EBMT 10-Q Quarterly Report Sept. 30, 2023

EAGLE BANCORP MONTANA, INC.

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ebmt20230930_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

☐	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 registrant 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) (Zip code)

( 406 ) 442-3080

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 ☒

Table of Contents

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

7,988,132 shares outstanding

As of October 31, 2023

Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Financial Condition as of September 30, 2023 and December 31, 2022	1

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022	3

	Condensed Consolidated Statements of Comprehensive Income ( Loss) for the three and nine months ended September 30, 2023 and 2022	5

	Condensed Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2023 and 2022	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	44
Item 6.	Exhibits	44

Signatures		45

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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 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 emergence or continuation of widespread health emergencies or pandemics, including the magnitude and duration of the ongoing novel coronavirus, or COVID-19, and its impacts 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 traditional and non-traditional financial service providers;

●

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 or reduces loan demand;

	●	our ability to attract deposits and other sources of funding or liquidity;
	●	the impact of adverse developments affecting the U.S. banking industry, including bank failures and liquidity concerns, which could cause continued or worsening economic and market volatility, and regulatory responses thereto;
	●	the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior, adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures and labor shortages on economic conditions and our business;
	●	an inability to access capital markets or maintain deposits or borrowing costs;
	●	uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements;
	●	the risks related to the transition and physical impacts of climate change;
	●	our ability to achieve environmental, social and governance goals and commitments or the impact of any changes in the Company’s sustainability strategy or commitments generally;

●

changes or volatility in the securities markets that lead to impairment in the value of our investment securities and goodwill;

●

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

●

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

●

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

●

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

●

political developments, uncertainties or instability;

	●	our ability to enter new markets successfully and capitalize on growth opportunities;
	●	the need to retain capital for strategic or regulatory reasons;
	●	changes in consumer spending, borrowing and savings habits;
	●	our ability to continue to increase and manage our commercial and residential real estate, multi-family and commercial business loans;

●

the level of future deposit insurance premium assessments;

	●	our ability to implement new technologies and maintain secure and reliable technology systems;
	●	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, 2022, 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)

	September 30,		December 31,
	2023		2022
ASSETS:
Cash and due from banks	$	19,743	$	19,321
Interest-bearing deposits in banks		1,040		2,490
Total cash and cash equivalents		20,783		21,811

Securities available-for-sale, at fair value (amortized cost of $ 350,754 at September 30, 2023 and $ 385,275 at December 31, 2022)		308,786		349,495
Federal Home Loan Bank ("FHLB") stock		10,438		5,089
Federal Reserve Bank ("FRB") stock		4,131		4,131
Mortgage loans held-for-sale, at fair value		17,880		8,250
Loans receivable, net of allowance for credit losses of $ 16,230 at September 30, 2023 and $ 14,000 at December 31, 2022 ⁽¹⁾		1,459,543		1,339,678
Accrued interest and dividends receivable		13,657		11,284
Mortgage servicing rights, net		15,738		15,412
Assets held-for-sale, at fair value		-		1,305
Premises and equipment, net		92,979		84,323
Cash surrender value of life insurance, net		47,647		47,724
Goodwill		34,740		34,740
Core deposit intangible, net		6,264		7,459
Other assets		30,478		17,683

Total assets	$	2,063,064	$	1,948,384

⁽¹⁾ Allowance for credit losses at September 30, 2023; allowance for loan losses for prior period.

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)

	September 30,			December 31,
	2023			2022
LIABILITIES:
Deposit accounts:
Noninterest-bearing	$	435,655		$	468,955
Interest-bearing		1,179,823			1,166,317
Total deposits		1,615,478			1,635,272

Accrued expenses and other liabilities		31,597			26,458
FHLB advances and other borrowings		199,757			69,394
Other long-term debt:
Principal amount		60,155			60,155
Unamortized debt issuance costs		( 1,193	)		( 1,311	)
Total other long-term debt, net		58,962			58,844

Total liabilities		1,905,794			1,789,968

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 shares issued at September 30, 2023 and December 31, 2022; 7,988,132 and 8,006,033 shares outstanding at September 30, 2023 and December 31, 2022), respectively		85			85
Additional paid-in capital		109,422			109,164
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")		( 4,727	)		( 5,156	)
Treasury stock, at cost ( 519,297 and 501,396 shares at September 30, 2023 and December 31, 2022, respectively)		( 11,574	)		( 11,343	)
Retained earnings		94,979			92,023
Accumulated other comprehensive loss, net of tax		( 30,915	)		( 26,357	)
Total shareholders' equity		157,270			158,416

Total liabilities and shareholders' equity	$	2,063,064		$	1,948,384

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				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023			2022
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	21,068	$	16,665	$	57,942		$	42,933
Securities available-for-sale		2,794		2,555		8,586			5,863
FHLB and FRB dividends		212		63		480			160
Other interest income		20		59		66			206
Total interest and dividend income		24,094		19,342		67,074			49,162

INTEREST EXPENSE:
Deposits		5,152		717		11,767			1,451
FHLB advances and other borrowings		2,672		136		5,993			157
Other long-term debt		683		602		2,035			1,855
Total interest expense		8,507		1,455		19,795			3,463

NET INTEREST INCOME		15,587		17,887		47,279			45,699

Provision for credit losses ⁽¹⁾		588		517		1,186			1,654

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		14,999		17,370		46,093			44,045

NONINTEREST INCOME:
Service charges on deposit accounts		447		498		1,313			1,223
Mortgage banking, net		4,338		4,447		11,252			16,183
Interchange and ATM fees		643		594		1,861			1,668
Appreciation in cash surrender value of life insurance		382		291		1,165			748
Net loss on sale of available-for-sale securities		-		-		( 222	)		( 6	)
Net gain on sale/disposal of premises and equipment		-		-		83			-
Other noninterest income		225		416		1,458			1,104
Total noninterest income	$	6,035	$	6,246	$	16,910		$	20,920

⁽¹⁾ Provision for credit losses for the three and nine months ended September 30, 2023; provision for loan losses for the three and nine months ended September 30, 2022.

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				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
NONINTEREST EXPENSE:
Salaries and employee benefits	$	10,837	$	11,699	$	31,614	$	33,511
Occupancy and equipment expense		1,956		1,946		6,100		5,441
Data processing		1,486		1,964		4,270		4,628
Advertising		340		464		930		1,052
Amortization		386		333		1,201		895
Loan costs		517		491		1,426		1,624
Federal Deposit Insurance Corporation ("FDIC") insurance premiums		301		93		862		330
Professional and examination fees		408		420		1,484		1,098
Acquisition costs		-		103		-		2,296
Other noninterest expense		1,644		1,980		5,311		4,651
Total noninterest expense		17,875		19,493		53,198		55,526

INCOME BEFORE PROVISION FOR INCOME TAXES		3,159		4,123		9,805		9,439

Provision for income taxes		524		1,031		1,913		2,360

NET INCOME	$	2,635	$	3,092	$	7,892	$	7,079

BASIC EARNINGS PER COMMON SHARE	$	0.34	$	0.40	$	1.01	$	0.98

DILUTED EARNINGS PER COMMON SHARE	$	0.34	$	0.40	$	1.01	$	0.98

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 (LOSS)

(Dollars in Thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022

NET INCOME	$	2,635		$	3,092		$	7,892		$	7,079

OTHER ITEMS OF COMPREHENSIVE LOSS BEFORE TAX:
Change in fair value of investment securities available-for-sale		( 9,763	)		( 16,009	)		( 6,410	)		( 46,657	)
Reclassification for net realized loss on investment securities available-for-sale		-			-			222			6
Total other comprehensive loss		( 9,763	)		( 16,009	)		( 6,188	)		( 46,651	)

Income tax benefit related to securities available-for-sale		2,571			4,216			1,630			12,284

COMPREHENSIVE (LOSS) INCOME	$	( 4,557	)	$	( 8,701	)	$	3,334		$	( 27,288	)

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 Nine Months Ended September 30, 2023 and 2022

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

																	*ACCUMULATED*
					*ADDITIONAL*			*UNALLOCATED*									*OTHER*
	*PREFERRED*		*COMMON*		*PAID-IN*			*ESOP*			*TREASURY*			*RETAINED*			*COMPREHENSIVE*
	*STOCK*		*STOCK*		*CAPITAL*			*SHARES*			*STOCK*			*EARNINGS*			*(LOSS) INCOME*			*TOTAL*

Balance at June 30, 2023	$	-	$	85	$	109,345		$	( 4,870	)	$	( 11,574	)	$	93,462		$	( 23,723	)	$	162,725
Net income		-		-		-			-			-			2,635			-			2,635
Other comprehensive loss		-		-		-			-			-			-			( 7,192	)		( 7,192	)
Dividends paid ($ 0.140 per share)		-		-		-			-			-			( 1,118	)		-			( 1,118	)
Stock compensation expense		-		-		143			-			-			-			-			143
ESOP shares allocated ( 5,997 shares)		-		-		( 66	)		143			-			-			-			77
Balance at September 30, 2023	$	-	$	85	$	109,422		$	( 4,727	)	$	( 11,574	)	$	94,979		$	( 30,915	)	$	157,270

Balance at June 30, 2022	$	-	$	85	$	109,410		$	( 5,443	)	$	( 9,691	)	$	87,510		$	( 19,081	)	$	162,790
Net income		-		-		-			-			-			3,092			-			3,092
Other comprehensive loss		-		-		-			-			-			-			( 11,793	)		( 11,793	)
Dividends paid ($ 0.1375 per share)		-		-		-			-			-			( 1,100	)		-			( 1,100	)
Stock compensation expense		-		-		135			-			-			-			-			135
ESOP shares allocated ( 5,997 shares)		-		-		( 57	)		143			-			-			-			86
Treasury stock purchased ( 99,517 shares at $ 19.45 average cost per share)		-		-		-			-			( 1,936	)		-			-			( 1,936	)
Balance at September 30, 2022	$	-	$	85	$	109,488		$	( 5,300	)	$	( 11,627	)	$	89,502		$	( 30,874	)	$	151,274

Balance at December 31, 2022	$	-	$	85	$	109,164		$	( 5,156	)	$	( 11,343	)	$	92,023		$	( 26,357	)	$	158,416
Net income		-		-		-			-			-			7,892			-			7,892
New credit standard (Topic 326) - impact in year of adoption		-		-		-			-			-			( 1,616	)		-			( 1,616	)
Other comprehensive loss		-		-		-			-			-			-			( 4,558	)		( 4,558	)
Dividends paid ($ 0.415 per share)		-		-		-			-			-			( 3,320	)		-			( 3,320	)
Stock compensation expense		-		-		432			-			-			-			-			432
ESOP shares allocated ( 17,991 shares)		-		-		( 174	)		429			-			-			-			255
Treasury stock purchased ( 17,901 shares at $ 12.89 average cost per share)		-		-		-			-			( 231	)		-			-			( 231	)
Balance at September 30, 2023	$	-	$	85	$	109,422		$	( 4,727	)	$	( 11,574	)	$	94,979		$	( 30,915	)	$	157,270

