						2020
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Real estate loans:
Residential 1-4 family ⁽¹⁾	$	100,948			12.13	%	$	110,802			13.14	%
Residential 1-4 family construction		35,558			4.27			46,290			5.49
Total residential 1-4 family		136,506			16.40			157,092			18.63

Commercial real estate		329,772			39.65			316,668			37.56
Commercial construction and development		66,718			8.02			65,281			7.74
Farmland		67,592			8.13			65,918			7.82
Total commercial real estate		464,082			55.80			447,867			53.12

Total real estate loans		600,588			72.20			604,959			71.75

Other loans:
Home equity		53,270			6.40			56,563			6.71
Consumer		19,424			2.33			20,168			2.39

Commercial		108,956			13.10			109,209			12.95
Agricultural		49,642			5.97			52,242			6.20
Total commercial loans		158,598			19.07			161,451			19.15

Total other loans		231,292			27.80			238,182			28.25

Total loans		831,880			100.00	%		843,141			100.00	%

Deferred loan fees		(2,541	)					(2,038	)
Allowance for loan losses		(11,900	)					(11,600	)
Total loans, net	$	817,439					$	829,503

⁽¹⁾

Excludes loans held-for-sale.

Loans receivable, net decreased $12.06 million, or 1.5%, to $817.44 million at March 31, 2021 from $829.50 million at December 31, 2020. Total residential loans decreased $20.58 million, home equity loans decreased $3.29 million, total commercial loans decreased $2.85 million and consumer loans decreased $744,000. However, these decreases were partially offset by an increase in total commercial real estate loans of $16.21 million.

Total loan originations were $364.34 million for the three months ended March 31, 2021. Total residential 1-4 family originations were $275.43 million, which includes $267.17 million of loans held-for-sale originations. Total commercial real estate originations were $54.20 million. Total commercial originations were $30.22 million which includes $15.23 million of SBA PPP loans. Home equity loan originations totaled $2.66 million. Consumer loan originations totaled $1.83 million. Loans held-for-sale increased by $5.99 million to $60.61 million at March 31, 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 March 31, 2021 there was no 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:

	March 31,			December 31,
	2021			2020
	(Dollars in Thousands)
Nonaccrual loans
Real estate loans:
Residential 1-4 family	$	675		$	684
Residential 1-4 family construction		337			337
Commercial real estate		668			631
Commercial construction and development		-			36
Farmland		1,866			2,245
Other loans:
Home equity		93			94
Consumer		145			151
Commercial		546			537
Agricultural		1,327			1,542
Accruing loans delinquent 90 days or more
Real estate loans:
Residential 1-4 family		-			34
Residential 1-4 family construction		-			170
Farmland		147			-
Other loans:
Commercial		-			6
Agricultural		464			182
Restructured loans:
Real estate loans:
Commercial real estate		1,748			1,633
Commercial construction and development		-			14
Other loans:
Home equity		16			17
Agricultrual		79			160
Total nonperforming loans		8,111			8,473
Real estate owned and other repossessed property, net		-			25
Total nonperforming assets	$	8,111		$	8,498

Total nonperforming loans to total loans		0.98	%		1.00	%
Total nonperforming loans to total assets		0.62	%		0.67	%
Total allowance for loan loss to nonperforming loans		146.71	%		136.91	%
Total nonperforming assets to total assets		0.62	%		0.68	%

Nonaccrual loans as of March 31, 2021 and December 31, 2020 include $1.09 million and $1.28 million, respectively of acquired loans that deteriorated subsequent to the acquisition date.

