Equibles

10-Q

Eagle Bancorp Montana, Inc. (EBMT)

10-Q 2022-08-04 For: 2022-06-30
View Original
Added on April 06, 2026

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2022

☐ 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 8,036,407 shares outstanding

As of July 29, 2022

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Financial Condition as of June 30, 2022 and December 31, 2021 1
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 3
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2022 and 2021 6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 7
Notes to the Unaudited Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Mine Safety Disclosures 41
Item 5. Other Information 42
Item 6. Exhibits 42
Signatures 43

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Cautionary Note Regarding Forward-Looking Statements ****

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

● statements of our goals, intentions and expectations;
● statements regarding our business plans, prospects, growth and operating strategies;
--- ---
● statements regarding the current global COVID-19 pandemic;
--- ---
● statements regarding the asset quality of our loan and investment portfolios; and
● estimates of our risks and future costs and benefits.
--- ---

These forward-looking statements are based on current beliefs and expectations of the management of Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”) and Opportunity Bank of Montana (“OBMT” or the “Bank”), Eagle’s wholly-owned subsidiary, and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause the Company’s actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
● the negative impacts and disruptions resulting from the continuing outbreak of the novel coronavirus, or COVID-19, and the steps taken by governmental and other authorities to contain, mitigate and combat the pandemic, on the economies and communities we serve, which may likely have an adverse impact on our credit portfolio, goodwill, stock price, borrowers and the economy as a whole both globally and domestically;
--- ---
● local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities;
● competition among depository and other financial institutions;
--- ---
● risks related to the concentration of our business in Montana, including risks associated with changes in the prices, values and sales volume of residential and commercial real estate in Montana;
--- ---
● inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
--- ---
● our ability to attract deposits and other sources of funding or liquidity;
--- ---
● changes or volatility in the securities markets;
--- ---
● our ability to implement our growth strategy, including identifying and consummating suitable acquisitions, raising additional capital to finance such transactions, entering new markets, possible failures in realizing the anticipated benefits from such acquisitions and an inability of our personnel, systems and infrastructure to keep pace with such growth;
--- ---
● the effect of acquisitions we may make, if any, including, without limitation, the failure to achieve expected revenue growth and/or expense savings from such acquisitions, including our recent acquisition of First Community Bancorp, Inc.;
--- ---
● risks related to the integration of any businesses we have acquired or expect to acquire, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, including our recent acquisition of First Community Bancorp, Inc.;
--- ---
● potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;
--- ---
● political developments, uncertainties or instability;
--- ---
● our ability to enter new markets successfully and capitalize on growth opportunities;
--- ---
● the need to retain capital for strategic or regulatory reasons;
● changes in consumer spending, borrowing and savings habits;
● our ability to continue to increase and manage our commercial and residential real estate, multi-family and commercial business loans;
● possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;
--- ---
● the level of future deposit insurance premium assessments;
--- ---
● our ability to develop and maintain secure and reliable information technology systems, effectively defend ourselves against cyberattacks, or recover from breaches to our cybersecurity infrastructure;
--- ---
● the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates;
--- ---
● changes in the financial performance and/or condition of our borrowers and their ability to repay their loans when due; and
--- ---
● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.
--- ---

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Part II, Item 1A, “Risk Factors” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2021, any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

December 31,
2021
ASSETS:
Cash and due from banks 18,821 $ 10,938
Interest-bearing deposits in banks 17,608 43,669
Federal funds sold 9,606 6,827
Total cash and cash equivalents 46,035 61,434
Securities available-for-sale 384,041 271,262
Federal Home Loan Bank ("FHLB") stock 2,337 1,702
Federal Reserve Bank ("FRB") stock 4,206 2,974
Mortgage loans held-for-sale, at fair value 16,947 25,819
Loans receivable, net of allowance for loan losses of 13,325 at June 30, 2022 and 12,500 at December 31, 2021 1,237,627 920,639
Accrued interest and dividends receivable 9,504 5,751
Mortgage servicing rights, net 14,809 13,693
Assets held-for-sale, at fair value 2,041 -
Premises and equipment, net 76,581 67,266
Cash surrender value of life insurance, net 45,563 36,474
Goodwill 34,740 20,798
Core deposit intangible, net 8,226 1,780
Other assets 17,815 6,334
Total assets 1,900,472 $ 1,435,926

All values are in US Dollars.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

December 31,
2021
LIABILITIES: **** ****
Deposit accounts:
Noninterest-bearing 498,834 $ 368,846
Interest-bearing 1,152,999 853,703
Total deposits 1,651,833 1,222,549
Accrued expenses and other liabilities 22,332 21,779
FHLB advances and other borrowings 4,500 5,000
Other long-term debt:
Principal amount 60,155 30,155
Unamortized debt issuance costs (1,138 ) (286 )
Total other long-term debt, net 59,017 29,869
Total liabilities 1,737,682 1,279,197
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; 8,507,429 and 7,110,833 shares issued; 8,086,407 and 6,794,811 shares outstanding at June 30, 2022 and December 31, 2021, respectively) 85 71
Additional paid-in capital 109,410 80,832
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") (5,443 ) (5,729 )
Treasury stock, at cost (421,022 and 316,022 shares at June 30, 2022 and December 31, 2021, respectively) (9,691 ) (7,321 )
Retained earnings 87,510 85,383
Accumulated other comprehensive (loss) income, net of tax (19,081 ) 3,493
Total shareholders' equity 162,790 156,729
Total liabilities and shareholders' equity 1,900,472 $ 1,435,926

All values are in US Dollars.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
INTEREST AND DIVIDEND INCOME: **** ****
Interest and fees on loans $ 14,895 $ 11,012 $ 26,268 $ 22,041
Securities available-for-sale 2,011 1,018 3,308 1,895
FHLB and FRB dividends 38 63 97 132
Other interest income 108 32 147 58
Total interest and dividend income 17,052 12,125 29,820 24,126
INTEREST EXPENSE: **** ****
Deposits 422 366 734 768
FHLB advances and other borrowings 15 45 21 115
Other long-term debt 648 389 1,253 779
Total interest expense 1,085 800 2,008 1,662
NET INTEREST INCOME 15,967 11,325 27,812 22,464
Loan loss provision 858 22 1,137 321
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 15,109 11,303 26,675 22,143
NONINTEREST INCOME: **** ****
Service charges on deposit accounts 394 293 725 566
Mortgage banking, net 5,491 9,932 11,736 21,695
Interchange and ATM fees 621 494 1,074 919
Appreciation in cash surrender value of life insurance 250 173 457 331
Net loss on sale of available-for-sale securities (6 ) - (6 ) -
Other noninterest income 592 416 1,649 1,190
Total noninterest income $ 7,342 $ 11,308 $ 15,635 $ 24,701

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
NONINTEREST EXPENSE:
Salaries and employee benefits $ 11,431 $ 12,745 $ 21,812 $ 24,831
Occupancy and equipment expense 1,817 1,651 3,495 3,081
Data processing 1,413 1,198 2,664 2,495
Advertising 303 251 588 524
Amortization of core deposit intangible 440 143 562 287
Loan costs 587 750 1,133 1,472
Federal Deposit Insurance Corporation ("FDIC") insurance premiums 144 81 237 162
Professional and examination fees 356 328 678 610
Acquisition costs 1,876 - 2,193 -
Other noninterest expense 1,679 1,890 3,632 2,788
Total noninterest expense 20,046 19,037 36,994 36,250
INCOME BEFORE PROVISION FOR INCOME TAXES 2,405 3,574 5,316 10,594
Provision for income taxes 634 893 1,329 2,648
NET INCOME $ 1,771 $ 2,681 $ 3,987 $ 7,946
BASIC EARNINGS PER SHARE $ 0.24 $ 0.40 $ 0.57 $ 1.17
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.39 $ 0.57 $ 1.17

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
NET INCOME $ 1,771 $ 2,681 $ 3,987 $ 7,946
OTHER ITEMS OF COMPREHENSIVE (LOSS) INCOME BEFORE TAX: **** **** **** ****
Change in fair value of investment securities available-for-sale (13,581 ) 1,332 (30,648 ) (1,240 )
Reclassification for net realized losses on investment securities available-for-sale 6 - 6 -
Total other comprehensive (loss) income (13,575 ) 1,332 (30,642 ) (1,240 )
Income tax benefit (provision) related to securities available-for-sale 3,574 (350 ) 8,068 327
COMPREHENSIVE (LOSS) INCOME $ (8,230 ) $ 3,663 $ (18,587 ) $ 7,033

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three and Six Months Ended June 30, 2022 and 2021

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

**** **** **** **** ACCUMULATED ****
ADDITIONAL UNALLOCATED **** **** OTHER ****
COMMON PAID-IN ESOP TREASURY RETAINED COMPREHENSIVE ****
STOCK CAPITAL SHARES STOCK EARNINGS (LOSS) INCOME TOTAL
Balance at April 1, 2022 - $ 71 $ 80,960 $ (5,586 ) $ (9,592 ) $ 86,750 $ (9,080 ) $ 143,523
Net income - - - - - 1,771 - 1,771
Other comprehensive loss - - - - - - (10,001 ) (10,001 )
Dividends paid (0.125 per share) - - - - - (1,011 ) - (1,011 )
Stock issued in connection with First Community Bancorp, Inc. acquisition - 14 28,337 - - - - 28,351
Stock compensation expense - - 135 - - - - 135
ESOP shares allocated (5,997 shares) - - (22 ) 143 - - - 121
Treasury stock purchased (5,000 shares at 19.75 average cost per share) - - - - (99 ) - - (99 )
Balance at June 30, 2022 - $ 85 $ 109,410 $ (5,443 ) $ (9,691 ) $ 87,510 $ (19,081 ) $ 162,790
Balance at April 1, 2021 - $ 71 $ 77,744 $ (103 ) $ (4,423 ) $ 78,586 $ 3,956 $ 155,831
Net income - - - - - 2,681 - 2,681
Other comprehensive income - - - - - - 982 982
Dividends paid (0.0975 per share) - - - - - (660 ) - (660 )
Stock compensation expense - - 90 - - - - 90
ESOP shares allocated (4,154 shares) - - 57 42 - - - 99
Treasury stock purchased through tender offer (250,000 shares at 25.12 average cost per share) - - - - (6,279 ) - - (6,279 )
Sale of shares to ESOP (251,256 shares at 23.88 average price per share) - - 2,929 (6,000 ) 3,071 - - -
Balance at June 30, 2021 - $ 71 $ 80,820 $ (6,061 ) $ (7,631 ) $ 80,607 $ 4,938 $ 152,744
Balance at January 1, 2022 - $ 71 $ 80,832 $ (5,729 ) $ (7,321 ) $ 85,383 $ 3,493 $ 156,729
Net income - - - - - 3,987 - 3,987
Other comprehensive loss - - - - - - (22,574 ) (22,574 )
Dividends paid (0.25 per share) - - - - - (1,860 ) - (1,860 )
Stock issued in connection with First Community Bancorp, Inc. acquisition - 14 28,337 - - - - 28,351
Stock compensation expense - - 270 - - - - 270
ESOP shares allocated (11,994 shares) - - (29 ) 286 - - - 257
Treasury stock purchased (105,000 shares at 22.57 average cost per share) - - - - (2,370 ) - - (2,370 )
Balance at June 30, 2022 - $ 85 $ 109,410 $ (5,443 ) $ (9,691 ) $ 87,510 $ (19,081 ) $ 162,790
Balance at January 1, 2021 - $ 71 $ 77,602 $ (145 ) $ (4,423 ) $ 73,982 $ 5,851 $ 152,938
Net income - - - - - 7,946 - 7,946
Other comprehensive loss - - - - - - (913 ) (913 )
Dividends paid (0.195 per share) - - - - - (1,321 ) - (1,321 )
Stock compensation expense - - 180 - - - - 180
ESOP shares allocated (8,308 shares) - - 109 84 - - - 193
Treasury stock purchased through tender offer (250,000 shares at 25.12 average cost per share) - - - - (6,279 ) - - (6,279 )
Sale of shares to ESOP (251,256 shares at 23.88 average price per share) - 2,929 (6,000 ) 3,071 - - -
Balance at June 30, 2021 - $ 71 $ 80,820 $ (6,061 ) $ (7,631 ) $ 80,607 $ 4,938 $ 152,744

