# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Sep 30, 2020

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2020-11-05
- Accepted by EDGAR: Nov 5, 2020, 12:27 ET
- Period: 2020-09-30
- Accession: 0001437749-20-022714
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000143774920022714/ebmt20200930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000143774920022714/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $1.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $5.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $5.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $6.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $16.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.94 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $2.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.94 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $2.36 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 6,813,739 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 6,833,929 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $3.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $15.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2020-01-01 to 2020-09-30 | $2.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $987.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $72.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-09-30 | $1.26bn | us-gaap:Assets |
| Total liabilities | at 2020-09-30 | $1.11bn | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $29.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2020-09-30 | $147.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 61,220 characters.

### Overview

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

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

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

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

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee changed the federal funds target rate from 2.50% to 1.75% during the year ended December 31, 2019. The rate decreased from 1.75% to 0.25% during the nine months ended September 30, 2020. The rate reductions add continued pressure on loan yields.

### Recent Events

### COVID-19

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Recent Events– continued

### COVID-19 – continued

The Bank has offered multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. In addition, during the three months ended September 30, 2020, the Montana Board of Investments ("MBOI") began offering 12-months of interest payment assistance to qualified borrowers. As of September 30, 2020, loan modifications for 66 borrowers represented $55.21 million in loans compared to 315 borrowers representing $125.71 million as of June 30, 2020. The Bank qualified 26 borrowers for the MBOI program representing $23.68 million in loans, which are included in the third quarter modifications. As of September 30, 2020 there were approximately 76 forbearances approved for residential mortgage loans, of which 68 are sold and serviced. Our interest income in future periods could be reduced as a result of such measures. In addition, it is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged. Utilization of credit lines were 83.4% at the end of the third quarter and were consistent with the previous quarter and historical usage. The Paycheck Protection Program has provided some temporary relief to small business customers of Eagle but the extent of the impact the pandemic will have on businesses’ ability to sustain operations is unclear at this point. Eagle will continue to closely monitor each of its loans for risk.

Our fee income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, early withdrawal fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) providing economic relief for the country, including the $349 billion Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) to fund short-term loans for small businesses. In April 2020, additional funding was approved for the PPP. Eagle began taking loan applications from its small business clients immediately after the program was implemented, and as of September 30, 2020, had helped 758 customers receive $45.22 million in SBA PPP loans. The Bank has started to process applications for PPP loan forgiveness for customers, with 569 loans representing $9.92 million of the total SBA PPP loans qualifying for the streamlined PPP loan forgiveness application.

As of September 30, 2020, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.

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

As of September 30, 2020, our goodwill was not impaired. COVID-19 could cause a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At September 30, 2020 we had goodwill of $20.80 million.

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Recent Events– continued

### Acquisitions

The Bank has used growth through mergers or acquisition in addition to its strategy of organic growth. In August 2018, the Company entered into an Agreement and Plan of Merger with Big Muddy Bancorp, Inc. (“BMB”), a Montana corporation, and BMB’s wholly-owned subsidiary, The State Bank of Townsend, a Montana chartered commercial bank (“SBOT”). SBOT operated four branches in Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities, throughout the state. On January 1, 2019, BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. The total consideration paid was $16.44 million and it was primarily related to common stock issued.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Financial Condition

Comparisons of financial condition in this section are between September 30, 2020 and December 31, 2019.

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

### Financial Condition Details

### Investment Activities

The following table summarizes investment activities:

*(Dollars in Thousands)*

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Financial Condition – continued