As of March 31, 2021, loan modifications for 41 borrowers represented $27.83 million in loans compared to 40 borrowers representing $29.00 million as of December 31, 2020. As of March 31, 2021 there are approximately 26 forbearances remaining for residential mortgage loans, of which 24 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:

	March 31,					December 31,
	2021					2020
			Percent					Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Noninterest checking	$	331,589		30.32	%	$	318,389		30.82	%
Interest-bearing checking		174,840		15.99			160,614		15.55
Savings		197,748		18.09			179,868		17.41
Money market		224,107		20.49			202,407		19.59
Total		928,284		84.89			861,278		83.37
Certificates of deposit accounts:
IRA certificates		25,453		2.33			24,693		2.39
Brokered certificates		495		0.05			495		0.05
Other certificates		139,172		12.73			146,617		14.19
Total certificates of deposit		165,120		15.11			171,805		16.63
Total deposits	$	1,093,404		100.00	%	$	1,033,083		100.00	%

Deposits increased by $60.32 million, or 5.8%, to $1.09 billion at March 31, 2021 from $1.03 billion at December 31, 2020. Money market increased by $21.70 million, savings increased by $17.88 million, interest-bearing checking increased by $14.23 million, and noninterest checking increased by $13.20 million. Certificates of deposit decreased by $6.69 million. The decrease in time certificates of deposit was driven by a decrease in other certificates of $7.45 million. Due to the low interest rate environment, some depositors were compelled to move funds from other certificates to non-maturity deposits upon maturity.

The following table summarizes borrowing activity:

	March 31,					December 31,
	2021					2020
	Net		Percent			Net		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
FHLB advances and other borrowings	$	11,862		28.46	%	$	17,070		36.43	%
Other long-term debt:
Senior notes fixed at 5.75%, due 2022		9,963		23.91			9,952		21.23
Subordinated debentures fixed at 5.50% to floating, due 2030		14,693		35.26			14,684		31.34
Subordinated debentures variable, due 2035		5,155		12.37			5,155		11.00
Total other long-term debt		29,811		71.54			29,791		63.57
Total borrowings	$	41,673		100.00	%	$	46,861		100.00	%

FHLB advances and other borrowings decreased by $5.21 million, or 30.5% to $11.86 million at March 31, 2021 from $17.07 million at December 31, 2020. The decrease was primarily due to maturities of FHLB advances.

Shareholders’ Equity

Total shareholders’ equity increased $2.89 million, or 1.9%, to $155.83 million at March 31, 2021 from $152.94 million at December 31, 2020. This was primarily due to net income of $5.27 million. The increase in net income was partly offset by other comprehensive loss of $1.90 million and dividends paid of $661,000.

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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.

	For the Three Months Ended March 31,
	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:
Investment securities	$	163,423	$	877		2.18	%	$	171,263	$	1,027		2.41	%
FHLB and FRB stock		4,947		69		5.66			7,371		94		5.12
Loans receivable⁽¹⁾		890,042		11,029		5.03			840,427		11,432		5.46
Other earning assets		79,620		26		0.13			19,973		78		1.57
Total interest-earning assets		1,138,032		12,001		4.28			1,039,034		12,631		4.88
Noninterest-earning assets		138,933							114,701
Total assets	$	1,276,965						$	1,153,735

Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts:
Checking	$	171,721	$	10		0.02	%	$	133,829	$	18		0.05	%
Savings		182,566		27		0.06			139,302		46		0.13
Money market		215,138		110		0.21			151,392		176		0.47
Certificates of deposit		168,321		255		0.61			254,512		1,099		1.73
Advances from FHLB and other borrowings including long-term debt		44,375		460		4.20			112,758		815		2.90
Total interest-bearing liabilities		782,121		862		0.45			791,793		2,154		1.09
Noninterest checking		317,036							213,753
Other noninterest-bearing liabilities		21,837							15,837
Total liabilities		1,120,994							1,021,383

Total equity		155,971							132,352

Total liabilities and equity	$	1,276,965						$	1,153,735
Net interest income/interest rate spread⁽²⁾			$	11,139		3.83	%			$	10,477		3.79	%

Net interest margin⁽³⁾						3.97	%						4.04	%
Total interest-earning assets to interest-bearing liabilities						145.51	%						131.23	%

⁽¹⁾Includes loans held-for-sale.

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis

The following tables present the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume multiplied by the old rate; (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume, which have been allocated proportionately to the change due to volume and the change due to rate.