Balance at December 31, 2021	$	-	$	71	$	80,832		$	( 5,729	)	$	( 7,321	)	$	85,383		$	3,493		$	156,729
Net income		-		-		-			-			-			7,079			-			7,079
Other comprehensive loss		-		-		-			-			-			-			( 34,367	)		( 34,367	)
Dividends paid ($ 0.3875 per share)		-		-		-			-			-			( 2,960	)		-			( 2,960	)
Stock issued in connection with First Community Bancorp, Inc. acquisition		-		14		28,337			-			-			-			-			28,351
Stock compensation expense		-		-		405			-			-			-			-			405
ESOP shares allocated ( 17,991 shares)		-		-		( 86	)		429			-			-			-			343
Treasury stock purchased ( 204,517 shares at $ 21.05 average cost per share)		-		-		-			-			( 4,306	)		-			-			( 4,306	)
Balance at September 30, 2022	$	-	$	85	$	109,488		$	( 5,300	)	$	( 11,627	)	$	89,502		$	( 30,874	)	$	151,274

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)

	Nine Months Ended
	September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,892		$	7,079
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for credit losses ⁽¹⁾		1,186			1,654
Recovery of mortgage servicing rights		-			( 56	)
Depreciation		2,854			2,615
Net amortization of investment securities premiums and discounts		807			1,182
Amortization of mortgage servicing rights		1,330			1,710
Amortization of right-of-use assets		512			512
Amortization of core deposit intangibles		1,201			895
Compensation expense related to restricted stock awards		432			405
ESOP compensation expense for allocated shares		255			343
Net gain on sale of loans		( 8,551	)		( 15,645	)
Originations of loans held-for-sale		( 265,496	)		( 449,013	)
Proceeds from sales of loans held-for-sale		264,418			466,069
Net gain on sale of real estate owned and other repossessed assets		-			( 203	)
Net gain on sale/disposal of premises and equipment		( 83	)		( 1	)
Net realized loss on sales of available-for-sale securities		222			6
Net appreciation in cash surrender value of life insurance		( 1,165	)		( 748	)
Net change in:
Accrued interest and dividends receivable		( 2,373	)		( 2,273	)
Other assets		( 7,143	)		241
Accrued expenses and other liabilities		851			891
Net cash (used in) provided by operating activities		( 2,851	)		15,663

CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		34,020			43,794
Maturities, principal payments and calls		27,340			30,876
Purchases		( 28,126	)		( 77,073	)
FHLB stock purchased		( 5,349	)		( 612	)
FRB stock purchased		-			( 392	)
Net cash received from acquisitions		-			13,397
Loan origination and principal collection, net		( 123,687	)		( 191,855	)
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans		-			535
Proceeds from bank owned life insurance		1,230			-
Proceeds from sale of premises and equipment		979			5
Purchases of premises and equipment, net		( 11,602	)		( 10,733	)
Net cash used in investing activities	$	( 105,195	)	$	( 192,058	)

⁽¹⁾ Provision for credit losses for the quarter ended September 30, 2023; provision for loan losses for prior period.

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)

	Nine Months Ended
	September 30,
	2023			2022
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits	$	( 19,794	)	$	130,594
Net decrease in repurchase agreements		-			( 22,853	)
Net short-term advances from FHLB and other borrowings		130,363			15,600
Payments on long-term FHLB and other borrowings		-			( 5,000	)
Proceeds from issuance of subordinated debentures		-			40,000
Repayment of senior debt		-			( 10,000	)
Payments for debt issuance costs		-			( 917	)
Purchase of treasury stock		( 231	)		( 4,306	)
Dividends paid		( 3,320	)		( 2,960	)
Net cash provided by financing activities		107,018			140,158

NET DECREASE IN CASH AND CASH EQUIVALENTS		( 1,028	)		( 36,237	)

CASH AND CASH EQUIVALENTS, beginning of period		21,811			61,434

CASH AND CASH EQUIVALENTS, end of period	$	20,783		$	25,197


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	17,109		$	3,423
Cash paid during the period for income taxes, net of refund		2,414			2,720

NONCASH INVESTING AND FINANCING ACTIVITIES:
Decrease in fair value of securities available-for-sale	$	( 6,188	)	$	( 46,651	)
Mortgage servicing rights recognized		1,656			3,102
Right-of-use assets obtained in exchange for lease liabilities		11			154
Loans transferred to real estate and other assets acquired in foreclosure		-			328
Stock issued in connection with acquisition		-			28,351
Commitments to invest in Low-Income Housing Tax Credit projects		3,068			-
Cumulative effect adjustment to retained earnings due to adoption of Topic 326		( 1,616	)		-

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

In September 2021, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with First Community Bancorp, Inc. ("FCB"), 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 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.

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. Investments in LIHTC projects are included in other assets on the consolidated statements of financial condition and tot aled $ 5,769,000 and $ 1,237,000 as of September 30, 2023 and December 31, 2022, respectively. The Company's remaining capital commitments to these LIHTC projects w ere $ 3,068,000 a s of September 30, 2023 and are included in accrued expenses and other liabilities on the consolidated statements of financial condition.

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.

The Bank currently has 31 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 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, 2022 , as filed with the SEC on March 8, 2023. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

The results of operations for the nine -month period ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or any other period. In preparing condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated statement of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit 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, th e 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 2023 . These reclassifications had no impact on net income or shareholders’ equity.

Subsequent Events

The Company has evaluated events and transactions subsequent to September 30, 2023 for recognition and/or disclosure.

Goodwill

Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of net identifiable assets acquired. Subsequent to initial recognition, the Company tests goodwill for impairment annually as of October 31, or more often if events or circumstances, such as adverse changes in the business climate indicate there may be impairment.

During the quarter ended September 30, 2023, Management determined that a triggering event had occurred because of a decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget. These conditions are primarily due to economic uncertainty and market volatility from the rising interest rate environment. As a result, the Company performed an interim goodwill impairment assessment as of August 31, 2023, and concluded that goodwill was not impaired.

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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 – continued

Recently Adopted Accounting Pronouncements

On January 1, 2023, the Company adopted Accounting Standards Update ("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 adoption of ASU No. 2017 - 04 did not have a material impact on the consolidated financial statements.

Application of New Accounting Guidance Adopted in 2023

On January 1, 2023, the Company adopted 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. This guidance is commonly referred to as Current Expected Credit Losses ("CECL"), and the CECL model is based on expected credit losses rather than the model used for periods prior to January 1, 2023, which was based on incurred losses. The allowance for credit losses is established for current expected credit losses on the Company's loan portfolio, including unfunded loan commitments, 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 estimate their credit losses. 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, Topic 326 amends the accounting for credit losses on available-for-sale debt securities, requiring credit losses on available-for-sale debt securities to be presented as an allowance rather than a write-down for those securities management does not intend to sell or is not likely to be required to sell.

On January 1, 2023, the Company also adopted ASU No. 2022 - 02, Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures. This guidance was an update to ASU No. 2016 - 13, and the Company adopted using the modified retrospective transition method. The amendments in this update eliminated the accounting guidance for troubled debt restructure ("TDR") loans and enhanced the disclosure requirements for certain loan modifications of receivables made to borrowers experiencing financial difficulty.

The Company adopted Topic 326 using the modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326. Results from periods prior to January 1, 2023 are presented using previously applicable U.S. GAAP. The adoption resulted in an increase of $ 700,000 to our allowance for credit losses ("ACL"), an increase of $ 1,500,000 to our allowance for unfunded loan commitments, and a net-of-tax cumulative effect adjustment of $ 1,616,000 to decrease the beginning balance of retained earnings.

The adoption of this guidance did not have an impact on the Company's available-for-sale securities. However, any subsequent estimated credit losses are required to be recognized through an allowance for credit losses associated with the applicable securities.

The Company finalized the adoption of ASC 326 as of January 1, 2023 as detailed in the following table:

	January 1, 2023 As Reported Under Topic 326		January 1, 2023 Pre-Topic 326 Adoption		Impact of Topic 326 Adoption
Assets
Real estate loans:
Residential 1-4 family	$	1,493	$	1,472	$	21
Commercial real estate		9,571		9,037		534

Other loans:
Home equity		512		509		3
Consumer		343		342		1
Commercial		2,781		2,640		141
Allowance for credit losses on loans	$	14,700	$	14,000	$	700

Liabilities
Allowance for credit losses on unfunded loan commitments	$	1,500	$	-	$	1,500

Total					$	2,200

Allowance for Credit Losses on Loans – The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The Company has elected to exclude accrued interest receivable from the amortized cost basis of loans, and accrued interest is reported separately on the consolidated statements of financial condition. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed and recoveries are credited to the allowance when received. The Company may also account for expected recoveries should information of an anticipated recovery become available. In the case of actual or expected recoveries, amounts may not exceed the aggregate of amounts previously charged off.

Management utilizes relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The lookback period in the analysis includes historical data from 2014 to present. Adjustments to historical loss information are made when management determines historical data is not likely reflective of the current portfolio such as limited data sets or lack of default or loss history. Adjustments to historical loss information are made when management determines historical data is not likely reflective of the current portfolio such as limited data sets or lack of default or loss history. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data.

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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 – continued

Collective Assessment – The allowance for credit losses on loans is measured on a collective cohort basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped first by call report code, then by similar risk characteristics.

The Company has elected to use the Weighted Average Remaining Maturity (WARM) methodology for all cohorts. The WARM methodology looks at historical quarterly loss rates for each loan cohort over the established “look back” period to determine an average loss rate for each cohort. Each cohort is analyzed to determine the remaining life using amortization schedules, including prepayments.

Historical charge off and recovery activity is compared to loan balances in each cohort quarterly and is averaged to determine an estimated annual charge off rate. The average loss rate over this look-back period is applied annually over the remaining life of the cohort to determine an expected loss percentage.

The Company utilizes reasonable and supportable forecasted losses based on current economic conditions when estimating the allowance for credit losses on loans. Forecasts are based on regression and matrix models that compare national economic indicators to peer charge off rates and local economic indicators to the Company’s charge off rates. The expected loss rate for each cohort is adjusted by the difference between the Bank's historical loss rate and forecasted loss rates. The forecasting models are updated and compared to loss rates quarterly.

The Company recognizes that all significant factors that affect the collectability of the loan portfolio must be considered to determine the estimated credit losses as of the evaluation date. Furthermore, the methodology, in and of itself and even when selectively adjusted by comparison to market and peer data, does not provide a sufficient basis to determine the estimated credit losses. The Company adjusts the modeled expected losses by qualitative adjustments to incorporate significant risks to form a sufficient basis to estimate the credit losses.

Individual Analysis – Loans considered to have different risk characteristics that do not fall within any cohort will be analyzed individually on a quarterly basis for potential individual reserve requirements.

The Company has elected the collateral-dependent practical expedient for its collateral-dependent loans, where estimated credit losses are based upon the fair value of the collateral, less costs to sell if applicable. This practical expedient can be applied to a loan if the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. If it is probable that the Company will foreclose on the collateral, the use of the fair value of the collateral to calculate an allowance for credit loss is required. Estimates of future collateral proceeds will be based upon available appraisals, reference to recent valuations of comparable properties, and any other sources of information believed appropriate by management under the specific circumstances. When appraisals are ordered to support the analysis of a collateral-dependent loan, the appraisal is reviewed internally.