All values are in US Dollars.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

Six Months Ended
June 30,
2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES: **** ****
Net income $ 3,987 $ 7,946
Adjustments to reconcile net income to net cash provided by operating activities:
Loan loss provision 1,137 321
Recovery of mortgage servicing rights (56 ) (688 )
Depreciation 1,707 1,370
Net amortization of investment securities premiums and discounts 774 517
Amortization of mortgage servicing rights 1,118 2,018
Amortization of right-of-use assets 344 277
Amortization of core deposit intangible 562 287
Compensation expense related to restricted stock awards 270 180
ESOP compensation expense for allocated shares 257 193
Net gain on sale of loans (11,453 ) (24,758 )
Originations of loans held-for-sale (314,621 ) (558,167 )
Proceeds from sales of loans held-for-sale 334,946 580,714
Net loss on sale of available-for-sale securities 6 -
Net (gain) loss on sale of real estate owned and other repossessed assets (13 ) 9
Net gain on sale/disposal of premises and equipment (1 ) (16 )
Net appreciation in cash surrender value of life insurance (457 ) (331 )
Net change in:
Accrued interest and dividends receivable (999 ) 33
Other assets (373 ) 853
Accrued expenses and other liabilities (437 ) (225 )
Net cash provided by operating activities 16,698 10,533
CASH FLOWS FROM INVESTING ACTIVITIES: **** ****
Activity in available-for-sale securities:
Sales 43,794 -
Maturities, principal payments and calls 15,201 5,621
Purchases (77,073 ) (80,864 )
FHLB stock (purchased) redeemed (10 ) 186
FRB stock purchased (392 ) -
Net cash received from acquisitions 13,397 -
Loan origination and principal collection, net (129,737 ) (36,207 )
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans - 16
Proceeds from sale of premises and equipment 5 605
Purchases of premises and equipment, net (6,959 ) (8,169 )
Net cash used in investing activities $ (141,774 ) $ (118,812 )

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

(Unaudited)

Six Months Ended
June 30,
2022 2021
CASH FLOWS FROM FINANCING ACTIVITIES: **** ****
Net increase in deposits $ 85,324 $ 112,519
Advances on long-term FHLB and other borrowings 4,500 -
Payments on long-term FHLB and other borrowings (5,000 ) (7,770 )
Proceeds from issuance of subordinated debentures 40,000 -<br>-
Repayment of senior debt (10,000 ) -
Payments for debt issuance costs (917) -<br>-
Purchase of treasury stock (2,370 ) (6,279 )
Dividends paid (1,860 ) (1,321 )
Net cash provided by financing activities 109,677 97,149
NET INCREASE IN CASH AND CASH EQUIVALENTS (15,399 ) (11,130 )
CASH AND CASH EQUIVALENTS, beginning of period 61,434 69,802
CASH AND CASH EQUIVALENTS, end of period $ 46,035 $ 58,672
SUPPLEMENTAL CASH FLOW INFORMATION: **** ****
Cash paid during the period for interest $ 1,530 $ 1,852
Cash paid during the period for income taxes 2,720 3,750
NONCASH INVESTING AND FINANCING ACTIVITIES: **** ****
Decrease in fair value of securities available-for-sale $ (30,642 ) $ (1,240 )
Trade date payable securities - 728
Mortgage servicing rights recognized 2,178 3,353
Right-of-use assets obtained in exchange for lease liabilities 59 932
Loans transferred to real estate and other assets acquired in foreclosure 328 6
Stock issued in connection with acquisitions 28,351 -
Sale of shares from Eagle to ESOP in exchange for loan - (6,000 )

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

In March 2021, the Bank established a subsidiary, Opportunity Housing Fund, LLC ("OHF"), to invest in Low-Income Housing Tax Credit ("LIHTC") projects. The LIHTC program is designed to encourage capital investment in construction and rehabilitation of low-income housing. Tax credits are allowable over a 10-year period. During the year ended December 31, 2021, OHF made initial investments in two LIHTC projects. Investments in LIHTC projects are included in other assets on the statement of financial condition and totaled $1,237,000 and $935,000 as of June 30, 2022 and December 31, 2021, respectively.

In September 2021, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with First Community Bancorp, Inc., a Montana corporation ("FCB") and FCB's wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, FCB would merge with and into Eagle, with Eagle continuing as the surviving corporation. The merger closed on April 30, 2022. First Community Bank operated nine branches in Ashland, Culbertson, Froid, Glasgow, Helena, Hinsdale, Three Forks and Wolf Point, Montana.

On January 1, 2020, the Company acquired Western Holding Company of Wolf Point, ("WHC"), a Montana corporation, and WHC's wholly-owned subsidiary, Western Bank of Wolf Point ("WB"), a Montana chartered commercial bank. The acquisition included one branch in Wolf Point, Montana. In addition, Western Financial Services, Inc. ("WFS") was acquired through the WHC merger. WFS facilitates deferred payment contracts for customers that produce agricultural products.

On January 1, 2019, the Company acquired 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. This acquisition included four branches in Choteau, Denton, Dutton, and Townsend, Montana.

On  January 31, 2018, the Company acquired Twin Co. Inc, ("TwinCo"), a Montana corporation, and TwinCo's wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank. The acquisition included two branches in Sheridan and Twin Bridges, Montana.

The Bank currently has 30 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 operated certain branches under the names Dutton State Bank, Farmers State Bank of Denton and The State Bank of Townsend. Effective January 3, 2022, these branches were rebranded and are now only operating as Opportunity Bank of Montana.

Basis of Financial Statement Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2021, as filed with the SEC on March 9, 2022. 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 six-month period ended  June 30, 2022 are not necessarily indicative of the results to be expected for the year ending  December 31, 2022or any other period. In preparing condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated statement of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the fair value of financial instruments, the valuation of goodwill and deferred tax assets and liabilities.

Principles of Consolidation

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

Reclassifications

Certain prior period amounts were reclassified to conform to the presentation for 2022. These reclassifications had no impact on net income or shareholders’ equity.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. MERGERS AND ACQUISITIONS

Effective April 30, 2022 Eagle completed its previously announced merger with FCB. The acquisition closed after receipt of approvals from regulatory authorities, approval of FCB shareholders and the satisfaction of other closing conditions. The total consideration paid was $38,577,000 and included cash consideration of $10,226,000 and common stock issued of $28,351,000.

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

All of the assets acquired and liabilities assumed were recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combinations were expensed as incurred. Determining the fair value of assets and liabilities is a complicated process involving significant judgment 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.

FCB
April 30,
2022
(In Thousands)
Assets acquired:
Cash and cash equivalents $ 23,623
Securities available-for-sale 126,123
Loans receivable 190,894
Premises and equipment 6,393
Cash surrender value of life insurance 8,638
Core deposit intangible 7,004
Other assets 7,687
Total assets acquired $ 370,362
Liabilities assumed:
Deposits $ 321,107
Accrued expenses and other liabilities 1,767
Other borrowings 22,853
Total liabilities assumed $ 345,727
Net assets acquired $ 24,635
Consideration paid:
Cash $ 10,226
Common stock issued (1,396,596 shares) 28,351
Total consideration paid $ 38,577
Goodwill resulting from acquisition $ 13,942

Goodwill recorded for the FCB acquisition during the three months ended June 30, 2022 was provisionally $13,942,000 due to the timing of the transaction. Amounts may be subject to change due to retrospective measurement period adjustments based on new information.

FCB investments were written down an additional $4,559,000 to fair value on the date of acquisition based on market prices obtained from an independent third party.

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 FCB acquired loans was $5,416,000 as of April 30, 2022. During the three months ended June 30, 2022, accretion of the loan discount was $732,000.  The remaining accretable loan discount was $4,684,000 as of June 30, 2022. Three impaired loans were acquired through the FCB acquisition with insignificant balances as of April 30, 2022.

Fair value adjustments were recorded for FCB related to premises and equipment were insignificant overall. The Company used independent third party appraisals in the determination of the fair value of acquired properties.

Core deposit intangible assets of $7,004,000 were recorded for FCB 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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. MERGERS AND ACQUISITIONS – continued

Direct costs related to the acquisition were expensed as incurred. The Company recorded acquisition costs related to FCB of $1,876,000 and $2,193,000 during the three and six months ended June 30, 2022, respectively, and $761,000 during the year ended December 31, 2021. Acquisition costs included professional fees and data processing expenses incurred related to the acquisitions.

Operations of acquired entities have been included in the condensed consolidated financial statements since date of acquisition. The Company does not consider them as separate reporting segments and does not track the amount of revenues and net income attributable since acquisition. As such, it is impracticable to determine such amounts for the period from acquisition date through June 30, 2022.

The accompanying consolidated statements of income include the results of operations of FCB since the April 30, 2022 acquisition date. The following table presents unaudited pro forma results of operations for the three and six months ended June 30, 2021as if the acquisition had occurred on January 1, 2021. This pro forma information gives the 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 FCB on January 1, 2021. Cost savings are also not reflected in the unaudited pro forma amounts for the three and six months ended June 30, 2021.

Three Months Ended Six Months Ended
June 30, 2021 June 30, 2021
(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 $ 14,637 $ 28,811
Noninterest income 12,901 27,887
Noninterest expense 22,341 42,858
Income before provision for income taxes 5,197 13,840
Income tax provision 1,299 3,460
Net income $ 3,898 $ 10,380
Pro forma earnings per share^(1)^
Basic earnings per share $ 0.58 $ 1.53
Diluted earnings per share $ 0.57 $ 1.53
Weighted average shares outstanding, basic 6,775,557 6,775,503
Weighted average shares outstanding, diluted 6,794,900 6,791,885

^(1)^Significant assumptions utilized include the acquisition cost noted above and a 25.00% effective tax rate.

