EBMT 10-Q Quarter ended June 30, 2018

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

[   ]

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.

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(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

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(Address of principal executive offices)

(406) 442-3080

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(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 [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] 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     [X]
	(Do not check if smaller	Emerging growth company     [   ]
	reporting 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 [X]

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

5,460,452 shares outstanding

As of August 7, 2018

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	PAGE
Item1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition as of June 30, 2018 and December 31, 2017	1
	Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017	3
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017	5
	Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2018 and 2017	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	7
	Notes to the Unaudited Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	53
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
Signatures		56

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Note Regarding Forward-Looking Statements

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

●

statements of our goals, intentions and expectations;

●

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

●

statements regarding the 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. (the “Company”) 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;

●

general economic conditions, either nationally or in our market areas, that are worse than expected;

●

competition among depository and other financial institutions;

●

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;

●

changes or volatility in the securities markets;

●

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

●

our ability to successfully perform due diligence and integrate acquired businesses;

●

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;

●

the impact of a recurring recession on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;

●

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;
	●	the possibility of goodwill impairment charges in the future;

●

changes in the financial performance, and/or condition of our borrowers and their ability to repay their loans when due; and

●

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2017, 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.

		June 30,				December 31,
		2018				2017
ASSETS:
Cash and due from banks		$	7,583			$	5,517
Interest bearing deposits in banks			1,397				1,920
Total cash and cash equivalents			8,980				7,437
Securities available-for-sale			154,265				132,044
Federal Home Loan Bank stock			4,559				4,086
Federal Reserve Bank stock			2,019				1,465
Investment in Eagle Bancorp Statutory Trust I			155				155
Mortgage loans held-for-sale			11,700				8,949
Loans receivable, net of deferred loan fees of $1,029 at June 30, 2018 and $1,093 at December 31, 2017 and allowance for loan losses of $6,150 at June 30, 2018 and $5,750 at December 31, 2017			575,578				507,404
Accrued interest and dividends receivable			3,668				2,555
Mortgage servicing rights, net			6,716				6,578
Premises and equipment, net			27,969				21,958
Cash surrender value of life insurance			14,670				14,481
Real estate and other repossessed assets acquired in settlement of loans, net			457				525
Goodwill			12,124				7,034
Core deposit intangible, net			1,702				273
Deferred tax asset, net			2,012				1,360
Other assets			253				478
Total assets		$	826,827			$	716,782

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		June 30,				December 31,
		2018				2017
LIABILITIES:
Deposit accounts:
Noninterest bearing		$	133,736			$	99,799
Interest bearing			479,439				420,765
Total deposits			613,175				520,564
Accrued expenses and other liabilities			5,535				4,822
Federal Home Loan Bank advances and other borrowings			91,469				82,969
Other long-term debt:
Principal amount			25,155				25,155
Unamortized debt issuance costs			(312	)			(344	)
Total other long-term debt less unamortized debt issuance costs			24,843				24,811
Total liabilities			735,022				633,166
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; 8,000,000 shares authorized; 5,718,942 and 5,272,168 shares issued; 5,460,452 and 5,013,678 shares outstanding at June 30, 2018 and December 31, 2017)			57				53
Additional paid-in capital			51,890				42,780
Unallocated common stock held by Employee Stock Ownership Plan			(559	)			(643	)
Treasury stock, at cost			(2,826	)			(2,826	)
Retained earnings			44,862				43,939
Net accumulated other comprehensive (loss) income			(1,619	)			313
Total shareholders' equity			91,805				83,616
Total liabilities and shareholders' equity		$	826,827			$	716,782

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		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans		$	7,862			$	6,174			$	14,734			$	11,744
Securities available-for-sale			1,021				714				2,010				1,443
Federal Home Loan Bank and Federal Reserve Bank dividends			74				36				153				76
Interest on deposits in banks			18				1				35				1
Other interest income			1				-				1				1
Total interest and dividend income			8,976				6,925				16,933				13,265
INTEREST EXPENSE:
Deposits			494				376				920				756
Federal Home Loan Bank advances and other borrowings			315				322				652				527
Other long-term debt			357				347				704				619
Total interest expense			1,166				1,045				2,276				1,902
NET INTEREST INCOME			7,810				5,880				14,657				11,363
Loan loss provision			24				302				526				603
NET INTEREST INCOME AFTER LOAN LOSS PROVISION			7,786				5,578				14,131				10,760
NONINTEREST INCOME:
Service charges on deposit accounts			214				239				440				471
Net gain on sale of loans (includes $262 and $341 for the three months ended June 30, 2018 and 2017, respectively, and $587 and $899 for the six months ended June 30, 2018 and 2017, respectively, related to accumulated other comprehensive earnings reclassification)			1,720				2,263				3,159				4,088
Mortgage loan servicing fees			563				509				1,123				1,056
Wealth management income			147				180				279				321
Interchange and ATM fees			271				228				496				434
Appreciation in cash surrender value of life insurance			146				126				270				250
Net gain (loss) on sale of available-for-sale securities (includes $15 and ($14) for the three months ended June 30, 2018 and 2017, respectively, and ($90) and ($14) for the six months ended June 30, 2018 and 2017, respectively, related to accumulated other comprehensive earnings reclassification)			15				(14	)			(90	)			(14	)
Net loss on sale of real estate owned and other repossessed property			(32	)			(24	)			(57	)			(25	)
Other noninterest income			40				63				143				197
Total noninterest income			3,084				3,570				5,763				6,778

