Eagle Bancorp Montana, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Eagle Bancorp Montana, Inc.	ex_184886.htm
EX-31.2 - EXHIBIT 31.2 - Eagle Bancorp Montana, Inc.	ex_184885.htm
EX-31.1 - EXHIBIT 31.1 - Eagle Bancorp Montana, Inc.	ex_184845.htm
EX-10.2 - EXHIBIT 10.2 - Eagle Bancorp Montana, Inc.	ex_184908.htm
EX-10.1 - EXHIBIT 10.1 - Eagle Bancorp Montana, Inc.	ex_184907.htm

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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, 2020

☐	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	The Nasdaq Stock Market LLC

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APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

Common stock, par value $0.01 per share

6,818,883 shares outstanding

As of May 11, 2020

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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PART I.	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition as of March 31, 2020 and December 31, 2019	1

	Consolidated Statements of Income for the three months ended March 31, 2020 and 2019	3

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019	5

	Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2020 and 2019	6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	7

	Notes to the Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	50

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53

Signatures		54

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Note Regarding Forward-Looking Statements

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

●	statements of our goals, intentions and expectations;

●	statements regarding our business plans, prospects, growth and operating strategies;

●	statements regarding the 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 recent outbreak of the novel coronavirus, or COVID-19, 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;

●

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, 2019, any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	March 31,		December 31,
	2020		2019
ASSETS:
Cash and due from banks	$	11,544	$	18,094
Interest bearing deposits in banks		8,229		4,284
Federal funds sold		-		2,540
Total cash and cash equivalents		19,773		24,918

Securities available-for-sale, at fair value		167,904		126,875
Federal Home Loan Bank ("FHLB") stock		5,161		4,683
Federal Reserve Bank ("FRB") stock		2,601		2,526
Mortgage loans held-for-sale, at fair value		25,187		25,612
Loans receivable, net of allowance for loan losses of $9,250 at March 31, 2020 and $8,600 at December 31, 2019		812,784		770,635
Accrued interest and dividends receivable		5,329		4,577
Mortgage servicing rights, net		9,018		8,739
Premises and equipment, net		51,731		40,082
Cash surrender value of life insurance, net		25,898		23,608
Goodwill		20,798		15,836
Core deposit intangible, net		2,832		2,786
Other assets		9,584		3,383

Total assets	$	1,158,600	$	1,054,260

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	March 31,			December 31,
	2020			2019
LIABILITIES:
Deposit accounts:
Noninterest bearing	$	223,723		$	200,035
Interest bearing		664,502			608,958
Total deposits		888,225			808,993

Accrued expenses and other liabilities		17,067			9,825
Deferred tax liability, net		58			492
FHLB advances and other borrowings		94,585			88,350
Other long-term debt:
Principal amount		25,155			25,155
Unamortized debt issuance costs		(198	)		(214	)
Total other long-term debt, net		24,957			24,941

Total liabilities		1,024,892			932,601

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 and 6,714,983 shares issued; 6,818,883 and 6,423,033 shares outstanding at March 31, 2020 and December 31, 2019, respectively)		71			67
Additional paid-in capital		77,399			68,826
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")		(269	)		(311	)
Treasury stock, at cost		(3,643	)		(3,643	)
Retained earnings		58,670			55,391
Accumulated other comprehensive income, net of tax		1,480			1,329
Total shareholders' equity		133,708			121,659

Total liabilities and shareholders' equity	$	1,158,600		$	1,054,260

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended
	March 31,
	2020		2019
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	11,432	$	10,048
Securities available-for-sale		1,027		958
FHLB and FRB dividends		94		95
Other interest income		78		20
Total interest and dividend income		12,631		11,121

INTEREST EXPENSE:
Deposits		1,339		787
FHLB advances and other borrowings		463		594
Other long-term debt		352		365
Total interest expense		2,154		1,746

NET INTEREST INCOME		10,477		9,375

Loan loss provision		670		604

NET INTEREST INCOME AFTER LOAN LOSS PROVISION		9,807		8,771

NONINTEREST INCOME:
Service charges on deposit accounts		316		261
Net gain on sale of loans		5,411		2,599
Mortgage banking, net		1,602		365
Interchange and ATM fees		337		275
Appreciation in cash surrender value of life insurance		160		157
Net loss on sale of available-for-sale securities		-		(55	)
Other noninterest income		478		92
Total noninterest income		8,304		3,694

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended
	March 31,
	2020		2019
NONINTEREST EXPENSE:
Salaries and employee benefits	$	7,682	$	5,992
Occupancy and equipment expense		1,209		1,034
Data processing		1,250		928
Advertising		249		268
Amortization		164		254
Loan costs		247		135
Federal Deposit Insurance Corporation ("FDIC") insurance premiums		69		60
Postage		98		68
Professional and examination fees		285		305
Acquisition costs		128		1,171
Other noninterest expense		1,467		806
Total noninterest expense		12,848		11,021

INCOME BEFORE PROVISION FOR INCOME TAXES		5,263		1,444

Provision for income taxes		1,336		261

NET INCOME	$	3,927	$	1,183

BASIC EARNINGS PER SHARE	$	0.58	$	0.18

DILUTED EARNINGS PER SHARE	$	0.57	$	0.18

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2020			2019

NET INCOME	$	3,927		$	1,183

OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS) BEFORE TAX:
Change in fair value of investment securities available-for-sale		205			1,486
Reclassification for net realized losses on investment securities available-for-sale		-			55
Change in fair value of loans held-for-sale		-			296
Reclassification for net realized gains on loans held-for-sale		-			(309	)
Total other items of comprehensive income		205			1,528

Income tax (provision) benefit related to:
Investment securities		(54	)		(407	)
Loans held-for-sale		-			4
Total income tax provision		(54	)		(403	)

COMPREHENSIVE INCOME	$	4,078		$	2,308

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended March 31, 2020 and 2019

(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 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

Balance at January, 1 2019	$	-	$	57	$	52,051	$	(477	)	$	(2,640	)	$	46,926		$	(1,111	)	$	94,806
Net income		-		-		-		-			-			1,183			-			1,183
Other comprehensive income		-		-		-		-			-			-			1,125			1,125
Dividends paid ($0.0925 per share)		-		-		-		-			-			(597	)		-			(597	)
Stock issued in connection with Big Muddy Bancorp, Inc. acquisition		-		10		16,425		-			-			-			-			16,435
ESOP shares allocated (4,154 shares)		-		-		30		42			-			-			-			72
Treasury stock purchased (42,000 shares at $17.43 average cost per share)		-		-		-		-			(732	)		-			-			(732	)
Balance at March 31, 2019	$	-	$	67	$	68,506	$	(435	)	$	(3,372	)	$	47,512		$	14		$	112,292

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,927		$	1,183
Adjustments to reconcile net income to net cash provided by operating activities:
Loan loss provision		670			604
Impairment of servicing rights		153			-
Depreciation		574			417
Net amortization of investment securities premiums and discounts		280			280
Amortization of mortgage servicing rights		511			247
Amortization of right-of-use assets		117			119
Amortization of core deposit intangible and tax credits		164			254
Compensation expense related to restricted stock awards		70			-
ESOP compensation expense for allocated shares		82			72
Deferred income tax benefit		(23	)		(589	)
Net gain on sale of loans		(5,411	)		(2,599	)
Originations of loans held-for-sale		(132,225	)		(72,293	)
Proceeds from sales of loans held-for-sale		138,061			74,122
Net loss on sale of available-for-sale securities		-			55
Net loss on sale of real estate owned and other repossessed assets		-			37
Net gain on sale/disposal of premises and equipment		(4	)		-
Net appreciation in cash surrender value of life insurance		(160	)		(157	)
Net change in:
Accrued interest and dividends receivable		256			(270	)
Other assets		(6,042	)		353
Accrued expenses and other liabilities		2,688			(552	)
Net cash provided by operating activities		3,688			1,283

CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		-			3,900
Maturities, principal payments and calls		4,106			2,919
Purchases		(1,500	)		(1,513	)
FHLB stock (purchased) redeemed		(263	)		468
FRB stock purchased		-			(7	)
Net cash received from acquisitions		7,744			6,901
Loan origination and principal collection, net		(371	)		(22,583	)
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans		-			70
Purchases of premises and equipment, net		(11,596	)		(1,850	)
Net cash used in investing activities		(1,880	)		(11,695	)

