ebmt20200331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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	Nasdaq Global Market

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APPLICABLE ONLY TO CORPORATE ISSUERS

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

Common stock, par value $0.01 per share

6,756,107 shares outstanding

As of October 30, 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 September 30, 2020 and December 31, 2019	1

	Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019	3

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019	5

	Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2020 and 2019	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 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	51

Item 4.	Controls and Procedures	52

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	54
Item 6.	Exhibits	54

Signatures		55

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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 continuing outbreak of the novel coronavirus, or COVID-19, and the steps taken by governmental and other authorities to contain, mitigate and combat the pandemic, on the economies and communities we serve, which may likely have an adverse impact on our credit portfolio, goodwill, stock price, borrowers and the economy as a whole both globally and domestically;
	●	local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities;

●

competition among depository and other financial institutions;

●

risks related to the concentration of our business in Montana, including risks associated with changes in the prices, values and sales volume of residential and commercial real estate in Montana;

●

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

●

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

●

changes or volatility in the securities markets;

●

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

●

the effect of acquisitions we may make, if any, including, without limitation, the failure to achieve expected revenue growth and/or expense savings from such acquisitions;

●

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

●

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

●

political developments, uncertainties or instability;

●

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

●

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)

	September 30,		December 31,
	2020		2019
ASSETS:
Cash and due from banks	$	19,879	$	18,094
Interest bearing deposits in banks		7,672		4,284
Federal funds sold		45,260		2,540
Total cash and cash equivalents		72,811		24,918

Securities available-for-sale, at fair value		165,353		126,875
Federal Home Loan Bank ("FHLB") stock		2,817		4,683
Federal Reserve Bank ("FRB") stock		2,974		2,526
Mortgage loans held-for-sale, at fair value		41,484		25,612
Loans receivable, net of allowance for loan losses of $11,300 at September 30, 2020 and $8,600 at December 31, 2019		837,178		770,635
Accrued interest and dividends receivable		6,615		4,577
Mortgage servicing rights, net		9,518		8,739
Premises and equipment, net		54,450		40,082
Cash surrender value of life insurance, net		27,064		23,608
Goodwill		20,798		15,836
Core deposit intangible, net		2,505		2,786
Other assets		11,461		3,383

Total assets	$	1,255,028	$	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)

	September 30,			December 31,
	2020			2019
LIABILITIES:
Deposit accounts:
Noninterest bearing	$	295,058		$	200,035
Interest bearing		703,272			608,958
Total deposits		998,330			808,993

Accrued expenses and other liabilities		18,419			9,825
Deferred tax liability, net		1,367			492
FHLB advances and other borrowings		59,777			88,350
Other long-term debt:
Principal amount		30,155			25,155
Unamortized debt issuance costs		(383	)		(214	)
Total other long-term debt, net		29,772			24,941

Total liabilities		1,107,665			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; 6,756,107 and 6,423,033 shares outstanding at September 30, 2020 and December 31, 2019, respectively)		71			67
Additional paid-in capital		77,612			68,826
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")		(185	)		(311	)
Treasury stock, at cost		(4,630	)		(3,643	)
Retained earnings		69,478			55,391
Accumulated other comprehensive income, net of tax		5,017			1,329
Total shareholders' equity		147,363			121,659

Total liabilities and shareholders' equity	$	1,255,028		$	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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	11,340	$	10,731	$	33,832	$	31,378
Securities available-for-sale		874		916		2,853		2,802
FHLB and FRB dividends		95		107		284		297
Other interest income		30		19		134		55
Total interest and dividend income		12,339		11,773		37,103		34,532

INTEREST EXPENSE:
Deposits		779		1,022		3,063		2,733
FHLB advances and other borrowings		261		692		1,066		1,942
Other long-term debt		521		360		1,296		1,089
Total interest expense		1,561		2,074		5,425		5,764

NET INTEREST INCOME		10,778		9,699		31,678		28,768

Loan loss provision		854		694		2,751		1,995

NET INTEREST INCOME AFTER LOAN LOSS PROVISION		9,924		9,005		28,927		26,773

NONINTEREST INCOME:
Service charges on deposit accounts		282		329		814		882
Net gain on sale of loans		11,101		5,492		24,432		11,451
Mortgage banking, net		2,204		1,390		7,164		2,477
Interchange and ATM fees		407		364		1,123		977
Appreciation in cash surrender value of life insurance		160		254		480		571
Net gain on sale of available-for-sale securities		-		-		1,068		49
Net gain on sale/disposal of premises and equipment		-		438		4		438
Other noninterest income		817		153		1,888		772
Total noninterest income		14,971		8,420		36,973		17,617

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020		2019
NONINTEREST EXPENSE:
Salaries and employee benefits	$	11,325	$	7,555		$	28,274	$	20,057
Occupancy and equipment expense		1,280		1,152			3,677		3,229
Data processing		1,168		933			3,507		2,715
Advertising		208		320			624		800
Amortization		165		254			495		761
Loan costs		566		242			1,211		554
Federal Deposit Insurance Corporation ("FDIC") insurance premiums		75		(36	)		147		79
Postage		76		90			260		237
Professional and examination fees		389		182			1,081		767
Acquisition costs		-		517			157		1,693
Other noninterest expense		1,093		1,015			4,893		2,826
Total noninterest expense		16,345		12,224			44,326		33,718

INCOME BEFORE PROVISION FOR INCOME TAXES		8,550		5,201			21,574		10,672

Provision for income taxes		2,170		1,096			5,532		2,137

NET INCOME	$	6,380	$	4,105		$	16,042	$	8,535

BASIC EARNINGS PER COMMON SHARE	$	0.94	$	0.64		$	2.36	$	1.33

DILUTED EARNINGS PER COMMON SHARE	$	0.94	$	0.63		$	2.35	$	1.32

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

NET INCOME	$	6,380		$	4,105		$	16,042		$	8,535

OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of investment securities available-for-sale		1,263			1,166			6,074			4,617
Reclassification for net realized gains on investment securities available-for-sale		-			-			(1,068	)		(49	)
Change in fair value of loans held-for-sale		-			-			-			296
Reclassification for net realized gains on loans held-for-sale		-			-			-			(605	)
Total other comprehensive income		1,263			1,166			5,006			4,259

Income tax (provision) benefit related to:
Investment securities		(332	)		(307	)		(1,318	)		(1,203	)
Loans held-for-sale		-			-			-			82
Total income tax provision		(332	)		(307	)		(1,318	)		(1,121	)

COMPREHENSIVE INCOME	$	7,311		$	4,964		$	19,730		$	11,673

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

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

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

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,042		$	8,535
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loan loss provision		2,751			1,995
Impairment of servicing rights		878			-
Depreciation		1,813			1,308
Net amortization of investment securities premiums and discounts		749			704
Amortization of mortgage servicing rights		2,476			1,113
Amortization of right-of-use assets		347			354
Amortization of core deposit intangible and tax credits		495			761
Compensation expense related to restricted stock awards		226			330
ESOP compensation expense for allocated shares		223			213
Deferred income tax provision		22			417
Net gain on sale of loans		(24,432	)		(11,451	)
Originations of loans held-for-sale		(636,767	)		(345,699	)
Proceeds from sales of loans held-for-sale		645,327			339,245
Net gain on sale of available-for-sale securities		(1,068	)		(49	)
Net loss on sale of real estate owned and other repossessed assets		9			18
Net gain on sale/disposal of premises and equipment		(4	)		(438	)
Net appreciation in cash surrender value of life insurance		(480	)		(572	)
Net change in:
Accrued interest and dividends receivable		(1,030	)		(583	)
Other assets		(7,807	)		(571	)
Accrued expenses and other liabilities		3,936			741
Net cash provided by (used in) operating activities		3,706			(3,629	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		18,149			53,257
Maturities, principal payments and calls		32,553			9,998
Purchases		(40,145	)		(51,464	)
FHLB stock redeemed		2,081			1,108
FRB stock purchased		(373	)		(493	)
Net cash received from acquisitions		5,044			6,901
Loan origination and principal collection, net		(30,040	)		(50,189	)
Proceeds from bank owned life insurance		-			519
Purchases of bank owned life insurance		(845	)		-
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans		28			352
Proceeds from sale of premises and equipment		13			2,500
Purchases of premises and equipment, net		(15,693	)		(8,389	)
Net cash used in investing activities		(29,228	)		(35,900	)