### Lending Activities

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

*(Dollars in thousands)*

| Real estate loans: | September 30, 2020 Amount | Percent of Total | December 31, 2019 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| Residential 1-4 family (1) | $110,021 | 12.93% | $119,296 | 15.28% |
| Residential 1-4 family construction | 42,814 | 5.03% | 38,602 | 4.95% |
| Total residential 1-4 family | 152,835 | 17.96% | 157,898 | 20.23% |
| Commercial real estate | 308,485 | 36.24% | 331,062 | 42.41% |
| Commercial construction and development | 56,927 | 6.69% | 52,670 | 6.75% |
| Farmland | 67,061 | 7.88% | 50,293 | 6.44% |
| Total commercial real estate | 432,473 | 50.81% | 434,025 | 55.60% |
| Total real estate loans | 585,308 | 68.77% | 591,923 | 75.83% |
| Other loans: |  |  |  |  |
| Home equity | 61,460 | 7.22% | 56,414 | 7.23% |
| Consumer | 20,694 | 2.43% | 18,882 | 2.42% |
| Commercial | 123,303 | 14.49% | 72,797 | 9.33% |
| Agricultural | 60,308 | 7.09% | 40,522 | 5.19% |
| Total commercial | 183,611 | 21.58% | 113,319 | 14.52% |
| Total other loans | 265,765 | 31.23% | 188,615 | 24.17% |
| Total loans | 851,073 | 100.00% | 780,538 | 100.00% |
| Deferred loan fees | (2,595) |  | (1,303) |  |
| Allowance for loan losses | (11,300) |  | (8,600) |  |
| Total loans, net | $837,178 |  | $770,635 |  |

(1) Excludes loans held-for-sale.

Loans receivable, net increased $66.54 million, or 8.6%, to $837.18 million at September 30, 2020 from $770.64 million at December 31, 2019. The increase was impacted by the WHC acquisition. The WHC acquisition included $43.42 million of acquired loans. Excluding acquired loans, loans receivable increased by $23.12 million. Including acquired loans, total commercial loans increased $70.29 million, total commercial real estate loans decreased $1.56 million, total residential loans decreased $5.06 million, home equity loans increased $5.05 million and consumer loans increased $1.81 million.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Financial Condition – continued

### Lending Activities– continued

Total loan originations were $928.87 million for the nine months ended September 30, 2020. Total residential 1-4 family originations were $678.24 million, which includes $636.77 million of loans held-for-sale originations. Total commercial real estate originations were $101.58 million. Total commercial originations were $115.63 million, which includes $45.71 million of SBA PPP loans. Home equity loan originations totaled $23.93 million. Consumer loan originations totaled $9.49 million. Loans held-for-sale increased by $15.87 million to $41.48 million at September 30, 2020 from $25.61 million at December 31, 2019.

Generally, our collection procedures provide that when a loan is 15 or more days delinquent, the borrower is sent a past due notice. If the loan becomes 30 days delinquent, the borrower is sent a written delinquency notice requiring payment. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower, including face to face meetings and counseling to resolve the delinquency. All collection actions are undertaken with the objective of compliance with the Fair Debt Collection Act.

For mortgage loans and home equity loans, if the borrower is unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions. If a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until such time as it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial recording of any loss is charged to the allowance for loan losses. Subsequent write-downs are recorded as a charge to operations. As of September 30, 2020 and December 31, 2019, the Bank had $25,000 and $26,000, respectively, of real estate owned and other repossessed property.

The State of Montana placed a freeze on foreclosures on March 28, 2020. Subsequently it released the freeze effective May 24, 2020 with the exception of continued protection for those individuals deemed vulnerable to the coronavirus. The Bank has had minimal impact due to foreclosures affected by this freeze.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Financial Condition – continued

### Lending Activities– continued

The following table sets forth information regarding nonperforming assets:

*(Dollars in Thousands)*

| Non-accrual loans Real estate loans: | September 30, 2020 | December 31, 2019 |
| --- | ---: | ---: |
| Residential 1-4 family | $694 | $618 |
| Residential 1-4 family construction | 337 | 337 |
| Commercial real estate | 916 | 583 |
| Commercial construction and development | - | 50 |
| Farmland | 1,435 | 323 |
| Other loans: |  |  |
| Home equity | 97 | 78 |
| Consumer | 163 | 156 |
| Commercial | 668 | 750 |
| Agricultural | 1,290 | 499 |
| Accruing loans delinquent 90 days or more |  |  |
| Real estate loans: |  |  |
| Residential 1-4 family | - | 4 |
| Commercial real estate | 57 | - |
| Other loans: |  |  |
| Agricultural | - | 1,805 |
| Restructured loans: |  |  |
| Real estate loans: |  |  |
| Commercial real estate | 1,633 | - |
| Commercial construction and development | 14 | - |
| Farmland | - | 153 |
| Other loans: |  |  |
| Home equity | 18 | 20 |
| Commercial | - | 74 |
| Agricultural | 160 | - |
| Total nonperforming loans | 7,482 | 5,450 |
| Real estate owned and other repossessed property, net | 25 | 26 |
| Total nonperforming assets | $7,507 | $5,476 |
| Total nonperforming loans to total loans | 0.88% | 0.70% |
| Total nonperforming loans to total assets | 0.60% | 0.52% |
| Total allowance for loan loss to nonperforming loans | 151.03% | 157.80% |
| Total nonperforming assets to total assets | 0.60% | 0.52% |