Where the primary and/or expected source of repayment of a specific loan is believed to be the receipt of principal and interest payments from the borrower and/or the refinancing of the loan by another creditor, impairment will generally be measured based upon the present value of expected proceeds discounted at the contractual interest rate. Expected refinancing proceeds may be estimated from review of term sheets actually received by the borrower from other creditors and/or from the Company’s knowledge of terms generally available from other banks.

Determining the Contractual Life – Expected credit losses are estimated over the contractual life of the loans, adjusted for expected prepayments when appropriate. The contractual life excludes expected extensions, renewals and modifications. Prepayment assumptions will be determined by analysis of historical behavior by loan cohort.

Restructured Loans – The allowance for credit losses on loans that are considered modifications to borrowers experiencing financial difficulty are measured using the same method as all other loans held for investment. Modifications to borrowers experiencing financial difficulties are considered modifications if the creditor grants a concession to the debtor, for economic or legal reasons related to the debtor's financial difficulties, that it would not otherwise consider. Loan modifications that result in a change in the timing or amount of contractual cash flows include situations where there are interest rate reductions, term extensions, other than insignificant payment delays, and combinations of the listed modifications. In addition, for public business entities, the amendments in the update require that entities disclose current-period gross charge-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 loans by credit-quality indicator and the loan category by year of origination.

Allowance for Credit Losses on Unfunded Commitments – The Company estimates expected credit losses over the period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is adjusted through a provision for credit losses expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate utilizes the same factors and assumptions as the allowance for credit losses on loans and is applied at the same collective cohort level.

Allowance for Credit Losses on Available-for-Sale Debt Securities – For available-for-sale securities in an unrealized loss position, the Company will first determine whether it intends to sell the security or will more likely than not be required to sell the security before recovery of its amortized cost basis. The security’s amortized cost basis will be written down to fair value through other expense if either of the criteria regarding intent or requirement to sell is met. If neither of the aforementioned criteria are met, the Company will determine whether the decline in fair value has resulted from credit losses. If a credit loss exists, the Company will report the portion of impairment related to credit losses in an allowance for credit losses with an offsetting entry to net income. The amount of ACL is limited to the amount fair value is less than the amortized cost basis. Any portion of estimated credit losses that have not been recorded through an ACL are recognized in other comprehensive income.

Recently Issued Accounting Pronouncements

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, 2024. The Company evaluated the guidance and identified substitution rates for impacted loans and debt. 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, 2024. 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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Table of Contents

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

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.

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

NOTE 2. MERGERS AND ACQUISITIONS – continued

For acquisitions, the fair value analysis of the loan portfolios resulted in a valuation adjustment for each loan based on an amortization schedule of expected cash flow. Individual amortization schedules were used for each loan over a certain amount and those with specifically identified loss exposure. The remainder of the loans were grouped by type and risk rating into loan pools (based on loan type, fixed or variable interest rate, revolving or term payments and risk rating). Yield inputs for the amortization schedules included contractual interest rates, estimated prepayment speeds, liquidity adjustments and market yields. Credit inputs for the amortization schedules included probability of payment default, loss given default rates and individually identified loss exposure.

The total accretable discount on FCB acquired loans was $ 5,416,000 as of April 30, 2022. During the three and nine months ended September 30, 2023 , accretion of the loan discount w a s $ 142,000 and $ 714,000 , respectively . During the three and nine months ended September 30, 2022, accretion of the loan discount was $ 333,000 and $ 1,060,000 , respectively. T he remaining accretable loan discount w as $ 3,405,000 a s of September 30, 2023 . Three impaired loans were acquired through the FCB acquisition with insignificant balances as of April 30, 2022.

Fair value adjustments 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.

Direct costs related to the acquisition were expensed as incurred. The Company recorded no acquisition costs related to FCB dur ing the three and nine months ended September 30, 2023 , The Company recorded acquisition costs related to FCB of $ 103,000 and $ 2,296,000 during the three and nine months ended September 30, 2022, respectively . Acquisition costs included professional fees and data processing expenses incurred related to the acquisition.

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 September 30, 2023 .

NOTE 3. INVESTMENT SECURITIES

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

	September 30, 2023									December 31, 2022
			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	$	6,848	$	136	$	( 266	)	$	6,718	$	2,575	$	2	$	( 187	)	$	2,390
U.S. Treasury obligations		52,484		-		( 7,706	)		44,778		58,715		-		( 6,764	)		51,951
Municipal obligations		149,729		1		( 20,868	)		128,862		190,811		77		( 18,039	)		172,849
Corporate obligations		4,243		-		( 398	)		3,845		7,240		1		( 251	)		6,990
Mortgage-backed securities		29,129		-		( 2,382	)		26,747		31,553		-		( 1,900	)		29,653
Collateralized mortgage obligations		96,014		-		( 10,464	)		85,550		90,812		-		( 8,681	)		82,131
Asset-backed securities		12,307		35		( 56	)		12,286		3,569		-		( 38	)		3,531
Total	$	350,754	$	172	$	( 42,140	)	$	308,786	$	385,275	$	80	$	( 35,860	)	$	349,495

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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				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023			2022
	(In Thousands)
Proceeds from sale of available-for-sale securities	$	-	$	-	$	34,020		$	43,794

Gross realized gain on sale of available-for-sale securities		-		-		69			-
Gross realized loss on sale of available-for-sale securities		-		-		( 291	)		( 6	)
Net realized loss on sale of available-for-sale securities	$	-	$	-	$	( 222	)	$	( 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.

	September 30, 2023
	Amortized		Fair
	Cost		Value
	(In Thousands)
Due in one year or less	$	2,899	$	2,870
Due from one to five years		42,969		38,322
Due from five to ten years		68,892		57,534
Due after ten years		110,851		97,763
		225,611		196,489
Mortgage-backed securities		29,129		26,747
Collateralized mortgage obligations		96,014		85,550
Total	$	350,754	$	308,786

As of September 30, 2023 and December 31, 2022 , securities with a fair value of $ 22,063,000 and $ 58,942,000 , respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

The Company’s investment securities that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months were as follows:

	September 30, 2023
	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	$	-	$	-		$	1,670	$	( 266	)
U.S. Treasury obligations		-		-			44,777		( 7,706	)
Municipal obligations		36,958		( 2,115	)		90,980		( 18,753	)
Corporate obligations		-		-			3,845		( 398	)
Mortgage-backed securities and collateralized mortgage obligations		11,829		( 166	)		100,468		( 12,680	)
Asset-backed securities		9,580		( 56	)		-		-
Total	$	58,367	$	( 2,337	)	$	241,740	$	( 39,803	)

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES – continued

	December 31, 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	$	1,773	$	( 187	)	$	-	$	-
U.S. Treasury obligations		10,969		( 196	)		40,982		( 6,568	)
Municipal obligations		128,036		( 8,781	)		33,092		( 9,258	)
Corporate obligations		4,994		( 246	)		995		( 5	)
Mortgage-backed securities and collateralized mortgage obligations		67,310		( 3,647	)		44,444		( 6,934	)
Asset-backed securities		3,531		( 38	)		-		-
Total	$	216,613	$	( 13,095	)	$	119,513	$	( 22,765	)

As of September 30, 2023 and December 31, 2022 , there were, respectively, 319 and 388 securities in unrealized loss positions. Based on analysis of available-for-sale debt securities with unrealized losses as of September 30, 2023 , the Company determined the decline in value was unrelated to credit losses and was primarily caused by changes in interest rates and market spreads subsequent to the initial purchase of the securities. The Company is not likely to be required to sell these securities prior to maturity. As a result, no ACL was recorded on available-for-sale securities at September 30, 2023 and no other-than-temporary impairment was recorded at December 31, 2022. As part of this determination, consideration was given to the extent to which fair value was less than amortized cost, adverse security ratings by a rating agency and other factors.

NOTE 4. LOANS RECEIVABLE

Loans receivable consisted of the following:

	September 30,			December 31,
	2023			2022
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	195,073		$	195,703
Commercial real estate		907,366			826,549

Other loans:
Home equity		83,221			74,271
Consumer		29,832			27,609
Commercial		260,281			231,291

Total		1,475,773			1,355,423

Deferred loan fees, net ⁽¹⁾		-			( 1,745	)
Allowance for credit losses ⁽²⁾		( 16,230	)		( 14,000	)
Total loans, net	$	1,459,543		$	1,339,678

⁽¹⁾ Deferred loan fees, net are included in individual loan buckets above and totaled $1.44 million at September 30, 2023.
⁽²⁾ Allowance for credit losses for the quarter ended September 30, 2023; allowance for loan losses for prior period.

Included in the above are loans guaranteed by U.S. government agencies tota ling $ 23,633,000 and $ 24,605,000 at September 30, 2023 and December 31, 2022 , respectively.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE – continued

The following table provides allowance for credit losses activity for the three months ended September 30, 2023 .

	Residential		Commercial		Home
	1-4 Family		Real Estate		Equity		Consumer			Commercial			Total
	(In Thousands)
Allowance for credit losses on loans:
Beginning balance, June 30, 2023	$	1,786	$	10,011	$	526	$	318		$	2,919		$	15,560
Charge-offs		-		-		-		( 20	)		( 102	)		( 122	)
Recoveries		-		6		4		-			4			14
Provision		61		546		8		3			160			778
Total ending allowance balance, September 30, 2023	$	1,847	$	10,563	$	538	$	301		$	2,981		$	16,230

The following table provides allowance for credit losses activity for the nine months ended September 30, 2023.

	Residential		Commercial		Home
	1-4 Family		Real Estate		Equity		Consumer			Commercial			Total
	(In Thousands)
Allowance for credit losses on loans:
Beginning balance, December 31, 2022, prior to adoption of ASC 326	$	1,472	$	9,037	$	509	$	342		$	2,640		$	14,000
Impact of adopting ASC 326		21		534		3		1			141			700
Charge-offs		-		-		-		( 50	)		( 128	)		( 178	)
Recoveries		195		17		13		1			16			242
Provision		159		975		13		7			312			1,466
Total ending allowance balance, September 30, 2023	$	1,847	$	10,563	$	538	$	301		$	2,981		$	16,230

The following table provides allowance for loan losses activity for the three and nine months ended September 30, 2022.