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2020			2019
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	102,765		$	70,144
Net advances from FRB borrowings		23,786			-
Net short-term payments on FHLB and other borrowings		(27,000	)		(29,687	)
Long-term advances from FHLB and other borrowings		10,000			33,000
Payments on long-term FHLB and other borrowings		(37,859	)		(28,836	)
Proceeds from issuance of subordinated debentures		15,000			-
Repayment of subordinated debentures		(10,000	)		-
Payments for debt issuance costs		(335	)		-
Purchase of treasury stock		(987	)		(1,210	)
Dividends paid		(1,955	)		(1,797	)
Net cash provided by financing activities		73,415			41,614

NET INCREASE IN CASH AND CASH EQUIVALENTS		47,893			2,085

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

CASH AND CASH EQUIVALENTS, end of period	$	72,811		$	13,286


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	5,652		$	5,245
Cash paid during the period for income taxes	$	5,200		$	1,131

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in fair value of securities available-for-sale	$	5,006		$	4,568
Mortgage servicing rights recognized	$	4,133		$	2,231
Right-of-use assets obtained in exchange for lease liabilities	$	104		$	2,374
Loans transferred to real estate and other assets acquired in foreclosure	$	37		$	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 nine-month period ended September 30, 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. WFS was a wholly owned subsidiary of WB and was acquired through the 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 September 30, 2020 for recognition and/or disclosure.

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	$	11,544	$	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	$	103,631	$	107,516

Liabilities assumed:
Deposits	$	86,572	$	92,706
Accrued expenses and other liabilities		4,554		1,960
Other borrowings		2,500		-
Total liabilities assumed	$	93,626	$	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 $4,962,000. 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 and nine months ended September 30, 2020, accretion of the loan discount was $264,000 and $512,000, respectively. The remaining accretable loan discount was $654,000 as of September 30, 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 and nine months ended September 30, 2020, accretion of the loan discount was $182,000 and $513,000, respectively. The remaining accretable loan discount was $820,000 as of September 30, 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 remaining balance of the acquired impaired loans as of September 30, 2020 was $129,000.

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 from date of acquisition. 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 from date of acquisition.

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

Direct costs related to the acquisitions were expensed as incurred. There were no acquisition costs recorded during the three months ended September 30, 2020. The Company recorded acquisition costs related to WHC of $157,000 during the nine months ended September 30, 2020 and $818,000 during the year ended December 31, 2019. The Company recorded acquisition costs related to BMB of $1,380,000 during the year ended December 31, 2019. Acquisition costs included professional fees and data processing expenses incurred related to the acquisitions.

Operations of acquired entities have been included in the consolidated financial statements since date of acquisition. The Company does not consider them as separate reporting segments and does not track the amount of revenues and net income attributable since acquisition. As such, it is impracticable to determine such amounts for the period from acquisition date through September 30, 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 and nine months ended September 30, 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 and nine months ended September 30, 2019.

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
	(Dollars in Thousands, Except Per Share Data)		(Dollars in Thousands, Except Per Share Data)
Pro forma net income⁽¹⁾
Net interest income after loan loss provision	$	9,720	$	28,918
Noninterest income		8,709		18,484
Noninterest expense		12,913		35,785
Income before provision for income taxes		5,516		11,617
Income tax provision		1,103		2,323
Net income	$	4,413	$	9,294

Pro forma earnings per share⁽¹⁾
Basic earnings per share	$	0.69	$	1.45
Diluted earnings per share	$	0.68	$	1.44

Basic weighted average shares outstanding		6,403,693		6,420,711
Diluted weighted average shares outstanding		6,425,380		6,442,934

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

	September 30, 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 obligations	$	2,269	$	39	$	-		$	2,308	$	686	$	9	$	-		$	695
U.S. treasury obligations		5,144		544		-			5,688		12,632		270		-			12,902
Municipal obligations		90,182		5,495		(6	)		95,671		50,699		1,616		(93	)		52,222
Corporate obligations		10,586		87		(9	)		10,664		8,356		40		(8	)		8,388
Mortgage-backed securities		8,156		146		(6	)		8,296		9,460		56		(21	)		9,495
Collateralized mortgage obligations		25,041		884		(3	)		25,922		33,129		297		(92	)		33,334
Asset-backed securities		17,166		15		(377	)		16,804		10,110		-		(271	)		9,839
Total	$	158,544	$	7,210	$	(401	)	$	165,353	$	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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(In Thousands)

Proceeds from sale of available-for-sale securities	$	-	$	-	$	18,149	$	53,257

Gross realized gain on sale of available-for-sale securities	$	-	$	-	$	1,068	$	549
Gross realized loss on sale of available-for-sale securities		-		-		-		(500	)
Net realized gain on sale of available-for-sale securities	$	-	$	-	$	1,068	$	49

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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.

	September 30, 2020
	Amortized		Fair
	Cost		Value
	(In Thousands)

Due in one year or less	$	1,976	$	1,987
Due from one to five years		16,793		17,517
Due from five to ten years		17,892		18,572
Due after ten years		88,686		93,059
		125,347		131,135
Mortgage-backed securities		8,156		8,296
Collateralized mortgage obligations		25,041		25,922
Total	$	158,544	$	165,353

As of September 30, 2020 and December 31, 2019 securities with a fair value of $21,238,000 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:

	September 30, 2020
	Less Than 12 Months					12 Months or Longer
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In Thousands)
U.S. government obligations	$	-	$	-		$	-	$	-
U.S. treasury obligations		-		-			-		-
Municipal obligations		950		(6	)		-		-
Corporate obligations		3,241		(9	)		-		-
Mortgage-backed securities and collateralized mortgage obligations		1,748		(3	)		1,614		(6	)
Asset-backed securities		2,476		(14	)		9,555		(363	)
Total	$	8,415	$	(32	)	$	11,169	$	(369	)

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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)
U.S. government obligations	$	-	$	-		$	-	$	-
U.S. treasury obligations		-		-			-		-
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 and nine months ended September 30, 2020, or 2019. As of September 30, 2020 and December 31, 2019, there were, respectively, 21 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 September 30, 2020 and December 31, 2019, there were no U.S. government or U.S. treasury obligations with unrealized losses. As of September 30, 2020, 8 municipal obligations had unrealized losses of approximately 0.63% of the amortized cost associated with these securities. At December 31, 2019, 10 municipal obligations had unrealized losses of approximately 0.83% of the amortized cost associated with these securities. As of September 30, 2020, 3 corporate obligations had unrealized losses of approximately 0.28% of the amortized cost associated with these securities. At December 31, 2019, 1 corporate obligation had an unrealized loss of approximately 0.80% of the amortized cost 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 September 30, 2020, 2 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses of approximately 0.27% of the amortized cost associated with these securities. At December 31, 2019, 12 MBSs and CMOs had unrealized losses of approximately 0.63% of the amortized cost 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 September 30, 2020, 8 asset-backed securities (“ABSs”) had unrealized losses of approximately 3.04% of the amortized cost associated with these securities. At December 31, 2019, 5 ABSs had unrealized losses of approximately 2.68% of the amortized cost 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:

	September 30,			December 31,
	2020			2019
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	152,835		$	157,898
Commercial real estate		432,473			434,025

Other loans:
Home equity		61,460			56,414
Consumer		20,694			18,882
Commercial		183,611			113,319

Total		851,073			780,538

Deferred loan fees, net		(2,595	)		(1,303	)
Allowance for loan losses		(11,300	)		(8,600	)
Total loans, net	$	837,178		$	770,635

Within the loan categories above, $11,274,000 and $13,602,000 was guaranteed by the United States Department of Agriculture Rural Development at September 30, 2020 and December 31, 2019, respectively. Also within the loan categories above, $9,460,000 and $5,701,000 was guaranteed by the United States Department of Agriculture Farm Service Agency at September 30, 2020 and December 31, 2019, respectively. In addition, $45,216,000 was guaranteed by the Small Business Administration ("SBA") under their Payroll Protection Program ("PPP") at September 30, 2020. Deferred loan fees, net includes $1,207,000 of remaining deferred fees related to the PPP at September 30, 2020.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

Allowance for loan losses activity was as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

Internal classification of the loan portfolio was as follows:

	September 30, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	108,957	$	-	$	865	$	199	$	-	$	110,021
Residential 1-4 family construction		42,477		-		337		-		-		42,814
Commercial real estate		304,205		1,633		2,647		-		-		308,485
Commercial construction and development		56,913		14		-		-		-		56,927
Farmland		65,399		136		1,473		53		-		67,061
Other loans:
Home equity		61,345		-		115		-		-		61,460
Consumer		20,531		-		163		-		-		20,694
Commercial		121,769		829		705		-		-		123,303
Agricultural		58,617		446		814		431		-		60,308
Total	$	840,213	$	3,058	$	7,119	$	683	$	-	$	851,073

	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.