	For the Three Months Ended March 31,
	2021									2020
				Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest-earning assets:
Investment securities	$	(47	)	$	(103	)	$	(150	)	$	207		$	(138	)	$	69
FHLB and FRB stock		(31	)		6			(25	)		3			(4	)		(1	)
Loans receivable⁽¹⁾		675			(1,078	)		(403	)		1,573			(189	)		1,384
Other earning assets		233			(285	)		(52	)		78			(20	)		58
Total interest-earning assets		830			(1,460	)		(630	)		1,861			(351	)		1,510

Interest-bearing liabilities:
Checking, savings and money market accounts		93			(186	)		(93	)		27			91			118
Certificates of deposit		(372	)		(472	)		(844	)		200			234			434
Advances from FHLB and other borrowings including long-term debt		(494	)		139			(355	)		(97	)		(47	)		(144	)
Total interest-bearing liabilities		(773	)		(519	)		(1,292	)		130			278			408

Change in net interest income	$	1,603		$	(941	)	$	662		$	1,731		$	(629	)	$	1,102

⁽¹⁾Includes loans held-for-sale.

Results of Operations for the Three Months Ended March 31, 2021 and 2020

Net Income. Eagle’s net income for the three months ended March 31, 2021 was $5.27 million compared to $3.93 million for the three months ended March 31, 2020. The increase of $1.34 million was due to an increase in noninterest income of $5.09 million and an increase in net interest income after loan loss provision of $1.03 million, partially offset by an increase in noninterest expense of $4.36 million and an increase in provision for income taxes of $1.76 million. Basic and diluted earnings per share were both $0.78 for the current period. Basic earnings per share was $0.58 and diluted earnings per share was $0.57 for the prior year comparable period.

Net Interest Income. Net interest income increased to $11.14 million for the three months ended March 31, 2021, from $10.48 million for the same quarter in the prior year. The increase of $662,000, or 6.3%, was the result of a decrease in interest expense of $1.29 million, partially offset by a decrease in interest and dividend income of $630,000.

Interest and Dividend Income. Interest and dividend income was $12.00 million for the three months ended March 31, 2021, compared to $12.63 million for the three months ended March 31, 2020, a decrease of $630,000 or 5.0%. Interest and fees on loans decreased to $11.03 million for the three months ended March 31, 2021 from $11.43 million for the three months ended March 31, 2020. This decrease of $403,000, or 3.5%, was due to decrease in the average yield of loans for the quarter ended March 31, 2021 partially offset by an increase in the average balance of loans. Net fee income of $1.53 million earned on PPP loans for the three months ended March 31, 2021, along with the 1.0% contractual rate on PPP loans contributed to the downward push on loan yield. The average interest rate earned on loans receivable decreased by 43 basis points, from 5.46% to 5.03%. Interest accretion on purchased loans was $189,000 for the three months ended March 31, 2021 which resulted in a 7 basis point increase in net interest margin compared to $558,000 for the three months ended March 31, 2020 which resulted in a 22 basis point increase in net interest margin. Average balances for loans receivable, including loans held-for-sale, for the three months ended March 31, 2021 were $890.04 million, compared to $840.43 million for the prior year period. This represents an increase of $49.61 million, or 5.9% and was impacted by PPP loans and organic growth. Interest and dividends on investment securities available-for-sale decreased by $150,000, or 14.6% period over period. Average interest rates earned on investments decreased to 2.18% for the three months ended March 31, 2021 from 2.41% for the three months ended March 31, 2020. In addition, average balances for investments decreased to $163.42 million for the three months ended March 31, 2021, from $171.26 million for the three months ended March 31, 2020.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Three Months Ended March 31, 2021 and 2020 – continued

Interest Expense. Total interest expense was $862,000 for the three months ended March 31, 2021 compared to $2.15 million for the three months ended March 31, 2020. The decrease of $1.29 million or 60.0% was due to a decrease in interest expense on deposits of $937,000, as well as a net decrease in interest expense on total borrowings of $355,000. The average balance for total deposits was $1.05 billion for three months ended March 31, 2021 compared to $892.79 million for the three months ended March 31, 2020. This increase was impacted by PPP funding and economic stimulus. However, the overall average rate on total deposits was 0.15% for the three months ended March 31, 2021 compared to 0.60% for the three months ended March 31, 2020. The average rate paid on total borrowings increased from 2.90% for the three months ended March 31, 2020, to 4.20% for the three months ended March 31, 2021. However, the average balance for total borrowings decreased from $112.76 million for the three months ended March 31, 2020 to $44.38 million for the three months ended March 31, 2021 due to increased liquidity levels.