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2020			2019
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits	$	(10,040	)	$	21,728
Net short-term advances (payments) on FHLB and other borrowings		7,910			(11,047	)
Long-term advances from FHLB and other borrowings		10,000			18,000
Payments on long-term FHLB and other borrowings		(14,175	)		(16,862	)
Purchase of treasury stock		-			(732	)
Dividends paid		(648	)		(597	)
Net cash (used in) provided by financing activities		(6,953	)		10,490

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(5,145	)		78

CASH AND CASH EQUIVALENTS, beginning of period		24,918			11,201

CASH AND CASH EQUIVALENTS, end of period	$	19,773		$	11,279


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	2,172		$	1,613
Cash paid during the period for income taxes	$	-		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in fair value of securities available-for-sale	$	205		$	1,541
Mortgage servicing rights recognized	$	943		$	465
Right-of-use assets obtained in exchange for lease liabilities	$	-		$	2,461
Loans transferred to real estate and other assets acquired in foreclosure	$	34		$	131
Stock issued in connection with acquisitions	$	8,467		$	16,435

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

In August 2019, Eagle and OBMT, entered into an Agreement and Plan of Merger with 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. 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.

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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2019, as filed with the SEC on March 11, 2020. 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, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or any other period. In preparing 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 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 consolidated financial statements include Eagle, the Bank, Eagle Bancorp Statutory Trust I (the “Trust”) and Western Financial Services, Inc. (“WFS”). WFS was acquired through the WHC merger. All significant intercompany transactions and balances have been eliminated in consolidation.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Reclassifications

Certain prior period amounts were reclassified to conform to the presentation for 2020. These reclassifications had no impact on net income or shareholders’ equity.

Subsequent Events

The Company has evaluated events and transactions subsequent to March 31, 2020 for recognition and/or disclosure.

On March 28, 2020 the State of Montana implemented a Shelter-in-Place order related to the COVID-19 pandemic. This resulted in a substantial reduction is business activity and in some cases the temporary closing of certain businesses. The order was lifted effective April 27, 2020, including the beginning of a phased approach to re-open businesses. The Bank is closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been affected.

Ongoing impact of COVID-19 on business operations:

■

Loan Accommodations – The bank is offering multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. As of April 30, 2020, there were 185 loans totaling $69,131,000 deferring payments for 90 days, primarily from the real estate rental, accommodation and food services, and the art, entertainment and recreation industries. Approximately 113 borrowers representing $45,375,000 in loans have been approved for up to 6-months interest only payments. There have been approximately 116 forbearances in process for residential mortgage loans totaling $23,921,000.

■

Payroll Protection Program – On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) providing economic relief for the country, including the 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 April 30, 2020, had received approvals for $43,808,000 in SBA PPP loans, with 471 loans funded for $31,287,000.

■

Liquidity Changes – Subsequent to the end of the quarter and in coordination with the roll out of the PPP, Eagle was approved for short-term funding through the FRB Discount Window. The discount window has not been utilized; however, a new funding facility through the FRB called Payroll Protection Program Loan Funding (“PPPLF”) was made available and the Bank has received approval to collateralize with pools of PPP loans for funding. As of April 30, 2020, the Bank had $24,065,000 in PPPLF borrowings secured by 334 PPP loans at a rate of 0.35%. As the PPP loans are repaid, it is currently anticipated Eagle will repay the FRB borrowings.

NOTE 2. MERGERS AND ACQUISITIONS

Effective January 1, 2019, Eagle completed its merger with BMB. The transaction provided an opportunity to expand market presence and lending activities throughout the state. The acquisition closed after receipt of approvals from regulatory authorities, approval of BMB shareholders and the satisfaction of other closing conditions. The total consideration paid was $16,436,000 and included cash consideration of $1,000 and common stock issued of $16,435,000.

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.

These transactions were accounted for under the acquisition method of accounting.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. MERGERS AND ACQUISITIONS – continued

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		BMB
	January 1,		January 1,
	2020		2019
	(In Thousands)
Assets acquired:
Cash and cash equivalents	$	14,244	$	6,902
Securities available-for-sale		43,710		2,096
Loans receivable		43,424		89,204
Premises and equipment		740		2,246
Cash surrender value of life insurance		2,131		2,862
Other real estate owned		-		223
Core deposit intangible		208		1,988
Other assets		1,874		1,995
Total assets acquired	$	106,331	$	107,516

Liabilities assumed:
Deposits	$	89,272	$	92,706
Accrued expenses and other liabilities		4,554		1,960
Other borrowings		2,500		-
Total liabilities assumed	$	96,326	$	94,666

Net assets acquired	$	10,005	$	12,850

Consideration paid:
Cash	$	6,500	$	1
Common stock issued (395,850 shares WHC and 996,041 shares BMB)		8,467		16,435
Total consideration paid	$	14,967	$	16,436

Goodwill resulting from acquisition	$	4,962	$	3,586

Goodwill recorded for the WHC acquisition during the three months ended March 31, 2020 was provisionally $4,962,000 due to the timing of the transaction. Amounts may be subject to change due to retrospective measurement period adjustments based on new information. Goodwill recorded for the BMB acquisition during the three months ended March 31, 2019 was $3,586,000. Certain estimates that existed at January 1, 2019 were realized and a final true up of $126,000 was recorded to goodwill during the three months ended December 31, 2019. The final goodwill recorded related to the BMB acquisition was $3,712,000.

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. BMB investment fair value adjustments were considered insignificant.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO 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 three months ended March 31, 2020, accretion of the loan discount was $130,000. The remaining accretable loan discount was $1,036,000 as of March 31, 2020.

The total accretable discount on BMB acquired loans was $2,813,000 as of January 1, 2019. During the year ended December 31, 2019, accretion of the loan discount was $1,480,000. During the three months ended March 31, 2020, accretion of the loan discount was $119,000. The remaining accretable loan discount was $1,214,000 as of March 31, 2020.

One impaired loan was acquired through the WHC acquisition with an insignificant balance as of January 1, 2020. Four impaired loans were acquired through the BMB acquisition with a net balance of $556,000 as of January 1, 2019. The balance of the acquired impaired loans as of March 31, 2020 was $134,000.

Fair value adjustments of $590,000 and $276,000 were recorded for WHC and BMB, respectively, 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. Core deposit intangible assets of $1,988,000 were recorded for BMB and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years.

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 acquisitions were expensed as incurred. The Company recorded acquisition costs related to WHC of $128,000 during the three months ended March 31, 2020 and $818,000 during the years ended December 31, 2019. The Company recorded acquisition costs related to BMB of $1,380,000 and $804,000 during the years ended December 31, 2019 and 2018, respectively. Acquisition costs included professional fees and data processing expenses incurred related to the acquisitions.

Operations of WHC have been included in the consolidated financial statements since January 1, 2020. The Company does not consider WHC a separate reporting segment and does not track the amount of revenues and net income attributable to WHC since acquisition. As such, it is impracticable to determine such amounts for the period from January 1, 2020 through March 31, 2020.

Operations of BMB have been included in the consolidated financial statements since January 1, 2019. The Company does not consider BMB a separate reporting segment and does not track the amount of revenues and net income attributable to BMB since acquisition. As such, it is impracticable to determine such amounts for the period from January 1, 2019 through March 31, 2020.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. MERGERS AND ACQUISITIONS – continued

The accompanying consolidated statements of income include the results of operations of WHC since the January 1, 2020 acquisition date. The following table presents unaudited pro forma results of operations for the three months ended March 31, 2019 as if the acquisition had occurred on January 1, 2019. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of WHC on January 1, 2019. Cost savings are also not reflected in the unaudited pro forma amounts for the three months ended March 31, 2019.