	September 30, 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	$	115	$	-	$	115	$	694	$	109,212	$	110,021
Residential 1-4 family construction		952		-		952		337		41,525		42,814
Commercial real estate		919		57		976		916		306,593		308,485
Commercial construction and development		-		-		-		-		56,927		56,927
Farmland		41		-		41		1,435		65,585		67,061
Other loans:
Home equity		67		-		67		115		61,278		61,460
Consumer		43		-		43		163		20,488		20,694
Commercial		57		-		57		668		122,578		123,303
Agricultural		29		-		29		1,290		58,989		60,308
Total	$	2,223	$	57	$	2,280	$	5,618	$	843,175	$	851,073

	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.

	September 30, 2020
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	791	$	850	$	296
Residential 1-4 family construction		337		387		-
Commercial real estate		2,549		2,789		-
Commercial construction and development		14		14		-
Farmland		1,435		1,451		-
Other loans:
Home equity		115		138		-
Consumer		163		191		-
Commercial		668		796		-
Agricultural		1,450		1,707		-
Total	$	7,522	$	8,323	$	296

	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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	Average Recorded Investment				Average Recorded Investment
	(In Thousands)				(In Thousands)
Real estate loans:
Residential 1-4 family	$	860	$	401	$	704	$	355
Residential 1-4 family construction		337		337		337		486
Commercial real estate		2,561		787		1,565		663
Commercial construction and development		54		-		32		7
Farmland		1,345		476		956		238
Other loans:
Home equity		153		149		107		295
Consumer		181		137		160		134
Commercial		731		768		746		551
Agricultural		1,470		615		975		272
Total	$	7,692	$	3,670	$	5,582	$	3,001

Interest income recognized on impaired loans for the three and nine months ended September 30, 2020 and 2019 is considered insignificant. Interest payments received on a cash basis related to impaired loans were $485,000 and $394,000 for September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020 and December 31, 2019, there were troubled debt restructured (“TDR”) loans of $1,825,000 and $246,000, respectively.

During the three months ended September 30, 2020, there were no new TDR loans. During the nine months ended September 30, 2020 there were a total of three new TDR loans. The recorded investment at time of restructure was $94,000 for a commercial construction and development loan, $1,633,000 for a commercial real estate loan and $160,000 for an agricultural loan. No charge-offs were incurred and the loans are on accrual status. The recorded investments were $14,000, $1,633,000 and $160,000, respectively at September 30, 2020. There were no new TDR loans during the three or nine months ended September 30, 2019.

There was one loan modified as a TDR that defaulted during the three and nine months ended September 30, 2020 where the default occurred within 12 months of restructuring. As a result, a charge-off of $67,000 was incurred on this loan during the third quarter bringing the net book balance to $0. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.

As of September 30, 2020, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in troubled debt restructures.

The Company has offered borrowers accommodations due to the impact from COVID-19, including 90-day deferrals, interest only payments and forbearances, which are not considered TDR's as they met the criteria established in the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). In addition, during the three months ended September 30, 2020, the Montana Board of Investments ("MBOI") began offering 12-months of interest payment assistance to 26 qualified borrowers. As of September 30, 2020, loan modifications for 90-day deferrals, interest only payments and the MBOI program included 66 borrowers representing $55,210,000 in loans compared to 315 borrowers representing $125,713,000 as of June 30, 2020. As of September 30, 2020, there were approximately 76 forbearances approved for residential mortgage loans, of which 68 are sold and serviced.

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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 $1,395,326,000 and $1,169,869,000 at September 30, 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 $815,000 and $671,000 for the three months ended September 30, 2020 and 2019, respectively. Mortgage loan servicing fees were $2,320,000 and $1,918,000 for the nine months ended September 30, 2020 and 2019, respectively. These fees, net of amortization, are included in 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 $16,253,000 and $8,402,000 at September 30, 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
	September 30,
	2020			2019
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	9,550		$	7,666
Mortgage servicing rights capitalized		1,700			1,030
Amortization of mortgage servicing rights		(854	)		(478	)
Ending balance	$	10,396		$	8,218
Valuation allowance:
Beginning balance		(1,216	)		-
Recovery of servicing rights		338			-
Ending balance		(878	)		-
Mortgage servicing rights, net	$	9,518		$	8,218

	As of or For the
	Nine Months Ended
	September 30,
	2020			2019
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	8,739		$	7,100
Mortgage servicing rights capitalized		4,133			2,231
Amortization of mortgage servicing rights		(2,476	)		(1,113	)
Ending balance	$	10,396		$	8,218
Valuation allowance:
Beginning balance		-			-
Impairment of servicing rights		(878	)		-
Ending balance		(878	)		-
Mortgage servicing rights, net	$	9,518		$	8,218

After an impairment expense on mortgage servicing rights assets of $1,216,000 was recorded for the six months ended June 30, 2020, a recovery of $338,000 was recorded for the three months ended September 30, 2020 as a result of slower than expected prepayment speed assumptions. Impairment of servicing rights is included in other noninterest expense on the consolidated statements of income.

The fair values of these rights were $9,518,000 and $9,835,000 at September 30, 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:

	September 30,	December 31,
	2020	2019
Key assumptions:
Discount rate	12%	12%
Prepayment speed range	234 - 337%	110 - 246%
Weighted average prepayment speed	289%	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:

	September 30,		December 31,
	2020		2019
	(In Thousands)

Noninterest checking	$	295,058	$	200,035
Interest bearing checking		155,671		116,397
Savings		169,981		126,991
Money market		187,245		132,506
Time certificates of deposit		190,375		233,064
Total	$	998,330	$	808,993

Time certificates of deposits include $495,000 and $10,180,000 related to fixed rate brokered CDs at September 30, 2020 and December 31, 2019, respectively. In addition, time certificates of deposits include $0 and $16,000,000 related to fixed rate brokered certificates through the Certificate of Deposit Account Registry Service (“CDARS”) at September 30, 2020 and December 31, 2019, respectively.

NOTE 7. OTHER LONG-TERM DEBT

Other long-term debt consisted of the following:

	September 30, 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	$	(59	)	$	10,000	$	(92	)
Subordinated debentures fixed at 6.75%, due 2025		-		-			10,000		(122	)
Subordinated debentures fixed at 5.50% to floating, due 2030		15,000		(324	)		-		-
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035		5,155		-			5,155		-
Total other long-term debt	$	30,155	$	(383	)	$	25,155	$	(214	)

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

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

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

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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 three-month LIBOR plus 1.42%, making the rate 1.654% and 3.328% as of September 30, 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.