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Financial Condition – continued

### Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

*(Dollars in Thousands)*

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

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

The following table summarizes borrowing activity:

*(Dollars in Thousands)*

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

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

### Shareholders’ Equity

Total shareholders’ equity increased $25.70 million, or 21.1%, to $147.36 million at September 30, 2020 from $121.66 million at December 31, 2019. This was primarily the result of stock issued in connection with the WHC acquisition of $8.47 million, net income of $16.04 million and other comprehensive income of $3.69 million. These increases were slightly offset by dividends paid of $1.96 million and stock repurchases of $987,000.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Analysis of Net Interest Income

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

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

*(Dollars in Thousands)*

| Assets: Interest earning assets: | For the Three Months Ended September 30, 2020 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) | 2019 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $163,102 | $874 | 2.13% | $134,980 | $916 | 2.69% |
| FHLB and FRB stock | 6,299 | 95 | 5.98% | 8,049 | 107 | 5.27% |
| Loans receivable(1) | 902,543 | 11,340 | 4.98% | 779,770 | 10,731 | 5.46% |
| Other earning assets | 43,662 | 30 | 0.27% | 4,188 | 19 | 1.80% |
| Total interest earning assets | 1,115,606 | 12,339 | 4.39% | 926,987 | 11,773 | 5.04% |
| Noninterest earning assets | 129,312 |  |  | 100,911 |  |  |
| Total assets | $1,244,918 |  |  | $1,027,898 |  |  |
| Liabilities and equity: |  |  |  |  |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Deposit accounts: |  |  |  |  |  |  |
| Checking | $157,542 | $13 | 0.03% | $114,820 | $11 | 0.04% |
| Savings | 160,118 | 33 | 0.08% | 119,555 | 24 | 0.08% |
| Money market | 176,276 | 102 | 0.23% | 121,588 | 109 | 0.36% |
| Certificates of deposit | 200,527 | 631 | 1.25% | 213,073 | 878 | 1.63% |
| Advances from FHLB and other borrowings including long-term debt | 108,427 | 782 | 2.86% | 136,306 | 1,052 | 3.06% |
| Total interest bearing liabilities | 802,890 | 1,561 | 0.77% | 705,342 | 2,074 | 1.17% |
| Noninterest checking | 276,580 |  |  | 188,291 |  |  |
| Other noninterest bearing liabilities | 21,840 |  |  | 15,753 |  |  |
| Total liabilities | 1,101,310 |  |  | 909,386 |  |  |
| Total equity | 143,608 |  |  | 118,512 |  |  |
| Total liabilities and equity | $1,244,918 |  |  | $1,027,898 |  |  |
| Net interest income/interest rate spread(2) |  | $10,778 | 3.62% |  | $9,699 | 3.87% |
| Net interest margin(3) |  |  | 3.83% |  |  | 4.15% |
| Total interest earning assets to interest bearing liabilities |  |  | 138.95% |  |  | 131.42% |

(1) Includes loans held-for-sale.

