ITEM1A. | RISK FACTORS |
We hold certain intangible assets that could be classified as impaired in the future.If these assets are considered to be either partially or fully impaired in the future, our earnings and the book values of these assets would decrease.
As a result of theour branch acquisition from Sterling in December 2012, the final goodwill recorded related to the acquisition was $7.03 million.and whole bank acquisitions we record goodwill. We are required to test our goodwill for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. It is possible that future impairment testing could result in a partial or full impairment of the value of our goodwill. If an impairment determination is made in a future reporting period, our earnings and the book value of goodwill will be reduced by the amount of the impairment.
Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
Changes in the structure of Fannie Mae and Freddie Mac (“GSEs”) and the relationship among the GSEs, the federal government and the private markets, or the conversion of the current conservatorship of the GSEs into receivership, could result in significant changes to our securities portfolio.
The GSEs are currently in conservatorship, with their primary regulator, the Federal Housing Finance Agency, acting as conservator. We cannot predict if, when or how the conservatorships will end, or any associated changes to the GSEs’ business structure that could result. There are several proposed approaches, including possible legislative changes in discussion in both the House Financial Services Committee and the Senate Banking Committee which, if enacted, could change the nature of government participation in the private mortgage market or alternatively the structure of the GSEs, the relationship among the GSEs, the government and the private markets, including the trading markets for agency conforming mortgage loans and markets for mortgage-related securities in which we participate. We cannot predict the prospects for the enactment, timing or content of legislative or rulemaking proposals regarding the future status of any of these approaches. Accordingly, there continues to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form. GSE reform, if enacted, could result in a significant change and adversely impact our business operations, particularly as to our residential mortgage lending activities.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally and in our statesmarket areas in particular.
Our financial performance generally, and in particular the ability of our borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer and whose success we rely on to drive our future growth, is highly dependent upon the business environment in the markets in which we operate, principally in Montana, and in the United States as a whole. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in Montana. The economic conditions in our local markets may be different from, and in some instances worse than, the economic conditions in the United States as a whole. Some elements of the business environment that affect our financial performance include short-term andlong-termand long-term interest rates, the prevailing yield curve, inflation and price levels, monetary policy, unemployment and the strength of the domestic economy and the local economy in the markets in which we operate. Unfavorable market conditions can result in deterioration in the credit quality of our borrowers and thedemand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for loan and lease losses, adverse asset values and an overall material adverse effect on the quality of our loan portfolio. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; state or local government insolvency; or a combination of these or other factors.
In recent years, economic growth and business activity across a wide range of industries and regions in the U.S. has been slow and uneven. There are continuing concerns related to the level of U.S. government debt and fiscal actions that may be taken to address that debt, further declining oil prices and ongoing federal budget negotiations that may have a destabilizing effect on financial markets. There can be no assurance that economic conditions will continue to improve, and these conditions could worsen. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and saving habits. Such conditions could have a material adverse effect on the credit quality of our loans or our business, financial condition or results of operations.
If the allowance for credit loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If the assumptions prove to be incorrect, the allowance for creditloan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income.
Our emphasis on the origination of consumer, commercial real estate and commercial business loans is one of the more significant factors in evaluating the allowance for loan losses. As we continue to increase the amount of such loans, additional or increased provisions for loan losses may be necessary and would decrease earnings.
Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or financial condition.
We could record future losses on our securities portfolio.
A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss exists with respect to our investment securities portfolio that constitutes an impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers deteriorates and there is limited liquidity for these securities.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.
Our accounting policies are essential to understanding our financial results and condition. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.
From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could also be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.
Because we have increased our commercial real estate and commercial business loan originations, our credit risk has increased and continued downturns in the local real estate market or economy could adversely affect our earnings.
We intend to continue our recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than the residential real estate (1-4 family) loans we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.
Declines in home values could decrease our loan originations and increase delinquencies and defaults.
Declines in home values in our markets could adversely impact results from operations. Like all financial institutions, we are subject to the effects of any economic downturn, and in particular, a significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios. Declines in the average sale prices of homes in our primary markets could lead to higher loan losses.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services to our customers. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. Failure to successfully keep pace with technological change affecting the financial services industry and avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of operations.
We expect that new technologies and business processes applicable to the consumer credit industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to maintain current technology and business processes could cause disruptions in our operations or cause our products and services to be less competitive, all of which could have a material adverse effect on our business, financial condition or results of operations.
We depend on the services of our executive officers and other key employees.
Our success depends upon the continued employment of certain members of our senior management team. We also depend upon the continued employment of the individuals that manage several of our key functional areas. The departure of any member of our senior management team may adversely affect our operations.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits, borrowings and trust preferred securities. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income.
Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates.
Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates.
We may be impacted by the retirement of London Interbank Offered Rate (“LIBOR”) as a reference rate.
In July of 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), the regulatory agency that oversees LIBOR, announced that LIBOR rates may no longer be published after 2021. In response, the Alternative Reference Rate Committee (“ARRC”) convened to study potential replacement rates to be used as benchmarks. The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as a potential successor rate to LIBOR and published its Paced Transition Plan to encourage the adoption of SOFR. However, there are some key technical and conceptual differences between LIBOR and SOFR.
At this time, there is no consensus as to which rates may become acceptable alternatives to LIBOR, and it is impossible to predict how the alternatives will affect the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements. This uncertainty may adversely affect LIBOR rates and if LIBOR rates are no longer available, the Company may incur expenses in implementing substitute indices.
We earn a significant portion of our noninterest income through sales of residential mortgages in the secondary market. market. We rely on the mortgage secondary market for some of our liquidity.
Our noninterest income attributable to mortgage banking activities has grown significantly in recent years. We originate and sell mortgage loans, including $308.68$480.05 million of mortgage loans sold during 2016.2019. We rely on Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other purchasers to purchase loans in order to reduce our credit risk and provide funding for additional loans we desire to originate. We cannot provide assurance that these purchasers will not materially limit their purchases from us due to capital constraints or other factors, including, with respect to FNMA and FHLMC, a change in the criteria for conforming loans. In addition, various proposals have been made to reform the U.S. residential mortgage finance market, including the role of FNMA and FHLMC. The exact effects of any such reforms are not yet known, but may limit our ability to sell conforming loans to FNMA and FHLMC. In addition, mortgage lending is highly regulated, and our inability to comply with all federal and state regulations and investor guidelines regarding the origination, underwriting documentation and servicing of mortgage loans may also impact our ability to continue selling mortgage loans. If we are unable to continue to sell loans in the secondary market or we experience a period of low mortgage activity, our noninterest income as well as our ability to fund, and thus originate, additional mortgage loans may be adversely affected, which could have a material adverse effect on our business, financial condition or results of operations.
We have identified a material weakness in our internal control over financial reporting, and any inability to maintain effective internal control over financial reporting could have a material adverse effect on our business and stock price.
We are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. We are required to have our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting.
During the course of preparing our audited financial statements for our 2019 Form 10-K, we, in conjunction with our independent registered public accounting firm, concluded that a lack of adequate controls in connection with the review of manual journal entries constituted a material weakness in our internal control over financial reporting. Specifically, the design of the manual journal entry review control did not ensure that all manual journal entries were captured and independently reviewed, thus management could not ensure that all entries were accurate and could not verify all manual journal entries contained sufficient supporting documentation. The material weakness did not result in any identified misstatement to the financial statements, and there were no changes to previously released financial results. However, the control deficiencies created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.These deficiencies in design and operating effectiveness are considered a material weakness because they could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews at a level of precision necessary to identify a material error.
A material weakness is a deficiency, or combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal controls that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
While we are taking steps to address the identified material weakness and prevent additional material weaknesses from occurring, there is no guarantee that these steps will be sufficient to remediate the identified material weakness or prevent additional material weaknesses from occurring. If we fail to remediate the material weakness, or if additional material weaknesses are discovered in the future, we may fail to meet our future reporting obligations and our financial statements may contain material misstatements. Any such failure could also adversely affect the results of the periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting.
There can be no assurance we will be able to continue paying dividends on our common stock at recent levels.
We may not be able to continue paying quarterly dividends commensurate with recent levels given that the ability to pay dividends on our common stock depends on a variety of factors. The payment of dividends is subject to government regulation in that the regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. Our ability to pay dividends is subject to certain regulatory requirements. The Federal Reserve generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of a subsidiary bank or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The Federal Reserve Board policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.
As a result, future dividends will generally depend on the level of earnings at the Bank. The Bank is subject to Montana law and, in certain circumstances, Montana law places limits or restrictions on a bank’s ability to declare and pay dividends. Also, in the event there shall occur an event of default on any of our debt instruments, we would be unable to pay any dividends on our common stock.
Our business strategy includes significant growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We intend to pursue an organic growth strategy for our business; however, we regularly evaluate potential acquisitions and expansion opportunities. If appropriate opportunities present themselves, we expect to engage in selected acquisitions of financial institutions, branch acquisitions and other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful. There are risks associated with our growth strategy. To the extent that we grow through acquisitions, we cannot ensure that we will be able to adequately or profitably manage this growth.
Acquiring other banks, branches or other assets, as well as other expansion activities, involves various risks including the risks of incorrectly assessing the credit quality of acquired assets, encountering greater than expected costs of integrating acquired banks or branches, the risk of loss of customers and/or employees of the acquired institution or branch, executing cost savings measures, not achieving revenue enhancements and otherwise not realizing the transaction’s anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic efforts may divert resources or management’s attention from ongoing business operations, may require investment in integration and in development and enhancement of additional operational and reporting processes and controls and may subject us to additional regulatory scrutiny.
Our growth initiatives may also require us to recruit and retain experienced personnel to assist in such initiatives. Accordingly, the failure to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, to the extent we expand our lending beyond our current market areas, we could incur additional risks related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.
If we do not successfully execute our acquisition growth plan, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge, which would adversely affect our results of operations. While we believe we will have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.
We may be unsuccessful in integrating the operations of the business we have acquired or expect to acquire in the future.
From time to time, we evaluate and acquire businesses that we believe complement our existing business. The acquisition component of our growth strategy depends on the successful integration of these acquisitions. We face numerous risks and challenges to the successful integration of acquired businesses, including the following:
● | the potential for unexpected costs, delays and challenges that may arise in integrating acquisitions into our existing business; |
● | limitations on our ability to realize the expected cost savings and synergies from an acquisition; |
● | challenges related to integrating acquired operations, including our ability to retain key employees and maintain relationships with significant customers and depositors; |
● | challenges related to the integration of businesses that operate in new geographic areas, including difficulties in identifying and gaining access to customers in new markets; and |
● | the discovery of previously unknown liabilities following an acquisition associated with the acquired business. |
If we are unable to successfully integrate the businesses we acquire, our business, financial condition and results of operations may be materially adversely affected.
Strong competition may limit growth and profitability.
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve Board and the Montana Division of Banking and Financial Institutions. The federal banking laws and regulations govern the activities in which we may engage, and are primarily for the protection of depositors and the Deposit Insurance Fund at the FDIC. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.
Financial reform legislation enacted by Congress will,has, among other things, tightentightened capital standards, createcreated a new Consumer Financial Protection Bureau and resultresulted in new laws and regulations that are expected to increase our costs of operations.
Since the recent financial crisis, federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, have undergone substantial review and change. In particular, the Dodd-Frank Act drastically revised the laws and regulations under which we operate. Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities.
The Dodd-Frank Act created the Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators, which in the case of the Bank is the FRB.
It is difficult to predict at this time what impact the Dodd-Frank Act and its implementing rules will have on community banks like the Bank. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.
If our investment in the Federal Home Loan Bank of Des Moines becomes impaired, our earnings and shareholders’ equity could decrease.
We are required to own common stock of the Federal Home Loan Bank of Des Moines (‘FHLB”) to qualify for membership in the FHLB System and to be eligible to borrow funds under the FHLB’s advance program. The aggregate cost of our FHLB common stock as of December 31, 20162019 was $4.01$4.68 million. FHLB common stock is not a marketable security and can only be redeemed by the FHLB.
FHLB’s may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a FHLB, including the FHLB of Des Moines, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB of Des Moines common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and shareholders’ equity to decrease by the amount of the impairment charge.
Future legislative or regulatory actions responding to perceived financial and market problems could impair our ability to foreclose on collateral.
There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be adopted, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.
ITEM1B. | UNRESOLVED STAFF COMMENTS. |
None.
ITEM2. | PROPERTIES. |
Eagle’s and the Bank’s executive office is located at 1400 Prospect Avenue in Helena, Montana. TheAs of December 31, 2019, the Bank conductsconducted its business through 1624 offices. These offices are located in Helena, Butte, Bozeman, Townsend, Livingston, Big Timber, Billings, Missoula, and Hamilton, Montana. A loan production office was opened in Great Falls, Montana in January 2015.Sheridan, Twin Bridges, Choteau, Denton and Dutton, Montana. The Bozeman – Mendenhall Branch that wasSheridan and Twin Bridges branches were acquired in 20122018 as part of the Sterling MontanaTwinCo acquisition. The Choteau, Denton, Dutton and Townsend branches were acquired in 2019 as part of the BMB acquisition. In addition, a branch acquisitionin Wolf Point was soldacquired in June 2015 and was relocated to a leased location.2020 as part of the WHC acquisition. The principal banking office in Helena also serves as the executive headquarters. This headquarters houses approximately 33.0%28.0% of the Bank’s full-time employees. In addition, an operations center is located in Helena. The following table includes the location of each of the Bank’s offices, the year the office was opened and the net book value including land, buildings and furnitureof premises and equipment. The square footage at each location is also presented.