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		-			4,811			4,811
Amounts reclassified from accumulated other comprehensive income, before income taxes		-			(1,068	)		(1,068	)
Income tax provision		-			(986	)		(986	)
Total other comprehensive income		-			2,757			2,757
Balance, June 30, 2020		-			4,086			4,086
Other comprehensive income, before reclassifications and income taxes		-			1,263			1,263
Amounts reclassified from accumulated other comprehensive income, before income taxes		-			-			-
Income tax provision		-			(332	)		(332	)
Total other comprehensive income		-			931			931
Balance, September 30, 2020	$	-		$	5,017		$	5,017

Balance, January 1, 2019	$	227		$	(1,338	)	$	(1,111	)
Other comprehensive income, before reclassifications and income taxes		296			3,451			3,747
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes		(605	)		(49	)		(654	)
Income tax benefit (provision)		82			(896	)		(814	)
Total other comprehensive (loss) income		(227	)		2,506			2,279
Balance, June 30, 2019		-			1,168			1,168
Other comprehensive income, before reclassifications and income taxes		-			1,166			1,166
Amounts reclassified from accumulated other comprehensive income, before income taxes		-			-			-
Income tax provision		-			(307	)		(307	)
Total other comprehensive income		-			859			859
Balance, September 30, 2019	$	-		$	2,027		$	2,027

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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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(Dollars in Thousands, Except Per Share Data)

Basic weighted average shares outstanding		6,776,417		6,403,693		6,804,495		6,420,711
Dilutive effect of stock compensation		37,322		21,687		29,434		22,223
Diluted weighted average shares outstanding		6,813,739		6,425,380		6,833,929		6,442,934

Net income available to common shareholders	$	6,380	$	4,105	$	16,042	$	8,535

Basic earnings per common share	$	0.94	$	0.64	$	2.36	$	1.33

Diluted earnings per common share	$	0.94	$	0.63	$	2.35	$	1.32

There were no anti-dilutive shares at September 30, 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 $0.0950 per share for the quarters ended September 30 and December 31, 2019. A dividend of $0.0950 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 $0.0950 per share was declared on April 23, 2020 and paid on June 5, 2020 to shareholders of record on May 15, 2020. A dividend of $0.0975 per share was declared on July 23, 2020 and paid on September 4, 2020 to shareholders of record on August 14, 2020. A dividend of $0.0975 per share was declared on October 22, 2020, payable on December 4, 2020 to shareholders of record on November 13, 2020.

Stock Repurchase Program

On July 23, 2020, Eagle's Board of Directors (the "Board") authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. During the third quarter of 2020, the Company purchased 41,337 shares at an average price of $15.75 under this repurchase plan. The plan expires on July 23, 2021.

On July 18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2019 or the first quarter of 2020. However, during the second quarter of 2020, 1,281 shares were purchased at an average price of $16.95 per share. In addition, during the third quarter of 2020, 20,158 shares were purchased at an average price of $15.60 per share. This plan expired 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. This 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:

	September 30, 2020						December 31, 2019
	Notional		Fair Value				Notional		Fair Value
	Amount		Asset		Liability		Amount		Asset		Liability
	(In Thousands)
Interest rate lock commitments	$	280,492	$	7,148	$	-	$	48,303	$	554	$	-
Forward TBA mortgage-backed securities		226,000		-		432		67,000		-		201

Changes in the fair value of the derivatives are recorded in mortgage banking, net within noninterest income on the consolidated statements of income. Net gains of $2,961,000 and $1,393,000 were recorded for the three months ended September 30, 2020 and 2019, respectively. Net gains of $6,363,000 and $864,000 were recorded for the nine months ended September 30, 2020 and 2019, respectively.

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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 judgment and estimation.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy at the reporting date, is set forth below.

Available-for-Sale Securities – Securities classified as available-for-sale are reported at fair value utilizing Level 1 (nationally recognized securities exchanges) and Level 2 inputs. For level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include but is not limited to dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions.

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

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

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

Real Estate and Other Repossessed Assets – Fair values are determined at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based primarily on third party appraisals, less costs to sell and are considered Level 3 inputs for determining fair value. Repossessed assets are reviewed and evaluated periodically for additional impairment and adjusted accordingly.

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

	September 30, 2020
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government obligations		-	$	2,308	$	-	$	2,308
U.S. treasury obligations		5,688		-		-		5,688
Municipal obligations		-		95,671		-		95,671
Corporate obligations		-		10,664		-		10,664
Mortgage-backed securities		-		8,296		-		8,296
Collateralized mortgage obligations		-		25,922		-		25,922
Asset-backed securities		-		16,804		-		16,804
Loans held-for-sale		-		41,484		-		41,484
Interest rate lock commitments		-		-		7,148		7,148
Financial liabilities:
Forward TBA mortgage-backed securities		-		432		-		432

	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 obligations		-	$	695	$	-	$	695
U.S. treasury obligations		12,902		-		-		12,902
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

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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:

	September 30, 2020
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans	$	-	$	-	$	482	$	482
Real estate and other repossessed assets		-		-		-		-
Mortgage servicing rights		-		-		9,518		9,518

	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	10 - 15%
		Prepayment speeds	100 - 350%
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 tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2020.

	Interest
	Rate Lock
	Commitments
	(In Thousands)
Balance, July, 1 2020	$	5,501
Purchases and issuances		8,360
Sales and settlements		(6,713	)
Balance, September 30, 2020	$	7,148

Net change in unrealized gains relating to items held at end of period	$	1,647

	Interest
	Rate Lock
	Commitments
	(In Thousands)
Balance, January 1, 2020	$	554
Purchases and issuances		21,061
Sales and settlements		(14,467	)
Balance, September 30, 2020	$	7,148

Net change in unrealized gains relating to items held at end of period	$	6,594

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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.

	September 30, 2020
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	72,811	$	-	$	-	$	72,811	$	72,811
FHLB stock		2,817		-		-		2,817		2,817
FRB stock		2,974		-		-		2,974		2,974
Loans receivable, gross		-		-		857,472		857,472		848,478
Accrued interest and dividends receivable		6,615		-		-		6,615		6,615
Mortgage servicing rights		-		-		9,518		9,518		9,518
Financial liabilities:
Non-maturing interest bearing deposits		-		512,897		-		512,897		512,897
Noninterest bearing deposits		295,058		-		-		295,058		295,058
Time certificates of deposit		-		-		191,384		191,384		190,375
Accrued expenses and other liabilities		17,987		-		-		17,987		17,987
FHLB advances and other borrowings		-		-		59,998		59,998		59,777
Other long-term debt		-		-		29,323		29,323		30,155

	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, gross		-		-		778,923		778,923		779,235
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 composed of individuals from the finance and credit administration areas of the Company. We are currently developing an implementation plan, including assessment of processes, segmentation of the loan portfolio and identifying and adding data fields necessary for analysis. The adoption of this standard is likely to result in an increase in the allowance for loan and lease losses as a result of changing from an “incurred loss” model to an “expected loss” model. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance is effective for the Company on January 1, 2023 and adoption of the standard is being evaluated to assess the impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as SOFR. The guidance was effective upon issuance and generally can be applied through December 31, 2022. The 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 nine months ended September 30, 2020. The rate reductions add continued pressure on loan yields.

Recent Events

COVID-19

The third quarter performance was strong due to higher mortgage banking operations, as a result of a historically low interest rate environment, and substantial gains from loan sales. However, the Company also continues to see the impact of the COVID-19 pandemic and its consequences on our Montana communities. The Bank is focused on supporting our customers, communities and employees while prudently managing risk. The Bank is closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been impacted.

Health care and social assistance, hotels and lodging, bars and restaurants, schools and childcare, farmers and ranchers, casinos, and nursing homes, among others, have seen dramatic changes in revenues for their business. The Bank evaluates exposure in the most affected industries. The Bank continues to reach out to specific borrowers to assess the risks and understand their needs.

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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 has offered multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. In addition, during the three months ended September 30, 2020, the Montana Board of Investments ("MBOI") began offering 12-months of interest payment assistance to qualified borrowers. As of September 30, 2020, loan modifications for 66 borrowers represented $55.21 million in loans compared to 315 borrowers representing $125.71 million as of June 30, 2020. The Bank qualified 26 borrowers for the MBOI program representing $23.68 million in loans, which are included in the third quarter modifications. As of September 30, 2020 there were approximately 76 forbearances approved for residential mortgage loans, of which 68 are sold and serviced. 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 credit lines were 83.4% at the end of the third quarter and were consistent with the previous quarter and historical usage. The Paycheck Protection Program has provided 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 September 30, 2020, had helped 758 customers receive $45.22 million in SBA PPP loans. The Bank has started to process applications for PPP loan forgiveness for customers, with 569 loans representing $9.92 million of the total SBA PPP loans qualifying for the streamlined PPP loan forgiveness application.