	Residential		Commercial		Home
	1-4 Family		Real Estate		Equity			Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, June 30, 2022	$	1,643	$	8,337	$	507		$	361		$	2,477		$	13,325
Charge-offs		-		-		-			( 6	)		-			( 6	)
Recoveries		-		6		-			3			5			14
Provision		17		400		1			1			98			517
Ending balance, September 30, 2022	$	1,660	$	8,743	$	508		$	359		$	2,580		$	13,850

Allowance for loan losses:
Beginning balance, December 31, 2021	$	1,596	$	7,470	$	533		$	365		$	2,536		$	12,500
Charge-offs		-		-		( 32	)		( 14	)		( 299	)		( 345	)
Recoveries		-		20		-			4			17			41
Provision		64		1,253		7			4			326			1,654
Ending balance, September 30, 2022	$	1,660	$	8,743	$	508		$	359		$	2,580		$	13,850

Ending balance, September 30, 2022 allocated to loans individually evaluated for impairment	$	199	$	-	$	-		$	-		$	79		$	278

Ending balance, September 30, 2022 allocated to loans collectively evaluated for impairment	$	1,461	$	8,743	$	508		$	359		$	2,501		$	13,572

Loans receivable:
Ending balance, September 30, 2022	$	195,265	$	781,843	$	67,409		$	27,703		$	241,608		$	1,313,828

Ending balance, September 30, 2022 of loans individually evaluated for impairment	$	687	$	1,173	$	97		$	34		$	1,655		$	3,646

Ending balance, September 30, 2022 of loans collectively evaluated for impairment	$	194,578	$	780,670	$	67,312		$	27,669		$	239,953		$	1,310,182

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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 by amortized cost and based on year originated was as follows:

	September 30, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total Loans
	(In Thousands)
RESIDENTIAL 1-4 FAMILY
Pass	$	18,202	$	37,298	$	25,117	$	15,881	$	11,192	$	32,034	$	6,479	$	146,203
Special Mention		-		-		-		-		-		229		-		229
Substandard		-		-		-		-		-		506		-		506
Total Residential 1-4 family		18,202		37,298		25,117		15,881		11,192		32,769		6,479		146,938
RESIDENTIAL 1-4 FAMILY CONSTRUCTION
Pass		9,377		30,975		6,710		-		-		-		316		47,378
Special Mention		-		-		757		-		-		-		-		757
Total Residential 1-4 family construction		9,377		30,975		7,467		-		-		-		316		48,135
COMMERCIAL REAL ESTATE
Pass		57,308		155,691		142,955		53,647		56,326		104,785		33,459		604,171
Special Mention		534		-		502		122		3,504		2,360		-		7,022
Substandard		431		-		-		-		-		339		-		770
Total Commercial real estate		58,273		155,691		143,457		53,769		59,830		107,484		33,459		611,963
COMMERCIAL CONSTRUCTION AND DEVELOPMENT
Pass		21,333		80,468		27,959		6,520		6,985		3,874		3,480		150,619
Special Mention		-		-		-		-		-		995		-		995
Total Commercial construction and development		21,333		80,468		27,959		6,520		6,985		4,869		3,480		151,614
FARMLAND
Pass		16,220		36,858		19,923		22,940		9,785		30,859		4,319		140,904
Special Mention		-		-		-		-		-				-		-
Substandard		-		407		-		1,091		487		900		-		2,885
Total Farmland		16,220		37,265		19,923		24,031		10,272		31,759		4,319		143,789
HOME EQUITY
Pass		1,156		4,733		383		602		639		2,817		72,687		83,017
Substandard		-		-		-		-		-		111		93		204
Total Home Equity		1,156		4,733		383		602		639		2,928		72,780		83,221
CONSUMER
Pass		10,664		9,003		3,966		2,319		591		1,196		2,004		29,743
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		14		6		41		-		11		17		89
Total Consumer		10,664		9,017		3,972		2,360		591		1,207		2,021		29,832
COMMERCIAL
Pass		25,188		24,625		24,366		21,728		3,373		6,817		23,598		129,695
Special Mention		-		-		54		27		-		134		15		230
Substandard		-		-		17		-		-		-		10		27
Doubtful		-		-		-		-		-		-		-		-
Total Commercial		25,188		24,625		24,437		21,755		3,373		6,951		23,623		129,952
AGRICULTURAL
Pass		36,931		20,941		7,995		6,831		1,970		1,710		51,914		128,292
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		285		186		55		427		559		525		2,037
Doubtful		-		-		-		-		-		-		-		-
Total Agricultural		36,931		21,226		8,181		6,886		2,397		2,269		52,439		130,329
TOTAL LOANS
Pass		196,379		400,592		259,374		130,468		90,861		184,143		198,256		1,460,073
Special Mention		534		-		1,313		149		3,504		3,718		15		9,233
Substandard		431		706		209		1,187		914		2,375		645		6,467
Doubtful		-		-		-		-		-		-		-		-
Total	$	197,344	$	401,298	$	260,896	$	131,804	$	95,279	$	190,236	$	198,916	$	1,475,773

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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 (prior to the adoption of ASU No. 2016 - 13 ):

	December 31, 2022
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	135,079	$	515	$	353	$	-	$	-	$	135,947
Residential 1-4 family construction		59,756		-		-		-		-		59,756
Commercial real estate		520,505		16,833		1,732		-		-		539,070
Commercial construction and development		150,101		1,044		-		-		-		151,145
Farmland		131,646		2,232		2,456		-		-		136,334
Other loans:
Home equity		74,147		-		124		-		-		74,271
Consumer		27,560		10		39		-		-		27,609
Commercial		125,035		1,476		736		8		-		127,255
Agricultural		101,441		311		2,182		102		-		104,036
Total	$	1,325,270	$	22,421	$	7,622	$	110	$	-	$	1,355,423

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

	September 30, 2023
	Loans Past Due and Still Accruing

			90 Days				Nonaccrual		Nonaccrual
	30-89 Days		and				Loans with		Loans with		Current		Total
	Past Due		Greater		Total		no ACL		ACL		Loans		Loans
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	253	$	-	$	253	$	312	$	-	$	146,373	$	146,938
Residential 1-4 family construction		1,034		-		1,034		-		-		47,101		48,135
Commercial real estate		1,358		-		1,358		339		-		610,266		611,963
Commercial construction and development		92		-		92		-		-		151,522		151,614
Farmland		73		-		73		3,719		-		139,997		143,789
Other loans:
Home equity		-		-		-		188		-		83,033		83,221
Consumer		63		-		63		68		7		29,694		29,832
Commercial		68		-		68		-		-		129,884		129,952
Agricultural		283		-		283		2,348		772		126,926		130,329
Total	$	3,224	$	-	$	3,224	$	6,974	$	779	$	1,464,796	$	1,475,773

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

NOTE 4. LOANS RECEIVABLE – continued

	December 31, 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	$	1,798	$	330	$	2,128	$	483	$	133,336	$	135,947
Residential 1-4 family construction		500		-		500		-		59,256		59,756
Commercial real estate		780		-		780		350		537,940		539,070
Commercial construction and development		-		-		-		-		151,145		151,145
Farmland		1,620		-		1,620		754		133,960		136,334
Other loans:
Home equity		226		-		226		107		73,938		74,271
Consumer		93		-		93		25		27,491		27,609
Commercial		597		746		1,343		44		125,868		127,255
Agricultural		-		-		-		1,535		102,501		104,036
Total	$	5,614	$	1,076	$	6,690	$	3,298	$	1,345,435	$	1,355,423

The following tables presents the amortized cost basis of collateral-dependent loans by class of loans.

	September 30, 2023
	Real Estate		Business Assets		Other
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	278	$	-	$	-
Residential 1-4 family construction		757		-		-
Commercial real estate		39		300		-
Farmland		3,713		-		-
Other loans:
Home equity		45		-		-
Consumer		-		-		26
Commercial		-		10		-
Agricultural		-		2,399		-
Total	$	4,832	$	2,709	$	26

Prior to the implementation of ASU No. 2016 - 13, Financial Instruments – Credit Losses (Topic 326 ) on January 1, 2023, a loan was considered impaired when the Company determined it was probable that it would be unable to collect all amounts due to the contractual terms of the loan agreement, including scheduled interest payments. Various factors determined impairment such as the financial condition of the borrower, value of the underlying collateral, and general economic conditions.

The implementation of ASU No. 2016 - 13 significantly changed disclosures related to loans and, as a result, certain disclosures are no longer required. The following tables represent disclosures for the prior period that are no longer required as of January 1, 2023, but are included in this Form 10 -Q since the Company is required to disclose comparative information.

The following table provides additional information on impaired loans with and without related allowance reserves at December 31, 2022:

	December 31, 2022
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	483	$	585	$	-
Residential 1-4 family construction		-		-		-
Commercial real estate		3,614		3,697		-
Commercial construction and development		-		-		-
Farmland		754		866		-
Other loans:
Home equity		107		133		-
Consumer		25		30		-
Commercial		184		232		35
Agricultural		1,535		1,633		115
Total	$	6,702	$	7,176	$	150

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Table of Contents

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

NOTE 4. LOANS RECEIVABLE – continued

The following table provides information on impaired loans for the three and nine months ended September 30, 2022:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2022		2022
	Average Recorded Investment
	(In Thousands)
Real estate loans:
Residential 1-4 family	$	629	$	652
Residential 1-4 family construction		-		169
Commercial real estate		403		1,213
Commercial construction and development		-		-
Farmland		770		1,200
Other loans:
Home equity		108		106
Consumer		35		48
Commercial		76		292
Agricultural		1,587		1,673
Total	$	3,608	$	5,353

Interest income recognized on nonaccrual loans for the three and nine months ended September 30, 2023 and 2022 is considered insignificant. In terest payments received on a cash basis related to nonaccrual loans w ere $ 375,000 at September 30, 2023 and $ 415,000 at December 31, 2022 .

During the three months ended September 30, 2023, the Company modified one commercial real estate loan with an amortized cost basis of $ 431,000 for a borrower experiencing financial difficulty by consolidating four loans and refinancing into one short-term, interest only loan for 12 months. There was no forgiveness of principal and the loan is considered current with its modified terms as of September 30, 2023. During the nine months ended September 30, 2023 , the Company modified two commercial real estate loans. The first loan with an amortized cost basis of $ 534,000 was modified by consolidating two lines of credit and refinancing into one long term loan for ten years. The second loan with an amortized cost basis of $ 431,000 was modified by consolidating four loans and refinancing into one short-term, interest only loan for 12 months. There has been no forgiveness of principal for either of the loans, and they are considered current with their modified terms as of September 30, 2023.

Prior to the adoption of ASU No. 2022 - 02, during the three months ended September 30, 2022, there were no new TDR loans. During the nine months ended September 30, 2022, there were two new TDR agricultural loans. The recorded investment for the first loan at the time of restructure was $ 331,000 . No charge-offs were incurred and the loan is now on accrual status. The recorded investment at the time of restructure for the second loan was $ 145,000 . This loan was paid off during the nine months ended September 30, 2023.

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 $ 2,053,358,000 and $ 2,022,066,000 at September 30, 2023 and December 31, 2022 , 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 $ 1,262,000 and $ 1,225,000 for the three months ended September 30, 2023 and 2022 , respectively. Mortgage loan servicing fees were $ 3,797,000 and $ 3,581,000 for the nine months ended September 30, 2023 and 2022 , 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 $ 16,531,000 and $ 11,912,000 at September 30, 2023 and December 31, 2022 , respectively.