NOTE 3. INVESTMENT SECURITIES

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

June 30, 2022 December 31, 2021
Gross Gross
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains (Losses) Value Cost Gains (Losses) Value
(In Thousands)
Available-for-Sale: **** ****
U.S. government and agency obligations $ 3,047 $ 6 $ (57 ) $ 2,996 $ 1,618 $ 15 $ - $ 1,633
U.S. Treasury obligations 73,727 - (5,420 ) 68,307 52,707 580 (104 ) 53,183
Municipal obligations 192,534 220 (13,615 ) 179,139 119,381 4,616 (330 ) 123,667
Corporate obligations 7,237 9 (89 ) 7,157 9,251 103 (18 ) 9,336
Mortgage-backed securities 34,118 14 (1,198 ) 32,934 14,662 92 (118 ) 14,636
Collateralized mortgage obligations 95,275 1 (5,711 ) 89,565 63,286 416 (635 ) 63,067
Asset-backed securities 4,005 - (62 ) 3,943 5,617 123 - 5,740
Total $ 409,943 $ 250 $ (26,152 ) $ 384,041 $ 266,522 $ 5,945 $ (1,205 ) $ 271,262

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3.

INVESTMENT SECURITIES

– continued

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

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(In Thousands)
Proceeds from sale of available-for-sale securities $ 43,794 $ - $ 43,794 $ -
Gross realized gain on sale of available-for-sale securities $ - $ - $ - $ -
Gross realized loss on sale of available-for-sale securities (6 ) - (6 ) -
Net realized loss on sale of available-for-sale securities $ (6 ) $ - $ (6 ) $ -

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.

June 30, 2022
Amortized Fair
Cost Value
(In Thousands)
Due in one year or less $ 26,627 $ 26,525
Due from one to five years 21,506 21,370
Due from five to ten years 86,957 79,069
Due after ten years 145,460 134,578
280,550 261,542
Mortgage-backed securities 34,118 32,934
Collateralized mortgage obligations 95,275 89,565
Total $ 409,943 $ 384,041

As of  June 30, 2022 and December 31, 2021, securities with a fair value of $61,040,000 and $22,245,000, 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:

June 30, 2022
Less Than 12 Months 12 Months or Longer
Gross Gross
Fair Unrealized Fair Unrealized
Value Losses Value Losses
(In Thousands)
U.S. government and agency obligations $ 1,965 $ (57 ) $ - $ -
U.S. Treasury obligations 68,307 (5,420 ) - -
Municipal obligations 141,508 (13,615 ) - -
Corporate obligations 3,899 (89 ) - -
Mortgage-backed securities and collateralized mortgage obligations 101,532 (5,965 ) 17,159 (944 )
Asset-backed securities 3,386 (62 ) - -
Total $ 320,597 $ (25,208 ) $ 17,159 $ (944 )

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3.

INVESTMENT SECURITIES

– continued

December 31, 2021
Less Than 12 Months 12 Months or Longer
Gross Gross
Fair Unrealized Fair Unrealized
Value Losses Value Losses
(In Thousands)
U.S. government and agency obligations $ - $ - $ - $ -
U.S. Treasury obligations 19,301 (104 ) - -
Municipal obligations 17,973 (330 ) - -
Corporate obligations 2,982 (18 ) - -
Mortgage-backed securities and collateralized mortgage obligations 50,002 (741 ) 1,296 (12 )
Asset-backed securities - - - -
Total $ 90,258 $ (1,193 ) $ 1,296 $ (12 )

Unrealized losses associated with investments are believed to be caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. The Company does not intend to sell the securities, and it is not likely to be required to sell these securities prior to maturity. Based on the Company's evaluation of these securities, no other-than-temporary impairment was recorded for the three months ended June 30, 2022 and 2021, respectively or the six months ended June 30, 2022 and 2021, respectively. As of  June 30, 2022 and December 31, 2021, there were, respectively, 328 and 43 securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

NOTE 4. LOANS RECEIVABLE

Loans receivable consisted of the following:

June 30, December 31,
2022 2021
(In Thousands)
Real estate loans:
Residential 1-4 family $ 186,229 $ 146,815
Commercial real estate 743,326 569,976
Other loans:
Home equity 62,445 51,748
Consumer 25,775 18,455
Commercial 234,741 147,870
Total 1,252,516 934,864
Deferred loan fees, net (1,564 ) (1,725 )
Allowance for loan losses (13,325 ) (12,500 )
Total loans, net $ 1,237,627 $ 920,639

Within the commercial real estate loan category above, $8,703,000 and $10,232,000 was guaranteed by the United States Department of Agriculture Rural Development at  June 30, 2022 and  December 31, 2021, respectively. Also within the loan categories above, $ 12,103,000 and $7,333,000 was guaranteed by the United States Department of Agriculture Farm Service Agency at  June 30, 2022 and  December 31, 2021, respectively. In addition, within the commercial loan category above, $349,000 and $4,172,000 was guaranteed by the Small Business Administration ("SBA") under their Payroll Protection Program ("PPP") at  June 30, 2022 and December 31, 2021, respectively. Deferred loan fees, net includes $31,000 and $286,000 of remaining deferred fees related to the PPP at June 30, 2022 and  December 31, 2021, respectively.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4.

LOANS RECEIVABLE

– continued

Allowance for loan losses activity was as follows:

Residential Commercial Home
1-4 Family Real Estate Equity Consumer Commercial Total
(In Thousands)
Allowance for loan losses:
Beginning balance, April 1, 2022 $ 1,616 $ 7,659 $ 536 $ 357 $ 2,532 $ 12,700
Charge-offs - - (32 ) - (215 ) (247 )
Recoveries - 8 - 1 5 14
Provision 27 670 3 3 155 858
Ending balance, June 30, 2022 $ 1,643 $ 8,337 $ 507 $ 361 $ 2,477 $ 13,325
Allowance for loan losses:
Beginning balance, January 1, 2022 $ 1,596 $ 7,470 $ 533 $ 365 $ 2,536 $ 12,500
Charge-offs - - (32 ) (8 ) (299 ) (339 )
Recoveries - 14 - 1 12 27
Provision 47 853 6 3 228 1,137
Ending balance, June 30, 2022 $ 1,643 $ 8,337 $ 507 $ 361 $ 2,477 $ 13,325
Ending balance, June 30, 2022 allocated to loans individually evaluated for impairment $ 199 $ - $ - $ - $ 319 $ 518
Ending balance, June 30, 2022 allocated to loans collectively evaluated for impairment $ 1,444 $ 8,337 $ 507 $ 361 $ 2,158 $ 12,807
Loans receivable:
Ending balance, June 30, 2022 $ 186,229 $ 743,326 $ 62,445 $ 25,775 $ 234,741 $ 1,252,516
Ending balance, June 30, 2022 of loans individually evaluated for impairment $ 573 $ 1,173 $ 119 $ 35 $ 1,670 $ 3,570
Ending balance, June 30, 2022 of loans collectively evaluated for impairment $ 185,656 $ 742,153 $ 62,326 $ 25,740 $ 233,071 $ 1,248,946
Residential Commercial Home
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
1-4 Family Real Estate Equity Consumer Commercial Total
(In Thousands)
Allowance for loan losses:
Beginning balance, April 1, 2021 $ 1,542 $ 7,131 $ 521 $ 369 $ 2,337 $ 11,900
Charge-offs - (25 ) - (8 ) - (33 )
Recoveries - 7 - 2 2 11
Provision 2 14 1 - 5 22
Ending balance, June 30, 2021 $ 1,544 $ 7,127 $ 522 $ 363 $ 2,344 $ 11,900
Allowance for loan losses:
Beginning balance, January 1, 2021 $ 1,506 $ 6,951 $ 515 $ 364 $ 2,264 $ 11,600
Charge-offs - (35 ) - (10 ) (6 ) (51 )
Recoveries - 9 - 6 15 30
Provision 38 202 7 3 71 321
Ending balance, June 30, 2021 $ 1,544 $ 7,127 $ 522 $ 363 $ 2,344 $ 11,900
Ending balance, June 30, 2021 allocated to loans individually evaluated for impairment $ 199 $ - $ - $ - $ 7 $ 206
Ending balance, June 30, 2021 allocated to loans collectively evaluated for impairment $ 1,345 $ 7,127 $ 522 $ 363 $ 2,337 $ 11,694
Loans receivable:
Ending balance, June 30, 2021 $ 141,621 $ 497,898 $ 55,739 $ 18,859 $ 162,482 $ 876,599
Ending balance, June 30, 2021 of loans individually evaluated for impairment $ 981 $ 4,387 $ 131 $ 79 $ 1,692 $ 7,270
Ending balance, June 30, 2021 of loans collectively evaluated for impairment $ 140,640 $ 493,511 $ 55,608 $ 18,780 $ 160,790 $ 869,329

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4.

LOANS RECEIVABLE

– continued

Internal classification of the loan portfolio was as follows:

June 30, 2022
Special
Pass Mention Substandard Doubtful Loss Total
(In Thousands)
Real estate loans:
Residential 1-4 family $ 131,400 $ 280 $ 481 $ 199 $ - $ 132,360
Residential 1-4 family construction 53,869 - - - - 53,869
Commercial real estate 471,740 12,646 1,811 - - 486,197
Commercial construction and development 132,585 - - - - 132,585
Farmland 119,105 3,198 2,241 - - 124,544
Other loans:
Home equity 62,309 - 136 - - 62,445
Consumer 25,704 7 64 - - 25,775
Commercial 126,861 744 854 8 - 128,467
Agricultural 103,066 651 2,448 109 - 106,274
Total $ 1,226,639 $ 17,526 $ 8,035 $ 316 $ - $ 1,252,516
December 31, 2021
--- --- --- --- --- --- --- --- --- --- --- --- ---
Special
Pass Mention Substandard Doubtful Loss Total
(In Thousands)
Real estate loans:
Residential 1-4 family $ 100,680 $ - $ 301 199 $ - $ 101,180
Residential 1-4 family construction 45,298 - 337 - - 45,635
Commercial real estate 406,896 1,527 2,145 - - 410,568
Commercial construction and development 92,403 - - - - 92,403
Farmland 65,037 177 1,744 47 - 67,005
Other loans:
Home equity 51,614 - 134 - - 51,748
Consumer 18,392 - 63 - - 18,455
Commercial 100,881 130 524 - - 101,535
Agricultural 44,550 332 1,444 9 - 46,335
Total $ 925,751 $ 2,166 $ 6,692 $ 255 $ - $ 934,864