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

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

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

\- 43 -

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

### Analysis of Net Interest Income – continued

*(Dollars in Thousands)*

| Assets: Interest earning assets: | For the Nine Months Ended September 30, 2020 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) | 2019 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $168,170 | $2,853 | 2.26% | $137,533 | $2,802 | 2.72% |
| FHLB and FRB stock | 6,934 | 284 | 5.46% | 7,582 | 297 | 5.24% |
| Loans receivable(1) | 870,114 | 33,832 | 5.18% | 753,541 | 31,378 | 5.57% |
| Other earning assets | 34,309 | 134 | 0.52% | 3,984 | 55 | 1.85% |
| Total interest earning assets | 1,079,527 | 37,103 | 4.58% | 902,640 | 34,532 | 5.11% |
| Noninterest earning assets | 124,192 |  |  | 95,835 |  |  |
| Total assets | $1,203,719 |  |  | $998,475 |  |  |
| Liabilities and equity: |  |  |  |  |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Deposit accounts: |  |  |  |  |  |  |
| Checking | $147,054 | $47 | 0.04% | $115,549 | $33 | 0.04% |
| Savings | 149,129 | 118 | 0.11% | 118,972 | 61 | 0.07% |
| Money market | 160,477 | 362 | 0.30% | 121,907 | 305 | 0.33% |
| Certificates of deposit | 224,251 | 2,536 | 1.51% | 205,396 | 2,334 | 1.52% |
| Advances from FHLB and other borrowings including long-term debt | 115,861 | 2,362 | 2.72% | 131,011 | 3,031 | 3.09% |
| Total interest bearing liabilities | 796,772 | 5,425 | 0.91% | 692,835 | 5,764 | 1.11% |
| Noninterest checking | 250,132 |  |  | 179,539 |  |  |
| Other noninterest bearing liabilities | 18,935 |  |  | 12,487 |  |  |
| Total liabilities | 1,065,839 |  |  | 884,861 |  |  |
| Total equity | 137,880 |  |  | 113,614 |  |  |
| Total liabilities and equity | $1,203,719 |  |  | $998,475 |  |  |
| Net interest income/interest rate spread(2) |  | $31,678 | 3.67% |  | $28,768 | 4.00% |
| Net interest margin(3) |  |  | 3.91% |  |  | 4.26% |
| Total interest earning assets to interest bearing liabilities |  |  | 135.49% |  |  | 130.28% |

(1) Includes loans held-for-sale.

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

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

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

\- 44 -

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.

*(In Thousands)*

| Interest earning assets: | For the Three Months Ended September 30, 2020 Volume | Due to Rate | Net | 2019 Volume | Due to Rate | Net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $191 | $(233) | $(42) | $(114) | $(6) | $(120) |
| FHLB and FRB stock | (24) | 12 | (12) | 19 | 8 | 27 |
| Loans receivable(1) | 1,690 | (1,081) | 609 | 2,452 | 578 | 3,030 |
| Other earning assets | 179 | (168) | 11 | 25 | (14) | 11 |
| Total interest earning assets | 2,036 | (1,470) | 566 | 2,382 | 566 | 2,948 |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Checking, savings and money market accounts | 61 | (57) | 4 | 11 | 60 | 71 |
| Certificates of deposit | (52) | (195) | (247) | 142 | 275 | 417 |
| Advances from FHLB and other borrowings including long-term debt | (215) | (55) | (270) | 156 | 82 | 238 |
| Total interest bearing liabilities | (206) | (307) | (513) | 309 | 417 | 726 |
| Change in net interest income | $2,242 | $(1,163) | $1,079 | $2,073 | $149 | $2,222 |

(1) Includes loans held-for-sale.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Rate/Volume Analysis – continued

*(In Thousands)*

| Interest earning assets: | For the Nine Months Ended September 30, 2020 Volume | Due to Rate | Net | 2019 Volume | Due to Rate | Net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $624 | $(573) | $51 | $(300) | $56 | $(244) |
| FHLB and FRB stock | (25) | 12 | (13) | 54 | 10 | 64 |
| Loans receivable(1) | 4,854 | (2,400) | 2,454 | 6,549 | 2,394 | 8,943 |
| Other earning assets | 419 | (340) | 79 | 7 | 4 | 11 |
| Total interest earning assets | 5,872 | (3,301) | 2,571 | 6,310 | 2,464 | 8,774 |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, money market and checking accounts | 121 | 7 | 128 | 29 | 147 | 176 |
| Certificates of deposit | 214 | (12) | 202 | 311 | 792 | 1,103 |
| Advances from FHLB and other borrowings including long-term debt | (351) | (318) | (669) | 451 | 410 | 861 |
| Total interest bearing liabilities | (16) | (323) | (339) | 791 | 1,349 | 2,140 |
| Change in net interest income | $5,888 | $(2,978) | $2,910 | $5,519 | $1,115 | $6,634 |

(1) Includes loans held-for-sale.