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

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
	September 30,
	2023			2022
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	15,501		$	14,809
Mortgage servicing rights capitalized		681			924
Amortization of mortgage servicing rights		( 444	)		( 592	)
Ending balance	$	15,738		$	15,141

	As of or For the
	Nine Months Ended
	September 30,
	2023			2022
	(In Thousands)
Mortgage servicing rights:
Beginning balance	$	15,412		$	13,749
Mortgage servicing rights capitalized		1,656			3,102
Amortization of mortgage servicing rights		( 1,330	)		( 1,710	)
Ending balance	$	15,738		$	15,141
Valuation allowance:
Beginning balance		-			( 56	)
Recovery of mortgage servicing rights		-			56
Ending balance		-			-
Mortgage servicing rights, net	$	15,738		$	15,141

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

The fair values of these mortgage servicing rights were $ 20,576,000 and $ 19,288,000 at September 30, 2023 and December 31, 2022 , respectively. The fair value of mortgage servicing rights was determined at loan level, depending on the interest rate and term of the specific loan, using the following valuation assumptions:

	September 30,	December 31,
	2023	2022
Key assumptions:
Discount rate	12%	12 %
Prepayment speed range	98 - 555 %	116 - 210 %
Weighted average prepayment speed	111 %	131 %

NOTE 6. DEPOSITS

Deposits are summarized as follows:

	September 30,		December 31,
	2023		2022
	(In Thousands)
Noninterest checking	$	435,655	$	468,955
Interest-bearing checking		225,573		252,922
Savings		233,181		273,790
Money market		326,718		387,947
Time certificates of deposit		394,351		251,658
Total	$	1,615,478	$	1,635,272

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

NOTE 7. OTHER LONG-TERM DEBT

Other long-term debt consisted of the following:

	September 30, 2023					December 31, 2022
			Unamortized					Unamortized
			Debt					Debt
	Principal		Issuance			Principal		Issuance
	Amount		Costs			Amount		Costs
	(In Thousands)
Subordinated debentures fixed at 5.50 % to floating, due 2030	$	15,000	$	( 227	)	$	15,000	$	( 249	)
Subordinated debentures fixed at 3.50 % to floating, due 2032		40,000		( 966	)		40,000		( 1,062	)
Subordinated debentures variable at 3-Month SOFR plus 1.68 %, due 2035		5,155		-			5,155		-
Total other long-term debt	$	60,155	$	( 1,193	)	$	60,155	$	( 1,311	)

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 February 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.

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% until June 30, 2023, making the rate 6.20 % as of December 31, 2022 . In December of 2022, Governors of the Federal Reserve System adopted final rule 12 C.F.R. Part 253, Regulation Implementing the Adjustable Interest Rate (LIBOR) Act. Rule 253 identified SOFR-benchmark rates to replace LIBOR in certain financial contracts after June 30, 2023. As a result, the variable rate for interest payable converted to three -month CME Term SOFR plus 1.68 % beginning during the quarter ended September 30, 2023. The rate was 7.08 % as of September 30, 2023. 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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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, June 30, 2023	$	( 23,723	)
Other comprehensive loss, before reclassifications and income taxes		( 9,763	)
Amounts reclassified from accumulated other comprehensive loss, before income taxes		-
Income tax benefit		2,571
Total other comprehensive loss		( 7,192	)
Balance, September 30, 2023	$	( 30,915	)

Balance, June 30, 2022	$	( 19,081	)
Other comprehensive loss, before reclassifications and income taxes		( 16,009	)
Amounts reclassified from accumulated other comprehensive loss, before income taxes		-
Income tax benefit		4,216
Total other comprehensive loss		( 11,793	)
Balance, September 30, 2022	$	( 30,874	)

Balance, December 31, 2022	$	( 26,357	)
Other comprehensive loss, before reclassifications and income taxes		( 6,410	)
Amounts reclassified from accumulated other comprehensive loss, before income taxes		222
Income tax benefit		1,630
Total other comprehensive loss		( 4,558	)
Balance, September 30, 2023	$	( 30,915	)

Balance, December 31, 2021	$	3,493
Other comprehensive loss, before reclassifications and income taxes		( 46,657	)
Amounts reclassified from accumulated other comprehensive income, before income taxes		6
Income tax benefit		12,284
Total other comprehensive loss		( 34,367	)
Balance, September 30, 2022	$	( 30,874	)

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NOTE 9. EARNINGS PER COMMON SHARE

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
	(Dollars in Thousands, Except Per Share Data)
Basic weighted average shares outstanding		7,784,279		7,793,485		7,787,987		7,241,520
Dilutive effect of stock compensation		7,687		14,565		4,606		12,722
Diluted weighted average shares outstanding		7,791,966		7,808,050		7,792,593		7,254,242

Net income available to common shareholders	$	2,635	$	3,092	$	7,892	$	7,079

Basic earnings common per share	$	0.34	$	0.40	$	1.01	$	0.98

Diluted earnings per common share	$	0.34	$	0.40	$	1.01	$	0.98

Restricted stock units excluded from the diluted average outstanding share calculation because their effect would be anti-dilutive		19,237		-		18,443		-

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:

	September 30, 2023						December 31, 2022
	Notional		Fair Value				Notional		Fair Value
	Amount		Asset		Liability		Amount		Asset		Liability
	(In Thousands)
Interest rate lock commitments	$	31,340	$	-	$	192	$	18,603	$	-	$	81
Forward TBA mortgage-backed securities		22,000		255		-		13,000		11		-

Changes in the fair value of the derivatives are recorded in mortgage banking, net, within noninterest income on the condensed consolidated statements of inc ome. Net gains of $ 39,000 and $ 209,000 were recorded for the three months ended September 30, 2023 and 2022, respectively. Net gains of $ 133,000 were recorded for the nine months ended September 30, 2023 compared to net losses of $ 282,000 for the nine months ended September 30, 2022.

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.

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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

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.

Collateral-Dependent Loans – Individually reviewed collateral-dependent loans are reported at the fair value of the underlying collateral less costs to sell. Collateral-dependent loans are considered Level 3 inputs. 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.

	September 30, 2023
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency obligations	$	-	$	6,718	$	-	$	6,718
U.S. Treasury obligations		44,778		-		-		44,778
Municipal obligations		-		128,862		-		128,862
Corporate obligations		-		3,845		-		3,845
Mortgage-backed securities		-		26,747		-		26,747
Collateralized mortgage obligations		-		85,550		-		85,550
Asset-backed securities		-		12,286		-		12,286
Loans held-for-sale		-		17,880		-		17,880
Forward TBA mortgage-backed securities		-		255		-		255
Financial liabilities:
Interest rate lock commitments		-		-		192		192

	December 31, 2022
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency obligations	$	-	$	2,390	$	-	$	2,390
U.S. Treasury obligations		51,951		-		-		51,951
Municipal obligations		-		172,849		-		172,849
Corporate obligations		-		6,990		-		6,990
Mortgage-backed securities		-		29,653		-		29,653
Collateralized mortgage obligations		-		82,131		-		82,131
Asset-backed securities		-		3,531		-		3,531
Loans held-for-sale		-		8,250		-		8,250
Forward TBA mortgage-backed securities		-		11		-		11
Financial liabilities:
Interest rate lock commitments		-		-		81		81

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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:

	September 30, 2023
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Collateral-dependent loans individually evaluated, net of ACL ⁽¹⁾	$	-	$	-	$	2,491	$	2,491
Mortgage servicing rights		-		-		-		-

	December 31, 2022
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans ⁽¹⁾	$	-	$	-	$	281	$	281
Mortgage servicing rights		-		-		1,346	$	1,346

^{(

1

)} The Company adopted ASC 326 as of January 1, 2023, under which the concept of impaired loans went away. The comparable period presents impaired loans under previously applicable GAAP.

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

Collateral-dependent loans individually evaluated	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 %
Interest rate lock commitments	Internal pricing model	Pull-through expectations	85 - 95 %

The following tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3 ) on a recurring basis during the three months and nine months ended September 30, 2023.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
	Interest Rate Lock Commitments						Interest Rate Lock Commitments
	(In Thousands)						(In Thousands)
Beginning balance	$	( 57	)	$	334		$	( 81	)	$	1,218
Purchases and issuances		( 133	)		( 640	)		( 283	)		95
Sales and settlements		( 2	)		( 466	)		172			( 2,085	)
Ending balance	$	( 192	)	$	( 772	)	$	( 192	)	$	( 772	)
Unrealized losses related to items held at end of period	$	( 135	)	$	( 1,106	)	$	( 111	)	$	( 1,990	)

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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.

	September 30, 2023
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	20,783	$	-	$	-	$	20,783	$	20,783
FHLB stock		-		10,438		-		10,438		10,438
FRB stock		-		4,131		-		4,131		4,131
Loans receivable, gross		-		-		1,409,511		1,409,511		1,475,773
Accrued interest and dividends receivable		13,657		-		-		13,657		13,657
Mortgage servicing rights		-		-		20,576		20,576		15,738
Financial liabilities:
Non-maturing interest-bearing deposits		-		785,472		-		785,472		785,472
Noninterest-bearing deposits		435,655		-		-		435,655		435,655
Time certificates of deposit		-		-		390,486		390,486		394,351
Accrued expenses and other liabilities		31,405		-		-		31,405		31,405
FHLB advances and other borrowings		-		-		199,697		199,697		199,757
Other long-term debt		-		-		55,752		55,752		60,155

	December 31, 2022
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	21,811	$	-	$	-	$	21,811	$	21,811
FHLB stock		-		5,089		-		5,089		5,089
FRB stock		-		4,131		-		4,131		4,131
Loans receivable, gross		-		-		1,322,814		1,322,814		1,353,678
Accrued interest and dividends receivable		11,284		-		-		11,284		11,284
Mortgage servicing rights		-		-		19,288		19,288		15,412
Financial liabilities:
Non-maturing interest-bearing deposits		-		914,659		-		914,659		914,659
Noninterest-bearing deposits		468,955		-		-		468,955		468,955
Time certificates of deposit		-		-		246,348		246,348		251,658
Accrued expenses and other liabilities		26,377		-		-		26,377		26,377
FHLB advances and other borrowings		-		-		69,373		69,373		69,394
Other long-term debt		-		-		56,721		56,721		60,155

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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

This discussion and analysis provides information that management believes is necessary to understand Eagle's financial condition, changes in financial condition, results of operations, and cash flows for the three and nine months ended September 30, 2023, as compared to 2022. The following should be read in conjunction with the Company's Consolidated Financial Statements, and accompanying Notes thereto, for the year ended December 31, 2022, included in Eagle's Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 8, 2023, and in conjunction with the Condensed Consolidated Financial Statements, and accompanying Notes thereto, included in Part I - Item 1. Financial Statements. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the future results that may be attained for the entire year or other interim periods.

Executive Summary

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. Our earnings depend primarily on our level of net interest income, which is the difference between interest earned on our interest-earning assets, consisting primarily of loans and investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, net gains and losses on sale of assets, and mortgage loan service fees. Net interest income and noninterest income are offset by provisions for loan losses, general administrative and other expenses, including salaries and employee benefits and occupancy and equipment costs, as well as by state and federal income tax expense.

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 over the past decade. The purpose of diversification is to mitigate the Bank’s exposure 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, and has recently been, 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. It may become more difficult to maintain deposit growth due to significant competition, the current conditions in the banking industry 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 increased the federal funds target rate to 4.50% during the year ended December 31, 2022. The rate increased to 5.50% during the nine months ended September 30, 2023 .