	Three Months Ended
	March 31, 2019
	(Dollars in Thousands, Except Per Share Data)
Pro forma net income⁽¹⁾
Net interest income after loan loss provision	$	9,486
Noninterest income		3,983
Noninterest expense		11,710
Income before provision for income taxes		1,759
Income tax provision		352
Net income	$	1,407

Pro forma earnings per share⁽¹⁾
Basic earnings per share	$	0.22
Diluted earnings per share	$	0.22

Basic weighted average shares outstanding		6,450,326
Diluted weighted average shares outstanding		6,510,486

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

	March 31, 2020									December 31, 2019
			Gross									Gross
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
	(In Thousands)
Available-for-Sale:
U.S. government and agency obligations	$	15,257	$	610	$	-		$	15,867	$	13,318	$	279	$	-		$	13,597
Municipal obligations		70,685		2,117		(118	)		72,684		50,699		1,616		(93	)		52,222
Corporate obligations		8,349		24		(304	)		8,069		8,356		40		(8	)		8,388
Mortgage-backed securities		10,066		95		(33	)		10,128		9,460		56		(21	)		9,495
Collateralized mortgage obligations		44,040		1,375		(287	)		45,128		33,129		297		(92	)		33,334
Asset-backed securities		17,499		-		(1,471	)		16,028		10,110		-		(271	)		9,839
Total	$	165,896	$	4,221	$	(2,213	)	$	167,904	$	125,072	$	2,288	$	(485	)	$	126,875

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

	Three Months Ended
	March 31,
	2020		2019
	(In Thousands)

Proceeds from sale of available-for-sale securities	$	-	$	3,900

Gross realized gain on sale of available-for-sale securities	$	-	$	11
Gross realized loss on sale of available-for-sale securities		-		(66	)
Net realized loss on sale of available-for-sale securities	$	-	$	(55	)

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES – continued

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, 2020
	Amortized		Fair
	Cost		Value
	(In Thousands)

Due in one year or less	$	11,771	$	11,811
Due from one to five years		16,110		15,962
Due from five to ten years		15,575		16,150
Due after ten years		68,334		68,725
		111,790		112,648
Mortgage-backed securities		10,066		10,128
Collateralized mortgage obligations		44,040		45,128
Total	$	165,896	$	167,904

As of March 31, 2020 and December 31, 2019 securities with a fair value of $28,345,353 and $18,897,000, 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, 2020
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In Thousands)
Municipal obligations	$	9,520	$	(118	)	$	-	$	-
Corporate obligations		5,036		(304	)		-		-
Mortgage-backed securities and collateralized mortgage obligations		13,815		(291	)		2,740		(29	)
Asset-backed securities		6,967		(478	)		9,061		(993	)
Total	$	35,338	$	(1,191	)	$	11,801	$	(1,022	)

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES – continued

	December 31, 2019
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In Thousands)
Municipal obligations	$	11,142	$	(93	)	$	-	$	-
Corporate obligations		-		-			992		(8	)
Mortgage-backed securities and collateralized mortgage obligations		9,868		(35	)		7,968		(78	)
Asset-backed securities		940		(33	)		8,900		(238	)
Total	$	21,950	$	(161	)	$	17,860	$	(324	)

Unrealized losses associated with investments are believed to be caused by changing market conditions, primarily spreads related to U.S. treasuries, that are considered to be temporary and the Company does not intend to sell the securities, and it is not likely to be required to sell these securities prior to maturity. Based on the Company’s evaluation of these securities, no other-than-temporary impairment was recorded for the three months ended March 31, 2020, or 2019. As of March 31, 2020 and December 31, 2019, there were, respectively, 58 and 28 securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

As of March 31, 2020, 27 U.S. government and agency securities and municipal obligations had unrealized losses of approximately 1.22% of the fair value associated with these securities. At December 31, 2019, 10 U.S. government and agency securities and municipal obligations had unrealized losses of approximately 0.83% of the fair value associated with these securities. As of March 31, 2020, 6 corporate obligations had unrealized losses of approximately 5.69% of the fair value associated with these securities. At December 31, 2019, 1 corporate obligation had an unrealized loss of approximately 0.80% of the fair value associated with these securities. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

As of March 31, 2020, 15 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses of approximately 1.90% of the fair value associated with these securities. At December 31, 2019, 12 MBSs and CMOs had unrealized losses of approximately 0.63% of the fair value associated with these securities. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

As of March 31, 2020, 10 asset-backed securities (“ABSs”) had unrealized losses of approximately 8.41% of the fair value associated with these securities. At December 31, 2019, 5 ABSs had unrealized losses of approximately 2.68% of the fair value associated with these securities. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE

Loans receivable consisted of the following:

	March 31,			December 31,
	2020			2019
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	160,047		$	157,898
Commercial real estate		455,620			434,025

Other loans:
Home equity		57,752			56,414
Consumer		19,924			18,882
Commercial		129,876			113,319

Total		823,219			780,538

Deferred loan fees, net		(1,185	)		(1,303	)
Allowance for loan losses		(9,250	)		(8,600	)
Total loans, net	$	812,784		$	770,635

Within the loan categories above, $11,610,000 and $13,602,000 was guaranteed by the United States Department of Agriculture Rural Development at March 31, 2020 and December 31, 2019, respectively. Also within the loan categories above, $8,686,000 and $5,701,000 was guaranteed by the United States Department of Agriculture Farm Service Agency at March 31, 2020 and December 31, 2019, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

Allowance for loan losses activity was as follows:

	Residential		Commercial			Home
	1-4 Family		Real Estate			Equity		Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, 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

	Residential		Commercial			Home
	1-4 Family		Real Estate			Equity		Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, January, 1 2019	$	1,301	$	3,593		$	477	$	190		$	1,039		$	6,600
Charge-offs		-		(20	)		-		(9	)		(95	)		(124	)
Recoveries		-		6			-		6			8			20
Provision		-		344			-		10			250			604
Ending balance, March 31, 2019	$	1,301	$	3,923		$	477	$	197		$	1,202		$	7,100

Ending balance, March 31, 2019 allocated to loans individually evaluated for impairment	$	-	$	-		$	-	$	-		$	-		$	-

Ending balance, March 31, 2019 allocated to loans collectively evaluated for impairment	$	1,301	$	3,923		$	477	$	197		$	1,202		$	7,100

Loans receivable:
Ending balance, March 31, 2019	$	144,313	$	394,988		$	54,637	$	19,043		$	116,122		$	729,103

Ending balance, March 31, 2019 of loans individually evaluated for impairment	$	984	$	1,239		$	433	$	129		$	1,743		$	4,528

Ending balance, March 31, 2019 of loans collectively evaluated for impairment	$	143,329	$	393,749		$	54,204	$	18,914		$	114,379		$	724,575

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

Internal classification of the loan portfolio was as follows:

	March 31, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	121,510	$	-	$	1,140	$	-	$	-	$	122,650
Residential 1-4 family construction		37,060		-		337		-		-		37,397
Commercial real estate		334,121		185		2,913		-		-		337,219
Commercial construction and development		55,756		94		-		-		-		55,850
Farmland		61,645		83		770		53		-		62,551
Other loans:
Home equity		57,517		99		136		-		-		57,752
Consumer		19,745		-		179		-		-		19,924
Commercial		76,043		958		697		-		-		77,698
Agricultural		50,740		121		881		436		-		52,178
Total	$	814,137	$	1,540	$	7,053	$	489	$	-	$	823,219

	December 31, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	118,116	$	-	$	1,180	$	-	$	-	$	119,296
Residential 1-4 family construction		38,265		-		337		-		-		38,602
Commercial real estate		328,750		-		2,312		-		-		331,062
Commercial construction and development		52,620		-		50		-		-		52,670
Farmland		49,959		108		168		58		-		50,293
Other loans:
Home equity		56,039		78		297		-		-		56,414
Consumer		18,694		-		188		-		-		18,882
Commercial		71,868		159		707		63		-		72,797
Agricultural		39,347		138		570		467		-		40,522
Total	$	773,658	$	483	$	5,809	$	588	$	-	$	780,538

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

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

	March 31, 2020
	Loans Past Due and Still Accruing
			90 Days
	30-89 Days		and				Non-Accrual		Current		Total
	Past Due		Greater		Total		Loans		Loans		Loans
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	1,656	$	127	$	1,783	$	737	$	120,130	$	122,650
Residential 1-4 family construction		32		99		131		337		36,929		37,397
Commercial real estate		2,863		-		2,863		971		333,385		337,219
Commercial construction and development		70		-		70		-		55,780		55,850
Farmland		371		379		750		1,050		60,751		62,551
Other loans:
Home equity		169		-		169		136		57,447		57,752
Consumer		133		-		133		179		19,612		19,924
Commercial		327		210		537		707		76,454		77,698
Agricultural		228		128		356		782		51,040		52,178
Total	$	5,849	$	943	$	6,792	$	4,899	$	811,528	$	823,219