As of September 30, 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.

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 September 30, 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 September 30, 2020 we had goodwill of $20.80 million.

While all industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we had exposures in the following impacted industries, as a percentage of loans as of September 30, 2020: health and social assistance (2.9%), hotels and lodging (4.2%), bars and restaurants (2.5%), casinos (1.2%) and nursing homes (0.4%).

The Company is committed to assisting our customers and communities in this time of need. The State of Montana entered its Phase 2 reopening on June 1, 2020 and Eagle reopened branch lobbies. However, due to increased COVID-19 cases throughout the state, branch lobbies were closed again. In addition, effective July 16, 2020, a mandatory mask directive for indoor areas open to the public was implemented for the State of Montana. Accommodations have been made for employees to work from home when feasible while keeping drive-ups open and scheduling in-person appointments.

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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 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 September 30, 2020 and December 31, 2019.

Total assets were $1.26 billion at September 30, 2020, an increase of $200.77 million, or 19.0% from $1.05 billion at December 31, 2019. The increase was largely due to the change in securities available-for sale and loans receivable. Securities available-for-sale increased by $38.47 million from December 31, 2019. Loans receivable increased by $66.54 million from December 31, 2019. In addition, total cash and cash equivalents increased by $47.89 from December 31, 2019 and has been impacted by PPP funds deposited by borrowers and FRB's Payroll Protection Program Loan Funding ("PPPLF") facility. Total liabilities were $1.11 billion at September 30, 2020, an increase of $175.07 million, or 18.8%, from $932.60 million at December 31, 2019. The increase was largely due to an increase in deposits partially offset by a reduction in FHLB advances and other borrowings. Total deposits increased by $189.34 million from December 31, 2019. Total shareholders’ equity increased by $25.70 million from December 31, 2019.

Financial Condition Details

Investment Activities

The following table summarizes investment activities:

	September 30,					December 31,
	2020					2019
	Fair Value		Percentage of Total			Fair Value		Percentage of Total
	(Dollars in Thousands)
Securities available-for-sale:
U.S. government obligations	$	2,308		1.40	%	$	695		0.55	%
U.S. treasury obligations		5,688		3.44	%		12,902		10.17	%
Municipal obligations		95,671		57.85	%		52,222		41.17	%
Corporate obligations		10,664		6.45	%		8,388		6.61	%
Mortgage-backed securities		8,296		5.02	%		9,495		7.48	%
Collateralized mortgage obligations		25,922		15.68	%		33,334		26.27	%
Asset-backed securities		16,804		10.16	%		9,839		7.75	%
Total securities available-for-sale	$	165,353		100.00	%	$	126,875		100.00	%

Securities available-for-sale were $165.35 million at September 30, 2020, an increase of $38.47 million, or 30.3%, from $126.88 million at December 31, 2019. Securities increased during the period due to the WHC acquisition, which included acquired securities of $43.71 million. Excluding securities acquired, securities decreased by $5.23 million. Sales and maturities of securities were largely offset by purchases during the period.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Lending Activities

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

	September 30,						December 31,
	2020						2019
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Real estate loans:
Residential 1-4 family ⁽¹⁾	$	110,021			12.93	%	$	119,296			15.28	%
Residential 1-4 family construction		42,814			5.03	%		38,602			4.95	%
Total residential 1-4 family		152,835			17.96	%		157,898			20.23	%

Commercial real estate		308,485			36.24	%		331,062			42.41	%
Commercial construction and development		56,927			6.69	%		52,670			6.75	%
Farmland		67,061			7.88	%		50,293			6.44	%
Total commercial real estate		432,473			50.81	%		434,025			55.60	%

Total real estate loans		585,308			68.77	%		591,923			75.83	%

Other loans:
Home equity		61,460			7.22	%		56,414			7.23	%
Consumer		20,694			2.43	%		18,882			2.42	%

Commercial		123,303			14.49	%		72,797			9.33	%
Agricultural		60,308			7.09	%		40,522			5.19	%
Total commercial		183,611			21.58	%		113,319			14.52	%

Total other loans		265,765			31.23	%		188,615			24.17	%

Total loans		851,073			100.00	%		780,538			100.00	%

Deferred loan fees		(2,595	)					(1,303	)
Allowance for loan losses		(11,300	)					(8,600	)
Total loans, net	$	837,178					$	770,635

⁽¹⁾

Excludes loans held-for-sale.

Loans receivable, net increased $66.54 million, or 8.6%, to $837.18 million at September 30, 2020 from $770.64 million at December 31, 2019. The increase was impacted by the WHC acquisition. The WHC acquisition included $43.42 million of acquired loans. Excluding acquired loans, loans receivable increased by $23.12 million. Including acquired loans, total commercial loans increased $70.29 million, total commercial real estate loans decreased $1.56 million, total residential loans decreased $5.06 million, home equity loans increased $5.05 million and consumer loans increased $1.81 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 $928.87 million for the nine months ended September 30, 2020. Total residential 1-4 family originations were $678.24 million, which includes $636.77 million of loans held-for-sale originations. Total commercial real estate originations were $101.58 million. Total commercial originations were $115.63 million, which includes $45.71 million of SBA PPP loans. Home equity loan originations totaled $23.93 million. Consumer loan originations totaled $9.49 million. Loans held-for-sale increased by $15.87 million to $41.48 million at September 30, 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. As of September 30, 2020 and December 31, 2019, the Bank had $25,000 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:

	September 30,			December 31,
	2020			2019
	(Dollars in Thousands)
Non-accrual loans
Real estate loans:
Residential 1-4 family	$	694		$	618
Residential 1-4 family construction		337			337
Commercial real estate		916			583
Commercial construction and development		-			50
Farmland		1,435			323
Other loans:
Home equity		97			78
Consumer		163			156
Commercial		668			750
Agricultural		1,290			499
Accruing loans delinquent 90 days or more
Real estate loans:
Residential 1-4 family		-			4
Commercial real estate		57			-
Other loans:
Agricultural		-			1,805
Restructured loans:
Real estate loans:
Commercial real estate		1,633			-
Commercial construction and development		14			-
Farmland		-			153
Other loans:
Home equity		18			20
Commercial		-			74
Agricultural		160			-
Total nonperforming loans		7,482			5,450
Real estate owned and other repossessed property, net		25			26
Total nonperforming assets	$	7,507		$	5,476

Total nonperforming loans to total loans		0.88	%		0.70	%
Total nonperforming loans to total assets		0.60	%		0.52	%
Total allowance for loan loss to nonperforming loans		151.03	%		157.80	%
Total nonperforming assets to total assets		0.60	%		0.52	%

Non-accrual loans as of September 30, 2020 and December 31, 2019 include $1.97 million and $1.05 million, respectively of acquired loans that deteriorated subsequent to the acquisition date.

As of September 30, 2020, loan modifications for 66 borrowers represented $55.21 million in loans compared to 315 borrowers representing $125.71 million as of June 30, 2020. As of September 30, 2020 there are approximately 76 forbearances approved for residential mortgage loans, of which 68 are sold and serviced.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

	September 30,					December 31,
	2020					2019
			Percent					Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Noninterest checking	$	295,058		29.55	%	$	200,035		24.72	%
Interest bearing checking		155,671		15.59	%		116,397		14.39	%
Savings		169,981		17.03	%		126,991		15.70	%
Money market		187,245		18.76	%		132,506		16.38	%
Total		807,955		80.93	%		575,929		71.19	%
Certificates of deposit accounts:
IRA certificates		24,756		2.48	%		25,240		3.12	%
Brokered certificates		495		0.05	%		10,180		1.26	%
Other certificates		165,124		16.54	%		197,644		24.43	%
Total certificates of deposit		190,375		19.07	%		233,064		28.81	%
Total deposits	$	998,330		100.00	%	$	808,993		100.00	%

Deposits increased by $189.34 million, or 23.4%, to $998.33 million at September 30, 2020 from $808.99 million at December 31, 2019. The increase was due in part to the WHC acquisition. Excluding acquired deposits, total deposits increased by $102.77 million. Including acquired deposits, noninterest checking increased by $95.02 million, money market increased by $54.74 million, savings increased by $42.99 million and interest bearing checking increased by $39.27 million. Certificates of deposit decreased by $42.68 million. The decrease in time certificates of deposit was impacted by a decrease of $9.68 million in fixed rate brokered CDs, as well as a decrease in other certificates of $32.52 million.