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

June 30, 2022
Loans Past Due and Still Accruing
90 Days
30-89 Days and Nonaccrual Current Total
Past Due Greater Total Loans Loans Loans
(In Thousands)
Real estate loans:
Residential 1-4 family $ 336 $ - $ 336 $ 573 $ 131,451 $ 132,360
Residential 1-4 family construction - - - - 53,869 53,869
Commercial real estate - - - 403 485,794 486,197
Commercial construction and development 482 - 482 - 132,103 132,585
Farmland 957 763 1,720 770 122,054 124,544
Other loans:
Home equity 27 - 27 119 62,299 62,445
Consumer 115 - 115 35 25,625 25,775
Commercial 1 759 760 83 127,624 128,467
Agricultural 177 620 797 1,587 103,890 106,274
Total $ 2,095 $ 2,142 $ 4,237 $ 3,570 $ 1,244,709 $ 1,252,516

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE

– continued

December 31, 2021
Loans Past Due and Still Accruing
90 Days
30-89 Days and Nonaccrual Current Total
Past Due Greater Total Loans Loans Loans
(In Thousands)
Real estate loans:
Residential 1-4 family $ 21 $ - $ 21 $ 616 $ 100,543 $ 101,180
Residential 1-4 family construction - - - 337 45,298 45,635
Commercial real estate 788 - 788 497 409,283 410,568
Commercial construction and development - - - - 92,403 92,403
Farmland 61 - 61 1,630 65,314 67,005
Other loans:
Home equity - - - 115 51,633 51,748
Consumer 55 - 55 62 18,338 18,455
Commercial 6 - 6 516 101,013 101,535
Agricultural - - - 1,718 44,617 46,335
Total $ 931 $ - $ 931 $ 5,491 $ 928,442 $ 934,864

The following tables include information regarding impaired loans.

June 30, 2022
Unpaid
Recorded Principal Related
Investment Balance Allowance
(In Thousands)
Real estate loans:
Residential 1-4 family $ 573 $ 665 $ 199
Residential 1-4 family construction - - -
Commercial real estate 403 486 -
Commercial construction and development - - -
Farmland 770 868 -
Other loans:
Home equity 119 145 -
Consumer 35 44 -
Commercial 83 137 -
Agricultural 1,587 1,686 319
Total $ 3,570 $ 4,031 $ 518
December 31, 2021
--- --- --- --- --- --- ---
Unpaid
Recorded Principal Related
Investment Balance Allowance
(In Thousands)
Real estate loans:
Residential 1-4 family $ 616 $ 703 $ 199
Residential 1-4 family construction 337 387 -
Commercial real estate 2,024 2,078 -
Commercial construction and development - - -
Farmland 1,630 1,721 -
Other loans:
Home equity 115 139 -
Consumer 62 73 -
Commercial 516 639 101
Agricultural 1,759 1,862 300
Total $ 7,059 $ 7,602 $ 600

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NOTE 4. LOANS RECEIVABLE

– continued

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Average Recorded Investment Average Recorded Investment
(In Thousands) (In Thousands)
Real estate loans:
Residential 1-4 family $ 580 $ 920 $ 595 $ 924
Residential 1-4 family construction - 337 169 337
Commercial real estate 1,134 2,413 1,213 2,337
Commercial construction and development - - - 25
Farmland 1,189 1,922 1,200 2,111
Other loans: -
Home equity 115 120 117 121
Consumer 40 112 49 115
Commercial 68 542 300 538
Agricultural 1,654 1,279 1,672 1,428
Total $ 4,780 $ 7,645 $ 5,315 $ 7,936

Interest income recognized on impaired loans for the three and six months ended June 30, 2022 and 2021 is considered insignificant. Interest payments received on a cash basis related to impaired loans were $404,000 and $405,000 at  June 30, 2022 and December 31, 2021, respectively.

As of  June 30, 2022 and December 31, 2021, there were troubled debt restructured (“TDR”) loans of $1,112,000 and $2,224,000, respectively.

During the three months ended June 30, 2022, there were no new TDR loans. During the six months ended  June 30, 2022, there were two new TDR loans. The recorded investments for both agricultural loans at the time of restructure were $331,000 and $145,000. No charge-offs were incurred and the loans are on nonaccrual status.

During the three months ended June 30, 2021, there were no new TDR loans. During the six months ended  June 30, 2021, there was one new TDR loan. The recorded investment for the commercial real estate loan at time of restructure was $115,000. The loan was paid off during the nine months ended September 30, 2021.

There were no loans modified as TDR's that defaulted during the three months ended June 30, 2022. There were two farmland loans modified as TDRs that defaulted during the six months ended  June 30, 2022 where the default occurred within 12 months of restructuring. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. The recorded investments for the farmland loans were $374,000 and $70,000 at June 30, 2022 and the Company has initiated foreclosure on these loans.

As of June 30, 2022, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in TDRs.

NOTE 5. MORTGAGE SERVICING RIGHTS

The Company is servicing mortgage loans for the benefit of others which are not included in the condensed consolidated statements of financial condition and have unpaid principal balances of $1,961,591,000 and $1,835,561,000 at  June 30, 2022 and December 31, 2021, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Mortgage loan servicing fees were $1,199,000 and $987,000 for the three months ended June 30, 2022 and 2021, respectively. Mortgage loan servicing fees were $2,355,000 and $1,924,000 for the six months ended June 30, 2022 and 2021, respectively. These fees, net of amortization, are included in mortgage banking, net which is a component of noninterest income on the condensed consolidated statements of income.

Custodial balances maintained in connection with the foregoing loan servicing are included in noninterest checking deposits and were $12,543,000 and $11,613,000 at  June 30, 2022 and December 31, 2021, respectively.

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NOTE 5.

MORTGAGE SERVICING RIGHTS – continued

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

As of or For the
Three Months Ended
June 30,
2022 2021
(In Thousands)
Mortgage servicing rights:
Beginning balance $ 14,288 $ 11,435
Mortgage servicing rights capitalized 1,030 1,821
Amortization of mortgage servicing rights (509 ) (1,024 )
Ending balance $ 14,809 $ 12,232
Valuation allowance:
Beginning balance $ - $ (115 )
Recovery of mortgage servicing rights - 11
Ending balance $ - $ (104 )
Mortgage servicing rights, net $ 14,809 $ 12,128
As of or For the
--- --- --- --- --- --- ---
Six Months Ended
June 30,
2022 2021
(In Thousands)
Mortgage servicing rights:
Beginning balance $ 13,749 $ 10,897
Mortgage servicing rights capitalized 2,178 3,353
Amortization of mortgage servicing rights (1,118 ) (2,018 )
Ending balance $ 14,809 $ 12,232
Valuation allowance:
Beginning balance $ (56 ) $ (792 )
Recovery of mortgage servicing rights 56 688
Ending balance - (104 )
Mortgage servicing rights, net $ 14,809 $ 12,128

Impairment expense on mortgage servicing rights was recorded during the year ended December 31, 2020 as a result of increased prepayment speed assumptions. Recoveries of $11,000 and $688,000 were recorded during the three and six months ended June 30, 2021, respectively. There was no recovery or impairment recorded during the three months ended June 30, 2022. However, a recovery of $56,000 was recorded during the six months ended *June 30, 2022.*Recovery (impairment) of servicing rights is included in other noninterest expense on the condensed consolidated statements of income.

The fair values of these rights were $18,398,000 and $14,686,000 at  June 30, 2022 and December 31, 2021, 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:

June 30, December 31,
2022 2021
Key assumptions:
Discount rate 12 % 12 %
Prepayment speed range 123-225 % 184-265 %
Weighted average prepayment speed 135 % 204 %

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. DEPOSITS

Deposits are summarized as follows:

June 30, December 31,
2022 2021
(In Thousands)
Noninterest checking $ 498,834 $ 368,846
Interest-bearing checking 265,808 203,410
Savings 386,239 223,069
Money market 327,813 277,469
Time certificates of deposit 173,139 149,755
Total $ 1,651,833 $ 1,222,549

NOTE 7. OTHER LONG-TERM DEBT

Other long-term debt consisted of the following:

June 30, 2022 December 31, 2021
Unamortized Unamortized
Debt Debt
Principal Issuance Principal Issuance
Amount Costs Amount Costs
(In Thousands)
Senior notes fixed at 5.75%, due 2022 $ - $ - $ 10,000 $ (4 )
Subordinated debentures fixed at 5.50% to floating, due 2030 15,000 (266 ) 15,000 (282 )
Subordinated debentures fixed at 3.50% to floating, due 2032 40,000 (872 ) - -
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035 5,155 - 5,155 -
Total other long-term debt $ 60,155 $ (1,138 ) $ 30,155 $ (286 )

In January 2022, the Company completed the issuance of $40,000,000 in aggregate principal amount of subordinated notes due in 2032 in a private placement transaction to certain institutional accredited investors and qualified buyers. The notes bear interest at an annual fixed rate of 3.50% payable semi-annually. Starting August 1, 2027, 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 218.0 basis points, payable quarterly. The notes are subject to redemption at the option of the Company on or after February 1, 2027. The subordinated debentures qualify as Tier 2 capital for regulatory capital purposes. A portion of the net proceeds were used to redeem the $10,000,000 senior notes due in February 2022.

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 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 SOFR plus a spread of 509.0 basis points, payable quarterly. The notes are subject to redemption at the option of the Company on or after July 1, 2025. The subordinated debentures qualify as Tier 2 capital for regulatory capital purposes.

In February 2017, the Company completed the issuance, through a private placement, of $10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. The interest was paid semi-annually through maturity date. The notes were not subject to redemption at the option of the Company. The notes were redeemed on February 15, 2022.