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 $299,000 in loan loss provisions for the three months ended March 31, 2021. Loan loss provisions were $670,000 for the three months ended March 31, 2020, which included $220,000 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 $13.39 million for the three months ended March 31, 2021, compared to $8.30 million for the three months ended March 31, 2020. The increase of $5.09 million is largely due to an increase in net gain on sale of loans which increased $8.87 million, partially offset by a decrease in mortgage banking, net of $4.11 million. During the three months ended March 31, 2021, $260.49 million residential mortgage loans were sold compared to $132.12 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the three months ended March 31, 2021 was 5.48% compared to 4.10% for the three months ended March 31, 2020.

Noninterest Expense. Noninterest expense was $17.21 million for the three months ended March 31, 2021 compared to $12.85 million for the three months ended March 31, 2020. The increase of $4.36 million or 33.9% is primarily due to increased salaries and employee benefits expense of $4.41 million. The increase in salaries expense is due in part to higher commission-based compensation related to mortgage loan growth and additional staff. Mortgage compensation and benefits increased $3.63 million for the three months ended March 31, 2021 compared to the same period in the prior year.

Provision for Income Taxes. Provision for income taxes was $1.76 million for the three months ended March 31, 2021, compared to $1.34 million for the three months ended March 31, 2020 due to increased income before provision for income taxes. The effective tax rate for the three months ended March 31, 2021 was 25.0% compared to 25.4% for the three months ended March 31, 2020.

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 ratios as of March 31, 2021 and December 31, 2020.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources - continued

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 quarter ended March 31, 2021, the liquidity level has steadily increased, as a result of PPP loan payoffs and deposit growth.

Capital Resources

As of March 31, 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 23.3% 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 March 31, 2021. The Bank's Tier I leverage ratio increased slightly from 11.72% as of December 31, 2020 to 11.94% as of March 31, 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 17.33%, 16.08% and 16.08%, 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.

	March 31, 2021
	(Unaudited)
	Dollar		% of
	Amount		Assets
	(Dollars in Thousands)
Total risk-based capital to risk weighted assets:
Actual capital level	$	159,007		17.33	%
Minimum required for capital adequacy purposes		96,333		10.50
Excess capital	$	62,674		6.83	%

Tier I capital to risk weighted assets:
Actual capital level	$	147,533		16.08	%
Minimum required for capital adequacy purposes		77,984		8.50
Excess capital	$	69,549		7.58	%

Common equity tier I capital to risk weighted assets:
Actual capital level	$	147,533		16.08	%
Minimum required for capital adequacy purposes		64,222		7.00
Excess capital	$	83,311		9.08	%

Tier I capital to adjusted total average assets:
Actual capital level	$	147,533		11.94	%
Minimum required for capital adequacy purposes		49,414		4.00
Excess capital	$	98,119		7.94	%

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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 March 31, 2021		Policy
(Basis Points)	Year 1	Year 2	Limits

+200	8.00%	12.30%	-15.00%
-100	-3.10%	-7.50%	-10.00%

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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 March 31, 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.

On July 23, 2020, Eagle's Board of Directors (the "Board") authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. 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 the first quarter of 2021. The plan expires 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 repurchase 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


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

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

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

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

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

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

101.INS	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)

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

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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: May 6, 2021	By:	/s/ Peter J. Johnson
		Peter J. Johnson
		President/CEO



Date: May 6, 2021	By:	/s/ Laura F. Clark
		Laura F. Clark
		Executive Vice President/CFO/COO

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