	December 31, 2019
	Loans Past Due and Still Accruing
			90 Days
	30-89 Days		and				Non-Accrual		Current		Total
	Past Due		Greater		Total		Loans		Loans		Loans
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	702	$	4	$	706	$	618	$	117,972	$	119,296
Residential 1-4 family construction		260		-		260		337		38,005		38,602
Commercial real estate		793		-		793		583		329,686		331,062
Commercial construction and development		72		-		72		50		52,548		52,670
Farmland		1,039		-		1,039		476		48,778		50,293
Other loans:
Home equity		420		-		420		98		55,896		56,414
Consumer		128		-		128		156		18,598		18,882
Commercial		484		-		484		824		71,489		72,797
Agricultural		702		1,805		2,507		499		37,516		40,522
Total	$	4,600	$	1,809	$	6,409	$	3,641	$	770,488	$	780,538

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

The following tables include information regarding impaired loans.

	March 31, 2020
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	737	$	793	$	-
Residential 1-4 family construction		337		387		-
Commercial real estate		971		1,170		-
Commercial construction and development		94		94		-
Farmland		1,050		1,092		-
Other loans:
Home equity		136		157		-
Consumer		179		195		-
Commercial		707		750		74
Agricultural		782		1,047		-
Total	$	4,993	$	5,685	$	74

	December 31, 2019
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	618	$	657	$	-
Residential 1-4 family construction		337		387		-
Commercial real estate		583		766		-
Commercial construction and development		50		225		-
Farmland		476		513		-
Other loans:
Home equity		98		115		-
Consumer		156		169		-
Commercial		824		887		74
Agricultural		499		756		-
Total	$	3,641	$	4,475	$	74

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

	Three Months Ended
	March 31,
	2020		2019
	Average Recorded Investment
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	677	$	301
Residential 1-4 family construction		337		634
Commercial real estate		777		490
Commercial construction and development		72		7
Farmland		763		346
Other loans:
Home equity		117		462
Consumer		167		128
Commercial		766		563
Agricultural		641		478
Total	$	4,317	$	3,409

Interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019 is considered insignificant. Interest payments received related to impaired loans were $454,000 and $394,000 for March 31, 2020 and December 31, 2019, respectively.

As of March 31, 2020 and December 31, 2019, there were troubled debt restructured (“TDR”) loans of $340,000 and $246,000, respectively.

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. No charge-offs were incurred and the loan is on accrual status.

During the year ended December 31, 2019, there were two new TDR loans. The recorded investments at time of restructure were $76,000 for a commercial loan and $153,000 for a farmland loan. No charge-offs were incurred and the loans are on non-accrual status. The recorded investments were $74,000 and $153,000, respectively at March 31, 2020.

There were no loans modified as TDR’s that defaulted during the three months ended March 31, 2020 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, 2020, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in troubled debt restructures.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO 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 consolidated statements of financial condition and have unpaid principal balances of $1,217,718,000 and $1,169,869,000 at March 31, 2020 and December 31, 2019, 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 $739,000 and $612,000 for the three months ended March 31, 2020 and 2019, respectively. These fees, net of amortization, are included mortgage banking, net which is a component of noninterest income on the consolidated statements of income.

Custodial balances maintained in connection with the foregoing loan servicing, and included in noninterest checking deposits, were $12,708,000 and $8,402,000 at March 31, 2020 and December 31, 2019, respectively.

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

	As of or For the
	Three Months Ended
	March 31,
	2020			2019
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	8,739		$	7,100
Mortgage servicing rights capitalized		943			465
Amortization of mortgage servicing rights		(511	)		(247	)
Ending balance	$	9,171		$	7,318
Valuation allowance:
Beginning balance		-			-
Impairment of servicing rights		(153	)		-
Ending balance		(153	)		-
Mortgage servicing rights, net	$	9,018		$	7,318

Impairment of servicing rights is included in other noninterest expense on the consolidated statements of income.

The fair values of these rights were $9,018,000 and $9,835,000 at March 31, 2020 and December 31, 2019, 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,
	2020			2019
Key assumptions:
Discount rate		12%			12%
Prepayment speed range	128	-	256%	110	-	246%
Weighted average prepayment speed		231%			171%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. DEPOSITS

Deposits are summarized as follows:

	March 31,		December 31,
	2020		2019
	(In Thousands)

Noninterest checking	$	223,723	$	200,035
Interest bearing checking		133,493		116,397
Savings		146,477		126,991
Money market		155,996		132,506
Time certificates of deposit		228,536		233,064
Total	$	888,225	$	808,993

Time certificates of deposits include $3,808,000 and $10,180,000 related to fixed rate brokered CDs at March 31, 2020 and December 31, 2019, respectively. In addition, time certificates of deposits include $6,000,000 and $16,000,000 related to fixed rate brokered certificates through the Certificate of Deposit Account Registry Service (“CDARS”) at March 31, 2020 and December 31, 2019, respectively.

NOTE 7. OTHER LONG-TERM DEBT

Other long-term debt consisted of the following:

	March 31, 2020					December 31, 2019
			Unamortized					Unamortized
			Debt					Debt
	Principal		Issuance			Principal		Issuance
	Amount		Costs			Amount		Costs
	(In Thousands)

Senior notes fixed at 5.75%, due 2022	$	10,000	$	(81	)	$	10,000	$	(92	)
Subordinated debentures fixed at 6.75%, due 2025		10,000		(117	)		10,000		(122	)
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035		5,155		-			5,155		-
Total other long-term debt	$	25,155	$	(198	)	$	25,155	$	(214	)

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7. OTHER LONG-TERM DEBT – continued

In September 2005, the Company completed the private placement of $5,155,000 in subordinated debentures to the Trust. The Trust funded the purchase of the subordinated debentures through the sale of trust preferred securities to First Tennessee Bank, N.A. with a liquidation value of $5,155,000. Using interest payments made by the Company on the debentures, the Trust began paying quarterly dividends to preferred security holders in December 2005. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred securities was fixed at 6.02% until December 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 2.871% and 3.328% as of March 31, 2020 and December 31, 2019, respectively. Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date.

For the three months ended March 31, 2020 and 2019, interest expense on all other long-term debt was $352,000 and $365,000, respectively.

NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

				Unrealized
	Unrealized			Gains (Losses)
	Gains (Losses)			on Investment
	on Loans			Securities
	Held-for-Sale			Available-for-Sale			Total
				(In Thousands)
Balance, January 1, 2020	$	-		$	1,329		$	1,329
Other comprehensive income, before reclassifications and income taxes		-			205			205
Amounts reclassified from accumulated other comprehensive income, before income taxes		-			-			-
Income tax provision		-			(54	)		(54	)
Total other comprehensive income		-			151			151
Balance, March 31, 2020	$	-		$	1,480		$	1,480

Balance, January 1, 2019	$	227		$	(1,338	)	$	(1,111	)
Other comprehensive income, before reclassifications and income taxes		296			1,486			1,782
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes		(309	)		55			(254	)
Income tax benefit (provision)		4			(407	)		(403	)
Total other comprehensive (loss) income		(9	)		1,134			1,125
Balance, March 31, 2019	$	218		$	(204	)	$	14

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9. EARNINGS PER SHARE

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

	Three Months Ended
	March 31,
	2020		2019
	(Dollars in Thousands, Except Per Share Data)

Basic weighted average shares outstanding		6,818,883		6,450,326
Dilutive effect of stock compensation		12,042		60,160
Diluted weighted average shares outstanding		6,830,925		6,510,486

Net income available to common shareholders	$	3,927	$	1,183

Basic earnings per share	$	0.58	$	0.18

Diluted earnings per share	$	0.57	$	0.18

There were no anti-dilutive shares at March 31, 2020 and December 31, 2019.