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

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

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

*Interest Expense.* Total interest expense was $1.56 million for the three months ended September 30, 2020 compared to $2.07 million for the three months ended September 30, 2019. The decrease of $513,000 or 24.7% was due to a decrease in interest expense on deposits of $243,000, as well as a decrease in interest expense on total borrowings of $270,000. The average balance for total deposits was $971.04 million for three months ended September 30, 2020 compared to $757.33 million for the three months ended September 30, 2019. This increase was impacted by the WHC acquisition. However, the overall average rate on total deposits was 0.32% for the three months ended September 30, 2020 compared to 0.54% for the three months ended September 30, 2019. The average balance for total borrowings decreased from $136.31 million for the three months ended September 30, 2019 to $108.43 million for the three months ended September 30, 2020. The average rate paid on total borrowings also decreased from 3.06% for the three months ended September 30, 2019, to 2.86% for the three months ended September 30, 2020.

*Loan Loss Provision*. Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the review of assets on a quarterly basis. The Bank classifies loans if warranted. While management believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. Using this methodology, the Bank recorded $450,000 in loan loss provisions for the three months ended September 30, 2020. Additionally, management considered the potential impact of COVID-19. Due to the economic slowdown, an increase in the related economic factors was included in the allowance for loan losses analysis and the loan loss reserves was increased by approximately $404,000. Therefore, the total loan loss provision for the three months ended September 30, 2020 was $854,000. Loan loss provisions were $694,000 for the three months ended September 30, 2019. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. However, if the economic forecast worsens relative to the assumptions we utilized, our allowance for credit losses will increase accordingly in future periods

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

*Noninterest Expense.* Noninterest expense was $16.35 million for the three months ended September 30, 2020 compared to $12.22 million for the three months ended September 30, 2019. The increase of $4.13 million or 33.8% is primarily due to increased salaries and employee benefits expense of $3.77 million. The increase in salaries expense is due in part to higher commission-based compensation related to mortgage loan growth and additional staff related to compliance with mortgage rules. Mortgage compensation and benefits increased $1.64 million for the three months ended September 30, 2020 compared to the same period in the prior year. Salaries and employee benefits expense was also impacted by the addition of staff partly due to the WHC acquisition.

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

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

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

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

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

\- 47 -

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

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

*Interest Expense.* Total interest expense was $5.43 million for the nine months ended September 30, 2020 compared to $5.76 million for the nine months ended September 30, 2019. The decrease of $339,000 or 5.9% was due to a decrease in interest expense on total borrowings of $669,000, partially offset by an increase in interest expense on deposits of $330,000. The average balance for total deposits was $931.04 million for nine months ended September 30, 2020 compared to $741.36 million for the nine months ended September 30, 2019. This increase was impacted by the WHC acquisition and also increased non-maturing deposits due to PPP funding and economic stimulus. However, the overall average rate on total deposits decreased to 0.44% for the nine months ended September 30, 2020 compared to 0.49% for the nine months ended September 30, 2019. The average balance for total borrowings decreased from $131.01 million for the nine months ended September 30, 2019 to $115.86 million for the nine months ended September 30, 2020. The average rate paid on total borrowings also decreased from 3.09% for the nine months ended September 30, 2019, to 2.72% for the nine months ended September 30, 2020.