Value At | Value At | ||||||||||||||||||||
December 31, 2016 | Square | December 31, 2019 | Square | ||||||||||||||||||
Location | Address | Opened | (In Thousands) | Footage | Address | Opened | (In Thousands) | Footage | |||||||||||||
Helena Main Office | 1400 Prospect Ave. | 1997 | $ | 3,226 | 32,304 | ||||||||||||||||
Helena - Prospect Office | 1400 Prospect Avenue | 1997 | $ 6,065 | 32,304 | |||||||||||||||||
Helena, MT 59601 | Helena, MT 59601 | ||||||||||||||||||||
Helena Neill Avenue Branch | 28 Neill Ave. | 1987 | 838 | 1,391 | |||||||||||||||||
Helena - Neill Office | 28 Neill Ave. | 1987 | 758 | 1,391 | |||||||||||||||||
Helena, MT 59601 | Helena, MT 59601 | ||||||||||||||||||||
Helena Skyway Branch | 2090 Cromwell Dixon | 2009 | 1,980 | 4,643 | |||||||||||||||||
Helena - Skyway Office | 2090 Cromwell Dixon | 2009 | 1,862 | 4,643 | |||||||||||||||||
Helena, MT 59602 | Helena, MT 59602 | ||||||||||||||||||||
Butte Office | 3401 Harrison Ave. | 1979 | 421 | 3,890 | 3401 Harrison Avenue | 1979 | 373 | 3,890 | |||||||||||||
Butte, MT 59701 | Butte, MT 59701 | ||||||||||||||||||||
Bozeman - Oak Office | 1455 Oak St. | 2009 | 6,991 | 19,818 | 1455 Oak Street | 1980 (Relocated 2009) | 6,474 | 19,818 | |||||||||||||
Bozeman, MT 59715 | Bozeman, MT 59715 | ||||||||||||||||||||
Townsend Office | 416 Broadway | 1979 | 133 | 1,973 | 400 Broadway | 1979 (Relocated 2019) | 1,081 | 6,326 | |||||||||||||
Townsend, MT 59644 | Townsend, MT 59644 | ||||||||||||||||||||
Bozeman - Downtown Branch | 237 W. Main St. | 2012 (Relocated 2015) | * | 71 | 1,711 | ||||||||||||||||
Bozeman - Mendenhall Office | 5 W. Mendenhall, Ste. 101 | 2012 | * | 1,558 | 3,626 | ||||||||||||||||
Bozeman, MT 59715 | Bozeman, MT 59715 | ||||||||||||||||||||
Livingston Office | 123 S. Main St. | 2012 (Leased until building | 2,484 | 11,072 | 123 S. Main Street | 2012 (Leased until building | 2,329 | 11,072 | |||||||||||||
Livingston, MT 59047 | was purchased in 2016) | Livingston, MT 59047 | was purchased in 2016) | ||||||||||||||||||
Big Timber Office | 101 McLeod St. | 2012 | 796 | 2,004 | 101 McLeod Street | 2012 | 760 | 2,004 | |||||||||||||
Big Timber, MT 59011 | Big Timber, MT 59011 | ||||||||||||||||||||
Billings Office | 455 S. 24th St. West | 2012 | * | 108 | 3,778 | ||||||||||||||||
Billings - S. 24th Street W. Office | Billings - S. 24th Street W. Office | 455 S. 24th Street West | 2012 | * | 272 | 3,778 | |||||||||||||||
Billings, MT 59102 | Billings, MT 59102 | ||||||||||||||||||||
Missoula - Higgins Branch | 200 N. Higgins | 2012 | * | 178 | 3,079 | ||||||||||||||||
Missoula - Higgins Office | 200 N. Higgins | 2012 | * | 159 | 3,079 | ||||||||||||||||
Missoula, MT 59802 | Missoula, MT 59802 | ||||||||||||||||||||
Missoula - Reserve Office | 1510 S Reserve St. | 2012 | * | 50 | 4,320 | 1510 S Reserve Street | 2012 | * | 220 | 4,320 | |||||||||||
Missoula, MT 59801 | Missoula, MT 59801 | ||||||||||||||||||||
Hamilton Office | 711 S. First Street | 2012 | 1,691 | 4,870 | 711 S. First Street | 2012 | 1,532 | 4,870 | |||||||||||||
Hamilton, MT 59840 | Hamilton, MT 59840 | ||||||||||||||||||||
Helena Operations Center | 3210 Euclid Ave. | 2012 | 399 | 6,758 | |||||||||||||||||
Missoula - Home Loan Office | 2800 S. Reserve Street | 2012 | * | 47 | 2,965 | ||||||||||||||||
3203 Broadwater Ave. | Missoula, MT 59801 | ||||||||||||||||||||
Missoula Home Loan Office | 2800 S. Reserve St. | 2012 | * | 23 | 2,965 | ||||||||||||||||
Helena - Operations Center | 3210 Euclid Avenue | 2012 | 2,854 | 6,758 | |||||||||||||||||
Missoula, MT 59801 | Helena, MT 59601 | ||||||||||||||||||||
Great Falls Loan Production Office | 120 1st Ave. North, Suite 201 | 2015 | * | 4 | 1,883 | ||||||||||||||||
Great Falls Office | 501 River Dr. S., Ste. 100 | 2015 (Relocated 2018) | * | 2,051 | 5,144 | ||||||||||||||||
Great Falls, MT 59401 | Great Falls, MT 59405 | ||||||||||||||||||||
Billings - Main Office | 895 Main Street, Ste. 1 | 2017 | * | 64 | 1,300 | ||||||||||||||||
Billings, MT 59105 | |||||||||||||||||||||
Sheridan Office | 103 N. Main | 2018 | 1,099 | 8,080 | |||||||||||||||||
Sheridan, MT 59749 | |||||||||||||||||||||
Twin Bridges Office | 107 S. Main | 2018 | 572 | 7,668 | |||||||||||||||||
Twin Bridges, MT 59754 | |||||||||||||||||||||
Choteau Office | 27 First St NW | 2019 | 268 | 4,860 | |||||||||||||||||
Choteau, MT 59422 | |||||||||||||||||||||
Denton Office | 423 Broadway Ave | 2019 | 220 | 1,150 | |||||||||||||||||
Denton, MT 59430 | |||||||||||||||||||||
Dutton Office | 101 Main St. W. | 2019 | 262 | 1,792 | |||||||||||||||||
Dutton, MT 59433 | |||||||||||||||||||||
Great Falls - Downtown Office | 21 3rd St N | 2019 | 581 | 7,766 | |||||||||||||||||
Great Falls, MT 59401 | |||||||||||||||||||||
Billings - N. 27th Street Office | 1005 N. 27th Street | 2019 | 8,622 | 14,245 | |||||||||||||||||
Billings, MT 59101 | |||||||||||||||||||||
* Leased location | |||||||||||||||||||||
As of December 31, 2016,2019, the net book value of land, buildings and furniturepremises and equipment owned by the Bank, less accumulated depreciation, totaled $19.39$40.08 million.
ITEM3. | LEGAL PROCEEDINGS. |
The Bank, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Bank. There were no lawsuits pending or known by the Company to be contemplated against Eagle or the Bank as of December 31, 2016.2019.
ITEM4. | MINE SAFETY DISCLOSURES. |
Not applicable.
PARTII
ITEM5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common stock is traded on the NASDAQNasdaq Global Market under the symbol “EBMT.” At the close of business on December 31, 2016,2019, there were 3,811,4096,423,033 shares of common stock outstanding, held by approximately 850923 shareholders of record. The closing price of the common stock on December 31, 2016,2019, was $21.10$21.39 per share. The following table includes the high and low prices for our common stock for each quarter presented, as well as, dividends paid during each quarter:
Dividends | ||||||||||||
Quarter Ended | High | Low | Paid | |||||||||
Calendar Year 2016: | ||||||||||||
December 31, 2016 | $ | 24.00 | $ | 14.25 | $ | 0.0800 | ||||||
September 30, 2016 | 15.25 | 12.59 | 0.0800 | |||||||||
June 30, 2016 | 13.56 | 11.99 | 0.0775 | |||||||||
March 31, 2016 | 12.42 | 11.15 | 0.0775 | |||||||||
Calendar Year 2015: | ||||||||||||
December 31, 2015 | 13.23 | 11.26 | 0.0775 | |||||||||
September 30, 2015 | 12.46 | 10.68 | 0.0775 | |||||||||
June 30, 2015 | 11.19 | 10.54 | 0.0750 | |||||||||
March 31, 2015 | 11.20 | 10.60 | 0.0750 | |||||||||
Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors (the “Board’’) and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue.
On July 21, 2016,18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the quarter ended December 31, 2016 or the quarterthree months ended September 30 2016.or December 31, 2019. The plan expires on July 21, 2017.18, 2020.
On July 23, 2015,19, 2018, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. DuringThe extent to which the quartercompany repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2015, 15,0002018. However, during the first quarter of 2019, 42,000 shares were purchased at an average price of $11.75$17.43 per share. During the quarter ended September 30, 2015, 46,065In addition, 28,000 shares were purchased during the second quarter of 2019 at an average price of $11.47$17.09 per share. The plan expired on July 23, 2016.
On July 1, 2014, the Board authorized the repurchase of up to 200,000 shares of its common stock. Under this plan, shares could be purchased on the open market or in privately negotiated transactions. Under this plan, 55,800 shares were purchased at an average price of $11.03 per share during the six months ended June 30, 2015. In addition, under this plan, 55,000 shares were purchased at an average price of $10.66 per share during the six months ended December 31, 2014. The plan expired on June 30, 2015.19, 2019.
ITEM6. | SELECTED FINANCIAL DATA. |
This item has been omitted based on Eagle’s status as a smaller reporting company.
ITEM7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of the financial condition and results of operations of Eagle is intended to help investors understand our company and our operations. The financial review is provided as a supplement to, and should be read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report.
Overview
Historically, our principal business has consisted of attracting deposits from the general public and the business community and making loans secured by various types of collateral, including real estate and other consumer assets. We are significantly affected by prevailing economic conditions, particularly interest rates, as well as government policies concerning, among other things, monetary and fiscal affairs, housing and financial institutions and regulations regarding lending and other operations, privacy and consumer disclosure. Attracting and maintaining deposits is influenced by a number of factors, including interest rates paid on competing investments offered by other financial and non-financial institutions, account maturities, fee structures and levels of personal income and savings. Lending activities are affected by the demand for funds and thus are influenced by interest rates, the number and quality of lenders and regional economic conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from maturities of investment securities and income provided from operations.
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 mortgage-backed securities and other 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 the majority of its loan originations in 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 we have also focused on adding commercial loans to our portfolio, both real estate and non-real estate. We have made significant progress in this initiative. As of December 31, 2016,2019, commercial real estate and land loans and commercial business loans represented 46.0%55.6% and 11.7%14.52% of the total loan portfolio, respectively. The purpose of this diversification is to mitigate our dependence on the mortgage market, as well as to improve our ability to manage our interest rate spread. The Bank’s management recognizes that fee income will also enable it to be less dependent on specialized lending and it maintains a significant loan serviced portfolio, which provides a steady source of fee income. As of December 31, 2016,2019, we had mortgage servicing rights, net of $5.85$8.74 million compared to $4.97$7.10 million as of December 31, 2015.2018. Gain on sale of loans also provides significant fee income or noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity.
Fee income is also supplemented with fees generated from our 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 deposit do not automatically reprice as interest rates rise.
In recent years, management’s focus has been on improving our core earnings. Core earnings can be described as income before taxes, with the exclusion of gain on sale of loans and adjustments to the market value of our loans serviced portfolio.loans. Management believes that we will need to continue to focus on increasing net interest margin, other areas of fee income, and control 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: loans typically earn higher rates of return than investments; a larger deposit base will yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to management’s strategy is funding the growth of our balance sheet in an efficient manner. Though deposit growth this last year was 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.
Other than in limited circumstances for certain high-credit-quality customers, we do not offer “interest only” mortgage loans on residential (1-4 family)1-4 family properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).
The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee (“FOMC”) changedincreased the federal funds target rate during the year ended December 31, 2018 from 0.5%1.50% to 0.75% in2.50%. The rate decreased from 2.50% to 1.75% during the year ended December 2016.31, 2019.
From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. In this regard,September 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, Inc. (“TwinCo”), a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, has experienceda Montana chartered commercial bank to acquire 100% of TwinCo’s equity voting interests. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated 2 branches in Madison County, Montana. The transaction provided an increaseopportunity to expand market presence and lending activities, particularly in loan originations dueagricultural lending. The acquisition closed January 31, 2018, after receipt of approvals from regulatory authorities, approval of TwinCo shareholders and the satisfaction of other closing conditions. The total consideration paid was $18.93 million and included cash consideration of $9.90 million and common stock issued of $9.03 million.
Effective January 1, 2019, Eagle completed its merger (the “Merger”) with Big Muddy Bancorp, Inc. (“BMB”), pursuant to an Agreement and Plan of Merger, dated as of August 21, 2018, by and among Eagle, Opportunity Bank of Montana, BMB and BMB’s wholly-owned subsidiary, The State Bank of Townsend, a Montana chartered commercial bank (“SBOT”). At the effective time of the Merger, BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. 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. The acquisition closed after receipt of approvals from regulatory authorities, approval of BMB shareholders and the satisfaction of other closing conditions. The total consideration paid was $16.44 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, a Montana chartered commercial bank (“WB”). The Merger Agreement provided that, upon the terms and subject to the Sterling branch acquisition which closed in December 2012. Deposit fee income has also increased due to the increaseconditions set forth in the number of accounts.Merger Agreement, WHC would merge with and into Eagle, with Eagle continuing as the surviving corporation. The addition ofdeal closed on January 1, 2020. In the wealth management division from the acquisition has also increased noninterest incometransaction, Eagle acquired one retail bank branch and furthered the Bank’s strategy to increase fee income to complement its margin. Operating expenses, primarily salariesapproximately $102.71 million in assets, $89.23 million in deposits and employee benefits also increased as a result of the acquisition.$44.59 million in gross loans, based on WHC’s December 31, 2019 financial statements.
The Bank completed a core systems conversion during the third quarter of 2015. Future cost savings are anticipated due to the core systems conversion.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-9,Codification (“ASC”) 606, Revenue from Contracts with Customers, (Topic 606). This guidance is a comprehensive newestablishes principles for reporting information about the nature, amount, timing and uncertainty of revenue recognition standard that will supersede substantially all existing revenue recognition guidance.and cash flows arising from the entity’s contracts to provide goods or services to customers. The new standard’s core principle is that a company willrequires an entity to recognize revenue when it transfers promisedto depict the transfer of goods or services to customers in an amount that reflects the consideration to which the companythat it expects to be entitled to receive in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifyingservices recognized as performance obligations inare satisfied. The new revenue recognition standards became effective for the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. On July 9, 2015, the FASB agreed to delay the effective date of the standard by one year. Therefore, the new standard will be effective in the first quarter of 2018 and is not expected to have a significant impact to the Company’s consolidated financial statements.Company on January 1, 2018.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall: Recognition and MeasurementThe majority of Financial Assets and Financial Liabilities.” The amendment has a number of provisionsour revenue-generating transactions are not subject to ASC 606, including the requirements that public business entities use the exit price notion when measuring the fair value ofrevenue generated from financial instruments, for disclosure purposes, a separate presentationsuch as our loans, guarantees, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. ASC 606 is applicable to non-interest revenue streams such as wealth management income, service charges on deposit accounts and interchange and other fees. However, the recognition of financial assetsthese revenue streams did not change significantly upon the adoption of ASC 606. Substantially all of the Company’s revenue is generated from contracts with customers. Descriptions of our revenue-generating activities that are within the scope of ASC 606 and are recorded in noninterest income on the consolidated statements of income are discussed below:
Wealth Management Income – We previously offered wealth management products and services through our wealth management division and financial liabilities by measurement categoryconsultants located in several of our markets. The Company discontinued its wealth management services during July of 2019. Revenue from wealth management represented fees due from wealth management customers as consideration for managing the customers’ assets. The Company’s performance obligation for these transactional-based services was generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Wealth management income was $258,000 and $536,000 for the years ended December 31, 2019 and 2018, respectively.
Service Charges on Deposit Accounts – Revenue from service charges consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds and, when applicable, pay interest on deposits. Service charges on deposit accounts may be transactional or non-transactional in nature. Transactional service charges occur in the form of financial asset (i.e. securitiesa service or loans receivables)penalty and are charged upon the occurrence of an event (e.g., overdraft fees, ATM fees, wire transfer fees). Transactional service charges are recognized as services are delivered to and eliminatingconsumed by the requirementcustomer, or as penalty fees are charged. Non-transactional service charges are charges that are based on a broader service, such as account maintenance fees and dormancy fees, and are recognized on a monthly basis. Service Charges on Deposit Accounts were $1,219,000 and $943,000 for public business entitiesthe years ended December 31, 2019 and 2018, respectively.