NOTE 10. DIVIDENDS AND STOCK REPURCHASE PROGRAM

Dividends

For the year ended December 31, 2019, Eagle paid dividends of $0.0925 per share for the quarters ended March 31 and June 30, 2019. Eagle paid dividends of $0.095 per share for the quarters ended September 30 and December 31, 2019. A dividend of $0.095 per share was declared on January 23, 2020 and paid on March 6, 2020 to shareholders of record on February 14, 2020. A dividend of $0.095 per share was declared on April 23, 2020, payable on June 5, 2020 to shareholders of record on May 15, 2020.

Stock Repurchase Program

On July 18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2019 or the first quarter of 2020. The plan expires on July 18, 2020.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. 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 consolidated statements of condition.

Derivatives are summarized as follows:

	March 31, 2020						December 31, 2019
	Notional		Fair Value				Notional		Fair Value
	Amount		Asset		Liability		Amount		Asset		Liability
	(In Thousands)
Interest rate lock commitments	$	187,583	$	4,451	$	-	$	48,303	$	554	$	-
Forward TBA mortgage-backed securities		99,000		-		1,796		67,000		-		201
Mandatory forward commitments		71,000		-		1,054		-		-		-

Changes in the fair value of the derivatives are recorded in mortgage banking, net within noninterest income on the consolidated statements of income. A net gain of $1,247,000 was recorded for the three months ended March 31, 2020. The Company did not record the aforementioned derivatives related to mortgage banking during the quarter ended March 31, 2019 as they were not considered significant.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. 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 judgement and estimation.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy 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 prepayments speeds and are considered level 3 inputs.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. 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, 2020
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency	$	-	$	15,867	$	-	$	15,867
Municipal obligations		-		72,684		-		72,684
Corporate obligations		-		8,069		-		8,069
Mortgage-backed securities		-		10,128		-		10,128
Collateralized mortgage obligations		-		45,128		-		45,128
Asset-backed securities		-		16,028		-		16,028
Loans held-for-sale		-		25,187		-		25,187
Interest rate lock commitments		-		-		4,451		4,451
Financial liabilities:
Forward TBA mortgage-backed securities		-		1,796		-		1,796
Mandatory forward commitments		-		1,054		-		1,054

	December 31, 2019
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency	$	-	$	13,597	$	-	$	13,597
Municipal obligations		-		52,222		-		52,222
Corporate obligations		-		8,388		-		8,388
Mortgage-backed securities		-		9,495		-		9,495
Collateralized mortgage obligations		-		33,334		-		33,334
Asset-backed securities		-		9,839		-		9,839
Loans held-for-sale		-		25,612		-		25,612
Interest rate lock commitments		-		-		554		554
Financial liabilities:
Forward TBA mortgage-backed securities		-		201		-		201
Mandatory forward commitments		-		-		-		-

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. 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, 2020
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans	$	-	$	-	$	59	$	59
Real estate and other repossessed assets		-		-		-		-
Mortgage servicing rights		-		-		9,018		9,018

	December 31, 2019
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans	$	-	$	-	$	491	$	491
Real estate and other repossessed assets		-		-		25		25
Mortgage servicing rights		-		-		-		-

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	Signficant Input
Instrument	Technique	Inputs	Values

Impaired loans	Fair value of underlying collateral	Discount applied to the obtained appraisal	10	-	30%
Real estate and other repossessed assets	Fair value of collateral	Discount applied to the obtained appraisal	10	-	30%
Mortgage servicing rights	Discounted cash flows	Discount rate Prepayment speeds	10 100	- -	15% 300%
Interest rate lock commitments	Internal pricing model	Pull-through expectations	80	-	90%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis.

	Interest
	Rate Lock
	Commitments
	(In Thousands)
Balance, January 1, 2020	$	554
Purchases and issuances		5,797
Sales and settlements		(1,900	)
Balance, March 31, 2020	$	4,451

Net change in unrealized gains relating to items held at end of period	$	3,897

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. 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 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, 2020
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	19,773	$	-	$	-	$	19,773	$	19,773
FHLB stock		5,161		-		-		5,161		5,161
FRB stock		2,601		-		-		2,601		2,601
Loans receivable, net		-		-		814,328		814,328		812,784
Accrued interest and dividends receivable		5,329		-		-		5,329		5,329
Mortgage servicing rights		-		-		9,018		9,018		9,018
Financial liabilities:
Non-maturing interest bearing deposits		-		435,966		-		435,966		435,966
Noninterest bearing deposits		223,723		-		-		223,723		223,723
Time certificates of deposit		-		-		230,227		230,227		228,536
Accrued expenses and other liabilities		14,217		-		-		14,217		14,217
FHLB advances and other borrowings		-		-		95,143		95,143		94,585
Other long-term debt		-		-		25,390		25,390		25,155

	December 31, 2019
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	24,918	$	-	$	-	$	24,918	$	24,918
FHLB stock		4,683		-		-		4,683		4,683
FRB stock		2,526		-		-		2,526		2,526
Loans receivable, net		-		-		770,327		770,327		770,635
Accrued interest and dividends receivable		4,577		-		-		4,577		4,577
Mortgage servicing rights		-		-		9,835		9,835		8,739
Financial liabilities:
Non-maturing interest bearing deposits		-		375,894		-		375,894		375,894
Noninterest bearing deposits		200,035		-		-		200,035		200,035
Time certificates of deposit		-		-		233,041		233,041		233,064
Accrued expenses and other liabilities		9,624		-		-		9,624		9,624
FHLB advances and other borrowings		-		-		88,447		88,447		88,350
Other long-term debt		-		-		24,661		24,661		25,155

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

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

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

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 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).

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS – continued

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

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance is effective for the Company on January 1, 2023 and adoption of the standard is not expected to have a significant impact on the Company’s 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 Secured Overnight Financing Rate (“SOFR”). The guidance was effective upon issuance and generally can be applied through December 31, 2022. The Bank 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.). In recent years, the Bank has also focused on adding commercial loans to its portfolio, both real estate and non-real estate. We have made significant progress in this initiative. The purpose of this diversification is to mitigate the Bank’s dependence on the residential mortgage market, as well as to improve its ability to manage its spread. Recent acquisitions have added to our agricultural loans, which generally have shorter maturities and nominally higher interest rates. This has provided additional interest income and improved interest rate sensitivity. The Bank’s management recognizes that fee income will also enable it to be less dependent on specialized lending and it now maintains a significant loan serviced portfolio which provides a steady source of fee income. Fee income is also supplemented with fees generated from the Bank’s deposit accounts. The Bank has a high percentage of non-maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its spread. Non-maturity deposits and certificates of deposits do not automatically reprice as interest rates rise. Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity.

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

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

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee changed the federal funds target rate from 2.50% to 1.75% during the year ended December 31, 2019. The rate decreased from 1.75% to 0.25% during the three months ended March 31, 2020. The rate reductions add continued pressure on loan yields.

Recent Events

COVID-19

The first quarter performance was strong, however, the Company has begun to see the impact of the COVID-19 pandemic and its consequences on our Montana communities. On March 28, 2020 the State of Montana implemented a Shelter-in-Place order, resulting in the closing of businesses or a substantial reduction in business activity. Recently, Montana’s governor lifted the order effective April 27, 2020, including the beginning of a phased approach to re-open businesses. The Bank is closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been impacted.

Restaurants, lodging, schools, childcare, health care, ranchers, farmers and entertainment industries, among others, have seen a dramatic change in revenues for their business.

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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

The bank is offering multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. As of April 30, 2020, there were 185 loans totaling $69.13 million deferring payments for 90 days, primarily from the real estate rental, accommodation and food services, and the art, entertainment and recreation industries. Approximately 113 borrowers representing $45.38 million in loans have been approved for up to 6-months interest only payments. There have been approximately 116 forbearances in process for residential mortgage loans totaling $23.92 million. Our interest income in future periods could be reduced as a result of such measures. In addition, it is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged. Utilization of borrowing lines at approximately 85% remained constant at the end of the quarter compared to the previous quarter. The Paycheck Protection Program is expected to provide some temporary relief to small business customers of Eagle but the extent of the impact the pandemic will have on businesses’ ability to sustain operations is unclear at this point. Eagle will continue to closely monitor each of its loans for risk.

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.

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 April 30, 2020, had received approvals for $43.81 million in SBA PPP loans, with 471 loans funded for $31.29 million.