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 3.71% and 1.63% as of June 30, 2022 and December 31, 2021, respectively. Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date. The subordinated debentures qualify as Tier 1 capital for regulatory purposes.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

Unrealized
(Losses) Gains
on Securities
Available-for-Sale
(In Thousands)
Balance, April 1, 2022 $ (9,080 )
Other comprehensive loss, before reclassifications and income taxes (13,581 )
Amounts reclassified from accumulated other comprehensive loss, before income taxes 6
Income tax benefit 3,574
Total other comprehensive loss (10,001 )
Balance, June 30, 2022 $ (19,081 )
Balance, April 1, 2021 $ 3,956
Other comprehensive income, before reclassifications and income taxes 1,332
Amounts reclassified from accumulated other comprehensive income, before income taxes -
Income tax provision (350 )
Total other comprehensive income 982
Balance, June 30, 2021 $ 4,938
Balance, January 1, 2022 $ 3,493
Other comprehensive loss, before reclassifications and income taxes (30,648 )
Amounts reclassified from accumulated other comprehensive loss, before income taxes 6
Income tax benefit 8,068
Total other comprehensive loss (22,574 )
Balance, June 30, 2022 $ (19,081 )
Balance, January 1, 2021 $ 5,851
Other comprehensive income, before reclassifications and income taxes (1,240 )
Amounts reclassified from accumulated other comprehensive income, before income taxes -
Income tax benefit 327
Total other comprehensive loss (913 )
Balance, June 30, 2021 $ 4,938

NOTE 9. EARNINGS PER SHARE

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

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in Thousands, Except Per Share Data)
Basic weighted average shares outstanding 7,410,796 6,775,557 6,960,963 6,775,503
Dilutive effect of stock compensation 11,226 19,343 12,270 16,382
Diluted weighted average shares outstanding 7,422,022 6,794,900 6,973,233 6,791,885
Net income available to common shareholders $ 1,771 $ 2,681 $ 3,987 $ 7,946
Basic earnings per share $ 0.24 $ 0.40 $ 0.57 $ 1.17
Diluted earnings per share $ 0.24 $ 0.39 $ 0.57 $ 1.17

Anti-dilutive shares at June 30, 2022 were considered insignificant. There were no anti-dilutive shares at December 31, 2021.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES

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

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

Derivatives are summarized as follows:

June 30, 2022 December 31, 2021
Notional Fair Value Notional Fair Value
Amount Asset Liability Amount Asset Liability
(In Thousands)
Interest rate lock commitments $ 68,257 $ 334 $ - $ 84,674 $ 1,218 $ -
Forward TBA mortgage-backed securities 46,000 299 - 51,000 - 94

Changes in the fair value of the derivatives are recorded in mortgage banking, net within noninterest income on the condensed consolidated statements of income.Net losses of $551,000 and $1,043,000 were recorded for the three months ended June 30, 2022 and 2021, respectively. Net losses of $491,000 and $2,326,000 were recorded for the six months ended  June 30, 2022 and 2021, respectively.

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

The fair value hierarchy is as follows:

■ Level 1 Inputs – Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
■ Level 2 Inputs – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
--- ---
■ Level 3 Inputs – Valuations are based on unobservable inputs that may include significant management judgment and estimation.
--- ---

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

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

– continued

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

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

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

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.

June 30, 2022
Level 1 Level 2 Level 3 Total Fair
Inputs Inputs Inputs Value
(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government obligations $ - $ 2,996 $ - $ 2,996
U.S. treasury obligations 68,307 - - 68,307
Municipal obligations - 179,139 - 179,139
Corporate obligations - 7,157 - 7,157
Mortgage-backed securities - 32,934 - 32,934
Collateralized mortgage obligations - 89,565 - 89,565
Asset-backed securities - 3,943 - 3,943
Loans held-for-sale - 16,947 - 16,947
Interest rate lock commitments - - 334 334
Forward TBA mortgage-backed securities - 299 - 299
December 31, 2021
--- --- --- --- --- --- --- --- ---
Level 1 Level 2 Level 3 Total Fair
Inputs Inputs Inputs Value
(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government obligations $ - $ 1,633 $ - $ 1,633
U.S. treasury obligations 53,183 - - 53,183
Municipal obligations - 123,667 - 123,667
Corporate obligations - 9,336 - 9,336
Mortgage-backed securities - 14,636 - 14,636
Collateralized mortgage obligations - 63,067 - 63,067
Asset-backed securities - 5,740 - 5,740
Loans held-for-sale - 25,819 - 25,819
Interest rate lock commitments - - 1,218 1,218
Financial liabilities:
Forward TBA mortgage-backed securities - 94 - 94

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

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

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

June 30, 2022
Level 1 Level 2 Level 3 Total Fair
Inputs Inputs Inputs Value
(In Thousands)
Impaired loans $ - $ - $ 218 $ 218
Real estate and other repossessed assets - - 345 345
Mortgage servicing rights - - 1,406 1,406
December 31, 2021
--- --- --- --- --- --- --- --- ---
Level 1 Level 2 Level 3 Total Fair
Inputs Inputs Inputs Value
(In Thousands)
Impaired loans $ - $ - $ 376 $ 376
Real estate and other repossessed assets - - 4 $ 4
Mortgage servicing rights - - 14,686 $ 14,686

The following table represents the Banks’s Level 3 financial assets and liabilities, the valuation techniques used to measure the fair value of those financial assets and liabilities, and the significant unobservable inputs and the ranges of values for those inputs.

Principal Significant Range of
Valuation Unobservable Significant Input
Instrument Technique Inputs Values
Impaired loans Fair value of underlying collateral Discount applied to the obtained appraisal 10-30%
Real estate and other repossessed assets Fair value of collateral Discount applied to the obtained appraisal 10-30%
Mortgage servicing rights Discounted cash flows Discount rate 10-15%
Prepayment speeds 120-265%
Interest rate lock commitments Internal pricing model Pull-through expectations 85-95%

The following tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the six months ended June 30, 2022.

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Interest Rate Lock Commitments Interest Rate Lock Commitments
(In Thousands) (In Thousands)
Beginning balance $ 91 $ 1,887 $ 1,218 $ 6,017
Purchases and issuances 448 5,012 735 5,750
Sales and settlements (205 ) (3,950 ) (1,619 ) (8,818 )
Ending balance $ 334 $ 2,949 $ 334 $ 2,949
Net change in fair value for gains (losses) relating to interest rate lock commitments held at end of period $ 243 $ 1,062 $ (884 ) $ (3,068 )

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

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

June 30, 2022
Total
Level 1 Level 2 Level 3 Estimated Carrying
Inputs Inputs Inputs Fair Value Amount
(In Thousands)
Financial assets:
Cash and cash equivalents $ 46,035 $ - $ - $ 46,035 $ 46,035
FHLB stock 2,337 - - 2,337 2,337
FRB stock 4,206 - - 4,206 4,206
Loans receivable, gross - - 1,261,334 1,261,334 1,250,952
Accrued interest and dividends receivable 9,504 - - 9,504 9,504
Mortgage servicing rights - - 18,398 18,398 14,809
Financial liabilities:
Non-maturing interest-bearing deposits - 979,860 - 979,860 979,860
Noninterest-bearing deposits 498,834 - - 498,834 498,834
Time certificates of deposit - - 169,642 169,642 173,139
Accrued expenses and other liabilities 22,332 - - 22,332 22,332
FHLB advances and other borrowings - - 4,500 4,500 4,500
Other long-term debt - - 57,661 57,661 60,155
December 31, 2021
--- --- --- --- --- --- --- --- --- --- ---
Total
Level 1 Level 2 Level 3 Estimated Carrying
Inputs Inputs Inputs Fair Value Amount
(In Thousands)
Financial assets:
Cash and cash equivalents $ 61,434 $ - $ - $ 61,434 $ 61,434
FHLB stock 1,702 - - 1,702 1,702
FRB stock 2,974 - - 2,974 2,974
Loans receivable, gross - - 939,204 939,204 933,139
Accrued interest and dividends receivable 5,751 - - 5,751 5,751
Mortgage servicing rights - - 14,686 14,686 13,693
Financial liabilities:
Non-maturing interest-bearing deposits - 703,948 - 703,948 703,948
Noninterest-bearing deposits 368,846 - - 368,846 368,846
Time certificates of deposit - - 149,605 149,605 149,755
Accrued expenses and other liabilities 21,037 - - 21,037 21,037
FHLB advances and other borrowings - - 5,003 5,003 5,000
Other long-term debt - - 29,299 29,299 30,155

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS

Recently 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).

In February 2022, the FASB issued ASU No. 2022-02, an update to ASU No. 2016-13. The amendments in the update eliminate TDR recognition and measurement guidance. Instead, entities must evaluate whether the modification represents a new loan or a continuation of an existing loan. Existing disclosure requirements are enhanced and the new requirements are introduced related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, for public business entities, the amendments in the update require that entities disclose current-period gross write-offs by year of origination for financing receivables. This information must be included in the vintage disclosures, which require an entity to disclose the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination.

The Company believes the amendments in these updates will have an impact on the Company’s condensed consolidated financial statements and is continuing to evaluate the significance of that impact, even though the adoption date has been deferred. In that regard, we have established a working group composed of individuals from the finance and credit administration areas of the Company. We have developed a current expected credit loss model and plan on utilizing this model concurrently with our existing allowance for loan loss model during 2022. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.

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

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as SOFR. The guidance was effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating this guidance to determine the date of adoption and the potential impact. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. ASU No. 2021-01 has not had and is not expected to have a significant impact on the Company's consolidated financial statements.

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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

Introduction ****

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

The Bank has a strong mortgage lending focus, with a large portion of its loan originations represented by single-family residential mortgages, which has enabled it to successfully market home equity loans, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). The Bank has also focused on adding commercial loans to its portfolio, both real estate and non-real estate. We have made significant progress in this initiative. The purpose of this diversification is to mitigate the Bank’s dependence on the residential mortgage market, as well as to improve our ability to manage our interest rate spread. Recent acquisitions have added to our agricultural loans, which generally have shorter maturities and nominally higher interest rates. This has provided additional interest income and improved interest rate sensitivity. The Bank’s management recognizes that fee income will also enable it to be less dependent on specialized lending and it now maintains a significant loan serviced portfolio which provides a steady source of fee income. Fee income is also supplemented with fees generated from deposit accounts. The Bank has a high percentage of non-maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its spread. Non-maturity deposits and certificates of deposits do not automatically reprice as interest rates rise. Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity.

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

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee held the federal funds target rate at 0.25% during the year ended December 31, 2021. The rate increased to 1.75% during the six months ended June 30, 2022.

Recent Events

Acquisitions

On September 30, 2021, the Company entered into an Agreement and Plan of Merger with First Community Bancorp, Inc., a Montana corporation and FCB's wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, FCB would merge with and into Eagle, with Eagle continuing as the surviving corporation. The transaction closed on April 30, 2022. In the transaction, Eagle acquired nine retail bank branches and two loan production offices in Montana. The total consideration paid was $38.58 million and included cash consideration of $10.23 million and common stock issued of $28.35 million.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### COVID-19

The Bank remains focused on supporting our customers, communities and employees while prudently managing risk.

Eagle began taking loan applications from its small business clients immediately after the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was implemented, and as of the close of the initial round of the program, had helped 764 borrowers receive $45.71 million in SBA PPP loans. The Bank processed applications for PPP loan forgiveness for customers, with 759 loans representing $45.31 million paid in full as of December 31, 2021. As of June 30, 2022, $53,000 of initial round SBA PPP loans remain unforgiven.  As of the close of the second round of the program, Eagle supported 646 borrowers in receiving $19.51 million in new PPP funding. The Bank processed applications for PPP loan forgiveness for customers, with 514 loans representing $15.45 million paid in full as of December 31, 2021. Of the 132 PPP loans representing $4.06 million remaining as of December 31, 2021, 112 loans or $3.77 million were forgiven during the six months ended June 30, 2022. The remaining 20 PPP loans represent $285,000.