Interchange and ATM Fees– Revenue from debit card fees includes interchange fee income from debit cards processed through card association networks. Interchange fees represent a portion of a transaction amount that the Company and other involved parties retain to disclosecompensate themselves for giving the methodscardholder immediate access to funds. Interchange rates are generally set by the card association networks and significant assumptions used to estimateare based on purchase volumes and other factors. The Company records interchange fees as services are provided. Interchange and ATM fees were $1,327,000 and $1,042,000 for the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendment is effective for annualyears ended December 31, 2019 and interim reporting periods beginning after December 15, 2017 and is not expected to have a significant impact to the Company’s consolidated financial statements.2018, respectively.
In February 2016, the FASB issued ASU No. 2016-2,2016-02, Leases (Topic 842) intended to improve financial reporting regarding leasing transactions. The new standard affects all companies and organizations that lease assets. The standard will requirerequires organizations to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases if the lease terms are more than 12 months. The guidance also will requirerequires qualitative and quantitative disclosures providing additional information about the amounts recorded in the financial statements. The amendments in this update arewere effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.years and was adopted by the Company in the first quarter of 2019. The Company is evaluating the potential impactadoption of the amendmentstandard did not have a significant impact on our consolidated financial statements. The Company’s operating leases primarily relate to branch locations. We currently lease six locations that are full-service branches and one mortgage lending branch. The leases expire on various dates through 2028. As a result of adopting the lease standard on January 1, 2019, the Company recorded right of use assets of $2,374,000 and corresponding lease liabilities. The right of use assets are included in premises and equipment, net and the lease liabilities are included in accrued expenses and other liabilities on the Company’s consolidated statement of financial statements.condition.
In JuneMarch 2017, the FASB issued ASU No. 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20) to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this standard in the first quarter of 2019 did not have a significant impact on our consolidated financial statements, as we typically do not invest in these types of securities.
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the standard amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
In October 2019, the FASB amended the effective date of the standard. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018,2022, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).
The Company believes the amendments in this update will have an impact on the Company’s consolidated financial statements and is workingcontinuing to evaluate the significance of that impact.impact, even though the adoption date has been deferred. In that regard, we have established a working group under the direction of our Chief Financial Officer and Chief Credit Officer. The group is composed of individuals from the finance and credit administration areas of the Company. We are currently developing an implementation plan, including assessment of processes, segmentation of the loan portfolio and identifying and adding data fields necessary for analysis. The adoption of this standard is likely to result in an increase in the allowance for loan and lease losses as a result of changing from an “incurred loss” model to an “expected loss” model. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.
a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.
Critical Accounting Policies
Certain accounting policies are important to the understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. The following are the accounting policies we believe are critical.
Allowance for Loan Losses
We recognize that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable losses based on all available information. The allowance for loan losses is based on management’s evaluation of the collectability of the loan portfolio, including past loan loss experience, known and inherent losses, information about specific borrower situations and estimated collateral values, and current economic conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of historical losses, internal data including delinquencies among others, industry data, and economic conditions.
As an integral part of their examination process, the FRB and the Montana Division of Banking will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. In establishing the allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss factors are derived using our historical loss experience and may be adjusted for factors that affect the collectability of the portfolio as of the evaluation date. Commercial business loans that are criticized are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under FASB ASC Topic 310Receivables. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results.
Mortgage Servicing Rights
ValuationFor sales of Investment Securities
Allmortgage loans, a portion of our investment securities are classified as available-for-sale and recorded at currentthe cost of originating the loan is allocated to the servicing right based on relative fair value. Unrealized gains or losses, net of deferred taxes, are reported in other comprehensive income as a separate component of shareholders’ equity. In general, fair value is based upon quoted market prices of identical assets, when available. If quoted market prices are not available, fair value is based upon valuation models that use cash flow, security structure and other observable information. Where sufficient data is not available to produce a fair valuation, fairFair value is based on broker quotesa market price valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing assets are evaluated for similar assets. Broker quotesimpairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be adjustedrecorded as an increase to ensureincome. Capitalized servicing rights are reported as assets and are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Derivative and Hedging Activity
FASB ASC Topic 815 Derivatives and Hedging requires that derivatives of the Company be recorded in the consolidated financial instruments are recordedstatements at fair value. Adjustments may include unobservable parameters, amongThese instruments have certain interest rate risk characteristics that change in value based upon changes in the market. The Company’s derivatives are primarily the result of its mortgage banking activities in the form of interest rate lock commitments and forward To-Be-Announced (“TBA”) mortgage backed securities. Derivatives are recorded as either other things. No adjustments were made to any broker quotes received by us.assets or other liabilities on the consolidated statements of financial condition and changes in the fair value of the derivatives are recorded in mortgage banking within noninterest income on the consolidated statements of income.
Fair Value
We conductFASB ASC Topic 820 Fair Value Measurements and Disclosures establishes a quarterly review and evaluationhierarchical disclosure framework associated with the level of our investment securities to determine if any declinespricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value are other than temporary. In making this determination, we consider the period of time the securities were in a loss position, the percentage decline in comparisonfinancial instruments generally correlates to the securities’ amortized cost,level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial condition ofinstrument is new to the issuer, if applicable,market and not yet established and the delinquency or default ratescharacteristics specific to the transaction. The objective of underlying collateral. We consider our intenta fair value measurement is to estimate the price at which an orderly transaction to sell the investment securities andasset or to transfer the likelihoodliability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that we will not have to sellholds the investment securities before recovery of their cost basis. If impairment exists, credit related impairment losses are recorded in earnings while noncredit related impairment losses are recorded in accumulated other comprehensive income.asset or owes the liability.
Deferred Income Taxes
We use the asset and liability method of accounting for income taxes as prescribed in FASB ASC Topic 740Income Taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings.
Financial Condition
December 31, 20162019 compared to December 31, 20152018
Total assets increased $43.58$200.36 million, or 6.95%23.5%, to $673.93$1.05 billion at December 31, 2019 from $853.90 million at December 31, 2016 from $630.352018. The largest driver of the increase was the increase in loans receivable, net, partly due to the acquisition of BMB. Loans receivable, net increased by $160.31 million or 26.3%, to $770.64 million at December 31, 2015. The loan portfolio increased $57.66 million or 14.3%, to $461.392019 from $610.33 million at December 31, 20162018. Total liabilities increased by $173.5 million, or 22.9%, to $932.60 million from $403.73$759.10 million at December 31, 2015. Securities available-for-sale decreased $17.302018. The increase was primarily due to an increase in deposits due in part to the BMB acquisition. Total deposits increased $182.38 million or 11.9%29.1%, to $128.44 million from $145.74$808.99 million at December 31, 2015. Total liabilities increased by $39.57 million, or 6.9%, to $614.47 million2019 from $574.90$626.61 million at December 31, 2015.2018. Total depositsshareholders’ equity increased $29.61$26.85 million or 6.1%, to $512.80$121.66 million at December 31, 2016. Federal Home Loan Bank (“FHLB”) advances and other borrowings increased $9.70 million or 13.3%,2019 compared to $82.41$94.81 million at December 31, 2016.2018.
Balance Sheet Details
InvestmentActivities
We maintain a portfolio of investment securities, classified as either available-for-sale (including those accounted for under FASB ASC Topic 825) or held-to-maturity to enhance total return on investments. Our investment securities include U.S. government and agency obligations, Small Business Administration pools, municipal securities, mortgage-backed securities (“MBSs”), collateralized mortgage obligations (“CMOs”), asset-backed securities (“ABSs”), and corporate obligations, all with varying characteristics as to rate, maturity and call provisions. There were no held-to-maturity investment securities included in the investment portfolio at December 31, 2016.2019 or 2018. All investment securities included in the investment portfolio are currently available-for-sale. Eagle also has interest-bearing deposits in other banks and stock in the FHLB of Des Moines and FRB. FHLB stock was $4.68 million and $5.01 million at December 31, 2019 and 2018, respectively. FRB stock was $2.53 million and $2.03 million at December 31, 2019 and 2018, respectively.
The following table summarizes investment activities:
| December 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
Fair Value | Percentage of Total | Fair Value | Percentage of Total | |||||||||||||
| (Dollars in Thousands) | |||||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government and agency | $ | 5,608 | 4.18 | % | $ | 10,615 | 7.03 | % | ||||||||
Municipal obligations | 67,664 | 50.45 | % | 67,069 | 44.42 | % | ||||||||||
Corporate obligations | 9,307 | 6.94 | % | 9,450 | 6.26 | % | ||||||||||
MBSs | 29,512 | 22.01 | % | 32,735 | 21.68 | % | ||||||||||
CMOs | 16,345 | 12.19 | % | 25,869 | 17.13 | % | ||||||||||
Total securities available-for-sale | 128,436 | 95.77 | % | 145,738 | 96.52 | % | ||||||||||
Interest-bearing deposits | 787 | 0.59 | % | 970 | 0.64 | % | ||||||||||
FHLB capital stock, at cost | 4,012 | 2.99 | % | 3,397 | 2.25 | % | ||||||||||
FRB capital stock, at cost | 871 | 0.65 | % | 887 | 0.59 | % | ||||||||||
Total | $ | 134,106 | 100.00 | % | $ | 150,992 | 100.00 | % | ||||||||
December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
Fair Value | Percentage of Total | Fair Value | Percentage of Total | Fair Value | Percentage of Total | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency | $ | 13,597 | 10.72 | % | $ | 9,347 | 6.57 | % | 4,857 | 3.68 | % | |||||||||||||
Municipal obligations | 52,222 | 41.17 | % | 68,278 | 48.04 | % | 67,886 | 51.41 | % | |||||||||||||||
Corporate obligations | 8,388 | 6.61 | % | 11,119 | 7.82 | % | 14,644 | 11.09 | % | |||||||||||||||
Mortgage-backed securities | 9,495 | 7.48 | % | 19,348 | 13.61 | % | 24,869 | 18.83 | % | |||||||||||||||
Collateralized mortgage obligations | 33,334 | 26.27 | % | 23,875 | 16.79 | % | 19,788 | 14.99 | % | |||||||||||||||
Asset-backed securities | 9,839 | 7.75 | % | 10,198 | 7.17 | % | - | 0.00 | % | |||||||||||||||
Total securities available-for-sale | $ | 126,875 | 100.00 | % | $ | 142,165 | 100.00 | % | 132,044 | 100.00 | % | |||||||||||||
Securities available-for-sale decreased $17.30 million.$15.29 million or 10.8%, to $126.88 million at December 31, 2019 compared to $142.17 million at December 31, 2018. The largest decrease in securities available-for-sale was CMOs,in municipal obligations which decreased $9.52by $16.06 million primarilylargely due to sales activity. U.S. government and agency securitiesMBSs also decreased by $5.01$9.85 million largely due to a security sale. MBSs decreased $3.22 million due to sales and principal payments receivedactivity as well. These decreases were partially offset by purchases. Municipalpurchases of collateralized mortgage obligations increased by $595,000 due to purchase activity largely offset by sales activity. of $9.45 million.
The following table sets forth information regarding the values, weighted average yields and maturities of investments:investments. The yields on municipal bonds have been computed on a tax equivalent basis.