As of March 31, 2020, all of our capital ratios, and our subsidiary bank’s 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.

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. 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 March 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 non-cash 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, 2020 we had goodwill of $20.80 million.

While all industries have and will continue to experience adverse impacts as a result of COVID-19 virus, we had exposures (on balance sheet loans and commitments to lend) in the following industry categories considered to be “at-risk” of significant impact as of March 31, 2020: storage units - $12.37 million, educational services - $2.28 million, healthcare and social assistance - $27.39 million, nursing homes - $6.10 million, casinos - $9.59 million, hotels/accommodations - $36.25 million and bars and restaurants - $17.11 million.

The Company is committed to assisting our customers and communities in this time of need. Most branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members. The branches with lobbies open will be retrofitted with sneeze guard protective screens and our branches have been supplied with gloves and disinfectant materials for lobby, drive through and ATM equipment. All of our facilities are being deep cleaned daily. Accommodations have also been made for employees to work from home as needed. We continue to support the communities we serve as demonstrated by donations to local food banks.

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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

Acquisitions

The Bank has used growth through mergers or acquisition in addition to its strategy of organic growth. 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. Ruby Valley Bank operated two branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. On January 31, 2018, TwinCo merged with and into Eagle, with Eagle continuing as the surviving corporation. The total consideration paid was $18.93 million and included cash consideration of $9.90 million and common stock issued of $9.03 million.

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, a Montana chartered commercial bank (“SBOT”). SBOT operated four branches in Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities, throughout the state. On January 1, 2019, BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. The total consideration paid was $16.44 million and it was primarily related to common stock issued.

On August 8, 2019, Eagle and OBMT, entered into an Agreement and Plan of Merger with Western Holding Company of Wolf Point (“WHC”), a Montana corporation, and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point (“WB”), a Montana chartered commercial bank. 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 deal closed on January 1, 2020 after receipt of approvals from regulatory authorities, approval of WHC shareholders and the satisfaction of other closing conditions. In the transaction, Eagle acquired one retail bank branch in Wolf Point, Montana. The total consideration paid was $14.97 million and included cash consideration of $6.50 million and common stock issued of $8.47 million.

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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, 2020 and December 31, 2019.

Total assets were $1.16 billion at March 31, 2020, an increase of $104.34 million, or 9.9% from $1.05 billion at December 31, 2019. The increase was largely due to the change in securities available-for sale and loans receivable which were impacted by the acquisition of WHC. Securities available-for-sale increased by $41.02 million from December 31, 2019. Loans receivable increased by $42.14 million from December 31, 2019. Total liabilities were $1.02 billion at March 31, 2020, an increase of $92.29 million, or 9.9%, from $932.60 million at December 31, 2019. The increase was mainly due to an increase in deposits which was impacted by the WHC acquisition. Total deposits increased by $79.24 million from December 31, 2019. Total shareholders’ equity increased by $12.05 million from December 31, 2019.

Balance Sheet Details

Investment Activities

The following table summarizes investment activities:

	March 31,					December 31,
	2020					2019
	Fair Value		Percentage of Total			Fair Value		Percentage of Total
	(Dollars in Thousands)
Securities available-for-sale:
U.S. government and agency	$	15,867		9.45	%	$	13,597		10.72	%
Municipal obligations		72,684		43.29	%		52,222		41.17	%
Corporate obligations		8,069		4.81	%		8,388		6.61	%
Mortgage-backed securities		10,128		6.03	%		9,495		7.48	%
Collateralized mortgage obligations		45,128		26.87	%		33,334		26.27	%
Asset-backed securities		16,028		9.55	%		9,839		7.75	%
Total securities available-for-sale	$	167,904		100.00	%	$	126,875		100.00	%

Securities available-for-sale were $167.90 million at March 31, 2020, an increase of $41.02 million, or 32.3%, from $126.88 million at December 31, 2019. Securities available-for-sale increased during the period mainly related to the WHC acquisition.

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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,
	2020						2019
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Real estate loans:
Residential 1-4 family ⁽¹⁾	$	122,650			14.90	%	$	119,296			15.28	%
Residential 1-4 family construction		37,397			4.54	%		38,602			4.95	%
Total residential 1-4 family		160,047			19.44	%		157,898			20.23	%

Commercial real estate		337,219			40.96	%		331,062			42.41	%
Commercial construction and development		55,850			6.78	%		52,670			6.75	%
Farmland		62,551			7.60	%		50,293			6.44	%
Total commercial real estate		455,620			55.34	%		434,025			55.60	%

Total real estate loans		615,667			74.78	%		591,923			75.83	%

Other loans:
Home equity		57,752			7.02	%		56,414			7.23	%
Consumer		19,924			2.42	%		18,882			2.42	%

Commercial		77,698			9.44	%		72,797			9.33	%
Agricultural		52,178			6.34	%		40,522			5.19	%
Total commercial loans		129,876			15.78	%		113,319			14.52	%

Total other loans		207,552			25.22	%		188,615			24.17	%

Total loans		823,219			100.00	%		780,538			100.00	%

Deferred loan fees		(1,185	)					(1,303	)
Allowance for loan losses		(9,250	)					(8,600	)
Total loans, net	$	812,784					$	770,635

⁽¹⁾

Excludes loans held-for-sale.

Loans receivable, net increased $42.14 million, or 5.5%, to $812.78 million at March 31, 2020 from $770.64 million at December 31, 2019 primarily due to the WHC acquisition. The WHC acquisition included $43.42 million of acquired loans. Excluding acquired loans, loans receivable decreased by $1.28 million. Including acquired loans, total commercial real estate loans increased $21.59 million, total commercial loans increased $16.56 million, total residential loans increased $2.15 million, home equity loans increased $1.34 million and consumer loans increased $1.04 million.

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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

Total loan originations were $201.01 million for the three months ended March 31, 2020. Total residential 1-4 family originations were $142.13 million, which includes $132.23 million of loans held-for-sale originations. Total commercial real estate originations were $28.96 million. Total commercial and home equity loan originations totaled $21.33 million and $5.82 million, respectively, for the same period. Consumer loan originations totaled $2.77 million. Loans held-for-sale decreased by $425,000, to $25.19 million at March 31, 2020 from $25.61 million at December 31, 2019.

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. However, in light of the COVID-19 pandemic, the Bank has temporarily modified these procedures by temporarily halting foreclosures in accordance with the decree of Montana’s Governor. As of March 31, 2020 and December 31, 2019, the Bank had $60,000 and $26,000, respectively, 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 Bank has had minimal impact due to foreclosures affected by this freeze.

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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,
	2020			2019
	(Dollars in Thousands)
Non-accrual loans
Real estate loans:
Residential 1-4 family	$	737		$	618
Residential 1-4 family construction		337			337
Commercial real estate		971			583
Commercial construction and development		-			50
Farmland		897			323
Other loans:
Home equity		117			78
Consumer		179			156
Commercial		633			750
Agricultural		782			499
Accruing loans delinquent 90 days or more
Real estate loans:
Residential 1-4 family		127			4
Residential 1-4 family construction		99			-
Farmland		379			-
Other loans:
Commercial		210			-
Agricultural		128			1,805
Restructured loans:
Real estate loans:
Commercial construction and development		94			-
Farmland		153			153
Other loans:
Home equity		19			20
Commercial		74			74
Total nonperforming loans		5,936			5,450
Real estate owned and other repossessed property, net		60			26
Total nonperforming assets	$	5,996		$	5,476

Total nonperforming loans to total loans		0.72	%		0.70	%
Total nonperforming loans to total assets		0.51	%		0.52	%
Total allowance for loan loss to nonperforming loans		155.83	%		157.80	%
Total nonperforming assets to total assets		0.52	%		0.52	%

Non-accrual loans as of March 31, 2020 and December 31, 2019 include $1.61 million and $1.05 million, respectively of acquired loans.