As of June 30, 2022, our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from our subsidiary Bank to service our debt. If our capital deteriorates such that our subsidiary Bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.

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

Financial Condition

Comparisons of financial condition in this section are between June 30, 2022 and December 31, 2021.

Total assets were $1.90 billion at June 30, 2022, an increase of $464.54 million, or 32.4% from $1.44 billion at December 31, 2021. The increase was largely due to the change in loans receivable and securities available-for-sale which were impacted by the acquisition of FCB. Loans receivable increased by $316.99 million from December 31, 2021. Securities available-for-sale increased by $112.78 million from December 31, 2021. Total liabilities were $1.74 billion at June 30, 2022, an increase of $458.48 million, or 35.8%, from $1.28 billion at December 31, 2021. The increase was mainly due to an increase in deposits which was also impacted by the FCB acquisition. Total deposits increased $429.28 million from December 31, 2021 and total borrowings increased $28.65 million from December 31, 2021. Total shareholders’ equity increased $6.06 million or 3.9% from December 31, 2021.

Financial Condition Details

Investment Activities

The following table summarizes investment activities:

June 30, December 31,
2022 2021
Fair Value Percentage of Total Fair Value Percentage of Total
(Dollars in Thousands)
Securities available-for-sale:
U.S. government obligations $ 2,996 0.78 % $ 1,633 0.60 %
U.S. Treasury obligations 68,307 17.79 53,183 19.61
Municipal obligations 179,139 46.64 123,667 45.58
Corporate obligations 7,157 1.86 9,336 3.44
Mortgage-backed securities 32,934 8.58 14,636 5.40
Collateralized mortgage obligations 89,565 23.32 63,067 23.25
Asset-backed securities 3,943 1.03 5,740 2.12
Total securities available-for-sale $ 384,041 100.00 % $ 271,262 100.00 %

Securities available-for-sale were $384.04 million at June 30, 2022, an increase of $112.78 million, or 41.6%, from $271.26 million at December 31, 2021. Securities were impacted by the FCB acquisition, which included acquired securities of $126.12 million. Excluding securities acquired, securities decreased by $13.34 million. The decrease was due to sales and maturity, principal payments and call activity. In addition, the decrease was impacted by unrealized losses at June 30, 2022 caused by recent increases in interest rates. These decreases were largely offset by purchases. Immediately following the acquisition, a restructure of FCB's portfolio was incurred to better align the acquired portfolio with Eagle's investment strategy.

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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:

June 30, December 31,
2022 2021
Amount Percent of Total Amount Percent of Total
(Dollars in thousands)
Real estate loans:
Residential 1-4 family ^(1)^ $ 132,360 10.57 % $ 101,180 10.82 %
Residential 1-4 family construction 53,869 4.30 45,635 4.88
Total residential 1-4 family 186,229 14.87 146,815 15.70
Commercial real estate 486,197 38.81 410,568 43.92
Commercial construction and development 132,585 10.59 92,403 9.88
Farmland 124,544 9.94 67,005 7.17
Total commercial real estate 743,326 59.34 569,976 60.97
Total real estate loans 929,555 74.21 716,791 76.67
Other loans:
Home equity 62,445 4.99 51,748 5.54
Consumer 25,775 2.06 18,455 1.97
Commercial 128,467 10.26 101,535 10.86
Agricultural 106,274 8.48 46,335 4.96
Total commercial loans 234,741 18.74 147,870 15.82
Total other loans 322,961 25.79 218,073 23.33
Total loans 1,252,516 100.00 % 934,864 100.00 %
Deferred loan fees (1,564 ) (1,725 )
Allowance for loan losses (13,325 ) (12,500 )
Total loans, net $ 1,237,627 $ 920,639
^(1)^ Excludes loans held-for-sale.
--- ---

Loans receivable, net increased $316.99 million, or 34.4%, to $1.24 billion at June 30, 2022 from $920.64 million at December 31, 2021. The increase was impacted by the FCB acquisition, which included $190.89 million of acquired loans and $126.92 million of organic growth in loans receivable. Including acquired loans, total commercial real estate loans increased $173.35 million, total commercial loans increased $86.87 million, total residential loans increased $39.41 million, home equity loans increased $10.70 million, and consumer loans increased $7.32 million.

Total loan originations were $588.00 million for the six months ended June 30, 2022. Total residential 1-4 family originations were $358.53 million, which includes $314.62 million of loans held-for-sale originations. Total commercial real estate originations were $160.52 million. Total commercial originations were $47.69 million. Home equity loan originations totaled $14.66 million. Consumer loan originations totaled $6.60 million. Loans held-for-sale decreased by $8.87 million to $16.95 million at June 30, 2022 from $25.82 million at December 31, 2021.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Lending Activities– continued

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 June 30, 2022 there was $345,000 of real estate owned and other repossessed property. As of December 31, 2021, there was $4,000 of real estate owned and other repossessed property.

The following table sets forth information regarding nonperforming assets:

June 30, December 31,
2022 2021
(Dollars in Thousands)
Nonaccrual loans
Real estate loans:
Residential 1-4 family $ 573 $ 616
Residential 1-4 family construction - 337
Commercial real estate 403 497
Farmland 146 989
Other loans:
Home equity 106 100
Consumer 35 62
Commercial 83 516
Agricultural 1,112 1,718
Accruing loans delinquent 90 days or more
Real estate loans:
Farmland 763 -
Commercial 759 -
Agricultural 620 -
Restructured loans:
Real estate loans:
Commercial real estate 1,527
Farmland 624 641
Other loans:
Home equity 13 15
Agricultural 475 41
Total nonperforming loans 5,712 7,059
Real estate owned and other repossessed property, net 345 4
Total nonperforming assets $ 6,057 $ 7,063
Total nonperforming loans to total loans 0.46 % 0.76 %
Total nonperforming loans to total assets 0.30 % 0.49 %
Total nonaccrual loans to total loans 0.29 % 0.59 %
Total allowance for loan loss to nonperforming loans 233.28 % 177.08 %
Total nonperforming assets to total assets 0.32 % 0.49 %

Nonaccrual loans as of June 30, 2022 and December 31, 2021 include $711,000 and $492,000, respectively of acquired loans that deteriorated subsequent to the acquisition date.

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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:

June 30, December 31,
2022 2021
Percent Percent
Amount of Total Amount of Total
(Dollars in Thousands)
Noninterest checking $ 498,834 30.20 % $ 368,846 30.16 %
Interest-bearing checking 265,808 16.09 203,410 16.64
Savings 386,239 23.38 223,069 18.25
Money market 327,813 19.85 277,469 22.70
Total 1,478,694 89.52 1,072,794 87.75
Certificates of deposit accounts:
IRA certificates 25,191 1.53 25,333 2.07
Other certificates 147,948 8.95 124,422 10.18
Total certificates of deposit 173,139 10.48 149,755 12.25
Total deposits $ 1,651,833 100.00 % $ 1,222,549 100.00 %

Deposits increased by $429.28 million, or 35.1%, to $1.65 billion at June 30, 2022 from $1.22 billion at December 31, 2021. The increase was impacted by the FCB acquisition. Excluding acquired deposits, total deposits increased by $108.17 million. Including acquired deposits, savings increased by $163.18 million, noninterest checking increased by $129.98 million, interest-bearing checking increased by $62.40 million, money market increased by $50.34 million, and certificates of deposit increased by $23.38 million.

The following table summarizes borrowing activity:

June 30, December 31,
2022 2021
Net Percent Net Percent
Amount of Total Amount of Total
(Dollars in Thousands)
FHLB advances and other borrowings $ 4,500 7.08 % $ 5,000 14.34 %
Other long-term debt:
Senior notes fixed at 5.75%, due 2022 - - 9,996 28.67
Subordinated debentures fixed at 3.50% to floating, due 2032 39,128 61.60 - -
Subordinated debentures fixed at 5.50% to floating, due 2030 14,734 23.20 14,718 42.21
Subordinated debentures variable, due 2035 5,155 8.12 5,155 14.78
Total other long-term debt 59,017 92.92 29,869 85.66
Total borrowings $ 63,517 100.00 % $ 34,869 100.00 %

Total borrowings increased by $28.65 million, or 82.2% to $63.52 million at June 30, 2022 from $34.87 million at December 31, 2021. This increase is largely due to issuance of $40.00 million of subordinated notes, slightly offset by the redemption of $10.00 million of senior notes and the maturity of $5.00 million of FHLB advances. In addition, during the year ended December 31, 2021, Eagle established a $10.00 million line of credit with a correspondent bank. The balance of this line of credit was $4.50 million at June 30, 2022 and $0 at December 31, 2021.

****** Shareholders’ Equity

Total shareholders’ equity increased by $6.06 million, or 3.9%, to $162.79 million at June 30, 2022 from $156.73 million at December 31, 2021. This was primarily the result of stock issued in connection with the FCB acquisition of $28.35 million. The increase was largely offset by an increase in other comprehensive loss of $22.57 million related to unrealized losses on securities available-for-sale. These unrealized losses were a result of increased interest rates.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Analysis of Net Interest Income