The following table summarizes borrowing activity:

	September 30,					December 31,
	2020					2019
	Net		Percent			Net		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
FHLB advances and other borrowings	$	59,777		66.75	%	$	88,350		77.99	%
Other long-term debt:
Senior notes fixed at 5.75%, due 2022		9,941		11.10	%		9,908		8.74	%
Subordinated debentures fixed at 6.75%, due 2025		-		0.00	%		9,878		8.72	%
Subordinated debentures fixed at 5.50% to floating, due 2030		14,676		16.39	%		-		0.00	%
Subordinated debentures variable, due 2035		5,155		5.76	%		5,155		4.55	%
Total other long-term debt		29,772		33.25	%		24,941		22.01	%
Total borrowings	$	89,549		100.00	%	$	113,291		100.00	%

FHLB advances and other borrowings decreased by $28.57 million, or 32.3%, to $59.78 million at September 30, 2020 from $88.35 million at December 31, 2019. The FHLB advances and other borrowings at September 30, 2020 include $23.79 million of FRB borrowings as Eagle used the FRB's "PPPLF" facility as a partial source of funding for its SBA PPP loans. Excluding FRB borrowings, FHLB advances decreased by $52.36 million from December 31, 2019. This decrease is due to slower than expected loan growth coupled with increased liquidity resulting from the WHC acquisition and growth in non-maturity deposits fueled by PPP funding and economic stimulus. Total other long-term debt increased by $4.83 million primarily due to the issuance in June 2020 of $15.00 million in subordinated notes due 2030, partially offset by the redemption in July 2020 of $10.00 million, 6.75% subordinated notes due 2025.

Shareholders’ Equity

Total shareholders’ equity increased $25.70 million, or 21.1%, to $147.36 million at September 30, 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, net income of $16.04 million and other comprehensive income of $3.69 million. These increases were slightly offset by dividends paid of $1.96 million and stock repurchases of $987,000.

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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 September 30,
	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	$	163,102	$	874		2.13	%	$	134,980	$	916		2.69	%
FHLB and FRB stock		6,299		95		5.98	%		8,049		107		5.27	%
Loans receivable⁽¹⁾		902,543		11,340		4.98	%		779,770		10,731		5.46	%
Other earning assets		43,662		30		0.27	%		4,188		19		1.80	%
Total interest earning assets		1,115,606		12,339		4.39	%		926,987		11,773		5.04	%
Noninterest earning assets		129,312							100,911
Total assets	$	1,244,918						$	1,027,898

Liabilities and equity:
Interest bearing liabilities:
Deposit accounts:
Checking	$	157,542	$	13		0.03	%	$	114,820	$	11		0.04	%
Savings		160,118		33		0.08	%		119,555		24		0.08	%
Money market		176,276		102		0.23	%		121,588		109		0.36	%
Certificates of deposit		200,527		631		1.25	%		213,073		878		1.63	%
Advances from FHLB and other borrowings including long-term debt		108,427		782		2.86	%		136,306		1,052		3.06	%
Total interest bearing liabilities		802,890		1,561		0.77	%		705,342		2,074		1.17	%
Noninterest checking		276,580							188,291
Other noninterest bearing liabilities		21,840							15,753
Total liabilities		1,101,310							909,386

Total equity		143,608							118,512

Total liabilities and equity	$	1,244,918						$	1,027,898
Net interest income/interest rate spread⁽²⁾			$	10,778		3.62	%			$	9,699		3.87	%

Net interest margin⁽³⁾						3.83	%						4.15	%
Total interest earning assets to interest bearing liabilities						138.95	%						131.42	%

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Analysis of Net Interest Income – continued

	For the Nine Months Ended September 30,
	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	$	168,170	$	2,853		2.26	%	$	137,533	$	2,802		2.72	%
FHLB and FRB stock		6,934		284		5.46	%		7,582		297		5.24	%
Loans receivable⁽¹⁾		870,114		33,832		5.18	%		753,541		31,378		5.57	%
Other earning assets		34,309		134		0.52	%		3,984		55		1.85	%
Total interest earning assets		1,079,527		37,103		4.58	%		902,640		34,532		5.11	%
Noninterest earning assets		124,192							95,835
Total assets	$	1,203,719						$	998,475

Liabilities and equity:
Interest bearing liabilities:
Deposit accounts:
Checking	$	147,054	$	47		0.04	%	$	115,549	$	33		0.04	%
Savings		149,129		118		0.11	%		118,972		61		0.07	%
Money market		160,477		362		0.30	%		121,907		305		0.33	%
Certificates of deposit		224,251		2,536		1.51	%		205,396		2,334		1.52	%
Advances from FHLB and other borrowings including long-term debt		115,861		2,362		2.72	%		131,011		3,031		3.09	%
Total interest bearing liabilities		796,772		5,425		0.91	%		692,835		5,764		1.11	%
Noninterest checking		250,132							179,539
Other noninterest bearing liabilities		18,935							12,487
Total liabilities		1,065,839							884,861

Total equity		137,880							113,614

Total liabilities and equity	$	1,203,719						$	998,475
Net interest income/interest rate spread⁽²⁾			$	31,678		3.67	%			$	28,768		4.00	%

Net interest margin⁽³⁾						3.91	%						4.26	%
Total interest earning assets to interest bearing liabilities						135.49	%						130.28	%

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis

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

	For the Three Months Ended September 30,
	2020									2019
				Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest earning assets:
Investment securities	$	191		$	(233	)	$	(42	)	$	(114	)	$	(6	)	$	(120	)
FHLB and FRB stock		(24	)		12			(12	)		19			8			27
Loans receivable⁽¹⁾		1,690			(1,081	)		609			2,452			578			3,030
Other earning assets		179			(168	)		11			25			(14	)		11
Total interest earning assets		2,036			(1,470	)		566			2,382			566			2,948

Interest bearing liabilities:
Checking, savings and money market accounts		61			(57	)		4			11			60			71
Certificates of deposit		(52	)		(195	)		(247	)		142			275			417
Advances from FHLB and other borrowings including long-term debt		(215	)		(55	)		(270	)		156			82			238
Total interest bearing liabilities		(206	)		(307	)		(513	)		309			417			726

Change in net interest income	$	2,242		$	(1,163	)	$	1,079		$	2,073		$	149		$	2,222

⁽¹⁾	Includes loans held-for-sale.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis – continued

	For the Nine Months Ended September 30,
	2020									2019
				Due to									Due to
	Volume			Rate			Net			Volume			Rate		Net
	(In Thousands)
Interest earning assets:
Investment securities	$	624		$	(573	)	$	51		$	(300	)	$	56	$	(244	)
FHLB and FRB stock		(25	)		12			(13	)		54			10		64
Loans receivable⁽¹⁾		4,854			(2,400	)		2,454			6,549			2,394		8,943
Other earning assets		419			(340	)		79			7			4		11
Total interest earning assets		5,872			(3,301	)		2,571			6,310			2,464		8,774

Interest bearing liabilities:
Savings, money market and checking accounts		121			7			128			29			147		176
Certificates of deposit		214			(12	)		202			311			792		1,103
Advances from FHLB and other borrowings including long-term debt		(351	)		(318	)		(669	)		451			410		861
Total interest bearing liabilities		(16	)		(323	)		(339	)		791			1,349		2,140

Change in net interest income	$	5,888		$	(2,978	)	$	2,910		$	5,519		$	1,115	$	6,634

⁽¹⁾	Includes loans held-for-sale.

Results of Operations for the Three Months Ended September 30, 2020 and 2019

Net Income. Eagle’s net income for the three months ended September 30, 2020 was $6.38 million compared to $4.11 million for the three months ended September 30, 2019. The increase of $2.27 million was due to an increase in noninterest income of $6.55 million, partially offset by an increase in noninterest expense of $4.13 million and an increase in provision for income taxes of $1.07 million. Basic and diluted earnings per share were both $0.94 for the current period. Basic earnings per share was $0.64 and diluted earnings per share was $0.63 for the prior year comparable period.