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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,
	2020					2019
			Percent					Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Noninterest checking	$	223,723		25.19	%	$	200,035		24.72	%
Interest bearing checking		133,493		15.03	%		116,397		14.39	%
Savings		146,477		16.49	%		126,991		15.70	%
Money market		155,996		17.56	%		132,506		16.38	%
Total		659,689		74.27	%		575,929		71.19	%
Certificates of deposit accounts:
IRA certificates		26,956		3.03	%		25,240		3.12	%
Brokered certificates		3,808		0.43	%		10,180		1.26	%
Other certificates		197,772		22.27	%		197,644		24.43	%
Total certificates of deposit		228,536		25.73	%		233,064		28.81	%
Total deposits	$	888,225		100.00	%	$	808,993		100.00	%

Deposits increased by $79.24 million, or 9.8%, to $888.23 million at March 31, 2020 from $808.99 million at December 31, 2019. The increase was due to increased deposits as a result of the WHC acquisition. Excluding acquired deposits, total deposits decreased by $10.04 million. Including acquired deposits, noninterest checking increased by $23.69 million, money market increased by $23.49 million, savings increased by $19.49 million and interest bearing checking increased by $17.10 million. Certificates of deposit decreased by $4.53 million. The decrease in time certificates of deposit was impacted by a decrease of $6.37 million in fixed rate brokered CDs.

The following table summarizes borrowing activity:

	March 31,					December 31,
	2020					2019
	Net		Percent			Net		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
FHLB advances and other borrowings	$	94,585		79.12	%	$	88,350		77.99	%
Other long-term debt:
Senior notes fixed at 5.75%, due 2022		9,919		8.30	%		9,908		8.74	%
Subordinated debentures fixed at 6.75%, due 2025		9,883		8.27	%		9,878		8.72	%
Subordinated debentures variable, due 2035		5,155		4.31	%		5,155		4.55	%
Total other long-term debt		24,957		20.88	%		24,941		22.01	%
Total borrowings		119,542		100.00	%		113,291		100.00	%

FHLB advances and other borrowings increased by $6.24 million, or 7.1%, to $94.59 million at March 31, 2020 from $88.35 million at December 31, 2019. This increase was partially due to $2.50 million assumed in the acquisition of WHC.

Shareholders’ Equity

Total shareholders’ equity increased $12.05 million, or 9.9%, to $133.71 million at March 31, 2020 from $121.66 million at December 31, 2019. This was primarily the result of stock issued in connection with the WHC acquisition of $8.47 million and net income of $3.93 million. These increases were slightly offset by dividends paid of $648,000.

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

	For the Three Months Ended March 31,
	2020							2019
	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	$	171,263	$	1,027		2.41	%	$	140,801	$	958		2.76	%
FHLB and FRB stock		7,371		94		5.12	%		7,122		95		5.41	%
Loans receivable⁽¹⁾		840,427		11,432		5.46	%		726,657		10,048		5.61	%
Other earning assets		19,973				1.57	%		4,092		20		1.98	%
Total interest earning assets		1,039,034		12,631		4.88	%		878,672		11,121		5.13	%
Noninterest earning assets		114,701							88,156
Total assets	$	1,153,735							966,828

Liabilities and equity:
Interest bearing liabilities:
Deposit accounts:
Checking	$	133,829	$	18		0.05	%	$	117,568	$	11		0.04	%
Savings		139,302		46		0.13	%		118,550		16		0.05	%
Money market		151,392		176		0.47	%		121,860		95		0.32	%
Certificates of deposit		254,512		1,099		1.73	%		195,667		665		1.38	%
Advances from FHLB and other borrowings including long-term debt		112,758				2.90	%		125,506		959		3.10	%
Total interest bearing liabilities		791,793		2,154		1.09	%		679,151		1,746		1.04	%
Noninterest checking		213,753							171,175
Other noninterest bearing liabilities		15,837							8,380
Total liabilities		1,021,383							858,706

Total equity		132,352							108,122

Total liabilities and equity	$	1,153,735							966,828
Net interest income/interest rate spread⁽²⁾				10,477		3.79	%			$	9,375		4.09	%

Net interest margin⁽³⁾						4.04	%						4.33	%
Total interest earning assets to interest bearing liabilities						131.23	%						129.38	%

⁽¹⁾	Includes loans held-for-sale.
⁽²⁾	Interest rate spread represents the difference between the average yield on interest earning assets and the average rate on interest bearing liabilities.
⁽³⁾	Net interest margin represents income before the provision for loan losses divided by average interest earning assets.
⁽⁴⁾	For purposes of this table, tax exempt income is not calculated on a tax equivalent basis.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

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,
	2020									2019
				Due to									Due to
	Volume			Rate			Net			Volume			Rate		Net
	(In Thousands)
Interest earning assets:
Investment securities	$	207		$	(138	)	$	69		$	(69	)	$	38	$	(31	)
FHLB and FRB stock		3			(4	)		(1	)		15			1		16
Loans receivable⁽¹⁾		1,573			(189	)		1,384			1,843			1,333		3,176
Other earning assets		78			(20	)		58			(5	)		8		3
Total interest earning assets		1,861			(351	)		1,510			1,784			1,380		3,164

Interest bearing liabilities:
Checking, savings and money market accounts		27			91			118			12			39		51
Certificates of deposit		200			234			434			73			237		310
Advances from FHLB and other borrowings including long-term debt		(97	)		(47	)		(144	)		105			170		275
Total interest bearing liabilities		130			278			408			190			446		636

Change in net interest income	$	1,731		$	(629	)	$	1,102		$	1,594		$	934	$	2,528

⁽¹⁾	Includes loans held-for-sale.

Results of Operations for the Three Months Ended March 31, 2020 and 2019

Net Income. Eagle’s net income for the three months ended March 31, 2020 was $3.93 million compared to $1.18 million for the three months ended March 31, 2019. The increase of $2.75 million was due to an increase in net interest income after loan loss provision of $1.04 million and an increase in noninterest income of $4.61 million, offset by an increase in noninterest expense of $1.83 million and an increase in provision for income taxes of $1.08 million. Basic earnings per share was $0.58 and diluted earnings per share was $0.57 for the current period. Basic and diluted earnings per share were both $0.18 for the prior year comparable period.

Net Interest Income. Net interest income increased to $10.48 million for the three months ended March 31, 2020, from $9.38 million for the same quarter in the prior year. This increase of $1.10 million, or 11.7%, was the result of an increase in interest and dividend income of $1.51 million, partially offset by an increase in interest expense of $408,000.

Interest and Dividend Income. Interest and dividend income was $12.63 million for the three months ended March 31, 2020, compared to $11.12 million for the three months ended March 31, 2019, an increase of $1.51 million, or 13.6%. Interest and fees on loans increased to $11.43 million for the three months ended March 31, 2020 from $10.05 million for the three months ended March 31, 2019. This increase of $1.38 million, or 13.7%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended March 31, 2020. Average balances for loans receivable, including loans held-for-sale, for the three months ended March 31, 2020 were $840.43 million, compared to $726.66 million for the prior year period. This represents an increase of $113.77 million, or 15.7% and was impacted by the WHC acquisition. The average interest rate earned on loans receivable decreased by 15 basis points, from 5.61% to 5.46%. Interest accretion on purchased loans was $558,000 for the three months ended March 31, 2020 which resulted in a 22 basis point increase in net interest margin compared to $520,000 for the three months ended March 31, 2019 which resulted in a 24 basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale increased by $69,000, or 7.2% period over period. Average balances for investments increased to $171.26 million for the three months ended March 31, 2020, from $140.80 million for the three months ended March 31, 2019. Average interest rates earned on investments decreased to 2.41% for the three months ended March 31, 2020 from 2.76% for the three months ended March 31, 2019.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Three Months Ended March 31, 2020 and 2019 – continued

Interest Expense. Total interest expense was $2.15 million for the three months ended March 31, 2020 compared to $1.75 million for the three months ended March 31, 2019. The increase of $408,000 or 23.4% was due to an increase in interest expense on deposits, partially offset by a decrease in total borrowings. The average balance for total deposits was $892.79 million for three months ended March 31, 2020 compared to $724.82 million for the three months ended March 31, 2019. This increase was impacted by the WHC acquisition. The overall average rate on total deposits was 0.60% for the three months ended March 31, 2020 compared to 0.44% for the three months ended March 31, 2019. The average balance for total borrowings decreased from $125.51 million for the three months ended March 31, 2019 to $112.76 million for the three months ended March 31, 2020. The average rate paid on total borrowings also decreased from 3.10% for the three months ended March 31, 2019, to 2.90% for the three months ended March 31, 2020.