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

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

For the Three Months Ended June 30,
2022 2021
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 $ 347,168 $ 2,011 2.32 % $ 203,873 $ 1,018 2.00 %
FHLB and FRB stock 6,010 38 2.54 4,880 63 5.18
Loans receivable^(1)^ 1,157,839 14,895 5.16 899,644 11,012 4.91
Other earning assets 53,033 108 0.82 84,116 32 0.15
Total interest-earning assets 1,564,050 17,052 4.37 1,192,513 12,125 4.08
Noninterest-earning assets 188,866 144,527
Total assets $ 1,752,916 $ 1,337,040
Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts:
Checking $ 245,431 $ 25 0.04 % $ 187,521 $ 12 0.03 %
Savings 273,663 70 0.10 195,041 29 0.06
Money market 373,569 228 0.24 233,408 125 0.21
Certificates of deposit 165,355 99 0.24 161,236 200 0.50
Advances from FHLB and other borrowings including long-term debt 70,539 663 3.77 39,714 434 4.38
Total interest-bearing liabilities 1,128,557 1,085 0.39 816,920 800 0.39
Noninterest checking 449,747 343,620
Other noninterest-bearing liabilities 24,193 19,700
Total liabilities 1,602,497 1,180,240
Total equity 150,419 156,800
Total liabilities and equity $ 1,752,916 $ 1,337,040
Net interest income/interest rate spread^(2)^ $ 15,967 3.98 % $ 11,325 3.69 %
Net interest margin^(3)^ 4.09 % 3.81 %
Total interest-earning assets to interest-bearing liabilities 138.59 % 145.98 %
^(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 Six Months Ended June 30,
2022 2021
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 $ 310,273 $ 3,308 2.15 % $ 183,648 $ 1,895 2.08 %
FHLB and FRB stock 5,279 97 3.71 4,914 132 5.42
Loans receivable^(1)^ 1,066,515 26,268 4.97 894,843 22,041 4.97
Other earning assets 60,636 147 0.49 81,868 58 0.14
Total interest-earning assets 1,442,703 29,820 4.17 1,165,273 24,126 4.18
Noninterest-earning assets 172,043 141,730
Total assets $ 1,614,746 $ 1,307,003
Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts:
Checking $ 226,440 $ 38 0.03 % $ 179,621 $ 22 0.02 %
Savings 247,741 101 0.08 188,803 56 0.06
Money market 334,042 420 0.25 224,273 235 0.21
Certificates of deposit 155,836 175 0.23 164,779 455 0.56
Advances from FHLB and other borrowings including long-term debt 67,101 1,274 3.83 42,044 894 4.29
Total interest-bearing liabilities 1,031,160 2,008 0.39 799,520 1,662 0.42
Noninterest checking 409,211 330,328
Other noninterest-bearing liabilities 22,534 20,769
Total liabilities 1,462,905 1,150,617
Total equity 151,841 156,386
Total liabilities and equity $ 1,614,746 $ 1,307,003
Net interest income/interest rate spread^(2)^ $ 27,812 3.78 % $ 22,464 3.76 %
Net interest margin^(3)^ 3.89 % 3.89 %
Total interest-earning assets to interest-bearing liabilities 139.91 % 145.75 %
^(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 June 30,
2022 2021
Due to Due to
Volume Rate Net Volume Rate Net
(In Thousands)
Interest-earning assets:
Investment securities $ 716 $ 277 $ 993 $ 189 $ (123 ) $ 66
FHLB and FRB stock 15 (40 ) (25 ) (30 ) (2 ) (32 )
Loans receivable^(1)^ 3,160 723 3,883 411 (459 ) (48 )
Other earning assets (12 ) 88 76 27 (21 ) 6
Total interest-earning assets 3,879 1,048 4,927 597 (605 ) (8 )
Interest-bearing liabilities:
Checking 4 9 13 4 (7 ) (3 )
Savings 12 29 41 12 (23 ) (11 )
Money Market 75 28 103 42 (1 ) 41
Certificates of deposit 5 (106 ) (101 ) (209 ) (397 ) (606 )
Advances from FHLB and other borrowings including long-term debt 337 (108 ) 229 (525 ) 194 (331 )
Total interest-bearing liabilities 433 (148 ) 285 (676 ) (234 ) (910 )
Change in net interest income $ 3,446 $ 1,196 $ 4,642 $ 1,273 $ (371 ) $ 902
^(1)^Includes loans held-for-sale.
---
For the Six Months Ended June 30,
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021
Due to Due to
Volume Rate Net Volume Rate Net
(In Thousands)
Interest earning assets:
Investment securities $ 1,307 $ 106 $ 1,413 $ 150 $ (234 ) $ (84 )
FHLB and FRB stock 10 (45 ) (35 ) (61 ) 4 (57 )
Loans receivable(1) 4,228 (1 ) 4,227 1,078 (1,529 ) (451 )
Other earning assets (15 ) 104 89 183 (229 ) (46 )
Total interest earning assets 5,530 164 5,694 1,350 (1,988 ) (638 )
Interest bearing liabilities:
Checking 6 10 16 9 (20 ) (11 )
Savings 17 28 45 27 (56 ) (29 )
Money Market 115 70 185 122 (148 ) (26 )
Certificates of deposit (25 ) (255 ) (280 ) (576 ) (874 ) (1,450 )
Advances from FHLB and other borrowings including long-term debt 533 (153 ) 380 (1,024 ) 338 (686 )
Total interest bearing liabilities 646 (300 ) 346 (1,442 ) (760 ) (2,202 )
Change in net interest income $ 4,884 $ 464 $ 5,348 $ 2,792 $ (1,228 ) $ 1,564
^(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

Results of Operations for the Three Months Ended June 30, 2022 and 2021

Net Income. Eagle’s net income for the three months ended June 30, 2022 was $1.77 million compared to $2.68 million for the three months ended June 30, 2021. The decrease of $910,000 was due to a decrease in noninterest income of $3.97 million and an increase in noninterest expense of $1.01 million. These decreases were largely offset by an increase in net interest income after loan loss provision of $3.81 million. Basic and diluted earnings per share were both $0.24 for the current period. Basic and diluted earnings per share were $0.40 and $0.39 for the prior year comparable period, respectively.

Net Interest Income. Net interest income increased to $15.97 million for the three months ended June 30, 2022, from $11.33 million for the same quarter in the prior year. The increase of $4.64 million, or 41.0%, was primarily the result of an increase in interest and dividend income of $4.92 million.

Interest and Dividend Income. Interest and dividend income was $17.05 million for the three months ended June 30, 2022 compared to $12.13 million for the three months ended June 30, 2021. Interest and fees on loans increased to $14.90 million for the three months ended June 30, 2022. This increase of $3.89 million, or 35.3%, was due to an increase in the average balance of loans, as well as an increase in the average yield on loans. Average balances for loans receivable, including loans held-for-sale, for the three months ended June 30, 2022 were $1.16 billion, compared to $899.64 million for the prior year period. This represents an increase of $258.20 million, or 28.7%. The increase was impacted by the FCB acquisition and organic loan growth. The average interest rate earned on loans receivable also increased by 25 basis points, from 4.91% for the three months ended June 30, 2021 to 5.16% for the current period. Interest accretion on purchased loans was $790,000 for the three months ended June 30, 2022 which resulted in a 20 basis point increase in net interest margin compared to $125,000 for the three months ended June 30, 2021 which resulted in a 4 basis point increase in net interest margin. PPP fee income on loans was $78,000 for the three months ended June 30, 2022, which resulted in a 2 basis point increase in net interest margin compared to $471,000 for the three months ended June 30, 2021, which resulted in a 16 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $993,000 period over period. Average balances for investments increased to $347.17 million for the three months ended June 30, 2022, from $203.87 million for the three months ended June 30, 2021. The increase in average investment balances was largely driven by the FCB acquisition. Average interest rates earned on investments also increased to 2.32% for the three months ended June 30, 2022 from 2.00% for the three months ended June 30, 2021.

Interest Expense. Total interest expense was $1.09 million for the three months ended June 30, 2022 compared to $800,000 for the three months ended June 30, 2021. The increase of $285,000, or 35.6%, was largely due to a net increase of $229,000 in interest expense on total borrowings. The average balance for total borrowings increased from $39.71 million for the three months ended June 30, 2021 to $70.54 million for the three months ended June 30, 2022. The increase was impacted by the issuance of $40.00 million of subordinated notes in January 2022. A portion of the net proceeds were used to redeem $10.00 million of senior notes due in February 2022. However, the average rate paid on total borrowings decreased from 4.38% for the three months ended June 30, 2021, to 3.77% for the three months ended June 30, 2022. The decrease in the average rate paid is due to the change in the mix of the outstanding borrowings. Interest expense on deposits increased $56,000, or 15.3% compared to prior year period. The average balance for total deposits was $1.51 billion for the three months ended June 30, 2022 compared to $1.12 billion for the three months ended June 30, 2021. However, the overall average rate on total deposits was down slightly from 0.13% for the three months ended June 30, 2021 compared to 0.11% for the three months ended June 30, 2022.

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. The Bank recorded $858,000 in loan loss provisions for the three months ended June 30, 2022 and $22,000 for the three months ended June 30, 2021. The increase in the loan loss provision was related to current quarter charge-offs, as well as loan growth. 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 $7.34 million for the three months ended June 30, 2022 compared to $11.31 million for the three months ended June 30, 2021. The decrease of $3.97 million was primarily driven by a decrease in mortgage banking, net of $4.44 million. Mortgage banking, net includes net gain on sale of mortgage loans which decreased $5.26 million to $5.22 million for the three months ended June 30, 2022 compared to $10.48 million for the three months ended June 30, 2021. This change reflects a mortgage market that is returning to more normal levels after record levels were reached in 2021. During the three months ended June 30, 2022, $150.52 million residential mortgage loans were sold compared to $292.09 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the three months ended June 30, 2022 was 3.47% compared to 3.59% for the three months ended June 30, 2021.

Noninterest Expense. Noninterest expense was $20.05 million for the three months ended June 30, 2022 compared to $19.04 million for the three months ended June 30, 2021, an increase of $1.01 million or 5.3%. The increase was impacted by acquisition costs of $1.88 million incurred during the three months ended June 30, 2022 related to the recently completed merger with FCB. This increase was partially offset by lower commissions paid on residential mortgage originations.

Provision for Income Taxes . Provision for income taxes was $634,000 for the three months ended June 30, 2022, compared to $893,000 for the three months ended June 30, 2021 due to decreased income before provision for income taxes. The effective tax rate for the three months ended June 30, 2022 was 26.4% compared to 25.0% for the three months ended June 30, 2021.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Six Months Ended June 30, 2022 and 2021

Net Income. Eagle’s net income for the six months ended June 30, 2022 was $3.99 million compared to $7.95 million for the six months ended June 30, 2021. The decrease of $3.96 million was largely due to a decrease in noninterest income of $9.06 million. This decrease was partially offset by an increase in net interest income after loan loss provision of $4.54 million and a decrease in provision for income taxes of $1.32 million. Basic and diluted earnings per share were both $0.57 for the current period. Basic and diluted earnings per share were both $1.17 for the prior year comparable period.

Net Interest Income. Net interest income increased to $27.81 million for the six months ended June 30, 2022, from $22.46 million for the same period in the prior year. The increase of $5.35 million, or 23.8%, was primarily the result of an increase in interest and dividend income of $5.69 million.

Interest and Dividend Income. Interest and dividend income was $29.82 million for the six months ended June 30, 2022 compared to $24.13 million for the six months ended June 30, 2021. Interest and fees on loans increased to $26.27 million for the six months ended June 30, 2022 from $22.04 million for the six months ended June 30, 2021. This increase of $4.23 million, or 19.2%, was due to an increase in the average balance of loans. Average balances for loans receivable, including loans held-for-sale, for the six months ended June 30, 2022 were $1.07 billion, compared to $894.84 million for the prior year period. This represents an increase of $171.68 million, or 19.2%. The increase was impacted by the FCB acquisition, as well as organic loan growth. The average interest rate earned on loans receivable was consistent period over period at 4.97%. Interest accretion on purchased loans was $897,000 for the six months ended June 30, 2022 which resulted in a 13 basis point increase in net interest margin compared to $314,000 for the six months ended June 30, 2021 which resulted in a 5 basis point increase in net interest margin. PPP fee income on loans was $255,000 for the six months ended June 30, 2022, which resulted in a 4 basis point increase in net interest margin compared to $970,000 for the six months ended June 30, 2021 which resulted in a 17 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $1.41 million period over period. Average balances for investments increased to $310.27 million for the six months ended June 30, 2022, from $183.65 million for the six months ended June 30, 2021. The increase in average investment balances was largely driven by the FCB acquisition. Average interest rates earned on investments also increased to 2.15% for the six months ended June 30, 2022 from 2.08% for the six months ended June 30, 2021.