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||
One Year or Less | One to Five Years | Five to Ten Years | After Ten Years | Total Investment Securities | ||||||||||||||||||||||||||||||||||||||||
Fair Value | Annualized Weighted Average Yield | Fair Value | Annualized Weighted Average Yield | Fair Value | Annualized Weighted Average Yield | Fair Value | Annualized Weighted Average Yield | Fair Value | Approximate Market Value | Annualized Weighted Average Yield | ||||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||
U.S. government and agency | $ | - | - | % | $ | 994 | 1.04 | % | $ | - | - | % | $ | 4,614 | 2.58 | % | $ | 5,608 | $ | 5,608 | 2.31 | % | ||||||||||||||||||||||
Municipal obligations | - | - | 2,702 | 2.50 | 11,133 | 3.38 | 53,829 | 3.81 | 67,664 | 67,664 | 3.69 | |||||||||||||||||||||||||||||||||
Corporate obligations | 1,040 | 1.22 | 4,362 | 1.46 | 3,905 | 1.95 | - | - | 9,307 | 9,307 | 1.64 | |||||||||||||||||||||||||||||||||
MBSs | - | - | - | - | - | - | 29,512 | 2.93 | 29,512 | 29,512 | 2.93 | |||||||||||||||||||||||||||||||||
CMOs | - | - | 5,152 | 1.89 | 5,025 | 1.98 | 6,168 | 2.31 | 16,345 | 16,345 | 2.08 | |||||||||||||||||||||||||||||||||
Total securities available-for-sale | 1,040 | 1.22 | 13,210 | 1.81 | 20,063 | 2.75 | 94,123 | 3.38 | 128,436 | 128,436 | 3.10 | |||||||||||||||||||||||||||||||||
Interest-bearing deposits | 787 | 0.43 | - | - | - | - | - | - | 787 | 787 | 0.43 | |||||||||||||||||||||||||||||||||
Federal funds sold | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
FHLB capital stock (no maturity) | - | - | - | - | - | - | - | - | 4,012 | 4,012 | 3.03 | |||||||||||||||||||||||||||||||||
FRB capital stock (no maturity) | - | - | - | - | - | - | - | - | 871 | 871 | 6.00 | |||||||||||||||||||||||||||||||||
Total | $ | 1,827 | 0.88 | % | $ | 13,210 | 1.81 | % | $ | 20,063 | 2.75 | % | $ | 94,123 | 3.38 | % | $ | 134,106 | $ | 134,106 | 3.10 | % | ||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
One Year or Less | One to Five Years | Five to Ten Years | After Ten Years | Total Investment Securities | ||||||||||||||||||||||||||||||||||||||||
Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Approximate Market Value | Weighted Average Yield | ||||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||
U.S. government and agency | $ | 7,532 | 2.03 | % | $ | 1,289 | 2.79 | % | $ | 4,083 | 2.75 | % | $ | 693 | 3.19 | % | $ | 13,597 | $ | 13,597 | 2.38 | % | ||||||||||||||||||||||
Municipal obligations | 1,002 | 3.01 | 7,386 | 2.63 | - | - | - | - | $ | 8,388 | 8,388 | 2.68 | ||||||||||||||||||||||||||||||||
Corporate obligations | 600 | 2.49 | 1,410 | 3.09 | 4,995 | 3.18 | 45,217 | 3.08 | $ | 52,222 | 52,222 | 3.08 | ||||||||||||||||||||||||||||||||
Mortgage-backed securities (1) | - | - | 4,184 | 2.90 | 18,131 | 2.49 | 11,019 | 2.36 | $ | 33,334 | 33,334 | 2.47 | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | - | - | - | - | 378 | 1.98 | 9,117 | 3.14 | $ | 9,495 | 9,495 | 3.09 | ||||||||||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | - | - | 9,839 | 2.40 | $ | 9,839 | 9,839 | 2.40 | ||||||||||||||||||||||||||||||||
Total securities available-for-sale | $ | 9,134 | 2.17 | % | $ | 14,269 | 2.77 | % | $ | 27,587 | 2.65 | % | $ | 75,885 | 2.90 | % | $ | 126,875 | $ | 126,875 | 2.76 | % | ||||||||||||||||||||||
(1) Mortgage-backed securities are shown at their final maturity date. They provide on-going liquidity for the Company through scheduled and prepaid principal payments on a monthly basis. |
Lending Activities
The following table includes the composition of the Bank’s loan portfolio by loan category:
December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1-4 family)(1) | $ | 113,262 | 24.24 | % | $ | 118,133 | 28.95 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential 1-4 family (1) | $ | 119,296 | 15.28 | % | $ | 116,939 | 18.92 | % | $ | 109,911 | 21.37 | % | $ | 113,262 | 24.24 | % | $ | 118,133 | 28.95 | % | ||||||||||||||||||||||||||||||||||||
Residential 1-4 family construction | 38,602 | 4.95 | % | 27,168 | 4.40 | % | 25,306 | 4.92 | % | 20,540 | 4.40 | % | 22,958 | 5.63 | % | |||||||||||||||||||||||||||||||||||||||||
Total residential 1-4 family | 157,898 | 20.23 | % | 144,107 | 23.32 | % | 135,217 | 26.29 | % | 133,802 | 28.64 | % | 141,091 | 34.58 | % | |||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 214,927 | 46.00 | % | 167,930 | 41.15 | % | 331,062 | 42.41 | % | 256,784 | 41.54 | % | 194,805 | 37.88 | % | 166,932 | 35.73 | % | 141,011 | 34.55 | % | |||||||||||||||||||||||||||||||||||
Real estate construction | 20,540 | 4.40 | % | 22,958 | 5.63 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial construction and development | 52,670 | 6.75 | % | 41,739 | 6.75 | % | 38,351 | 7.46 | % | 41,810 | 8.95 | % | 23,450 | 5.75 | % | |||||||||||||||||||||||||||||||||||||||||
Farmland | 50,293 | 6.44 | % | 29,915 | 4.84 | % | 11,627 | 2.26 | % | 6,185 | 1.32 | % | 3,469 | 0.85 | % | |||||||||||||||||||||||||||||||||||||||||
Total commercial real estate | 434,025 | 55.60 | % | 328,438 | 53.13 | % | 244,783 | 47.60 | % | 214,927 | 46.00 | % | 167,930 | 41.15 | % | |||||||||||||||||||||||||||||||||||||||||
Total real estate loans | 348,729 | 74.64 | % | 309,021 | 75.73 | % | 591,923 | 75.83 | % | 472,545 | 76.45 | % | 380,000 | 73.89 | % | 348,729 | 74.64 | % | 309,021 | 75.73 | % | |||||||||||||||||||||||||||||||||||
Other loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity | 49,018 | 10.49 | % | 45,345 | 11.11 | % | 56,414 | 7.23 | % | 52,159 | 8.44 | % | 52,672 | 10.24 | % | 49,018 | 10.49 | % | 45,345 | 11.11 | % | |||||||||||||||||||||||||||||||||||
Consumer | 14,800 | 3.16 | % | 14,641 | 3.59 | % | 18,882 | 2.42 | % | 16,565 | 2.68 | % | 15,712 | 3.06 | % | 14,800 | 3.16 | % | 14,641 | 3.59 | % | |||||||||||||||||||||||||||||||||||
Commercial | 54,706 | 11.71 | % | 39,072 | 9.57 | % | 72,797 | 9.33 | % | 59,053 | 9.56 | % | 63,300 | 12.31 | % | 52,795 | 11.30 | % | 37,174 | 9.10 | % | |||||||||||||||||||||||||||||||||||
Agricultural | 40,522 | 5.19 | % | 17,709 | 2.87 | % | 2,563 | 0.50 | % | 1,911 | 0.41 | % | 1,898 | 0.47 | % | |||||||||||||||||||||||||||||||||||||||||
Total commercial loans | 113,319 | 14.52 | % | 76,762 | 12.43 | % | 65,863 | 12.81 | % | 54,706 | 11.71 | % | 39,072 | 9.57 | % | |||||||||||||||||||||||||||||||||||||||||
Total other loans | 118,524 | 25.36 | % | 99,058 | 24.27 | % | 188,615 | 24.17 | % | 145,486 | 23.55 | % | 134,247 | 26.11 | % | 118,524 | 25.36 | % | 99,058 | 24.27 | % | |||||||||||||||||||||||||||||||||||
Total loans | 467,253 | 100.00 | % | 408,079 | 100.00 | % | 780,538 | 100.00 | % | 618,031 | 100.00 | % | 514,247 | 100.00 | % | 467,253 | 100.00 | % | 408,079 | 100.00 | % | |||||||||||||||||||||||||||||||||||
Deferred loan fees | (1,092 | ) | (795 | ) | (1,303 | ) | (1,098 | ) | (1,093 | ) | (1,092 | ) | (795 | ) | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (4,770 | ) | (3,550 | ) | (8,600 | ) | (6,600 | ) | (5,750 | ) | (4,770 | ) | (3,550 | ) | ||||||||||||||||||||||||||||||||||||||||||
Total loans, net | $ | 461,391 | $ | 403,734 | $ | 770,635 | $ | 610,333 | $ | 507,404 | $ | 461,391 | $ | 403,734 | ||||||||||||||||||||||||||||||||||||||||||
(1) Excludes loans held-for-sale |
(1) Excludes loans held-for-sale.
Loans receivable increased $57.66$160.31 million to $770.64 at December 31, 2019 due in part to the BMB acquisition. The BMB acquisition included $89.20 million of acquired loans. Excluding acquired loans, loans receivable, net increased by $71.11 million. CommercialIncluding acquired loans, total commercial real estate and land loans increased $47.00$105.59 million, total commercial loans increased $15.64$36.56 million, andtotal residential loans increased $13.79 million, home equity loans increased $3.67 million. Consumer loans remained consistent period over period only increasing $159,000. These increases were slightly offset by decreases in residential mortgage loans of $4.87$4.25 million and constructionconsumer loans of $2.42increased $2.31 million. Total loan originations were $529.84$796.10 million for the year ended December 31, 2016,2019, with total residential mortgages (1-4 family)1-4 family accounting for $333.03$562.23 million of the total. CommercialTotal commercial real estate and land loan originations totaled $94.08were $127.19 million. ConstructionTotal commercial and home equity loan originations totaled $32.15$72.18 million and $19.33$23.61 million, respectively, for the same period. Consumer loan originations totaled $8.28$10.89 million. Commercial loan originations totaled $42.97 million. There were no commercial loan originations from loan syndication programs with borrowers residing outside of Montana during the year ended December 31, 2016. Loans held-for-sale decreased slightlyincreased by $472,000,$18.29 million, to $18.23$25.61 million at December 31, 20162019 from $18.70$7.32 million at December 31, 2015.2018.
Loan Maturities.ies. The following table sets forth the estimated maturity of the loan portfolio of the Bank at December 31, 2016.2019. Balances exclude deferred loan fees and allowance for loan losses. Scheduled principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of a loan is typically substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally give the Bank the right to declare loans immediately due and payable in the event, among other things, the borrower sells the real property, subject to the mortgage, and the loan is not paid off. All mortgage loans are shown to be maturing based on the date of the last payment required by the loan agreement, except as noted.
Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due within six months.
One Year or Less | One to Five Years | After 5 Years | Total | |||||||||||||
Residential mortgage (1-4 family)(1) | $ | 1,351 | $ | 2,245 | $ | 127,896 | $ | 131,492 | ||||||||
Commercial real estate | 25,418 | 17,036 | 172,473 | 214,927 | ||||||||||||
Real estate construction | 14,029 | 3,087 | 3,424 | 20,540 | ||||||||||||
Home equity | 5,647 | 6,267 | 37,104 | 49,018 | ||||||||||||
Consumer | 1,316 | 9,792 | 3,692 | 14,800 | ||||||||||||
Commercial | 19,161 | 7,174 | 28,371 | 54,706 | ||||||||||||
Total loans(1) | $ | 66,922 | $ | 45,601 | $ | 372,960 | $ | 485,483 | ||||||||
One Year or Less | One to Five Years | After 5 Years | Total | |||||||||||||
Total residential 1-4 family (1) | $ | 24,553 | $ | 13,538 | $ | 119,807 | $ | 157,898 | ||||||||
Total commercial real estate | 26,047 | 32,651 | 375,327 | 434,025 | ||||||||||||
Home equity | 4,451 | 13,456 | 38,507 | 56,414 | ||||||||||||
Consumer | 2,144 | 12,394 | 4,344 | 18,882 | ||||||||||||
Total Commercial | 48,175 | 37,566 | 27,578 | 113,319 | ||||||||||||
Total loans (1) | $ | 105,370 | $ | 109,605 | $ | 565,563 | $ | 780,538 | ||||||||
(1) Excludes loans held-for-sale |
(1) Includes loans held-for-sale.
The following table includes loans by fixed or adjustable rates at December 31, 2016:2019:
Fixed | Adjustable | Total | ||||||||||
(Dollars in Thousands) | ||||||||||||
Due after December 31, 2017: | ||||||||||||
Residential mortgage (1 to 4 family) (1) | $ | 85,121 | $ | 45,020 | $ | 130,141 | ||||||
Commercial real estate | 80,467 | 109,042 | 189,509 | |||||||||
Real estate construction | 3,204 | 3,307 | 6,511 | |||||||||
Home equity | 9,066 | 34,305 | 43,371 | |||||||||
Consumer | 11,689 | 1,795 | 13,484 | |||||||||
Commercial | 26,385 | 9,160 | 35,545 | |||||||||
Total(1) | 215,932 | 202,629 | 418,561 | |||||||||
Due in less than one year | 59,225 | 7,697 | 66,922 | |||||||||
Total Loans(1) | $ | 275,157 | $ | 210,326 | $ | 485,483 | ||||||
Percent of total | 56.68 | % | 43.32 | % | 100.00 | % | ||||||
Fixed | Adjustable | Total | ||||||||||
(Dollars in Thousands) | ||||||||||||
Due after December 31, 2019: | ||||||||||||
Total residential 1-4 family (1) | $ | 62,001 | $ | 71,344 | $ | 133,345 | ||||||
Total commercial real estate | 109,441 | 298,537 | 407,978 | |||||||||
Home equity | 6,644 | 45,319 | 51,963 | |||||||||
Consumer | 15,177 | 1,561 | 16,738 | |||||||||
Total commercial | 49,781 | 15,363 | 65,144 | |||||||||
Total due after December 31, 2019 (1) | 243,044 | 432,124 | 675,168 | |||||||||
Due in less than one year | 78,879 | 26,491 | 105,370 | |||||||||
Total loans (1) | $ | 321,923 | $ | 458,615 | $ | 780,538 | ||||||
Percent of total | 41.24 | % | 58.76 | % | 100.00 | % | ||||||
(1) Excludes loans held-for-sale Years Ended December 31, 2016 2015 (In Thousands) Net loans receivableat beginning of period(1) Loans originated: Total loans originated Loans sold: Principal repayments and loan refinancings Deferred loan fees increase Allowance for losses increase Net loan increase Net loans receivable at end of period(1) Nonperforming Assets.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 December 31, Loans are reviewed on a quarterly basis and are placed on non-accrual status when they are 90 days or more delinquent. Loans may be placed on non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. The following table provides information regarding the Bank’s December 31, 2019 December 31, 2016 30-89 Days 90 Days and Greater Number Amount Percentage of Total Number Amount Percentage of Total Number Amount Percentage of Total (Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands) Loan type: Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial construction and development Farmland Other loans: Agricultural Total The following table sets forth information regarding nonperforming assets: December 31, 2016 2015 (Dollars in Thousands) Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans: Total nonperforming loans Real estate owned and other repossessed property, net Total nonperforming loans to total loans Total nonperforming loans to total assets Total allowance for loan loss to nonperforming loans Total nonperforming assets to total assets December 31, 2019 2018 2017 2016 2015 (Dollars in Thousands) Non-accrual loans Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Accruing loans delinquent 90 days or more Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Other loans: Home equity Agricultural Restructured loans Real estate loans: Farmland Other loans: Commercial Home equity Total nonperforming loans Real estate owned and other repossessed property, net Total nonperforming assets Total nonperforming loans to total loans Total nonperforming loans to total assets Total allowance for loan loss to nonperforming loans Total nonperforming assets to total assets During the year ended December 31, Management, in compliance with regulatory guidelines, conducts an internal loan review program, whereby loans are placed or classified in categories depending upon the level of risk of nonpayment or loss. These categories are special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to evaluate the loan for impairment and establish an allowance for loan loss Management’s evaluation of The following table reflects our classified assets: 2016 2015 (In Thousands) Residential mortgage (1-4 family): Commercial real estate: Real estate construction: Home equity loans: Consumer loans: Commercial loans: Securities available-for-sale: Real estate owned/repossessed property Total classified loans and real estate owned December 31, 2019 Special Mention Substandard Doubtful Loss Total (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total loans Real estate owned/repossessed property, net The classified loans as of December 31, 2019 include $1.05 million in acquired loans. December 31, 2018 Special Mention Substandard Doubtful Loss Total (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total loans Real estate owned/repossessed property, net The classified loans as of December 31, 2018 include $1.99 million in acquired loans. Allowance for Loan Losses and Real Estate Owned.The Bank segregates its loan portfolio for loan losses into the following broad categories: At least quarterly, the management of the Bank evaluates the need to establish an allowance against losses on loans based on estimated losses on specific loans when a finding is made that a loss is estimable and probable. Such evaluation includes a review of all loans for which full collectability may not be reasonably assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality. Real estate owned is evaluated annually and recorded at fair value. Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. At December 31, While we believe we have established our existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that bank regulators, in reviewing our loan portfolio, will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and earnings. In It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis. The following table includes information for allowance for loan losses: Years Ended December 31, 2016 2015 (Dollars in Thousands) Beginning balance Provision for loan losses Loans charged-off Recoveries Net loans charged-off Ending balance Allowance for loan losses to total loans Allowance for loan losses to total nonperformingloans Net charge-offs to average loansoutstanding during the period Years Ended December 31, 2019 2018 2017 (Dollars in Thousands) Beginning balance Provision for loan losses Loans charged-off Commercial real estate Home equity Consumer Commercial Recoveries Commercial real estate Home equity Consumer Commercial Net loans charged-off Ending balance Allowance for loan losses to total loans excluding loans held-for-sale Allowance for loan losses to total nonperforming loans Net charge-offs to average loans outstanding during the period The following table presents allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans: December 31, 2016 2015 2019 2018 2017 Amount Percentage of Allowance to Total Allowance Loan Category to Total Loans Amount Percentage of Allowance to Total Allowance Loan Category to Total Loans Amount Percentage of Allowance to Total Allowance Loan Category to Total Loans Amount Percentage of Allowance to Total Allowance Loan Category to Total Loans Amount Percentage of Allowance to Total Allowance Loan Category to Total Loans (Dollars in Thousands) (Dollars in Thousands) Real estate loans: Residential mortgage(1-4 family) Residential 1-4 family Commercial real estate Real estate construction Total real estate loans Other loans: Home equity Consumer Commercial Total other loans Total Deposits and Other Sources of Funds Deposits. Deposits are the Company’s primary source of funds. Core deposits are deposits that are more stable and somewhat less sensitive to rate changes. They also represent The following table includes deposit accounts and 2016 2015 Weighted Weighted Percent Average Percent Average Amount of Total Rate Amount of Total Rate (Dollars in Thousands) Noninterest checking Interest bearing checking Savings Money market accounts Total Certificates of deposit accounts: IRA certificates Brokered certificates Other certificates Total certificates of deposit Total deposits December 31, 2019 2018 2017 Weighted Weighted Weighted Percent Average Percent Average Percent Average Amount of Total Rate Amount of Total Rate Amount of Total Rate (Dollars in Thousands) Noninterest checking Interest bearing checking Savings Money market accounts Total Certificates of deposit accounts: IRA certificates Brokered certificates Other certificates Total certificates of deposit Total deposits Deposits increased by $182.38 million, or 29.1%, to $808.99 million at December 31, 2019 from $626.61 million at December 31, 2018. All deposit products increased during the period with the exception of The following table shows the amount of certificates of deposit with balances of $250,000 and greater by time remaining until maturity as of December 31, Balance Balance and Greater and Greater (In Thousands) (In Thousands) 3 months or less Over 3 to 6 months Over 6 to 12 months Over 12 months Total Our depositors