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 $450,000 in loan loss provisions for the three months ended March 31, 2020. Additionally, management considered the potential impact of COVID-19. Due to the Stay-at -Home Order and the closing of many businesses and resulting decline in business cash-flows, an increase in the related economic factors was included in the allowance for loan losses analysis and the loan loss reserves was increased by approximately $220,000. Therefore, the total loan loss provision for the three months ended March 31, 2020 was $670,000, Loan loss provisions were $604,000 for the three months ended March 31, 2019. 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 in March our allowance for credit losses will increase accordingly in future periods. Total nonperforming loans, including restructured loans, net, was $5.94 million at March 31, 2020 compared to $5.45 million at December 31, 2019. The Bank had $60,000 in other real estate owned and other repossessed assets at March 31, 2020 compared to $26,000 at December 31, 2019.

Noninterest Income. Total noninterest income was $8.30 million for the three months ended March 31, 2020, compared to $3.69 million for the three months ended March 31, 2019. The increase of $4.61 million is largely due to an increase in net gain on sale of loans which increased to $5.41 million for the three months ended March 31, 2020 from $2.60 million for the three months ended March 31, 2019. This increase was impacted by increased mortgage originations and higher margins on mortgage loans sold. During the three months ended March 31, 2020, $132.12 million residential mortgage loans were sold compared to $72.32 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, 2020 was 4.10% compared to 3.59% for the three months ended March 31, 2019.

Noninterest Expense. Noninterest expense was $12.85 million for the three months ended March 31, 2020 compared to $11.02 million for the three months ended March 31, 2019. The increase of $1.83 million or 16.6% is largely due to increased salaries and employee benefits expense of $1.69 million. The increase in salaries expense is due in part to higher commission-based compensation related to mortgage loan growth and additional staff related to compliance with mortgage rules. Mortgage commission-based compensation was $2.25 million for the three months ended March 31, 2020 compared to $721,000 for the three months ended March 31, 2019. Salaries and employee benefits expense was also impacted by the addition of staff related to the WHC acquisition. Acquisition costs were $128,000 for three months ended March 31, 2020 compared to $1.17 million for the three months ended March 31, 2019.

To accommodate the immediate need for personnel to work from home, Eagle purchased additional laptop computers and docking stations. There were also extra supplies and equipment needed to provide each location with a clean, disinfected and safer work environment. Most of these unusual expenses will be incurred in the second quarter ending June 30, 2020 and will impact noninterest expense. These costs are estimated to be $100,000.

Provision for Income Taxes. Provision for income taxes was $1.34 million for the three months ended March 31, 2020, compared to $261,000 for the three months ended March 31, 2019 due to increased income before provision for income taxes. The effective tax rate for the three months ended March 31, 2020 was 25.4% compared to 18.1% for the three months ended March 31, 2019.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

Liquidity

The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and FRB regulations. The liquidity requirement is retained for safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Des Moines. The Bank exceeded those minimum ratios as of March 31, 2020 and December 31, 2019.

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, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity, and meet operating expenses.

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

Through the end of the first quarter ended March 31, 2020, the liquidity level remained relatively consistent with the prior quarters. However, subsequent to the end of the quarter, and in coordination with the roll out of the PPP, Eagle was approved for short-term funding through the FRB Discount Window. The discount window has not been utilized; however, a new funding facility through the FRB called Payroll Protection Program Loan Funding (“PPPLF”) was made available and the Bank has received approval to collateralize with pools of PPP loans for funding. As of April 30, 2020, the Bank had $24.06 million in PPPLF borrowings secured by 334 PPP loans at a rate of 0.35%. As the PPP loans are repaid, it is currently anticipated Eagle will repay Federal Reserve borrowings.

Capital Resources

As of March 31, 2020, 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 17.5% compared to an increase of 10.6% at December 31, 2019. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

Beginning January 1, 2015, community banking organizations became subject to a new regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III). The rule established a new regulatory capital framework that incorporated revisions to the Basel capital framework, strengthened the definition of regulatory capital, increased risk-based capital requirements, and amended the methodologies for determining risk-weighted assets. These changes increased the amount of capital required by community banking organizations. Basel III included a multiyear transition period from January 1, 2015 through December 31, 2019.

The Banks’s Tier I leverage ratio, as measured under State of Montana and FRB rules, increased slightly from 11.08% as of December 31, 2019 to 11.88% as of March 31, 2020. The Bank’s capital position helps to mitigate its interest rate risk exposure.

As of March 31, 2020, 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, 2020, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 15.45%, 14.39%, 14.39% and 11.88%, respectively, compared to regulatory requirements of 10.50%, 8.50%, 7.00% and 4.00%, respectively. All of these ratios with the exception of the Tier 1 leverage ratio include the capital conservation buffer of 2.50%, which was fully phased-in on January 1, 2019.

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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

	March 31, 2020
	(Unaudited)
	Dollar		% of
	Amount		Assets
	(Dollars in Thousands)
Total risk-based capital to risk weighted assets:
Actual capital level	$	133,966		15.45	%
Minimum required for capital adequacy Basel III fully phased-in		91,019		10.50	%
Excess capital	$	42,947		4.95	%

Tier I capital to risk weighted assets:
Actual capital level	$	124,716		14.39	%
Minimum required for capital adequacy Basel III fully phased-in		73,682		8.50	%
Excess capital	$	51,034		5.89	%

Common equity tier I capital to risk weighted assets:
Actual capital level	$	124,716		14.39	%
Minimum required for capital adequacy Basel III fully phased-in		60,680		7.00	%
Excess capital	$	64,036		7.39	%

Tier I capital to adjusted total average assets:
Actual capital level	$	124,716		11.88	%
Minimum required for capital adequacy Basel III fully phased-in		41,991		4.00	%
Excess capital	$	82,725		7.88	%

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Impact of Inflation and Changing Prices

Our 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, 2020		Policy
(Basis Points)	Year 1	Year 2	Limits

+200	0.50%	4.40%	-15.00%
-100	-1.20%	-1.50%	-10.00%

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Table of Contents

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, 2020, our disclosure controls and procedures were not effective as of such date due to ongoing remediation of a material weakness in internal control over financial reporting as of December 31, 2019 as described below.

We identified a material weakness in internal control related to the review of manual journal entries. Specifically, the design of the manual journal entry review control did not ensure that all manual journal entries were captured and independently reviewed, thus management could not ensure that all entries were accurate and could not verify all manual journal entries contained sufficient supporting documentation. The material weakness did not result in any identified misstatement to the financial statements, and there were no changes to previously released financial results. However, the control deficiencies created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.

Management has implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated so that these controls are designed, implemented and operating effectively. The remediation actions include: (i) restricting user access of individuals able to make manual journal entries, (ii) ensuring the completeness of manual journal entries included in the review through a review of a system generated file maintenance report over manual journal entries, (iii) ensuring accurate and appropriate documentation is retained to support the journal entry. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The remediation of this material weakness is still in process.

Except as noted above, 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.

Other than as set forth below, there have not been any material changes in the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment, negatively impacted consumer and business spending, and disrupted trade and supply chains. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

●

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, farming, ranching, retail and restaurant industries, but across other industries as well;

●

declines in collateral values;

●

in an effort to support our communities during the pandemic, we are participating in the PPP under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit;

●

in response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers;

●

third party disruptions, including outages at network providers and other suppliers;

●

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and

●

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION - continued

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information.

None.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION - continued

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).

10.1	Amendment No. 3 to the Eagle Bancorp Montana, Inc. 2011 Stock Incentive Plan for Directors, Officers and Employees.

10.2	2020 Non-Employee Director Award Plan.

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

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

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

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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


	EAGLE BANCORP MONTANA, INC.

Date: May 11, 2020	By:	/s/ Peter J. Johnson
		Peter J. Johnson
		President/CEO



Date: May 11, 2020	By:	/s/ Laura F. Clark
		Laura F. Clark
		Executive Vice President/CFO/COO

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Eagle Bancorp Montana, Inc. - FORM 10-Q - May 11, 2020

Attached files

Eagle Bancorp Montana, Inc. Reports