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		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
NONINTEREST EXPENSE:
Salaries and employee benefits			5,461				4,586				10,370				9,019
Occupancy and equipment expense			835				672				1,663				1,389
Data processing			673				566				1,310				1,133
Advertising			298				269				576				458
Amortization of mortgage servicing rights			369				262				610				524
Amortization of core deposit intangible and tax credits			235				107				337				214
Loan costs			179				134				315				299
Federal insurance premiums			69				36				138				120
Postage			84				51				134				99
Legal, accounting and examination fees			184				200				326				285
Consulting fees			25				59				42				108
Acquisition costs			131				-				365				-
Write-down on real estate owned and other repossessed property			-				9				-				45
Other noninterest expense			701				669				1,382				1,366
Total noninterest expense			9,244				7,620				17,568				15,059
INCOME BEFORE INCOME TAXES			1,626				1,528				2,326				2,479
Income tax expense (includes ($23) and $858 for the three months ended June 30, 2018 and 2017, respectively, and ($700) and $883 for the six months ended June 30, 2018 and 2017, respectively related to income tax (benefit) expense from reclassification items)			293				462				420				650
NET INCOME		$	1,333			$	1,066			$	1,906			$	1,829
BASIC EARNINGS PER SHARE		$	0.24			$	0.28			$	0.35			$	0.48
DILUTED EARNINGS PER SHARE		$	0.24			$	0.27			$	0.35			$	0.47
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC EPS)			5,460,452				3,811,409				5,386,401				3,811,409
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED EPS)			5,524,912				3,869,885				5,450,861				3,872,765

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		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
NET INCOME		$	1,333			$	1,066			$	1,906			$	1,829
OTHER ITEMS OF COMPREHENSIVE (LOSS) INCOME:
Change in fair value of investment securities available-for-sale, before income taxes			(216	)			1,775				(2,799	)			2,054
Reclassification for realized gains and losses on investment securities included in income, before income tax			(15	)			14				90				14
Change in fair value of derivatives designated as cash flow hedges, before income taxes			402				657				664				998
Reclassification for realized gains on derivatives designated as cash flow hedges, before income taxes			(262	)			(341	)			(587	)			(899	)
Total other items of comprehensive (loss) income			(91	)			2,105				(2,632	)			2,167
Income tax benefit (expense) related to:
Investment securities			60				(730	)			720				(843	)
Derivatives designated as cash flow hedges			(37	)			(128	)			(20	)			(40	)
Total income tax benefit (expense)			23				(858	)			700				(883	)
COMPREHENSIVE INCOME (LOSS)		$	1,265			$	2,313			$	(26	)		$	3,113

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		PREFERRED				COMMON				PAID-IN				UNALLOCATED ESOP				TREASURY				RETAINED				ACCUMULATED OTHER COMPREHENSIVE
		STOCK				STOCK				CAPITAL				SHARES				STOCK				EARNINGS				INCOME (LOSS)				TOTAL
Balance at January 1, 2018		$	-			$	53			$	42,780			$	(643	)		$	(2,826	)		$	43,939			$	313			$	83,616
Net income																							1,906								1,906
Other comprehensive loss																											(1,932	)			(1,932	)
Dividends paid ($0.09 per share)																							(983	)							(983	)
Stock issued in connection with TwinCo acquisition							4				9,026																				9,030
Employee Stock Ownership Plan shares allocated or committed to be released for allocation (8,308 shares)											84				84																168
Balance at June 30, 2018		$	-			$	57			$	51,890			$	(559	)		$	(2,826	)		$	44,862			$	(1,619	)		$	91,805
Balance at January 1, 2017		$	-			$	41			$	22,366			$	(809	)		$	(2,971	)		$	41,240			$	(411	)		$	59,456
Net income																							1,829								1,829
Other comprehensive income																											1,284				1,284
Dividends paid ($0.08 per share)																							(609	)							(609	)
Employee Stock Ownership Plan shares allocated or committed to be released for allocation (8,308 shares)											78				84																162
Balance at June 30, 2017		$	-			$	41			$	22,444			$	(725	)		$	(2,971	)		$	42,460			$	873			$	62,122