*Loan Loss Provision*. Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the review of assets on a quarterly basis. The Bank classifies loans if warranted. While management believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. Using this methodology, the Bank recorded $1.35 million in loan loss provisions for the nine months ended September 30, 2020. Additionally, management considered the potential impact of COVID-19. Due to the economic slowdown, an increase in the related economic factors was included in the allowance for loan losses analysis and the loan loss reserves was increased by approximately $1.40 million. Therefore, the total loan loss provision for the nine months ended September 30, 2020 was $2.75 million. Loan loss provisions were $2.00 million for the nine months ended September 30, 2019. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. However, if the economic forecast worsens relative to the assumptions we utilized, our allowance for credit losses will increase accordingly in future periods. Total nonperforming loans, including restructured loans, net, was $7.48 million at September 30, 2020 compared to $5.45 million at December 31, 2019. The Bank had $25,000 in other real estate owned and other repossessed assets at September 30, 2020 compared to $26,000 at December 31, 2019.

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

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

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

### Liquidity and Capital Resources

### Liquidity

The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and FRB regulations. The liquidity requirement is retained for safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Des Moines. The Bank exceeded those minimum ratios as of September 30, 2020 and December 31, 2019.

\- 48 -

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Liquidity and Capital Resources - continued

The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Des Moines and other borrowings. Scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are generally predictable. However, other sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity, and meet operating expenses.

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

Through the quarter ended September 30, 2020, liquidity levels remained relatively consistent with the prior quarters. Despite significant liquidity events during the quarter ended September 30, 2020, liquidity levels remained stable. Elevated cash levels from deposit growth sparked by PPP funds deposited, tax refunds, economic stimulus money and flight to quality was only partially offset by the increase in PPP loans. Subsequent to the end of the first quarter, and in coordination with the roll out of the PPP, Eagle was approved for short-term funding through the FRB Discount Window. The discount window has not been utilized; however, Eagle has utilized the FRB's PPPLF facility as a partial source for its SBA PPP loans. As of September 30, 2020, the Bank had $23.79 million in PPPLF borrowings secured by $23.79 million PPP loans at a rate of 0.35%. As the PPP loans are repaid, it is currently anticipated Eagle will repay Federal Reserve borrowings. The Company closed a $15.00 million subordinated debt offering in June of 2020, adding to borrowings. In July, $10.00 million in callable subordinated debt was paid off, reducing overall borrowings.

### Capital Resources

As of September 30, 2020, the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200 basis point rise in interest rates scenario, increased the economic value of equity (“EVE”) by 34.0% compared to an increase of 10.6% at December 31, 2019. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

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

*(Unaudited)*

*(Dollars in Thousands)*

| Total risk-based capital to risk weighted assets: | September 30, 2020 Dollar Amount | % of Assets |
| --- | ---: | ---: |
| Actual capital level | $147,332 | 16.17% |
| Minimum required for capital adequacy purposes | 95,660 | 10.50% |
| Excess capital | $51,672 | 5.67% |
| Tier I capital to risk weighted assets: |  |  |
| Actual capital level | $136,032 | 14.93% |
| Minimum required for capital adequacy purposes | 77,439 | 8.50% |
| Excess capital | $58,593 | 6.43% |
| Common equity tier I capital to risk weighted assets: |  |  |
| Actual capital level | $136,032 | 14.93% |
| Minimum required for capital adequacy purposes | 63,773 | 7.00% |
| Excess capital | $72,259 | 7.93% |
| Tier I capital to adjusted total average assets: |  |  |
| Actual capital level | $136,032 | 11.54% |
| Minimum required for capital adequacy purposes | 47,138 | 4.00% |
| Excess capital | $88,894 | 7.54% |

\- 49 -

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

### Impact of Inflation and Changing Prices

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

### Interest Rate Risk

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

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

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

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

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

| Changes in Market Interest Rates (Basis Points) | Rate Sensitivity As of September 30, 2020 Year 1 | Year 2 | Policy Limits |
| ---: | ---: | ---: | ---: |
| +200 | 4.70% | 9.20% | -15.00% |
| -100 | -1.10% | -3.00% | -10.00% |

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

## Market risk

As filed, 162 characters.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONTROLS AND PROCEDURES

## Controls and procedures

As filed, 1,325 characters.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

## Risk factors

As filed, 230 characters.

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

Filed Nov 5, 2020.
Source: SEC EDGAR, the filing index for accession 0001437749-20-022714. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.