Recent Events

Acquisitions

On September 30, 2021, the Company entered into an Agreement and Plan of Merger with First Community Bancorp, Inc. ("FCB"), 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 mi llion.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition

Comparisons of financial condition in this section are between September 30, 2023 and December 31, 2022.

Total assets were $2.06 billion at September 30, 2023 , an increase of $114.68 million, or 5.9% from $1.95 billion at December 31, 2022 . Loans receivable, net increased by $119.86 million from December 31, 2022 . Securities available-for-sale decreased $40.71 million or 11.6% from December 31, 2022. Total liabilities were $1.91 billion at September 30, 2023 , an increase of $115.82 million, or 6.5%, from $1.79 billion at December 31, 2022 . Total borrowings increased $130.48 million from December 31, 2022 and total deposits decreased $19.79 million from December 31, 2022. Total shareholders’ equity decreased $1.15 million or 0.7% from December 31, 2022 .

Financial Condition Details

Investment Activities

The following table summarizes investment activities:

	September 30,					December 31,
	2023					2022
	Fair Value		Percentage of Total			Fair Value		Percentage of Total
	(Dollars in Thousands)
Securities available-for-sale:
U.S. government and agency obligations	$	6,718		2.18	%	$	2,390		0.68	%
U.S. Treasury obligations		44,778		14.50			51,951		14.86
Municipal obligations		128,862		41.72			172,849		49.47
Corporate obligations		3,845		1.25			6,990		2.00
Mortgage-backed securities		26,747		8.66			29,653		8.48
Collateralized mortgage obligations		85,550		27.71			82,131		23.50
Asset-backed securities		12,286		3.98			3,531		1.01
Total securities available-for-sale	$	308,786		100.00	%	$	349,495		100.00	%

Securities available-for-sale were $308.79 million at September 30, 2023 , a decrease of $40.71 million from $349.50 million at December 31, 2022 . The decrease was due to sales of $34.02 million and maturity, principal payments and call activity of $27.34 million. These decreases were largely offset by $28.13 million in investment purchases.

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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

Financial Condition – continued

Lending Activities

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

	September 30,						December 31,
	2023						2022
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Real estate loans:
Residential 1-4 family ⁽¹⁾	$	146,938			9.96	%	$	135,947			10.03	%
Residential 1-4 family construction		48,135			3.26			59,756			4.41
Total residential 1-4 family		195,073			13.22			195,703			14.44

Commercial real estate		611,963			41.47			539,070			39.76
Commercial construction and development		151,614			10.27			151,145			11.15
Farmland		143,789			9.74			136,334			10.06
Total commercial real estate		907,366			61.48			826,549			60.97

Total real estate loans		1,102,439			74.70			1,022,252			75.41

Other loans:
Home equity		83,221			5.64			74,271			5.48
Consumer		29,832			2.02			27,609			2.04

Commercial		129,952			8.81			127,255			9.39
Agricultural		130,329			8.83			104,036			7.68
Total commercial loans		260,281			17.64			231,291			17.07

Total other loans		373,334			25.30			333,171			24.59

Total loans		1,475,773			100.00	%		1,355,423			100.00	%

Deferred loan fees ⁽²⁾		-						(1,745	)
Allowance for credit losses ⁽³⁾		(16,230	)					(14,000	)
Total loans, net	$	1,459,543					$	1,339,678

	⁽¹⁾	Excludes loans held-for-sale.
	⁽²⁾	Deferred loan fees, net included in individual loan categories above for the quarter ended September 30, 2023.
	⁽³⁾	Allowance for credit losses for the quarter ended September 30, 2023; allowance for loan losses for prior period.

Loans receivable, net increased $119.86 million , or 8.9% , to $1.46 billion at September 30, 2023 from $1.34 billion at December 31, 2022 . Total commercial real estate loans increased $80.82 million, total commercial loans increased $28.99 million, total home equity loans increased $8.95 million, consumer loans increased $2.22 million and total residential loans decreased $630,000 .

Total loan originations were $563.04 million for the nine months ended September 30, 2023 . Total residential 1-4 family originations were $299.41 million, which includes $ 265.50 million of loans held-for-sale originations. Total commercial originations were $117.05 million. Total commercial real estate originations were $113.91 million. Home equity loan originations totaled $19.29 million. Consumer loan originations totaled $13.38 million. Loans held-for-sale increased by $9.63 million to $17.88 million at September 30, 2023 from $8.25 million at December 31, 2022 .

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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

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 credit losses. Subsequent write-downs are recorded as a charge to operations. As of September 30, 2023 and December 31, 2022 there was no real estate owned and other repossessed property.

The following table sets forth information regarding nonperforming assets:

	September 30,			December 31,
	2023			2022
	(Dollars in Thousands)
Nonaccrual loans
Real estate loans:
Residential 1-4 family	$	312		$	483
Commercial real estate		339			350
Farmland		3,719			143
Other loans:
Home equity		188			96
Consumer		75			25
Commercial		-			44
Agricultural		3,120			1,059
Accruing loans delinquent 90 days or more
Real estate loans:
Residential 1-4 family		-			330
Other loans:
Commercial		-			746
Restructured loans:		-			4,502
Total nonperforming loans		7,753			7,778
Real estate owned and other repossessed property, net		-			-
Total nonperforming assets	$	7,753		$	7,778

Total nonperforming loans to total loans		0.53	%		0.57	%
Total nonperforming loans to total assets		0.38	%		0.40	%
Total nonaccrual loans to total loans		0.53	%		0.24	%
Total nonperforming assets to total assets		0.38	%		0.40	%

Nonaccrual loans as of September 30, 2023 and December 31, 2022 include $1,725,000 and $694,000, respectively of acquired loans that deteriorated subsequent to the acquisition date.

Effective January 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings ("TDRs") and Vintage Disclosures. The update eliminated the recognition and measurement of TDRs, therefore, TDRs are not included in nonperforming assets as of September 30, 2023.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

	September 30,					December 31,
	2023					2022
			Percent					Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Noninterest checking	$	435,655		26.98	%	$	468,955		28.68	%
Interest-bearing checking		225,573		13.96			252,922		15.47
Savings		233,181		14.43			273,790		16.74
Money market		326,718		20.22			387,947		23.72
Total		1,221,127		75.59			1,383,614		84.61
Certificates of deposit accounts:
IRA certificates		23,693		1.47			24,907		1.52
Brokered certificates		40,000		2.48			-		0.00
Other certificates		330,658		20.46			226,751		13.87
Total certificates of deposit		394,351		24.41			251,658		15.39
Total deposits	$	1,615,478		100.00	%	$	1,635,272		100.00	%

Deposits decreased by $19.79 million, or 1.2%, to $1.62 billion at September 30, 2023 from $1.64 billion at December 31, 2022 . M oney market decreased by $61.23 million, savings decreased by $40.61 million, noninterest checking decreased by $33.30 million, and interest-bearing checking decreased by $27.35 million. As indicated in the table above, the decreases were largely offset by increases in certificates of deposits of $142.69 million, which included $40.00 million of fixed rate brokered certificates.

The estimated amount of uninsured deposits was $283.31 million or 17% of total deposits at September 30, 2023.

The following table summarizes borrowing activity:

	September 30,					December 31,
	2023					2022
	Net		Percent			Net		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
FHLB advances and other borrowings	$	199,757		77.21	%	$	69,394		54.11	%
Other long-term debt:
Subordinated debentures fixed at 5.50% to floating, due 2030		14,773		5.71			14,751		11.50
Subordinated debentures fixed at 3.50% to floating, due 2032		39,034		15.09			38,938		30.37
Subordinated debentures variable, due 2035		5,155		1.99			5,155		4.02
Total other long-term debt		58,962		22.79			58,844		45.89
Total borrowings	$	258,719		100.00	%	$	128,238		100.00	%

Total borrowings increased by $130.48 million, or 101.7% to $258.72 million at September 30, 2023 from $128.24 million at December 31, 2022 . This increase is largely due to an increase in FHLB advances and other borrowings related to funding loan growth.

Shareholders’ Equity

Total shareholders’ equity decreased by $1.15 million, or 0.7%, to $157.27 million at September 30, 2023 from $158.42 million at December 31, 2022 . The decrease was impacted by an increase in unrealized losses on securities available-for-sale of $4.56 million, dividends paid of $3.32 million and a net of tax cumulative adjustment of $1.62 million related to the adoption of the Current Expected Credit Losses standard. These decreases were offset by net income of $7.89 million.

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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 September 30,
	2023							2022
	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	$	319,308	$	2,794		3.47	%	$	378,680	$	2,555		2.68	%
FHLB and FRB stock		14,302		212		5.88			6,932		63		3.61
Loans receivable ⁽¹⁾		1,476,584		21,068		5.66			1,301,358		16,665		5.08
Other earning assets		2,416		20		3.28			12,057		59		1.94
Total interest-earning assets		1,812,610		24,094		5.27			1,699,027		19,342		4.52
Noninterest-earning assets		239,833							214,683
Total assets	$	2,052,443						$	1,913,710

Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts:
Checking	$	227,938	$	88		0.15	%	$	261,426	$	68		0.10	%
Savings		231,465		38		0.07			318,322		25		0.03
Money market		324,895		1,576		1.92			369,216		307		0.33
Certificates of deposit		386,646		3,450		3.54			203,359		317		0.62
FHLB advances and other borrowings		192,880		2,672		5.50			10,832		136		4.98
Other long-term debt		58,950		683		4.60			59,038		602		4.05
Total interest-bearing liabilities		1,422,774		8,507		2.37			1,222,193		1,455		0.47
Noninterest checking		431,826							503,905
Other noninterest-bearing liabilities		38,910							23,020
Total liabilities		1,893,510							1,749,118

Total equity		158,933							164,592

Total liabilities and equity	$	2,052,443						$	1,913,710
Net interest income/interest rate spread ⁽²⁾			$	15,587		2.90	%			$	17,887		4.05	%

Net interest margin ⁽³⁾						3.41	%						4.18	%
Total interest-earning assets to interest-bearing liabilities						127.40	%						139.01	%

⁽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

	For the Nine Months Ended September 30,
	2023							2022
	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	$	335,898	$	8,586		3.42	%	$	332,950	$	5,863		2.35	%
FHLB and FRB stock		12,610		480		5.09			5,827		160		3.67
Loans receivable ⁽¹⁾		1,417,291		57,942		5.47			1,144,459		42,933		5.02
Other earning assets		2,562		66		3.44			44,456		206		0.62
Total interest-earning assets		1,768,361		67,074		5.07			1,527,692		49,162		4.30
Noninterest-earning assets		231,503							186,200
Total assets	$	1,999,864						$	1,713,892

Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts:
Checking	$	239,494	$	538		0.30	%	$	238,032	$	106		0.06	%
Savings		243,939		110		0.06			268,244		94		0.05
Money market		333,731		3,685		1.48			348,568		759		0.29
Certificates of deposit		336,659		7,434		2.95			171,642		492		0.38
FHLB advances and other borrowings		151,819		5,993		5.28			7,881		157		2.66
Other long-term debt		58,912		2,035		4.62			60,131		1,855		4.12
Total interest-bearing liabilities		1,364,554		19,795		1.94			1,094,498		3,463		0.42
Noninterest checking		442,377							440,625
Other noninterest-bearing liabilities		32,016							22,698
Total liabilities		1,838,947							1,557,821

Total equity		160,917							156,071

Total liabilities and equity	$	1,999,864						$	1,713,892
Net interest income/interest rate spread ⁽²⁾			$	47,279		3.13	%			$	45,699		3.88	%

Net interest margin ⁽³⁾						3.57	%						4.00	%
Total interest-earning assets to interest-bearing liabilities						129.59	%						139.58	%

⁽¹⁾ Includes loans held-for-sale.