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		Six Months Ended
		June 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,906			$	1,829
Adjustments to reconcile net income to net cash provided by operating activities:
Loan loss provision			526				603
Write-down on real estate owned and other repossessed assets			-				45
Depreciation			578				472
Net amortization of investment securities premium and discounts			648				822
Amortization of mortgage servicing rights			610				524
Amortization of core deposit intangible and tax credits			337				214
Deferred income tax provision (benefit)			240				(50	)
Net gain on sale of loans			(3,159	)			(4,088	)
Net loss on sale of available-for-sale securities			90				14
Net loss on sale of real estate owned and other repossessed assets			57				25
Net appreciation in cash surrender value of life insurance			(211	)			(194	)
Net change in:
Accrued interest and dividends receivable			(408	)			(51	)
Loans held-for-sale			485				6,211
Other assets			167				324
Accrued expenses and other liabilities			862				738
Net cash provided by operating activities			2,728				7,438
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales			45,080				2,749
Maturities, principal payments and calls			5,950				5,035
Purchases			(45,970	)			(1,307	)
Federal Home Loan Bank stock purchased			(362	)			(829	)
Federal Reserve Bank stock purchased			(554	)			-
Cash paid for TwinCo Acquisition, net of cash received			(4,243	)			-
Loan origination and principal collection, net			(14,395	)			(42,917	)
Proceeds from Bank owned life insurance			205				-
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans			150				262
Additions to premises and equipment			(4,984	)			(1,119	)
Net cash used in investing activities			(19,123	)			(38,126	)

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		Six Months Ended
		June 30,
		2018				2017
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		$	10,421			$	1,470
Net short-term advances on Federal Home Loan Bank and other borrowings			23,376				11,553
Long-term advances from Federal Home Loan Bank and other borrowings			-				17,000
Payments on long-term Federal Home Loan Bank and other borrowings			(14,876	)			(6,784	)
Proceeds from issuance of long-term debt			-				10,000
Payments for debt issuance costs			-				(219	)
Dividends paid			(983	)			(609	)
Net cash provided by financing activities			17,938				32,411
NET INCREASE IN CASH AND CASH EQUIVALENTS			1,543				1,723
CASH AND CASH EQUIVALENTS, beginning of period			7,437				7,318
CASH AND CASH EQUIVALENTS, end of period		$	8,980			$	9,041
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest		$	2,120			$	1,763
Cash paid during the period for income taxes		$	230			$	680
NON-CASH INVESTING AND FINANCING ACTIVITIES:
(Decrease) increase in dmarket value of securities available-for-sale		$	(2,709	)		$	2,068
Mortgage servicing rights recognized		$	748			$	798
Loans transferred to real estate and other assets acquired in foreclosure		$	4			$	-
Stock issued in connection with TwinCo acquisition		$	9,030			$	-
Employee Stock Ownership Plan shares released		$	168			$	162

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NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income and cash flows for the unaudited interim periods.

The results of operations for the six -month period ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or any other period. The unaudited consolidated financial statements and notes presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Eagle Bancorp Montana, Inc.’s (“the Company” or “Eagle”) Form 10 -K for the year ended December 31, 2017.

Certain prior period amounts were reclassified to conform to the presentation for 2018. These reclassifications had no impact on net income or total shareholders’ equity. Certain loan amounts were reclassified for prior periods to be consistent with loan category classification for June 30, 2018. During the quarter ended March 31, 2018, Eagle completed the acquisition of TwinCo, Inc. (“TwinCo”). See Note 12. Mergers and Acquisitions for more information. The acquisition included the addition of over $55,000,000 in gross loans and added a considerable amount to Eagle’s agricultural loans. There was no impact to Eagle’s loan policies due to the acquisition. Loan costs were previously included in other noninterest expense on the Consolidated Statements of Income. These amounts were presented on their own lines for the three and six months ended June 30, 2018 and prior year amounts were reclassed to be consistent with the current year presentation.

The Company evaluated subsequent events for potential recognition and/or disclosure through August 7, 2018 the date the unaudited consolidated financial statements were issued.