are primarily residents of the state of Montana. The following table includes information related to FHLB of Des Moines and other borrowings: Years Ended Years Ended December 31, December 31, 2016 2015 2019 2018 2017 (Dollars in Thousands) (Dollars in Thousands) FHLB advances: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Repurchase agreements: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Other: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Total borrowings: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Advances Other Long-Term Debt. The following table summarizes other long-term debt activity: December 31, December 31, 2019 2018 Net Percent Net Percent Amount of Total Amount of Total (Dollars in Thousands) Senior notes fixed at 5.75%, due 2022 Subordinated debentures fixed at 6.75%, due 2025 Subordinated debentures variable, due 2035 Total other long-term debt Other long-term debt increased slightly by $65,000 to $24.94 million at December 31, 2019 from $24.88 million at December 31, 2018 due to amortization of debt issuance costs. Shareholders’ Equity Total shareholders’ equity increased by 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. Year Ended December 31, 2016 Year Ended December 31, 2015 Year Ended December 31, 2019 Year Ended December 31, 2018 Year Ended December 31, 2017 Average Interest Average Interest Average Interest Average Interest Average Interest Daily and Yield/ Daily and Yield/ Daily and Yield/ Daily and Yield/ Daily and Yield/ Balance Dividends Cost(4) Balance Dividends Cost(4) Balance Dividends Cost(4) Balance Dividends Cost(4) Balance Dividends Cost(4) (Dollars in Thousands) (Dollars in Thousands) Assets: Interest-earning assets: Interest earning assets: Investment securities FHLB and FRB stock Loans receivable, net(1) Other Total interest-earning assets Noninterest-earning assets Total interest earning assets Noninterest earning assets Total assets Liabilities and equity: Interest-bearing liabilities: Interest bearing liabilities: Deposit accounts: Checking Savings Money market Savings Checking Certificates of deposit Advances from FHLB and other borrowingsincluding subordinated debt Total interest-bearing liabilities Advances from FHLB and other borrowings including long-term debt Total interest bearing liabilities Non-interest checking Other noninterest-bearing liabilities Other noninterest bearing liabilities Total liabilities Total equity Total liabilities and equity Net interest income/interest rate spread(2) Net interest margin(3) Total interest-earning assets to interest-bearing liabilities Total interest earning assets to interest bearing liabilities (1) Includes loans held-for-sale. (2) Interest rate spread represents the difference between the average yield on (3) Net interest margin represents income before the provision for loan losses divided by average (4) For purposes of this table, tax exempt income is not calculated on a tax equivalent basis. Rate/Volume Analysis The following table presents 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. Year Ended December 31, 2016 Year Ended December 31, 2015 Year Ended December 31, 2019 Year Ended December 31, 2018 Due to Due to Due to Due to Volume Rate Net Volume Rate Net Volume Rate Net Volume Rate Net (In Thousands) (In Thousands) Interest earning assets: Investment securities FHLB and FRB stock Loans receivable, net Other earning assets Total interest earning assets Interest-bearing liabilities: Savings, money market andchecking accounts Interest bearing liabilities: Checking, savings and money market accounts Certificates of deposit Borrowings andsubordinated debentures Advances from FHLB and other borrowings including long-term debt Total interest-bearing liabilities Change in net interest income (1) Includes loans held-for-sale. Results of Operations Comparison of Operating Results for the Years Ended December 31, Net Income Eagle’s net income for the year ended December 31, Net Interest Income Net interest income increased to Interest and Dividend Income Total interest and dividend income was Interest Expense Total interest expense increased for the year ended December 31, Provision for Loan Losses Provisions for loan losses 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 Noninterest Income Noninterest Expense Noninterest expense was Provision for Income Taxes Provision for income taxes was $3.10 million for the year ended December 31, 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 December 31, 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. Comparison of Cash Flow forYears EndedDecember 31, Net cash provided by the Company’s operating activities, which is primarily comprised of cash transactions affecting net income, was Net cash used in the Company’s investing activities, which is primarily comprised of cash transactions from investment securities and activity in the loan portfolio, was Net cash provided by the Company’s financing activities was Capital Resources At The Bank’s Tier I leverage ratio, as measured under State of Montana and FRB rules, decreased from As of December 31, Impact of Inflation and Changing Prices Our consolidated financial statements and the accompanying notes, which are found in Item 8, 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 The following table includes the Banks’s net interest income sensitivity analysis. (Basis Points) Year 1 Year 2 Limits +200 Changes in Market Rate Sensitivity Interest Rates As of December 31, 2019 Policy (Basis Points) Year 1 Year 2 Limits +200 -0.30% 1.80% -15.0% -100 -2.40% -5.00% -10.0% The following table discloses how the Bank’s economic value of equity (“EVE”) would react to interest rate changes. Changes in Market EVE as a % Change from 0 Shock EVE as a % Change from 0 Shock Interest Rates As of November 30, 2016 Board Policy As of December 31, 2019 Board Policy (Basis Points) Projected EVE Limit Projected EVE Limit Must be no greater than: Must be no greater than: +400 14.1% -40.0% +300 13.6% -35.0% +200 10.6% -30.0% +100 7.0% -20.0% 0.0% 0.0% -13.5% -20.0% Off-Balance Sheet Arrangements As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. Commitments are December 31, 2019 2018 (In Thousands) Commitments to extend credit Letters of credit ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. This item has been omitted based on Eagle’s status as a smaller reporting company. ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Eagle’s audited consolidated financial statements, notes thereto, and auditor’s reports are found immediately following Part III of this report. ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM9A. CONTROLS AND PROCEDURES. Disclosure Controls and Procedures 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, as amended, as of December 31, Management Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an assessment of the effectiveness of our internal control over financial reporting. This assessment was based upon the criteria for effective internal control over financial reporting established in the 2013Internal Control - Integrated Framework, The Company’s internal control over financial reporting involves a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes the controls themselves, as well as monitoring of the controls and internal auditing practices and actions to correct deficiencies identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, We identified a material weakness in internal control related to the review of manual journal entries. Specifically, the design of the manual journal entry review control did not ensure that all manual journal entries were captured and independently reviewed, thus management could not ensure that all entries were accurate and could not verify all manual journal entries contained sufficient supporting documentation. The material weakness did not result in any identified misstatement to the financial statements, and there were no changes to previously released financial results. However, the control deficiencies created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. As a result, management believes that, as of December 31, 2019, our internal control over financial reporting was not effective. The Company’s independent registered public accounting firm, Moss Adams LLP has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, which appears in Item 8 of this Form 10-K. Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended December 31, 2019. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. Moss Adams LLP has issued an unqualified opinion on our financial statements, which is included in Item 8 of this Form 10-K. Remediation Management has implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated so that these controls are designed, implemented and operating effectively. The remediation actions include: (i) restricting user access of individuals able to make manual journal entries, (ii) ensuring the completeness of manual journal entries included in the review through a review of a system generated file maintenance report over manual journal entries, (iii) ensuring accurate and appropriate documentation is retained to support the journal entry. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of the 2nd quarter fiscal year 2020. Changes in Internal Control over Financial Reporting ITEM9B. OTHER INFORMATION. None. PARTIII Except as provided below, the information required by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of our year ended December 31, ITEM10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information about our directors may be found under the caption “Proposal I – Election of Directors” in our Proxy Statement for the Executive Officers of the Registrant The following is a list of the names and ages of our executive officers, all positions and offices held by each person and each person’s principal occupations or employment during the past five years. There are no family relationships between any executive officers and directors. Peter J. Johnson, President/Chief Executive Officer Age Mr. Johnson has served as President and CEO of Eagle since December 2009. He has also served as President of the Bank since July 2007 and CEO since November 2007. Prior to being named President, he had served as the Company’s Executive Vice President and Chief Financial Officer. He joined the Bank in 1981. He currently serves on the Montana Independent Bankers Association board of directors and served as a member of the Federal Reserve Board’s Community Depository Institution Advisory Council from 2010-2012. He is a past chairman of both the Helena Area Chamber of Commerce and the Diocese of Helena Finance Council. He Laura F. Clark Age Ms. Clark has served as the Rachel R.Amdahl, Senior Vice President/ChiefOperations Officer Age DaleF.Field, Senior Vice President/Chief Credit Officer Age 4 Mr. Field joined Eagle in 2001 as ChantelleR.Nash,Senior Vice President/Chief Risk Officer Age 4 Ms. Nash joined Eagle as a Compliance Manager in 2006 and served as Vice President/Compliance Officer since 2010. She was promoted to Senior Vice President/Chief Risk Officer in July 2014. Ms. Nash holds a Juris Doctor degree from University of Idaho College of Law in Moscow, Idaho. She Mr. Rensmon joined Eagle in September 2016 as Vice President/Chief Information Officer and was promoted to Senior Vice President in October 2018. He is responsible for all facets of information systems and technology for the Company. He was formerly the Chief Information Officer for Morrison-Maierle, Inc. and also was the President of Morrison-Maierle Systems Corp., which provided customized IT services and consulting to companies across Montana. He holds a Bachelor of Science degree in Information Systems Management from Montana State University-Billings. Age Mr. Ms. Chilton joined the Bank in September 2014 as Branch Administrator. She was promoted to Vice President in 2018. Prior to working for the Bank, Ms. Chilton had been Vice President of Retail Operations at a Code of Ethics We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and our Board. Our Code of Ethics and Conflict of Interest Policy is available on our website at ITEM11. EXECUTIVE COMPENSATION. The information in the Proxy Statement set forth under the captions of “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference. ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information in the Proxy Statement set forth under the ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information in the Proxy Statement set forth under the captions of “Transactions with Certain Related Persons” and “Board Independence” is incorporated herein by reference. ITEM14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information in the Proxy Statement set forth under the PARTIV ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) (1) The following documents are filed as part of this report: The audited Consolidated Statements of Financial Condition of Eagle Bancorp Montana, Inc. and subsidiaries as of December 31, (2) Schedules omitted as they are not applicable. (3) Exhibits. Exhibits 10.1 through 10.12 and 10.16 through 10.21 are management contracts or compensatory plans or arrangements. 2.1 2.2 2.3 3.1 3.2 4.1 4.2 4.3 4.4 10.1 10.2 10.7 American Federal Savings Bank Split-Dollar Plan, effective October 21, 10.10 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 21.1 23.1 23.2 31.1 31.2 32.1 * The schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Eagle Bancorp Montana agrees to furnish supplementally a copy of such schedules, or any section thereof, to the SEC upon request. See item 15(a)(3) above. FORM 10-K SUMMARY. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. /s/ Peter J. Johnson Peter J. Johnson President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date President and Chief Executive Officer Peter J. Johnson Director (Principal Executive Officer) Chief Financial Officer/Chief Operating Officer Laura F. Clark Principal Accounting Officer) /s/ Rick F. Hays Rick F. Hays /s/ Thomas J. McCarvel Vice Chairman March 11, 2020 Thomas J. McCarvel /s/ Lynn E. Dickey Director Lynn E. Dickey /s/ Maureen J. Rude Director Maureen J. Rude /s/ Shavon R. Cape Director Shavon R. Cape Director Tanya J. Chemodurow /s/ Kenneth M. Walsh Director March 11, 2020 Kenneth M. Walsh /s/ Corey Jensen Director March 11, 2020 Corey Jensen /s/ Benjamin G. Ruddy Director March 11, 2020 Benjamin G. Ruddy /s/ Cynthia A. Utterback Director March 11, 2020 Cynthia A. Utterback AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS and REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM December 31, 2018 EAGLE BANCORPMONTANA, INC.ANDSUBSIDIARIES Contents 1 Reportof Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Eagle Bancorp Montana, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet ofEagle Bancorp Montana, Inc. and subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statements ofincome, comprehensive income, shareholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of the Company as of December 31, 2019, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’sconsolidatedfinancial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment in Item 9A: There were ineffective controls to ensure appropriate review of manual journal entries posted to the general ledger. Specifically, the Company did not design and maintain effective controls to ensure manual journal entries (i) were properly prepared with sufficient supporting documentation or (ii) appropriately reviewed and approved. We considered the material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 31, 2019, and our opinion on such consolidated financial statements was not affected. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Moss Adams LLP Everett, Washington March 11, 2020 We have served as the Company’s auditor since 2019. Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Opinion on the Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated statements of financial condition ofEagle BancorpMontana, Inc. and Subsidiaries Basis for Opinion The Company’s management is responsible for these consolidated financial We conducted our audits in accordance with the standards of the Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Abilene, Texas February EAGLEBANCORP MONTANA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in Thousands, Except for Per Share Data) December 31, December 31, 2016 2015 2019 2018 ASSETS: Cash and due from banks Interest bearing deposits in banks Federal funds sold Total cash and cash equivalents Securities available-for-sale Federal Home Loan Bank stock Federal Reserve Bank stock Investment in Eagle Bancorp Statutory Trust I Mortgage loans held-for-sale Loans receivable, net of deferred loan fees of $1,092 at December 31, 2016and $795 at December 31, 2015 and allowance for loan losses of$4,770 at December 31, 2016 and $3,550 at December 31, 2015 Federal Home Loan Bank ("FHLB") stock Federal Reserve Bank ("FRB") stock Mortgage loans held-for-sale, at fair value Loans receivable, net of allowance for loan losses of $8,600 and $6,600 at December 31, 2019 and 2018, respectively Accrued interest and dividends receivable Mortgage servicing rights, net Premises and equipment, net Cash surrender value of life insurance Real estate and other repossessed assets acquired insettlement of loans, net Cash surrender value of life insurance, net Goodwill Core deposit intangible, net Deferred tax asset, net Other assets Total assets LIABILITIES: Deposit accounts: Noninterest bearing Interest bearing Total deposits Accrued expenses and other liabilities Federal Home Loan Bank advances and other borrowings Subordinated debentures: Deferred tax liability, net FHLB advances and other borrowings Other long-term debt: Principal amount Unamortized debt issuance costs Total subordinated debentures less unamortized debt issuance costs Total other long-term debt, net Total liabilities COMMITMENTS AND CONTINGENCIES (NOTE 11) SHAREHOLDERS' EQUITY: Preferred stock (no par value; 1,000,000 shares authorized; no sharesissued or outstanding) Common stock ($0.01 par value; 8,000,000 shares authorized;4,083,127 shares issued; 3,811,409 and 3,779,464 sharesoutstanding at December 31, 2016 and 2015, respectively) Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; no shares issued or outstanding) Common stock ($0.01 par value; 20,000,000 and 8,000,000 shares authorized; 6,714,983 and 5,718,942 shares issued; 6,423,033 and 5,477,652 shares outstanding at December 31, 2019 and 2018, respectively) Additional paid-in capital Unallocated common stock held by Employee Stock Ownership Plan Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") Treasury stock, at cost Retained earnings Net accumulated other comprehensive (loss) income Net accumulated other comprehensive income (loss), net of tax Total shareholders' equity Total liabilities and shareholders' equity Years Ended December 31, 2016 2015 INTEREST AND DIVIDEND INCOME: Interest and fees on loans Securities available-for-sale Federal Home Loan Bank and Federal Reserve Bank dividends Trust preferred securities Interest on deposits in banks Other interest income Total interest and dividend income INTEREST EXPENSE: Deposits Federal Home Loan Bank advances and other borrowings Subordinated debentures Total interest expense NET INTEREST INCOME Loan loss provision NET INTEREST INCOME AFTER LOAN LOSS PROVISION NONINTEREST INCOME: Service charges on deposit accounts Net gain on sale of loans (includes $2,938 and $1,907 for2016 and 2015, respectively, related to accumulated othercomprehensive earnings reclassification) Mortgage loan service fees Wealth management income Interchange and ATM fees Appreciation in cash surrender value of life insurance Net gain on sale of available-for-sale securities (includes $249and $234 for 2016 and 