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis

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

	For the Three Months Ended September 30,
	2023									2022
				Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest-earning assets:
Investment securities	$	(401	)	$	640		$	239		$	677		$	784		$	1,461
FHLB and FRB stock		67			82			149			27			(26	)		1
Loans receivable ⁽¹⁾		2,244			2,159			4,403			4,697			349			5,046
Other earning assets		(47	)		8			(39	)		(26	)		53			27
Total interest-earning assets		1,863			2,889			4,752			5,375			1,160			6,535

Interest-bearing liabilities:
Checking		(9	)		29			20			4			52			56
Savings		(7	)		20			13			17			(22	)		(5	)
Money Market		(37	)		1,306			1,269			66			95			161
Certificates of deposit		286			2,847			3,133			51			104			155
FHLB advances and other borrowings		2,286			250			2,536			12			87			99
Other long-term debt		(1	)		82			81			381			(168	)		213
Total interest-bearing liabilities		2,518			4,534			7,052			531			148			679

Change in net interest income	$	(655	)	$	(1,645	)	$	(2,300	)	$	4,844		$	1,012		$	5,856

	For the Nine Months Ended September 30,
	2023									2022
				Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest earning assets:
Investment securities	$	52		$	2,671		$	2,723		$	1,977		$	897		$	2,874
FHLB and FRB stock		186			134			320			38			(72	)		(34	)
Loans receivable ⁽¹⁾		10,235			4,774			15,009			8,884			389			9,273
Other earning assets		(194	)		54			(140	)		(38	)		154			116
Total interest earning assets		10,279			7,633			17,912			10,861			1,368			12,229

Interest bearing liabilities:
Checking		1			431			432			10			62			72
Savings		(9	)		25			16			33			(25	)		8
Money Market		(32	)		2,958			2,926			186			192			378
Certificates of deposit		473			6,469			6,942			39			(164	)		(125	)
FHLB advances and other borrowings		2,868			2,968			5,836			(42	)		47			5
Other long-term debt		(38	)		218			180			1,187			(500	)		687
Total interest bearing liabilities		3,263			13,069			16,332			1,413			(388	)		1,025

Change in net interest income	$	7,016		$	(5,436	)	$	1,580		$	9,448		$	1,756		$	11,204

⁽¹⁾ Includes loans held-for-sale.

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Table of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Three Months Ended September 30, 2023 and 2022

Net Income. Eagle’s net income for the three months ended September 30, 2023 was $2.64 million compared to $3.09 million for the three months ended September 30, 2022. The decrease of $457,000 was primarily due to a decrease in net interest income after provision for credit losses of $2.37 million, largely offset by a a decrease in noninterest expense of $1.61 million. Basic and diluted earnings per common share were both $0.34 for the current period. Basic and diluted earnings per common share were both $0.40 for the prior year comparable period.

Net Interest Income. Net interest income decreased to $15.59 million for the three months ended September 30, 2023, from $17.89 million for the same quarter in the prior year. The decrease of $2.30 million, or 12.9%, was the result of an increase in interest expense of $7.05 million partially offset by an increase in interest and dividend income of $4.75 million.

Interest and Dividend Income. Interest and dividend income was $24.09 million for the three months ended September 30, 2023 compared to $19.34 million for the three months ended September 30, 2022. Interest and fees on loans increased to $21.07 million for the three months ended September 30, 2023 from $16.67 million for the three months ended September 30, 2022. This increase of $4.40 million, or 26.4%, 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 September 30, 2023 were $1.48 billion, compared to $1.30 billion for the prior year period. This represents an increase of $175.22 million, or 13.5% and was impacted by organic growth. The average interest rate earned on loans receivable increased by 58 basis points, from 5.08% for the three months ended September 30, 2022 to 5.66% for the current period. Interest accretion on purchased loans was $175,000 for the three months ended September 30, 2023 which resulted in a 4 basis point increase in net interest margin compared to $392,000 for the three months ended September 30, 2022 which resulted in a 9 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $239,000, or 9.4% period over period. Average interest rates earned on investments increased to 3.47% for the three months ended September 30, 2023 from 2.68% for the three months ended September 30, 2022. However, average balances for investments decreased to $319.31 million for the three months ended September 30, 2023 from $378.68 million for the three months ended September 30, 2022.

Interest Expense. Total interest expense was $8.51 million for the three months ended September 30, 2023 compared to $1.46 million for the three months ended September 30, 2022. The increase of $7.05 million was due to an increase of $4.43 million in interest expense on deposits, as well as a net increase of $2.61 million in interest expense on total borrowings. The overall average rate on total deposits was up from 0.17% for the three months ended September 30, 2022 compar ed to 1.28% for the three months ended September 30, 2023. However, the average balance for total deposits was $1.60 billion for the three months ended September 30, 2023 compared to $1.66 billion for the three months ended September 30, 2022. The increase in interest expense on total borrowings was driven by the average balance of FHLB advances and other borrowings which increased from $10.83 million for the three months ended September 30, 2022 to $192.88 million for the three months ended September 30, 2023. Short-term borrowings have increased to fund loan growth. In addition, the average rate paid on FHLB advances and other borrowings increased from 4.98% for the three months ended September 30, 2022, to 5.50% for the three months ended September 30, 2023.

Provision for Credit Losses. Provision for credit losses was $588,000 for the three months ended September 30, 2023, compared to $517,000 in loan loss provisions, prior to the adoption of the Current Expected Credit Losses standard, for the three months ended September 30, 2022. The provision for credit losses for three months ended September 30, 2023 includes a provision for credit losses on loans of $778,000 and a decrease in the provision for unfunded commitments of $190,000.

Noninterest Income. Total noninterest income was $6.04 million for the three months ended September 30, 2023 compared to $6.25 million for the three months ended September 30, 2022. The slight decrease of $211,000, or 3.4% was due to a decrease in other noninterest income of $191,000 primarily due to a net gain on sale of real estate owned and other repossessed assets during the three months ended September 30, 2022. Mortgage banking, net, also decreased $109,000. Mortgage banking, net, includes net gain on sale of mortgage loans which decreased to $3.59 million for the three months ended September 30, 2023 compared to $4.20 million for the three months ended September 30, 2022. During the three months ended September 30, 2023, $109.02 million residential mortgage loans were sold compared to $121.26 million in the same period in the prior year. Mortgage volumes have been impacted by the current interest rate environment. Gross margin levels decreased 17 basis points from 3.46% for the three months ended September 30, 2022 to 3.29% for the three months ended September 30, 2023.

Noninterest Expense. Noninterest expense was $17.88 million for the three months ended September 30, 2023 compared to $19.49 million for the three months ended September 30, 2022, a decrease of $1.61 million or 8.3% . The decrease was primarily related to a decrease in salaries and employee benefits of $862,000 which was driven by lower commissions paid on residential mortgage originations. Data processing also decreased $478,000 due to implementing technology changes.

Provision for Income Taxes. Provision for income taxes was $524,000 for the three months ended September 30, 2023, compared to $1.03 million for the three months ended September 30, 2022 due to the increase in proportion of tax-exempt income compared to the pretax earnings. The effective tax rate was 16.6% for the current period, decreasing from 25.0% for the prior period.

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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 Nine Months Ended September 30, 2023 and 2022

Net Income. Eagle’s net income for the nine months ended September 30, 2023 was $7.89 million compared to $7.08 million for the nine months ended September 30, 2022. The increase of $813,000 was primarily due to an increase in net interest income after provision for credit losses of $2.04 million and a decrease in noninterest expense of $2.33 million, largely offset by a decrease in noninterest income of $4.01 million and a decrease in provision for income taxes of $447,000. Basic and diluted earnings per common share were both $1.01 for the current period. Basic and diluted earnings per common share were both $0.98 for the prior year comparable period.

Net Interest Income. Net interest income increased to $47.28 million for the nine months ended September 30, 2023, from $45.70 million for the same period in the prior year. The increase of $1.58 million, or 3.5%, was the result of an increase in interest and dividend income of $17.91 million largely offset by an increase in interest expense of $16.34 million.

Interest and Dividend Income. Interest and dividend income was $67.07 million for the nine months ended September 30, 2023 compared to $49.16 million for the nine months ended September 30, 2022. Interest and fees on loans increased to $57.94 million for the nine months ended September 30, 2023 from $42.93 million for the nine months ended September 30, 2022. This increase of $15.01 million, or 35.0%, 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 nine months ended September 30, 2023 were $1.42 billion, compared to $1.14 billion for the prior year period. This represents an increase of $272.83 million, or 23.8%, and was impacted by organic growth. The average interest rate earned on loans receivable also increased by 45 basis points, from 5.02% for the nine months ended September 30, 2022 to 5.47% for the current period. Interest accretion on purchased loans was $838,000 for the nine months ended September 30, 2023 which resulted in an 6 basis point increase in net interest margin compared to $1.29 million for the nine months ended September 30, 2022 which resulted in a 11 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $2.73 million period over period. The largest driver of the increase is due to average interest rates earned on investments increasing to 3.42% for the nine months ended September 30, 2023 from 2.35% for the nine months ended September 30, 2022. Average balances for investments also increased slightly to $335.90 million for the nine months ended September 30, 2023 from $332.95 million for the nine months ended September 30, 2022.

Interest Expense. Total interest expense was $19.80 million for the nine months ended September 30, 2023 compared to $3.46 million for the nine months ended September 30, 2022. The increase of $16.34 million was due to an increase of $10.32 million in interest expense on deposits, as well as a net increase of $6.01 million in interest expense on total borrowings. The overall average rate on total deposits was up from 0.13% for the nine months ended September 30, 2022 compared to 0.99% for the nine months ended September 30, 2023. In addition, the average balance for total deposits was $1.60 billion for the nine months ended September 30, 2023 compared to $1.47 billion for the nine months ended September 30, 2022 . The increase in the interest expense on total borrowings was due to the average rate paid on FHLB advances and other borrowings, which increased from 2.66% for the nine months ended September 30, 2022 to 5.28% for the nine months ended September 30, 2023. The average balance for FHLB advances and other borrowings also increased from $7.88 million for the nine months ended September 30, 2022 to $151.82 million for the nine months ended September 30, 2023. Short-term borrowings have increased to fund loan growth.

Provision for Credit Losses. Provision for credit losses was $1.19 million for the nine months ended September 30, 2023, compared to $1.65 million in loan loss provisions, prior to the adoption of the Current Expected Credit Losses standard, for the nine months ended September 30, 2022. The provision for credit losses for the nine months ended September 30, 2023 includes a provision for credit losses on loans of $1,466,000 and a decrease in the provision for unfunded commitments of $280,000.