Net Interest Income. Net interest income increased to $10.78 million for the three months ended September 30, 2020, from $9.70 million for the same quarter in the prior year. The increase of $1.08 million, or 11.1%, was the result of an increase in interest and dividend income of $566,000 and a decrease in interest expense of $513,000.

Interest and Dividend Income. Interest and dividend income was $12.34 million for the three months ended September 30, 2020, compared to $11.77 million for the three months ended September 30, 2019, an increase of $566,000, or 4.8%. Interest and fees on loans increased to $11.34 million for the three months ended September 30, 2020 from $10.73 million for the three months ended September 30, 2019. This increase of $609,000, or 5.7%, 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 September 30, 2020. Net fee income of $431,000 earned on PPP loans for the three months ended September 30, 2020, along with the 1.0% contractual rate on PPP loans contributed to the downward push on loan yield. Average balances for loans receivable, including loans held-for-sale, for the three months ended September 30, 2020 were $902.54 million, compared to $779.77 million for the prior year period. This represents an increase of $122.77 million, or 15.7% and was impacted by the WHC acquisition, as well as organic growth. The average interest rate earned on loans receivable decreased by 48 basis points, from 5.46% to 4.98%. Interest accretion on purchased loans was $468,000 for the three months ended September 30, 2020 which resulted in a 17 basis point increase in net interest margin compared to $289,000 for the three months ended September 30, 2019 which resulted in a 12 basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale decreased by $42,000, or 4.6% period over period. Average balances for investments increased to $163.10 million for the three months ended September 30, 2020, from $134.98 million for the three months ended September 30, 2019. The increase in average investments is primarily due to the WHC acquisition. However, average interest rates earned on investments decreased to 2.13% for the three months ended September 30, 2020 from 2.69% for the three months ended September 30, 2019.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Three Months Ended September 30, 2020 and 2019 – continued

Interest Expense. Total interest expense was $1.56 million for the three months ended September 30, 2020 compared to $2.07 million for the three months ended September 30, 2019. The decrease of $513,000 or 24.7% was due to a decrease in interest expense on deposits of $243,000, as well as a decrease in interest expense on total borrowings of $270,000. The average balance for total deposits was $971.04 million for three months ended September 30, 2020 compared to $757.33 million for the three months ended September 30, 2019. This increase was impacted by the WHC acquisition. However, the overall average rate on total deposits was 0.32% for the three months ended September 30, 2020 compared to 0.54% for the three months ended September 30, 2019. The average balance for total borrowings decreased from $136.31 million for the three months ended September 30, 2019 to $108.43 million for the three months ended September 30, 2020. The average rate paid on total borrowings also decreased from 3.06% for the three months ended September 30, 2019, to 2.86% for the three months ended September 30, 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 September 30, 2020. Additionally, management considered the potential impact of COVID-19. Due to the economic slowdown, 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 $404,000. Therefore, the total loan loss provision for the three months ended September 30, 2020 was $854,000. Loan loss provisions were $694,000 for the three months ended September 30, 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, our allowance for credit losses will increase accordingly in future periods

Noninterest Income. Total noninterest income was $14.97 million for the three months ended September 30, 2020, compared to $8.42 million for the three months ended September 30, 2019. The increase of $6.55 million is largely due to an increase in net gain on sale of loans which increased to $11.10 million for the three months ended September 30, 2020 from $5.49 million for the three months ended September 30, 2019. This increase was impacted by increased mortgage originations and higher margins on mortgage loans sold. During the three months ended September 30, 2020, $266.76 million residential mortgage loans were sold compared to $155.37 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the three months ended September 30, 2020 was 4.17% compared to 3.53% for the three months ended September 30, 2019.

Noninterest Expense. Noninterest expense was $16.35 million for the three months ended September 30, 2020 compared to $12.22 million for the three months ended September 30, 2019. The increase of $4.13 million or 33.8% is primarily due to increased salaries and employee benefits expense of $3.77 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 compensation and benefits increased $1.64 million for the three months ended September 30, 2020 compared to the same period in the prior year. Salaries and employee benefits expense was also impacted by the addition of staff partly due to the WHC acquisition.

Provision for Income Taxes. Provision for income taxes was $2.17 million for the three months ended September 30, 2020, compared to $1.10 million for the three months ended September 30, 2019 due to increased income before provision for income taxes. The effective tax rate for the three months ended September 30, 2020 was 25.4% compared to 21.1% for the three months ended September 30, 2019.

Results of Operations for the Nine Months Ended September 30, 2020 and 2019

Net Income. Eagle’s net income for the nine months ended September 30, 2020 was $16.04 million compared to $8.54 million for the nine months ended September 30, 2019. The increase of $7.50 million was due to an increase in net interest income after loan loss provision of $2.16 million and noninterest income of $17.62 million, partially offset by an increase in noninterest expense of $10.61 million and an increase in provision for income taxes of $3.39 million. Basic earnings per share was $2.36 and diluted earnings per share was $2.35 for the current period. Basic earnings per share was $1.33 and diluted earnings per share was $1.32 for the prior year comparable period.

Net Interest Income. Net interest income increased to $31.68 million for the nine months ended September 30, 2020, from $28.77 million for the same period in the prior year. The increase of $2.91 million, or 10.1%, was the result of an increase in interest and dividend income of $2.57 million and a decrease in interest expense of $339,000.

Interest and Dividend Income. Interest and dividend income was $37.10 million for the nine months ended September 30, 2020, compared to $34.53 million for the nine months ended September 30, 2019, an increase of $2.57 million, or 7.4%. Interest and fees on loans increased to $33.83 million for the nine months ended September 30, 2020 from $31.38 million for the nine months ended September 30, 2019. This increase of $2.45 million, or 7.8%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the nine months ended September 30, 2020. Net fee income of $509,000 earned on PPP loans for the nine months ended September 30, 2020, along with the 1.0% contractual rate on PPP loans contributed to the downward push on loan yield. Average balances for loans receivable, including loans held-for-sale, for the nine months ended September 30, 2020 were $870.11 million, compared to $753.54 million for the prior year period. This represents an increase of $116.57 million, or 15.5% and was impacted by the WHC acquisition, as well as organic growth and PPP funding. However, the average interest rate earned on loans receivable decreased by 39 basis points, from 5.57% for the nine months ended September 30, 2019 to 5.18% for the nine months ended September 30, 2020. Interest accretion on purchased loans was $1.38 million for the nine months ended September 30, 2020 which resulted in a 17 basis point increase in net interest margin compared to $1.35 million for the nine months ended September 30, 2019 which resulted in a 20 basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale increased by $51,000, or 1.8% period over period. Average balances for investments increased to $168.17 million for the nine months ended September 30, 2020, from $137.53 million for the nine months ended September 30, 2019. The increase in average investments is primarily due to the WHC acquisition. However, average interest rates earned on investments decreased to 2.26% for the nine months ended September 30, 2020 from 2.72% for the nine months ended September 30, 2019.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Nine Months Ended September 30, 2020 and 2019 – continued

Interest Expense. Total interest expense was $5.43 million for the nine months ended September 30, 2020 compared to $5.76 million for the nine months ended September 30, 2019. The decrease of $339,000 or 5.9% was due to a decrease in interest expense on total borrowings of $669,000, partially offset by an increase in interest expense on deposits of $330,000. The average balance for total deposits was $931.04 million for nine months ended September 30, 2020 compared to $741.36 million for the nine months ended September 30, 2019. This increase was impacted by the WHC acquisition and also increased non-maturing deposits due to PPP funding and economic stimulus. However, the overall average rate on total deposits decreased to 0.44% for the nine months ended September 30, 2020 compared to 0.49% for the nine months ended September 30, 2019. The average balance for total borrowings decreased from $131.01 million for the nine months ended September 30, 2019 to $115.86 million for the nine months ended September 30, 2020. The average rate paid on total borrowings also decreased from 3.09% for the nine months ended September 30, 2019, to 2.72% for the nine months ended September 30, 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 $1.35 million in loan loss provisions for the nine months ended September 30, 2020. Additionally, management considered the potential impact of COVID-19. Due to the economic slowdown, 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 $1.40 million. Therefore, the total loan loss provision for the nine months ended September 30, 2020 was $2.75 million. Loan loss provisions were $2.00 million for the nine months ended September 30, 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, our allowance for credit losses will increase accordingly in future periods. Total nonperforming loans, including restructured loans, net, was $7.48 million at September 30, 2020 compared to $5.45 million at December 31, 2019. The Bank had $25,000 in other real estate owned and other repossessed assets at September 30, 2020 compared to $26,000 at December 31, 2019.