Interest Expense. Total interest expense was $2.01 million for the six months ended June 30, 2022 compared to $1.66 million for the six months ended June 30, 2021. The increase of $346,000, or 20.8%, was due to a net increase of $380,000 in interest expense on total borrowings. The average balance for total borrowings increased from $42.04 million for the six months ended June 30, 2021 to $67.10 million for the six months ended June 30, 2022. The increase was impacted by the issuance of $40.00 million of subordinated notes in January 2022. A portion of the net proceeds were used to redeem $10.00 million of senior notes due in February 2022. However, the average rate paid on total borrowings decreased from 4.29% for the six months ended June 30, 2021, to 3.83% for the six months ended June 30, 2022. The decrease in the average rate paid was due to the change in the mix of the outstanding borrowings. Interest expense on deposits decreased $34,000, or 4.4% compared to prior year period. The average balance for total deposits was $1.37 billion for the six months ended June 30, 2022 compared to $1.09 billion for the six months ended June 30, 2021. However, the overall average rate on total deposits was 0.11% for the six months ended June 30, 2022 compared to 0.14% for the six months ended June 30, 2021.

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. The Bank recorded $1.14 million in loan loss provisions for the six months ended June 30, 2022 and $321,000 for the six months ended June 30, 2021. The increase in the loan loss provision was largely due to loan growth. 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 $15.64 million for the six months ended June 30, 2022 compared to $24.70 million for the six months ended June 30, 2021. The decrease of $9.06 million was primarily driven by a decrease in mortgage banking, net of $9.96 million. Mortgage banking, net includes net gain on sale of mortgage loans which decreased $13.31 million to $11.45 million for the six months ended June 30, 2022 compared to $24.76 million for the six months ended June 30, 2021. This change reflects a mortgage market that is returning to more normal levels after record levels were reached in 2021. During the six months ended June 30, 2022, $322.66 million residential mortgage loans were sold compared to $552.58 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the six months ended June 30, 2022 was 3.55% compared to 4.48% for the six months ended June 30, 2021. There has been some margin compression due to increased competition. Mortgage banking, net also includes the impact of fair value changes of loans held-for sale and derivatives which can fluctuate due to changes in the market. The net change in fair value of loans held-for sale and derivatives was a loss of $955,000 for the six months ended June 30, 2022 compared to a loss of $2.97 million for the prior period.

Noninterest Expense. Noninterest expense was $36.99 million for the six months ended June 30, 2022 compared to $36.25 million for the six months ended June 30, 2021, a slight increase of $744,000 or 2.1%. The increase was impacted by acquisition costs of $2.19 million incurred during the six months ended June 30, 2022 related to the FCB acquisition. This increase was largely offset by lower commissions paid on residential mortgage originations.

Provision for Income Taxes . Provision for income taxes was $1.33 million for the six months ended June 30, 2022, compared to $2.65 million for the six months ended June 30, 2021 due to decreased income before provision for income taxes. The effective tax rate was 25.0% for both the current and prior period.

  • 35 -

Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources ****

Liquidity

The Bank is required by regulation to maintain sufficient levels of liquidity for safety and soundness purposes. Appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0% and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Des Moines. The Bank exceeded those minimum ratiosas of June 30, 2022 and December 31, 2021.

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 Company uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit and demand deposit withdrawals. In addition, the Company uses liquidity resources for investment purposes, to meet operating expenses and capital expenditures, for dividend payments and stock repurchases and to maintain adequate liquidity levels.

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

Through the six months ended June 30, 2022, liquidity levels remained strong. The Company completed a $40.00 million subordinated debt offering in January 2022. A portion of the net proceeds were used to repay at maturity the $10.00 million of senior notes due in February 2022.

Capital Resources

As of June 30, 2022, 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 8.40% compared to an increase of 8.90% at December 31, 2021. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

The Company's and the Bank's regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed "well capitalized" pursuant to State of Montana and FRB rules as of June 30, 2022. The Company's and the Bank's actual capital amounts and ratios as of June 30, 2022 are presented in the table below and all of the ratios, with the exception of the Tier 1 capital adjusted total average assets ratio, include the capital conservation buffer of 2.50%.

Minimum
To Be Well
Minimum Required Capitalized Under
for Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
June 30, 2022:
Total risk-based capital to risk weighted assets
Consolidated $ 215,479 14.78 % $ 153,055 10.50 % N/A N/A
Bank 193,874 13.31 152,944 10.50 145,661 10.00
Tier 1 capital to risk weighted assets
Consolidated 147,154 10.10 123,901 8.50 N/A N/A
Bank 180,549 12.40 123,812 8.50 116,529 8.00
Common equity Tier 1 capital to risk weighted assets
Consolidated 142,154 9.75 102,036 7.00 N/A N/A
Bank 180,549 12.40 101,963 7.00 94,680 6.50
Tier 1 capital to adjusted total average assets
Consolidated 147,154 8.51 69,179 4.00 N/A N/A
Bank 180,549 10.60 68,164 4.00 85,205 5.00
  • 36 -

Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Minimum
To Be Well
Minimum Required Capitalized Under
for Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Amount Ratio Amount Ratio
(Dollars in Thousands)
December 31, 2021:
Total risk-based capital to risk weighted assets
Consolidated 164,639 15.18 % $ 113,904 10.50 % N/A N/A
Bank 165,786 15.32 113,591 10.50 108,182 10.00
Tier 1 capital to risk weighted assets
Consolidated 137,139 12.64 92,208 8.50 N/A N/A
Bank 153,286 14.17 91,955 8.50 86,546 8.00
Common equity Tier 1 capital to risk weighted assets
Consolidated 132,139 12.18 75,936 7.00 N/A N/A
Bank 153,286 14.17 75,727 7.00 70,318 6.50
Tier 1 capital to adjusted total average assets
Consolidated 137,139 9.75 56,290 4.00 N/A N/A
Bank 153,286 10.96 55,929 4.00 69,911 5.00

All values are in US Dollars.

  • 37 -

Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Impact of Inflation and Changing Prices

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

Interest Rate Risk

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

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

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

The Bank has established acceptable levels of interest rate risk as follows for an instantaneous and permanent shock in rates: projected net interest income over the next twelve months (i.e. year-1) and the subsequent twelve months (i.e. year-2) will not be reduced by more than 15.0% given an immediate increase or decrease in interest rates of up to 200 basis points or by more than 10.0% given an immediate increase or decrease in interest rates of up to 100 basis points. Our rate sensitivity of -16.3% for -200 basis points in year two as of June 30, 2022 is slightly outside of the policy limit of -15.0%. This was discussed at our most recent asset-liability committee meeting. Given the remote possibility of -200 basis points, it was determined that no steps need to be taken at this time.

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

Changes in Market Rate Sensitivity
Interest Rates As of June 30, 2022 Policy
(Basis Points) Year 1 Year 2 Limits
+200 2.5% 9.4% -15.0%
+100 1.5% 5.7% -10.0%
-100 4.9% -8.0% -10.0%
-200 9.0% -16.3% -15.0%
  • 38 -

Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

  • 39 -

Table of Contents

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 June 30, 2022, 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.

  • 40 -

Table of Contents

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, 2021 and any subsequently filed Quarterly Reports on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On April 21, 2022, Eagle's Board authorized the repurchase of up to 400,000 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 April 21, 2023. The following table summarizes the Company's purchase of its common stock for the three months ended June 30, 2022 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
April 1, 2022 through April 30, 2022 - $ - - 400,000
May 1, 2022 through May 31, 2022 5,000 19.75 5,000 395,000
June 1, 2022 through June 30, 2022 - - - 395,000
Total 5,000 $ 19.75 5,000

On July 22, 2021, Eagle's Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased during the third or fourth quarter of 2021. However, during the second quarter of 2022, the Company repurchased the total authorized amount of 100,000 shares at an average price of $22.71 per share. The plan expired on July 22, 2022.

On July 23, 2020, Eagle's Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchases depended upon market conditions and other corporate considerations. During the third quarter of 2020, 41,337 shares were purchased under this plan at an average price of $15.75 per share. However, no shares were purchased during the fourth quarter of 2020 or during 2021. The plan expired on July 23, 2021.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

  • 41 -

Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION - continued

Item 5. Other Information.

None.

Item 6. Exhibits. ****
Exhibit<br> <br>Number Description
--- ---
2.1 Agreement and Plan of Merger, dated as of September 30, 2021, by and among Eagle Bancorp Montana, Inc., Opportunity Bank of Montana, First Community Bancorp, Inc. and First Community Bank (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on October 1, 2021).
3.1 Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc. (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on February 23, 2010).
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation. (incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form 10-Q filed on May 9, 2019).
3.3 Bylaws of Eagle Bancorp Montana, Inc., amended as of August 20, 2015 (incorporated by reference to 3.1 of our Current Report on Form 8-K filed on August 25, 2015).
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 Miranda J. Spaulding, 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 Miranda J. Spaulding, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)^(1)^
101.SCH Inline XBRL Taxonomy Extension Schema Document^(1)^
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document^(1)^
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document^(1)^
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document^(1)^
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document^(1)^
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
^(1)^These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
  • 42 -

Table of Contents

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: August 4, 2022 By: /s/ Peter J. Johnson
Peter J. Johnson
CEO
Date: August 4, 2022 By: /s/ Miranda J. Spaulding
Miranda J. Spaulding
SVP/CFO
  • 43 -

ex_375943.htm

Exhibit 31.1

CERTIFICATION 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

I, Peter J. Johnson certify that:

1. I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp Montana, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
--- ---

Date: August 4, 2022

/s/ Peter J. Johnson
Peter J. Johnson
Chief Executive Officer
(Principal Executive Officer)

ex_375944.htm

Exhibit 31.2

CERTIFICATION 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

I, Miranda J. Spaulding certify that:

1. I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp Montana, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
--- ---

Date: August 4, 2022

/s/ Miranda J. Spaulding
Miranda J. Spaulding
Senior Vice President, Chief Financial Officer<br><br> <br>(Principal Financial Officer)

ex_375945.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Eagle Bancorp Montana, Inc. (the ‘Company’) on Form 10-Q for the period ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the ‘Report’), we, Peter J. Johnson, Chief Executive Officer of the Company, and Miranda J. Spaulding, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the undersigned’s best knowledge and belief:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
--- ---
/s/ Peter J. Johnson /s/ Miranda J. Spaulding
--- ---
Peter J. Johnson Miranda J. Spaulding
Chief Executive Officer<br><br> <br>(Principal Executive Officer)<br><br> <br>August 4, 2022 Chief Financial Officer and Principal Accounting Officer<br><br> <br>(Principal Financial Officer)<br><br> <br>August 4, 2022

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission and shall not be considered filed as part of the Report.

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