Noninterest Income. Total noninterest income was $16.91 million for the nine months ended September 30, 2023 compared to $20.92 million for the nine months ended September 30, 2022. The decrease of $4.01 million, or 19.2% was primarily due to a decrease in mortgage banking, net, of $4.93 million. Mortgage banking, net, includes net gain on sale of mortgage loans which decreased to $8.55 million for the nine months ended September 30, 2023 compared to $15.65 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, $256.17 million residential mortgage loans were sold compared to $443.92 million in the same period in the prior year. Mortgage volumes have been impacted by the current interest rate environment. Gross margin levels decreased 18 basis points from 3.52% for the nine months ended September 30, 2022 to 3.34% for the nine months ended September 30, 2023.

Noninterest Expense. Noninterest expense was $53.20 million for the nine months ended September 30, 2023 compared to $55.53 million for the nine months ended September 30, 2022, a decrease of $2.33 million or 4.2%. The largest driver of the decrease was acquisition costs of $2.30 million incurred during the nine months ended September 30, 2022 related to the completed merger with FCB. In addition, salaries and employee benefits decreased $1.90 million and was impacted by lower commissions paid on residential mortgage originations.

Provision for Income Taxes. Provision for income taxes was $1.91 million for the nine months ended September 30, 2023, compared to $2.36 million for the nine months ended September 30, 2022. The year-to-date effective tax rate was 19.5% for the current period compared to 25.0% for same period in 2022. The anticipated effective tax rate for 2023 is lower due to the increase in proportion of tax-exempt income compared to the pretax earnings.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

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 ratios as of September 30, 2023 and December 31, 2022 .

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, for investment purposes, to meet operating expenses and capital expenditures, for dividend payments and for stock repurchases 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.

The Bank's available borrowing capacity was approximately $333.43 million as of September 30, 2023 and $419.20 million as of December 31, 2022.

	September 30,				December 31,
	2023				2022
	Borrowings		Remaining Borrowing		Borrowings		Remaining Borrowing
	Outstanding		Capacity		Outstanding		Capacity
	(Dollars in Thousands)
Federal Home Loan Bank advances	$	199,757	$	216,430	$	69,394	$	296,200
Federal Reserve Bank discount window		-		32,000		-		38,000
Correspondent bank lines of credit		-		85,000		-		85,000
Total	$	199,757	$	333,430	$	69,394	$	419,200

During the first quarter of 2023, the FRB offered a new Bank Term Funding Program ("BTFP") for eligible depository institutions. The BTFP offers loans of up to one year in length to institutions pledging collateral eligible for purchase by FRB such as U.S. treasuries, agency securities, and mortgage-backed securities. These assets will be valu ed at par. The Company is not currently utilizing the program; however, this is an additional available funding source.

In addition to bank level liquidity management, Eagle must manage liquidity at the parent company level for various operating needs, including the servicing of debt, the payment of dividends on our common stock, share repurchases, payment of general corporate expense, and potential capital infusions into subsidiaries. The primary source of liquidity for Eagle consists of dividends from the Bank, which is governed by certain rules and regulations of the Montana Division of Banking and Financial Institutions and the Federal Reserve, and access to capital markets. Eagle also had a $10.00 million line of credit with a correspondent bank. The line of credit was increased to $15.00 million as of October 30, 2023. There w as no outstanding balance for this line of credit at September 30, 2023 or December 31, 2022. Eagle's ability to receive dividends from the Bank in future periods will depend on several factors, including, without limitation, the Bank's future profits, asset quality, liquidity, and overall condition. In addition, both the Montana Division of Banking and Financial Institutions and Federal Reserve may require approval to pay dividends, based on certain regulatory statutes and limitations.

Eagle presently believes that the sources of liquidity discussed above, including existing liquid funds on hand, are sufficient to meet its anticipated funding needs in the short and long term. However, if economic conditions were to significantly deteriorate, regulatory capital requirements for Eagle or the Bank were to increase as the result of regulatory directives or otherwise, or Eagle were to believe it is prudent to enhance current liquidity levels, then Eagle may seek additional liquidity from external sources.

Capital Resources

As of September 30, 2023 , the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200 basis point rise in interest rates scenario, decreased the economic value of equity (“EVE”) by 2.50% compared to a decrease of 12.60% at December 31, 2022 . The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

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 September 30, 2023 . The Company's and the Bank's actual capital amounts and ratios as of September 30, 2023 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)
September 30, 2023:
Total risk-based capital to risk weighted assets
Consolidated	$	227,012		13.43	%	$	177,341		10.50	%		N/A		N/A
Bank		215,583		12.76			177,341		10.50			168,896		10.00	%

Tier 1 capital to risk weighted assets
Consolidated		154,562		9.14			143,562		8.50			N/A		N/A
Bank		198,133		11.73			143,562		8.50			135,117		8.00

Common equity Tier 1 capital to risk weighted assets
Consolidated		149,562		8.85			118,227		7.00			N/A		N/A
Bank		198,133		11.73			118,227		7.00			109,782		6.50

Tier 1 capital to adjusted total average assets
Consolidated		154,562		7.80			79,212		4.00			N/A		N/A
Bank		198,133		9.68			81,842		4.00			102,303		5.00

											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)
December 31, 2022:
Total risk-based capital to risk weighted assets
Consolidated	$	219,595		14.10	%	$	163,560		10.50	%		N/A		N/A
Bank		202,905		13.04			163,444		10.50			155,661		10.00	%

Tier 1 capital to risk weighted assets
Consolidated		150,595		9.67			132,406		8.50			N/A		N/A
Bank		188,905		12.14			132,312		8.50			124,529		8.00

Common equity Tier 1 capital to risk weighted assets
Consolidated		145,594		9.35			109,040		7.00			N/A		N/A
Bank		188,905		12.14			108,962		7.00			101,179		6.50

Tier 1 capital to adjusted total average assets
Consolidated		150,595		7.78			77,422		4.00			N/A		N/A
Bank		188,905		9.82			76,947		4.00			96,184		5.00

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Impact of Inflation and Changing Prices

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

Interest Rate Risk

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

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.

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


Changes in Market	Rate Sensitivity
Interest Rates	As of September 30, 2023		Policy
(Basis Points)	Year 1	Year 2	Limits

+200	-7.3%	5.0%	-15.0%
+100	-3.3%	7.8%	-10.0%
-100	3.1%	10.9%	-10.0%
-200	5.6%	11.2%	-15.0%

Critical Acc ounting Policies and Estimates

The accounting and financial reporting policies of Eagle are in accordance with generally accepted accounting principles ("GAAP") and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Eagle has identified certain of its accounting policies as “critical accounting policies,” consisting of those related to the allowance for credit losses and business combinations. In determining which accounting policies are critical in nature, Eagle has identified the policies that require significant judgment or involve complex estimates. It is management's practice to discuss critical accounting policies with the Board of Directors' Audit Committee on a periodic basis, including the development, selection, implementation, and disclosure of the critical accounting policies. The application of these policies has a significant impact on Eagle’s unaudited interim consolidated financial statements. Eagle’s financial results could differ significantly if different judgments or estimates are used in the application of these policies. All accounting policies described in "Part II - Item 8. Financial Statements and Supplementary Data - Note 1 – Organization and Summary of Significant Accounting Policies" in Eagle’s 2022 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance. There have been no significant changes to the accounting policies, estimates, and assumptions, or the judgments affecting the application of these estimates and assumptions from those disclosed in Eagle’s 2022 Form 10-K, other than the following:

The Company adopted Accounting Standards Update ("ASU") No. 2016-13 Financial Instruments - Credit Losses, referred to as the Current Expected Credit Losses ("CECL") model on January 1, 2023 and ASU No. 2022-02 Financial Instruments - Credit Losses, Troubled Debt Restructurings and Vintage Disclosures, an update to ASU No. 2016-13.

The excess of consideration paid over fair value of net assets acquired is recorded as goodwill. Goodwill is not amortized but is tested at least annually for impairment or more frequently if events occur or circumstances change that indicate impairment may exist. A goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying value. An impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value. Estimating the fair value of the reporting unit requires the use of inputs and assumptions including projected earnings of the Company in future years for which there is inherent uncertainty.

During the quarter ended September 30, 2023, Management determined that a triggering event had occurred because of a decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget. These conditions are primarily due to economic uncertainty and market volatility from the rising interest rate environment. As a result, the Company performed an interim goodwill impairment assessment as of August 31, 2023, and concluded that goodwill was not impaired. However, changing economic conditions that may adversely affect the Company's performance, the fair value of its assets and liabilities, or its stock price could result in future impairment. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management will continue to monitor events that could influence this conclusion in the future.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Item 4. Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of September 30, 2023, our disclosure controls and procedures were effective. During the last quarter, there were no changes in the Company’s internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

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, 2022, as supplemented in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2023.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On April 20, 2023, Eagle's Board of Directors authorized the repurchase of up to 400,000 shares of its common stock beginning May 1, 2023. 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 on market conditions and other corporate considerations. During the second quarter of 2023, 17,901 shares were purchased under this plan at an average price of $12.89. No shares were purchased during the third quarter of 2023 under this plan. The plan expires on May 1, 2024.

On April 21, 2022, Eagle's Board authorized the repurchase of up to 400,000 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 on market conditions and other corporate considerations. During the second quarter of 2022, 5,000 shares were purchased under this plan at an average price of $19.75. During the third quarter of 2022, 99,517 shares were purchased under this plan at an average price of $19.45. During the fourth quarter of 2022, 6,608 shares were purchased under this plan at an average price of $18.80. No shares were purchased during the first quarter of 2023 under this plan. The plan expired on April 21, 2023.

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 repurchased its shares and the timing of such repurchases depended on market conditions and other corporate considerations. No shares were purchased during the third or fourth quarter of 2021. However, during the first 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.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Part II - OTHER INFORMATION - continued

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibit 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 Laura F. Clark, 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 Laura F. Clark, 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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

SIGNATURES

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


	EAGLE BANCORP MONTANA, INC.

Date: November 9, 2023	By:	/s/ Laura F. Clark
		Laura F. Clark
		President/CEO



Date: November 9, 2023	By:	/s/ Miranda J. Spaulding
		Miranda J. Spaulding
		SVP/CFO

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TABLE OF CONTENTS

Note 1. Organization and Summary Of Significant Accounting Policies Note 1. Organization and Summary Of Significant Accounting Policies Continued Note 2. Mergers and Acquisitions Note 2. Mergers and Acquisitions Continued Note 3. Investment Securities Note 3. Investment Securities Continued Note 4. Loans Receivable Note 4. Loans Receivable Continued Note 5. Mortgage Servicing Rights Note 5. Mortgage Servicing Rights Continued Note 6. Deposits Note 7. Other Long-term Debt Note 8. Accumulated Other Comprehensive Income (loss)Note 9. Earnings Per Common Share Note 10. Derivatives and Hedging Activities Note 11. Fair Value Of Financial Instruments Note 11. Fair Value Of Financial Instruments Continued Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II - Other Information Part II - Other Information - Continued

Exhibits

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 Laura F. Clark, 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 Laura F. Clark, 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.

EBMT 10-Q Quarter ended Sept. 30, 2023

Exhibits