NOTE 2 . INVESTMENT SECURITIES

Investment securities are summarized as follows:

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. INVESTMENT SECURITIES - continued

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

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.

Maturities of securities do not reflect repricing opportunities present in adjustable rate securities.

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. INVESTMENT SECURITIES - continued

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:

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to ( 1 ) the length of time and the extent to which the fair value has been less than cost, ( 2 ) the financial condition and near-term prospects of the issuer and ( 3 ) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of June 30, 2018 and December 31, 2017, there were, respectively, 121 and 87 securities in an unrealized loss position that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

As of June 30, 2018, 86 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 2.28% from the Company’s amortized cost basis of these securities. At December 31, 2017, 52 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 1.28% from the Company’s amortized cost basis of these securities. As of June 30, 2018, 10 corporate obligations had unrealized losses of approximately 2.88% from the Company’s amortized cost basis of these securities. At December 31, 2017, 15 corporate obligations had an unrealized loss with aggregate depreciation of approximately 0.84% from the Company's amortized cost basis of these securities. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 . INVESTMENT SECURITIES - continued

As of June 30, 2018, 20 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses with aggregate depreciation of approximately 3.32% from the Company’s amortized cost basis of these securities. At December 31, 2017, 20 MBSs and CMOs had unrealized losses with aggregate depreciation of approximately 1.71% from the Company’s amortized cost basis. Management’s analysis as of June 30, 2018 revealed no expected credit losses on the securities and therefore, declines are not deemed to be other than temporary.

As of June 30, 2018, 5 asset-backed securities (“ABSs”) had unrealized losses with aggregate depreciation of approximately 0.90% from the Company’s amortized cost basis of these securities. The ABSs were purchased during the quarter ended March 31, 2018. Management’s analysis as of June 30, 2018 revealed no expected credit losses on the securities and therefore, declines are not deemed to be other than temporary.

NOTE 3 . LOANS RECEIVABLE

Loans receivable consisted of the following:

Within the commercial real estate loan category, $12,797,000 and $13,114,000 was guaranteed by the United States Department of Agriculture Rural Development, at June 30, 2018 and December 31, 2017, respectively. The commercial real estate category and the commercial category also include $3,016,000 and $1,480,000 of loans guaranteed by the United States Department of Agriculture Farm Service Agency at June 30, 2018, respectively. The United States Department of Agriculture Farm Service Agency guaranteed loans were acquired through the TwinCo acquisition. In addition, within the commercial loan category, $256,000 and $486,000 were in loans originated through a syndication program where the business resides outside of Montana, at June 30, 2018, and December 31, 2017, respectively.

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NOTE 3 . LOANS RECEIVABLE - continued

The following table includes information regarding nonperforming assets.

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NOTE 3 . LOANS RECEIVABLE - continued

Allowance for loan losses activity was as follows:

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NOTE 3 . LOANS RECEIVABLE - continued

The Company utilizes an 8 -point internal loan rating system, largely based on regulatory classifications, as follows:

Loans R ated Pass – these are loans in categories 1 – 5 that are considered to be protected by the current net worth and paying capacity of the obligor, or by the value of the asset or the underlying collateral.

Loans R ated Special Mention – these loans in category 6 have potential weaknesses and are watched closely by management. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

Loans R ated Substandard – these loans in category 7 are inadequately protected by the current net worth and paying capacity of the obligor of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Loans R ated Doubtful – these loans in category 8 have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans R ated Loss – these loans are considered uncollectible and are not part of the 8 -point rating system. They are of such small value that their continuance as assets without establishment of a specific reserve is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather, that it is not practical or desirable to defer writing off a basically worthless asset even though practical recovery may be affected in the future.

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NOTE 3 . LOANS RECEIVABLE - continued

On an annual basis, or more often if needed, the Company formally reviews the ratings of all commercial real estate, construction, and commercial business loans that have a principal balance of $750,000 or more. Quarterly, the Company reviews the rating of any consumer loan, broadly defined, that is delinquent 90 days or more. Likewise, quarterly, the Company reviews the rating of any commercial loan, broadly defined, that is delinquent 60 days or more. Annually, the Company engages an independent third -party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

Internal classification of the loan portfolio was as follows:

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Credit risk profile based on payment activity of the loan portfolio was as follows:

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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NOTE 3 . LOANS RECEIVABLE - continued

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

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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NOTE 3 . LOANS RECEIVABLE - continued

The following tables include information regarding impaired loans.

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Interest income recognized on impaired loans for the three and six months ended June 30, 2018 and 2017 is considered insignificant.