Noninterest Income. Total noninterest income was $36.97 million for the nine months ended September 30, 2020, compared to $17.62 million for the nine months ended September 30, 2019. The increase of $19.35 million is largely due to an increase in net gain on sale of loans which increased to $24.43 million for the nine months ended September 30, 2020 from $11.45 million for the nine months ended September 30, 2019. This increase was impacted by increased mortgage originations and higher margins on mortgage loans sold. During the nine months ended September 30, 2020, $621.11 million residential mortgage loans were sold compared to $329.05 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the nine months ended September 30, 2020 was 3.93% compared to 3.48% for the nine months ended September 30, 2019. The increase in noninterest income was also impacted by mortgage banking activity of $7.16 million for the nine months ended September 30, 2020 compared to $2.48 million for the nine months ended September 30, 2019.

Noninterest Expense. Noninterest expense was $44.33 million for the nine months ended September 30, 2020 compared to $33.72 million for the nine months ended September 30, 2019. The increase of $10.61 million or 31.5% is largely due to increased salaries and employee benefits expense of $8.21 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 compensation and benefits increased $4.28 million for the nine months ended September 30, 2020 compared to the same period in the prior year. Salaries and employee benefits expense was also impacted by the addition of staff partly due to the WHC acquisition. Other noninterest expense includes $878,000 of impairment of servicing rights incurred during the nine months ended September 30, 2020.

Provision for Income Taxes. Provision for income taxes was $5.53 million for the nine months ended September 30, 2020, compared to $2.14 million for the nine months ended September 30, 2019 due to increased income before provision for income taxes. The effective tax rate for the nine months ended September 30, 2020 was 25.6% compared to 20.0% for the nine months ended September 30, 2019.

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 September 30, 2020 and December 31, 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

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 quarter ended September 30, 2020, liquidity levels remained relatively consistent with the prior quarters. Despite significant liquidity events during the quarter ended September 30, 2020, liquidity levels remained stable. Elevated cash levels from deposit growth sparked by PPP funds deposited, tax refunds, economic stimulus money and flight to quality was only partially offset by the increase in PPP loans. Subsequent to the end of the first 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, Eagle has utilized the FRB's PPPLF facility as a partial source for its SBA PPP loans. As of September 30, 2020, the Bank had $23.79 million in PPPLF borrowings secured by $23.79 million PPP loans at a rate of 0.35%. As the PPP loans are repaid, it is currently anticipated Eagle will repay Federal Reserve borrowings. The Company closed a $15.00 million subordinated debt offering in June of 2020, adding to borrowings. In July, $10.00 million in callable subordinated debt was paid off, reducing overall borrowings.

Capital Resources

As of September 30, 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 34.0% 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.

The Banks’s regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed "well capitalized" pursuant to State of Montana and FRB rules as of September 30, 2020. The Bank's Tier I leverage ratio increased slightly from 11.08% as of December 31, 2019 to 11.54% as of September 30, 2020, compared to a regulatory requirement of 4.00%. The Bank’s total capital, Tier 1 capital and common equity Tier 1 capital leverage ratios were 16.17%, 14.93% and 14.93%, respectively, compared to regulatory requirements of 10.50%, 8.50% and 7.00%, respectively. All of these ratios with the exception of the Tier 1 leverage ratio include the capital conservation buffer of 2.50%. The Bank’s capital position helps to mitigate its interest rate risk exposure.

	September 30, 2020
	(Unaudited)
	Dollar		% of
	Amount		Assets
	(Dollars in Thousands)
Total risk-based capital to risk weighted assets:
Actual capital level	$	147,332		16.17	%
Minimum required for capital adequacy purposes		95,660		10.50	%
Excess capital	$	51,672		5.67	%

Tier I capital to risk weighted assets:
Actual capital level	$	136,032		14.93	%
Minimum required for capital adequacy purposes		77,439		8.50	%
Excess capital	$	58,593		6.43	%

Common equity tier I capital to risk weighted assets:
Actual capital level	$	136,032		14.93	%
Minimum required for capital adequacy purposes		63,773		7.00	%
Excess capital	$	72,259		7.93	%

Tier I capital to adjusted total average assets:
Actual capital level	$	136,032		11.54	%
Minimum required for capital adequacy purposes		47,138		4.00	%
Excess capital	$	88,894		7.54	%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Impact of Inflation and Changing Prices

Our consolidated financial statements and the accompanying notes, which are found in Part I, Item 1, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Interest rates have a greater impact on our performance than do the general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Interest Rate Risk

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

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

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

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

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


Changes in Market	Rate Sensitivity
Interest Rates	As of September 30, 2020		Policy
(Basis Points)	Year 1	Year 2	Limits

+200	4.70%	9.20%	-15.00%
-100	-1.10%	-3.00%	-10.00%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item has been omitted based on Eagle’s status as a smaller reporting company.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONTROLS AND PROCEDURES

Item 4. Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of September 30, 2020, our disclosure controls and procedures were effective. During the last quarter, there were no changes in the Company’s internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION

Item 1.

Legal Proceedings.

Neither the Company nor the Bank is involved in any pending legal proceeding other than non-material legal proceedings occurring in the ordinary course of business.

Item 1A.

Risk Factors

There have not been any material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and any subsequently filed Quarterly Reports on Form 10-Q.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On July 23, 2020, Eagle's Board of Directors (the "Board") authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. The plan expires on July 23, 2021. The following table summarizes the Company's purchase of its common stock for the three months ended September 30, 2020 under this plan.

					Total Number		Maximum
					of Shares		Number of
					Purchased		Shares that
	Total				as Part of		May Yet Be
	Number of		Average		Publicly		Purchased
	Shares		Price Paid		Announced Plans		Under the Plans
	Purchased		Per Share		or Programs		or Programs

July 1, 2020 through July 31, 2020		1,696	$	16.00		1,696		98,304

August 1, 2020 through August 31, 2020		39,041		15.72		39,041		59,263

September 1, 2020 through September 30, 2020		600		16.95		600		58,663

Total		41,337	$	15.75		41,337

On July 18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2019 or the first quarter of 2020. However, during the second quarter of 2020, 1,281 shares were purchased at an average price of $16.95 per share. The following table summarizes the Company's purchase of its common stock for the three months ended September 30, 2020 under this plan. The plan expired on July 18, 2020.

					Total Number		Maximum
					of Shares		Number of
					Purchased		Shares that
	Total				as Part of		May Yet Be
	Number of		Average		Publicly		Purchased
	Shares		Price Paid		Announced Plans		Under the Plans
	Purchased		Per Share		or Programs		or Programs

July 1, 2020 through July 31, 2020		20,158	$	15.60		20,158		78,561

August 1, 2020 through August 31, 2020		-		-		-		78,561

September 1, 2020 through September 30, 2020		-		-		-		78,561

Total		20,158	$	15.60		20,158

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.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION - continued

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibit Number	Description


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

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

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

10.1	Salary Continuation Agreement between Opportunity Bank of Montana and Linda Chilton (filed herewith).

10.2	Third Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Laura F. Clark, dated September 21, 2020 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on September 22, 2020).

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

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

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

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

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

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SIGNATURES

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


	EAGLE BANCORP MONTANA, INC.

Date: November 5, 2020	By:	/s/ Peter J. Johnson
		Peter J. Johnson
		President/CEO



Date: November 5, 2020	By:	/s/ Laura F. Clark
		Laura F. Clark
		Executive Vice President/CFO/COO

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