2015, respectively, related toaccumulated other comprehensive earnings reclassification) Net loss on fair value hedge Net gain (loss) on sale of real estate owned and other repossessed property Other noninterest income Total noninterest income NONINTEREST EXPENSE: Salaries and employee benefits Occupancy and equipment expense Data processing Advertising Amortization of mortgage servicing rights Amortization of core deposit intangible and tax credits Federal insurance premiums Postage Legal, accounting and examination fees Consulting fees Other noninterest expense Total noninterest expenses INCOME BEFORE INCOME TAXES Income tax expense (includes ($455) and $321 for 2016and 2015, respectively, related to income tax (benefit)expense from reclassification items) NET INCOME BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE The accompanying notes are an integral part of these consolidated financial statements. EAGLEBANCORP MONTANA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF (Dollars in Years Ended December 31, 2016 2015 NET INCOME OTHER ITEMS OF COMPREHENSIVE (LOSS) INCOME: Change in fair value of investment securities available-for-sale,before income taxes Reclassification for realized gains and losses on investmentsecurities included in income, before income taxes Change in fair value of derivatives designated as cash flowhedges, before income taxes Reclassification for realized gains on derivatives designatedas cash flow hedges, before income taxes Total other items of comprehensive (loss) income Income tax benefit (expense) related to: Investment securities Derivatives designated as cash flow hedges Total income tax benefit (expense) COMPREHENSIVE INCOME Years Ended December 31, 2019 2018 INTEREST AND DIVIDEND INCOME: Interest and fees on loans Securities available-for-sale FHLB and FRB dividends Other interest income Total interest and dividend income INTEREST EXPENSE: Deposits FHLB advances and other borrowings Other long-term debt Total interest expense NET INTEREST INCOME Loan loss provision NET INTEREST INCOME AFTER LOAN LOSS PROVISION NONINTEREST INCOME: Service charges on deposit accounts Net gain on sale of loans Mortgage banking Wealth management income Interchange and ATM fees Appreciation in cash surrender value of life insurance Net gain (loss) on sale of available-for-sale securities Net gain on sale/disposal of premises and equipment Other noninterest income Total noninterest income NONINTEREST EXPENSE: Salaries and employee benefits Occupancy and equipment expense Data processing Advertising Amortization Loan costs Federal Deposit Insurance Corporation ("FDIC") insurance premiums Postage Professional and examination fees Acquisition costs Other noninterest expense Total noninterest expenses INCOME BEFORE PROVISION FOR INCOME TAXES Provision for income taxes NET INCOME BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE The accompanying notes are an integral part of these consolidated financial statements. EAGLEBANCORP MONTANA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF (Dollars in Preferred Stock Common Stock Paid-In Capital Unallocated ESOP Shares Treasury Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Balance at January 1, 2015 Net income Other comprehensive income Dividends paid Stock compensation expense Treasury stock purchased(116,865 shares at $11.30 average cost per share ) Treasury stock reissued for compensation(17,548 shares at $10.97 average cost per share ) Employee Stock Ownership Plan shares allocated orcommitted to be released for allocation (16,616 shares) Balance at December 31, 2015 Net income Other comprehensive loss Dividends paid Stock compensation expense Treasury stock reissued for compensation(31,945 shares at $10.97 average cost per share ) Employee Stock Ownership Plan shares allocated orcommitted to be released for allocation (16,616 shares) Balance at December 31, 2016 Years Ended December 31, 2019 2018 NET INCOME OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS): Change in fair value of investment securities available-for-sale Reclassification for net realized (gains) losses on investment securities available-for-sale Change in fair value of loans held-for-sale Reclassification for net realized gains on loans held-for-sale Total other items of comprehensive income (loss) Income tax (provision) benefit related to: Investment securities Loans held-for-sale Total income tax (provision) benefit COMPREHENSIVE INCOME The accompanying notes are an integral part of these consolidated financial statements. EAGLEBANCORP MONTANA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF (Dollars in Years Ended December 31, 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operatingactivities: Loan loss provision Depreciation Net amortization of investment securities premiums and discounts Amortization of mortgage servicing rights Amortization of core deposit intangible and tax credits Deferred income tax benefit Net gain on sale of loans Net gain on sale of available-for-sale securities Net (gain) loss on sale of real estate owned and other repossessed assets Net loss on fair value hedge Net loss (gain) on sale/disposal of premises and equipment Net appreciation in cash surrender value of life insurance Net change in: Accrued interest and dividends receivable Loans held-for-sale Other assets Accrued expenses and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Activity in available-for-sale securities: Sales Maturities, principal payments and calls Purchases Federal Home Loan Bank stock purchased Federal Reserve Bank stock redeemed (purchased) Loan origination and principal collection, net Proceeds from Bank owned life insurance Purchases of Bank owned life insurance Proceeds from sale of real estate and other repossessed assetsacquired in settlement of loans Proceeds from sale of premises and equipment Additions to premises and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits Net short-term advances (payments) from Federal Home Loan Bank and other borrowings Long-term advances from Federal Home Loan Bank and other borrowings Payments on long-term Federal Home Loan Bank and other borrowings Proceeds from issuance of subordinated debentures Payments for debt issuance costs Purchase of treasury stock, at cost Dividends paid Net cash provided by financing activities NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period Accumulated Additional Unallocated Other Preferred Common Paid-In ESOP Treasury Retained Comprehensive Stock Stock Capital Shares Stock Earnings Income (Loss) Total Balance at January 1, 2019 Net income Other comprehensive income Dividends paid Stock issued in connection with Big Muddy Bancorp, Inc. acquisition Stock compensation expense Treasury stock reissued for compensation (19,340 shares at $10.75 average cost per share ) ESOP shares allocated (16,616 shares) Treasury stock purchased (70,000 shares at $17.29 average cost per share) Balance at December 31, 2019 Balance at January 1, 2018 Net income Other comprehensive loss Dividends paid Stock issued in connection with TwinCo, Inc. acquisition Stock compensation expense Treasury stock reissued for compensation (17,200 shares at $10.83 average cost per share ) ESOP shares allocated (16,616 shares) Balance at December 31, 2018 The accompanying notes are an integral part of these consolidated financial statements. EAGLEBANCORP MONTANA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Years Ended December 31, 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Loan loss provision Write-down on real estate owned and other repossessed assets Depreciation Net amortization of investment securities premiums and discounts Amortization of mortgage servicing rights Amortization of core deposit intangible and tax credits Amortization of right of use assets Compensation expense related to restricted stock awards ESOP compensation expense for allocated shares Deferred income tax provision Net gain on sale of loans Originations of loans held-for-sale Proceeds from sales of loans held-for-sale Net (gain) loss on sale of available-for-sale securities Net loss on sale of real estate owned and other repossessed assets Net gain on sale/disposal of premises and equipment Net appreciation in cash surrender value of life insurance Net change in: Accrued interest and dividends receivable Other assets Accrued expenses and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Activity in available-for-sale securities: Sales Maturities, principal payments and calls Purchases FHLB stock purchased FRB stock purchased Cash received (paid) for acquisitions Loan origination and principal collection, net Proceeds from Bank owned life insurance Purchases of Bank owned life insurance Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans Proceeds from sale of premises and equipment Purchases of premises and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits Net short-term (payments) advances from FHLB and other borrowings Long-term advances from FHLB and other borrowings Payments on long-term FHLB and other borrowings Purchase of treasury stock Dividends paid Net cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period The accompanying notes are an integral part of these consolidated financial statements. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in Thousands) Years Ended December 31, 2019 2018 (In Thousands) SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for interest Cash paid during the year for income taxes Acquisitions: Assets acquired, excluding cash Liabilities assumed NON-CASH INVESTING AND FINANCING ACTIVITIES: Increase (decrease) in fair value of securities available-for-sale Mortgage servicing rights recognized Right of use assets obtained in exchange for lease liabilities Loans transferred to real estate and other assets acquired in foreclosure Stock issued in connection with acquisitions The accompanying notes are an integral part of these consolidated financial statements. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Organization and Organization Eagle Bancorp Statutory Trust I (the “Trust”) was established in September 2005 and is owned 100% by Eagle. AFSB NMTC Investment Fund, LLC was established in November 2012 and was owned 100% by the Bank. The Bank had equity investments in Certified Development Entities which received allocation of New Market Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund of the In 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 (“SBOT”), a Montana In August 2019, the Company The Bank is headquartered in Helena, Montana, and EAGLEBANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Organization and Summary of Significant Accounting Policies – continued The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In preparing consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from Principles of Consolidation The consolidated financial statements include Eagle Bancorp Montana Inc., the Bank, Eagle Bancorp Statutory Trust I and AFSB NMTC Investment Fund, LLC. All significant intercompany transactions and balances have been eliminated in consolidation. Reclassifications Certain prior period amounts were reclassified to conform to the presentation for 2019. These reclassifications had no impact on net income or total shareholders’ equity. During the quarter ended March 31, 2018, Eagle completed the acquisition of TwinCo, Inc. (“TwinCo”). During the quarter ended March 31, 2019, Eagle completed the acquisition of Big Muddy Bancorp, Inc. (“BMB”). See Note 2. Mergers and Acquisitions for more information. Subsequent Events The Company has evaluated events and transactions subsequent Significant Group Concentrations of Credit Risk Most of the Company’s business activity is with customers located within Montana. Note EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash and Cash Equivalents For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “cash and due from banks” and “interest bearing deposits in banks” all of which mature within ninety days. The Bank Investment Securities The Company can designate debt and equity securities as held-to-maturity, available-for-sale or trading. At December 31, Trading – Investments that are purchased with the intent of selling them within a short period of time. Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market concerns warrant such evaluation. The Company considers, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Declines in the fair value of individual EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Federal Home Loan Bank Stock The Company’s investment in Federal Reserve Bank Stock The Company’s investment in FRB stock is a restricted investment carried at cost, which approximates its fair value. Although the par value of the stock is $100 per share, banks pay only $50 per share at the time of purchase, with the understanding that the other half of the subscription amount is subject to call at any time. As a member of the Federal Reserve System, the Company is required to maintain a minimum level of investment in FRB stock based on a specific percentage of its capital and surplus. The Company had Mortgage Loans Held-for-Sale Mortgage loans originated and intended for sale in the secondary market are carried at fair value. Mortgage loans held-for-sale are sold with mortgage servicing rights either released or retained by the Bank. Fair value for loans held-for-sale is determined Loans The Bank Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances net of any unearned income, allowance for loan losses, and unamortized deferred fees or costs on originated loans and unamortized premiums or unaccreted discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs are deferred and amortized over the contractual life of the loan, and recorded as an adjustment to the yield, using the interest method. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Organization and Summary of Significant Accounting Policies – continued Loans – Non-Accrual and Past Due Loans–Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for A Residential EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Organization and Summary of Significant Accounting Policies – continued Loans – continued Commercial Real Estate Agricultural Loans– The Bank makes agricultural operating loans as well as long term agricultural real estate loans. Agricultural operating loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying real property. Agricultural real estate loans are secured with farm and ranch real estate. Payments on both types of agricultural loans are dependent on successful operation of the farm and/or ranch. Repayment is also affected by agricultural conditions that may include adverse weather conditions such as, drought, hail, flooding and severe winters. Also impacting the borrower’s ability to repay are commodity prices associated with the agricultural operation. When underwriting these loans, the Bank seeks to minimize these risks in a variety of ways, including giving careful consideration to the farm or ranch’s operating history, future operating projections, current and projected commodity prices and crop insurance. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Organization and Summary of Significant Accounting Policies – continued Loans – continued Home Equity Loans–The Bank originates home equity loans that are secured by the borrowers’ primary residence. These loans are typically subject to a prior lien, which may or may not be held by the Bank. Although these loans are secured by real estate, they carry a greater risk than first lien 1-4 family residential mortgages because of the existence of a prior lien on the property as well as the flexibility the borrower has with respect to the proceeds. The Bank attempts to minimize this risk by maintaining conservative underwriting policies on these types of loans. Generally, home equity loans are made for up to 85.00% of the appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. Consumer Loans–Consumer loans made by the Bank include automobile loans, recreational vehicle loans, boat loans, personal loans, credit lines, loans secured by deposit accounts and other personal loans. Risk is minimized due to relatively small loan amounts that are spread across many individual borrowers. Commercial Allowance for Loan Losses The Bank mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Bank considers tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Bank is engaged and require all lenders to obtain appropriate approvals for the extension of credit. The Bank also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced. A reporting system supplements the loan review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Organization and Summary of Significant Accounting Policies – continued Allowance for Loan Losses – continued The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. The allowance consists of specific Troubled Debt Restructured Loans A troubled debt restructured (“TDR”) loan is a loan in which the Bank grants a concession to the borrower that it would not otherwise consider, for reasons related to a borrower's financial difficulties. The loan terms which have been modified or restructured due to a borrower's financial difficulty, include but are not limited to a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals and rewrites or a combination of these modification methods. Mortgage Servicing Rights Servicing assets are recognized as separate assets when rights are acquired through Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are reported as assets and are amortized Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTE 1: Organization and Summary of Significant Accounting Policies – continued Premises and Equipment Land is carried at cost. Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the assets, ranging from 3 to 40 years. The costs of maintenance and repairs are expensed as incurred, while major expenditures for renewals and betterments are capitalized. The Company leases certain premises from third parties under various operating lease agreements. Effective January 1, 2019, operating leases are included in premises and equipment, net and other liabilities on the consolidated statements of financial position. Lease expense for lease payments is recognized on a straight-line basis over the life of the lease. Right of use assets and corresponding lease liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. If an implicit rate is not available in the lease, the Company uses an incremental borrowing rate to determine the present value of lease payments. Leases with a lease term of 12 months or less are not recorded on the consolidated statements of financial condition. Cash Surrender Value of Banked Owned Life Insurance Bank Owned Life Insurance (“BOLI”) policies are reflected on the consolidated statements of financial condition at cash surrender value, net of other charges or amounts due that are probable at settlement. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in noninterest income on the consolidated statements of income and are not subject to income taxes. Real Estate and Other Repossessed Assets Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, establishing a new carrying value. All write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Real estate and other repossessed properties was $26,000 and $107,000 at December 31, 2019 and 2018, respectively. Income Taxes The Company adopted authoritative guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. The Company’s income tax expense consists of the following components: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes– continued Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest accrued on penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, Employee Stock Ownership Plan Compensation expense recognized for the Company’s Treasury Stock Treasury stock is accounted for on the cost method. Advertising Costs The Company expenses advertising costs as they are incurred. Advertising costs were $1,028,000 and $1,158,000 for the years ended December 31, 2019 and 2018, respectively. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Organization and Summary of Significant Accounting Policies – continued Stock-Based Compensation Compensation cost is recognized for restricted stock awards, based on the fair value of the awards at the grant date. Compensation cost is recognized over the required service period, generally defined as the vesting period. Shares of restricted stock vest in equal installments over five years beginning one year from the grant date. Earnings Per Share Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items recorded directly to equity, such as unrealized holding gains and losses on securities available-for-sale. Loan Commitments and Related Financial Instruments Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Derivatives The Company’s derivatives are primarily the result of its mortgage banking activities and are in the form of interest rate lock commitments (“IRLCs) and To-Be-Announced (“TBA”) mortgage-backed securities. The derivatives are accounted for as free-standing or economic derivatives and are measured at fair value. The derivatives are recognized as either assets or liabilities on the consolidated statements of financial condition and the changes in the fair value of the Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the more information. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Organization and Summary of Transfers of Financial Assets Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Segment Reporting While management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the operations are considered by management to be aggregated in one reportable operating segment. Company on January 1, 2018. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Organization and Summary of RecentlyAdopted Accounting Pronouncements – continued The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, guarantees, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. ASC 606 is applicable to non-interest revenue streams such as wealth management income, service charges on deposit accounts and interchange and other fees. The recognition of these revenue streams did not change significantly upon the adoption of ASC 606. Substantially all of the Company’s revenue is generated from contracts with customers. Management determined that, based on the modified retrospective method, a cumulative-effect adjustment to opening retained earnings as a result of adopting this standard was not needed. Descriptions of our revenue-generating activities that are within the scope of ASC 606 and are recorded in noninterest income on the consolidated statements of income are discussed below: Wealth Management Income – We previously offered wealth management products and services through our wealth management division and financial consultants located in several of our markets. The Company discontinued its wealth management services during July of 2019. Revenue from wealth management represented fees due from wealth management customers as consideration for managing the customers’ assets. The Company’s performance obligation for these transactional-based services was generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Wealth management income was $258,000 and $536,000 for the years ended December 31, 2019 and 2018, respectively. Service Charges on Deposit Accounts– Revenue from service charges consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds and, when applicable, pay interest on deposits. Service charges on deposit accounts may be transactional or non-transactional in nature. Transactional service charges occur in the form of a service or penalty and are charged upon the occurrence of an event (e.g., overdraft fees, ATM fees, wire transfer fees). Transactional service charges are recognized as services are delivered to and consumed by the customer, or as penalty fees are charged. Non-transactional service charges are charges that are based on a broader service, such as account maintenance fees and dormancy fees, and are recognized on a monthly basis. Service Charges on Deposit Accounts were $1,219,000 and $943,000 for the years ended December 31, 2019 and 2018, respectively. Interchange and ATMFees– Revenue from debit card fees includes interchange fee income from debit cards processed through card association networks. Interchange fees represent a portion of a transaction amount that the Company and other involved parties retain to compensate themselves for giving the cardholder immediate access to funds. Interchange rates are generally set by the card association networks and are based on purchase volumes and other factors. The Company records interchange fees as services are provided. Interchange and ATM fees were $1,327,000 and $1,042,000 for the years ended December 31, 2019 and 2018, respectively. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Organization and Summary of Significant Accounting Policies – continued RecentlyAdopted Accounting Pronouncements – continued In February 2016, the FASB issued ASU No. In Recently Issued Accounting Pronouncements In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the standard amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Organization and Summary of Significant Accounting Policies – continued RecentlyIssued Accounting Pronouncements – continued In October 2019, the FASB amended the effective date of the standard. The amendments in this update are effective for fiscal years beginning after December 15, The Company believes the amendments in this update will have an impact on the Company’s consolidated financial statements and is In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Effective January 1, 2019, Eagle completed its previously announced merger with BMB, pursuant to an Agreement and Plan of Merger, dated as of August 21, 2018, by and among Eagle, Opportunity Bank of Montana, BMB and BMB’s wholly-owned subsidiary, SBOT, a Montana chartered commercial bank. BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. 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. The acquisition closed after receipt of approvals from regulatory authorities, approval of BMB shareholders and the satisfaction of other closing conditions. The total consideration paid was $16,436,000 and included cash consideration of $1,000 and common stock issued of $16,435,000. On September 5, 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire 100% of TwinCo’s equity voting interests. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated two branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. The acquisition closed January 31, 2018, after receipt of approvals from regulatory authorities, approval of TwinCo shareholders and the satisfaction of other closing conditions. The total consideration paid was $18,930,000 and included cash consideration of $9,900,000 and common stock issued of $9,030,000. These transactions were 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 combination are expensed as incurred. Determining the fair value of assets and liabilities is a complicated process involving significant judgement regarding methods and assumptions used to calculate estimated fair values. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The goodwill recorded is not deductible for federal income tax purposes. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: Mergers and Acquisitions – continued The following table summarizes the fair values of the assets acquired and liabilities assumed, consideration paid and the resulting goodwill. BMB TwinCo January 1, January 31, 2019 2018 (In Thousands, Except Share Data) Assets acquired: Cash and cash equivalents Investment securities Loans Premises and equipment Cash surrender value of life insurance Other real estate owned Core deposit intangible Other assets Total assets acquired Liabilities assumed: Deposits Accrued expenses and other liabilities Total liabilities assumed Net assets acquired Consideration paid: Cash Common stock issued (996,041 shares BMB and 446,774 shares TwinCo) Total consideration paid Goodwill resulting from acquisition Goodwill recorded for the BMB acquisition during the first quarter of 2019 was $3,586,000. Certain estimates that existed at January 1, 2019 were realized and a final true up of $126,000 of goodwill occurred in the fourth quarter. The final goodwill recorded related to the acquisition was $3,712,000. TwinCo investments were written down $941,000 to fair value on the date of acquisition based on market prices obtained from a third party. BMB investment fair value adjustments were considered insignificant. For both the BMB and TwinCo 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 loans 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 Years Ended December 31, 2016 2015 (Dollars in Thousands, Except for Per Share Data) Weighted average shares outstandingduring the period in which basicearnings per share is calculated Dilutive effect of stock compensation Average outstanding shares on whichdiluted earnings per share is calculated Net income applicable to commonstockholders Basic earnings per share Diluted earnings per share EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: Mergers and Acquisitions – continued The total accretable discount on TwinCo acquired loans was $1,834,000 as of January 31, 2018. During the year ended December 31, 2019, accretion of the loan discount was $409,000. During the year ended December 31, 2018, accretion of the loan discount was $589,000. The remaining accretable loan discount was $836,000 as of December 31, 2019. Four impaired loans were acquired through the BMB acquisition with a net balance of $556,000 as of January 1, 2019. The balance of the acquired impaired loans as of December 31, 2019 was $175,000. Two impaired loans were acquired through the TwinCo acquisition with a balance of $1,188,000 as of January 31, 2018. The balance of the acquired impaired loans as of December 31, 2019 was $1,061,000. The Company determined that applying the guidance in ASC 310-30 was not significant, however, the aforementioned loans are disclosed as impaired loans at December 31, 2019 and 2018. Fair value adjustments of $276,000 and $446,000 were recorded for BMB and TwinCo, respectively, related to premises and equipment. The Company used third party appraisals in the determination of the higher fair value compared to the book value of these acquired assets. Core deposit intangible assets of $1,988,000 were recorded for BMB and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years. Core deposit intangible assets of $1,609,000 were recorded for TwinCo and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years. For both the BMB and TwinCo acquisition, the core deposit intangible value is a function of the difference between the cost of the acquired core deposits and the alternative cost of funds. These cash flow streams were discounted to present value. The fair value of other deposit accounts acquired were valued by estimating future cash flows to be received or paid from individual or homogenous groups of assets and liabilities and then discounting those cash flows to a present value using rates of return that were available in financial markets for similar financial instruments on or near the acquisition date. Direct costs related to the acquisitions were expensed as incurred. The Company recorded acquisition costs related to BMB of $1,380,000 and $804,000 during the years ended December 31, 2019 and 2018, respectively. The Company recorded total acquisition costs related to the TwinCo acquisition of $1,041,000, of which $365,000 was recognized during the year ended December 31, 2018. Acquisition costs included legal and professional fees and data processing expenses incurred related to the acquisitions. Operations of BMB have been included in the consolidated financial statements since January 1, 2019. The Company does not consider BMB a separate reporting segment and does not track the amount of revenues and net income attributable to BMB since acquisition. As such, it is impracticable to determine such amounts for the period from January 1, 2019 through December 31, 2019. Operations of TwinCo have been included in the consolidated financial statements since February 1, 2018. The Company does not consider TwinCo a separate reporting segment and does not track the amount of revenues and net income attributable to TwinCo since acquisition. As such, it is impracticable to determine such amounts for the period from February 1, 2018 through December 31, 2019. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: Mergers and Acquisitions – continued The accompanying consolidated statements of income include the results of operations of the BMB acquired entity since the January 1, 2019 acquisition date. The following table presents unaudited pro forma results of operations for the year ended December 31, 2018 as if the acquisition had occurred on January 1, 2018. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of BMB on January 1, 2018. Cost savings are also not reflected in the unaudited pro forma amounts for the year ended December 31, 2018. Year Ended December 31, 2018 (Dollars in Thousands, Except Per Share Data) Pro forma net income(1) Net interest income after loan loss provision Noninterest income Noninterest expense Income before income taxes Income tax expense Net income Pro forma earnings per share(1) Basic earnings per share Diluted earnings per share Weighted average shares outstanding, basic Weighted average shares outstanding, diluted (1) Significant assumptions utilized include the acquisition cost noted above and a 20.00% effective tax rate. NOTE Investment Securities The Company’s investment policy requires that the Company purchase only high-grade investment securities. Most municipal obligations are categorized as “A” or better by a nationally recognized statistical rating organization. These ratings are achieved because the securities are backed by the full faith and credit of the municipality and also supported by third-party credit insurance policies. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: Investment Securities – continued Mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) are issued by government sponsored corporations, including Federal Home Loan Mortgage Corporation, Fannie Mae and the Guaranteed National Mortgage Association. assets, such as loans, leases, credit card debt, royalties or receivables. An ABS is similar to an MBS, except that the underlying securities are not mortgage-based. The amortized cost and fair values of securities, together with unrealized gains and losses, were as follows: December 31, 2016 December 31, 2019 Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value (In Thousands) (In Thousands) Available-for-sale: U.S. government and agency U.S. government and agency obligations Municipal obligations Corporate obligations MBSs - government-backed CMOs - government-backed Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Total December 31, 2015 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) Available-for-sale: U.S. government and agency Municipal obligations Corporate obligations MBSs - government-backed CMOs - government-backed Total Years Ended December 31, 2016 2015 (In Thousands) Proceeds from sale of available-for-sale securities Gross realized gain on sale of available-for-sale securities Gross realized loss on sale of available-for-sale securities Net realized gain on sale of available-for-sale securities December 31, 2018 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) Available-for-sale: U.S. government and agency obligations Municipal obligations Corporate obligations Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE InvestmentSecurities – continued Proceeds from sales of available-for-sale securities and the associated gross realized gains and losses were as follows: Years Ended December 31, 2019 2018 (In Thousands) Proceeds from sale of available-for-sale securities Gross realized gain on sale of available-for-sale securities Gross realized loss on sale of available-for-sale securities Net realized gain (loss) on sale of available-for-sale securities The amortized cost and fair value of securities December 31, 2019 Amortized Fair Amortized Fair Cost Value Cost Value (In Thousands) (In Thousands) Due in one year or less Due from one to five years Due from five to ten years Due after ten years MBSs - government-backed CMOs - government-backed Mortgage-backed securities Collateralized mortgage obligations Total At December 31, EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: Investment Securities – continued The Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months were as follows: December 31, 2016 December 31, 2019 Less than 12 Months 12 Months or Longer Less than 12 Months 12 Months or Longer Gross Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Value Losses (In Thousands) (In Thousands) U.S. government and agency U.S. government and agency obligations Municipal obligations Corporate obligations MBSs and CMOs - government-backed Mortgage-backed securities and collateralized mortgage obligations Asset-backed securities Total December 31, 2015 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 Municipal obligations Corporate obligations MBSs and CMOs - government-backed Total December 31, 2018 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 Municipal obligations Corporate obligations Mortgage-backed securities and collateralized mortgage obligations Asset-backed securities Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: Investment Securities – continued As of December 31, As of December 31, concerns regarding the underlying credit of the issuers or the underlying collateral. NOTE Loans Loans receivable consisted of the following: December 31, December 31, 2016 2015 2019 2018 (In Thousands) (In Thousands) First mortgage loans: Residential mortgage (1-4 family) Real estate loans: Residential 1-4 family Commercial real estate Real estate construction Other loans: Home equity Consumer Commercial Total Deferred loan fees, net Allowance for loan losses Deferred loan fees, net Total loans, net Within the December 31, 2016 2015 (Dollars in Thousands) Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net Total nonperforming loans Real estate owned and other repossessed assets, net Total nonperforming assets Total nonperforming assets as a percentage of total assets Allowance for loan losses Percent of allowance for loan losses to nonperforming loans Percent of allowance for loan losses to nonperforming assets EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Loans – continued Allowance for loan losses activity was as follows: Residential Mortgage (1-4 Family) Commercial Real Estate Real Estate Construction Home Equity Consumer Commercial Total (In Thousands) Allowance for loan losses: Beginning balance, January 1, 2016 Charge-offs Recoveries Provision Ending balance, December 31, 2016 Ending balance, December 31, 2016 allocated toloans individually evaluated for impairment Ending balance, December 31, 2016 allocated toloans collectively evaluated for impairment Loans receivable: Ending balance, December 31, 2016 Ending balance, December 31, 2016 of loansindividually evaluated for impairment Ending balance, December 31, 2016 of loanscollectively evaluated for impairment Residential Commercial Home 1-4 Family Real Estate Equity Consumer Commercial Total (In Thousands) Allowance for loan losses: Beginning balance, January 1, 2019 Charge-offs Recoveries Provision Ending balance, December 31, 2019 Ending balance, December 31, 2019 allocated to loans individually evaluated for impairment Ending balance, December 31, 2019 allocated to loans collectively evaluated for impairment Loans receivable: Ending balance, December 31, 2019 Ending balance, December 31, 2019 of loans individually evaluated for impairment Ending balance, December 31, 2019 of loans collectively evaluated for impairment Residential Mortgage (1-4 Family) Commercial Real Estate Real Estate Construction Home Equity Consumer Commercial Total (In Thousands) Allowance for loan losses: Beginning balance, January 1, 2015 Charge-offs Recoveries Provision Ending balance, December 31, 2015 Ending balance, December 31, 2015 allocated toloans individually evaluated for impairment Ending balance, December 31, 2015 allocated toloans collectively evaluated for impairment Loans receivable: Ending balance, December 31, 2015 Ending balance, December 31, 2015 of loansindividually evaluated for impairment Ending balance, December 31, 2015 of loanscollectively evaluated for impairment Residential Commercial Home 1-4 Family Real Estate Equity Consumer Commercial Total (In Thousands) Allowance for loan losses: Beginning balance, January 1, 2018 Charge-offs Recoveries Provision Ending balance, December 31, 2018 Ending balance, December 31, 2018 allocated to loans individually evaluated for impairment Ending balance, December 31, 2018 allocated to loans collectively evaluated for impairment Loans receivable: Ending balance, December 31, 2018 Ending balance, December 31, 2018 of loans individually evaluated for impairment Ending balance, December 31, 2018 of loans collectively evaluated for impairment EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Loans – continued December 31, 2016 Residential Mortgage (1-4 Family) Commercial Real Estate Real Estate Construction Home Equity Consumer Commercial Total (In Thousands) Grade: Pass Special mention Substandard Doubtful Loss Total Credit risk profile based on payment activity Performing Restructured loans Nonperforming Total December 31, 2015 Residential Mortgage (1-4 Family) Commercial Real Estate Real Estate Construction Home Equity Consumer Commercial Total (In Thousands) Grade: Pass Special mention Substandard Doubtful Loss Total Credit risk profile based on payment activity Performing Restructured loans Nonperforming Total The Company utilizes an LoansRated Pass – these are loans in categories 1 – 5 that are considered to be protected by the current net worth and paying capacity of the obligor, or by the value of the asset or the underlying collateral. LoansRated Special Mention – these loans in category 6 have potential weaknesses and are watched closely by management. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date. LoansRated Substandard – these loans in category 7 are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. LoansRated Doubtful – these loans in category 8 have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. LoansRated Loss – these loans are considered uncollectible and are not part of the On an annual basis, or more often if needed, the Company formally reviews the ratings of all commercial real estate, real estate construction and commercial business loans that have a principal balance of $750,000 or more. Quarterly, the Company reviews the rating of any consumer loan, broadly defined, that is delinquent 90 days or more. Likewise, quarterly, the Company reviews the rating of any commercial loan, broadly defined, that is delinquent 60 days or more. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment (In Thousands) With no related allowance: Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial With a related allowance: Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial Total: Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Loans – continued December 31, 2015 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment (In Thousands) With no related allowance: Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial With a related allowance: Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial Total: Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial Total December 31, 2019 Special Pass Mention Substandard Doubtful Loss Total (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total December 31, 2018 Special Pass Mention Substandard Doubtful Loss Total (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Loans – continued The following tables include information regarding delinquencies within the loan portfolio. December 31, 2019 Loans Past Due and Still Accruing 90 Days 30-89 Days and Non-Accrual Current Total Past Due Greater Total Loans Loans Loans (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total December 31, 2016 December 31, 2018 30-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans Recorded Investment >90 Days and Still Accruing Loans Past Due and Still Accruing (In Thousands) 90 Days Residential mortgage (1-4 family) 30-89 Days and Non-Accrual Current Total Past Due Greater Total Loans Loans Loans (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Real estate construction Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Loans – continued The following tables include information regarding impaired loans. December 31, 2015 December 31, 2019 30-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans Recorded Investment >90 Days and Still Accruing Unpaid Average (In Thousands) Recorded Principal Related Recorded Residential mortgage (1-4 family) Investment Balance Allowance Investment (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Real estate construction Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total December 31, 2018 Unpaid Average Recorded Principal Related Recorded Investment Balance Allowance Investment (In Thousands) Real estate loans: Residential 1-4 family Residential 1-4 family construction Commercial real estate Commercial construction and development Farmland Other loans: Home equity Consumer Commercial Agricultural Total Interest income EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Loans – continued During the year ended December 31, 2019, there were two new TDR loans. The During the year ended December 31, 2018, there was one new TDR loan. The recorded investment at time of restructure was $23,000 and no charge-off was incurred. The loan is a home equity loan and is on non-accrual status. The recorded investment was $20,000 at December 31, 2019 and $22,000 at December 31, 2018. There were no loans modified as TDR’s that defaulted during the year ended December 31, 2019 where the default occurred within 12 months of restructuring. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. As of December 31, Loans are granted to directors and officers of the Company in the ordinary course of business. Such loans are made in accordance with policies established for all loans of the Company, except that directors, officers and employees may be eligible to receive discounts on loan origination costs. Loans receivable (including loans sold and serviced for others) from related parties, including directors and (In Thousands) (In Thousands) Balance at January 1, 2015 Balance at January 1, 2018 Principal additions Principal payments Balance at December 31, 2015 Balance at December 31, 2018 Principal additions Principal payments Balance at December 31, 2016 Balance at December 31, 2019 December 31, 2016 2015 (In Thousands) Loans serviced, for the benefit of others,for directors, senior officers andtheir related parties Years Ended December 31, 2016 2015 (In Thousands) Interest income from loans ownedfor directors, senior officers andtheir related parties December 31, 2019 2018 (In Thousands) Loans serviced, for the benefit of others, for directors, executive officers and their related parties EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 December 31, 2016 Accrual Non-Accrual Total Status Status Modification (In Thousands) Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial Total Years Ended December 31, 2019 2018 (In Thousands) Interest income from loans owned for directors, executive officers and their related parties December 31, 2015 Accrual Non-Accrual Total Status Status Modification (In Thousands) Residential mortgage (1-4 family) Commercial real estate Real estate construction Home equity Consumer Commercial Total NOTE December 31, 2016 2015 (In Thousands) Residential mortgage (1-4 family) Commercial real estate Consumer Total foreclosed assets Years Ended December 31, 2016 2015 (In Thousands) Net gain (loss) on sale Operating expenses net of rental income Expenses related to foreclosed assets, net Mortgage Servicing Rights The Company is servicing mortgage loans for the benefit of others Custodial The following table is a summary of activity in mortgage servicing Years Ended December 31, 2019 2018 (In Thousands) Mortgage servicing rights: Beginning balance Mortgage servicing rights capitalized Amortization of mortgage servicing rights Ending balance There were no valuation allowances during December 31, 2019 and EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2016 2015 (In Thousands) Mortgage servicing rights: Beginning balance Mortgage servicing rights capitalized Amortization of mortgage servicing rights Ending balance Valuation allowance: Beginning balance Provision (credited) to operations Ending balance Mortgage servicing rights, net NOTE 5: Mortgage Servicing Rights – continued The fair values of these rights were December 31, 2019 2018 Key assumptions: Discount rate Prepayment speed range Weighted average prepayment speed NOTE Premises and Equipment The cost and accumulated depreciation of premises and equipment was as follows: December 31, December 31, 2016 2015 2019 2018 (In Thousands) (In Thousands) Land Buildings and improvements Furniture and equipment Construction in progress Accumulated depreciation Premises and equipment, net (1) Excluding right of use assets. Depreciation expense was The Company leases six locations that are full-service branches and one mortgage lending branch, under various operating lease agreements. Leases with a lease term of 12 months at commencement are not recorded on the balance sheet. The Company’s leases have maturities ranging from 2020 to 2028, some of which include lessee options to extend the leases for up to 10 years. Right of use assets and corresponding lease liabilities of $2,374,000 were recorded as a result of adopting the lease standard on January 1, 2019. Because most of our leases do not provide an implicit rate, the Company used the FHLB of Des Moines Fixed-Rate Advance interest rate as the incremental borrowing rate to determine the present value of future lease payments for all leases entered into prior to the adoption date. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: Premises and Equipment – continued The following table summarizes the Company’s leases: December 31, 2019 (In Thousands) Right of use assets, net of amortization Lease liabilities Weighted average remaining lease term (years) Weighted average discount rate The components of lease cost, which were included in occupancy and equipment expense on the Consolidated Statements of Income, were as follows: December 31, 2019 (In Thousands) Operating lease cost Short-term lease cost Total lease cost The following table presents the maturities of lease liabilities at December 31, 2019 for future periods: (In Thousands) 2020 2021 2022 2023 2024 Thereafter Total lease payments Less imputed interest Present value of lease liabilities EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Goodwill and Other Intangible Assets Goodwill and December 31, 2016 2015 (In Thousands) Goodwill acquisitions. Goodwill totaled $15,836,000 and $12,124,000 at December 31, 2019 and 2018, respectively. The components of December 31, December 31, 2016 2015 2019 2018 (In Thousands) (In Thousands) Core deposit intangible Accumulated amortization Core deposit intangible, net Core deposit intangible assets are amortized on an accelerated basis over their estimated life of 10 years. Amortization expense related to intangible assets was Years ending December 31: (In Thousands) 2020 2021 2022 2023 2024 Thereafter Total Years ended December 31: (In Thousands) 2017 2018 2019 2020 2021 Thereafter Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Deposits Deposits are summarized as follows: December 31, December 31, 2016 2015 2019 2018 Weighted Weighted Weighted Weighted Average Average Average Average Balance Rate Balance Rate Balance Rate Balance Rate (Dollars in Thousands) (Dollars in Thousands) Noninterest checking Interest bearing checking Savings Money market Time certificates of deposits Total Time certificates of deposits include $16,000,000 and $0 related to fixed rate brokered certificates through the Certificate of Deposit Account Registry Service (“CDARS”) at December 31, 2019 and 2018, respectively. At December 31, Time certificates of deposits with balances of $250,000 and greater was EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: Deposits– continued At December 31, (In Thousands) Within one year One to two years Two to three years Three to four years Thereafter Total Years ending December 31: (In Thousands) 2020 2021 2022 2023 2024 Thereafter Total Interest expense on deposits was as follows: Years Ended Years Ended December 31, December 31, 2016 2015 2019 2018 (In Thousands) (In Thousands) Checking Savings Money market Time certificates of deposits Total At December 31, NOTE Advances from the Federal Home Loan Bankand At December 31, (In Thousands) Within one year One to two years Two to three years Three to four years Four to five years Thereafter Total Years ending December 31: (In Thousands) 2020 2021 2022 2023 2024 Thereafter Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Advances from the Federal Home Loan Bank and Other Borrowings– continued Federal Home LoanBankAdvances Other Borrowings At December 31, Federal Funds Purchased The Bank has a The Bank has a The Bank All Borrowings Outstanding For all borrowings outstanding the weighted average interest rate for advances at December 31, The maximum amount outstanding at any month-end was EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE December 31, 2016 2015 Unamortized Unamortized Debt Debt Principal Issuance Principal Issuance Amount Costs Amount Costs (In Thousands) Subordinated debentures: Variable at 3-Month Libor plus 1.42%, due 2035 Fixed at 6.75%, due 2025 Total December 31, 2019 2018 Unamortized Unamortized Debt Debt Principal Issuance Principal Issuance Amount Costs Amount Costs (In Thousands) Senior notes fixed at 5.75%, due 2022 Subordinated debentures fixed at 6.75%, due 2025 Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035 Total other long-term debt In February 2017, the Company completed the issuance, through a private placement, of $10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. The interest will be paid semi-annually through maturity date. The notes are not subject to redemption at the option of the Company. In June 2015, the Company completed the issuance of $10,000,000 in aggregate principal amount of subordinated notes due in 2025 in a private placement transaction to an institutional accredited investor. The notes will bear interest at an annual fixed rate of 6.75% and interest will be paid quarterly through maturity date or earlier redemption. The notes are subject to redemption at the option of the Company on or after June 19, 2020. The subordinated debentures qualify as Tier 2 capital for regulatory capital purposes. In September 2005, the Company completed the private placement of $5,155,000 in subordinated debentures to For EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: Commitments and Contingencies Financial Instruments and Off-Balance-Sheet Activities All financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary market. In response to marketplace demands, the Bank routinely makes commitments to extend credit for fixed rate and variable rate loans with or without rate lock guarantees. When rate lock guarantees are made to customers, the Bank becomes subject to market risk for changes in interest rates that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor. Commitments to extend credit are agreements to lend to a customer as long as the borrower satisfies the Bank’s underwriting standards and related provisions of the borrowing agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans, and normally consists of real property. The Bank’s experience has been that substantially all loan commitments are completed or terminated by the borrower within 3 to 12 months. Commitments are summarized as follows: December 31, 2019 2018 (In Thousands) Commitments to extend credit Letters of credit EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 Commitments and Contingencies Employment Contracts The Company has entered into change of control agreements with its Chief Financial Officer/Chief Operating Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Chief Operations Officer and Chief Information Officer. The change in control agreements provide a double trigger benefit equal to the sum of the executive’s annual salary and bonus for the most recently completed year. The benefits are payable if the executive’s employment is terminated without cause within two years after a change in control or if the executive resigns for good reason during the two years after a change in control. The change in control agreements are for two years, renewing automatically for successive one-year periods unless Eagle provides written notice of nonrenewal 90 days before the contract anniversary date. The officer would also receive benefit payments (less co-payment amounts) for continued life, medical, dental and disability insurance coverage substantially identical to coverage maintained by the Bank before employment termination. Continued insurance coverage benefits are payable for the 12-month period following termination or, if sooner, until life, medical, dental and disability insurance coverage is obtained from another employer. Legal Proceedings Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s financial statements. Years ended December 31: (In Thousands) 2017 2018 2019 2020 2021 Thereafter Total Unrealized Gains (Losses) on Derivatives Designated as Cash Flow Hedges Unrealized (Losses) Gains on Investment Securities Available for Sale Total (In Thousands) Balance, January 1, 2015 Other comprehensive income,before reclassifications and income taxes Amounts reclassified from accumulated othercomprehensive income (loss), before income taxes Income tax expense Total other comprehensive income Balance, December 31, 2015 Other comprehensive income (loss),before reclassifications and income taxes Amounts reclassified from accumulated othercomprehensive income (loss), before income taxes Income tax benefit Total other comprehensive loss Balance, December 31, 2016 NOTE Income Taxes The components of the Company’s income tax provision (benefit) were as follows: Years Ended December 31, 2019 2018 (In Thousands) Current U.S. federal Montana Total current income tax provision Deferred U.S. federal Montana Total deferred income tax provision Total income tax provision Years Ended December 31, 2016 2015 (In Thousands) Current U.S. federal Montana Deferred U.S. federal Montana Total EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: Income Taxes – continued The nature and components of deferred tax assets and liabilities were as follows: December 31, December 31, 2016 2015 2019 2018 (In Thousands) (In Thousands) Deferred tax assets: Loans receivable Deferred loan fees Lease liability Deferred compensation Employee benefits Unrealized losses onsecurities available-for-sale Unrealized losses on securities available-for-sale Acquisition costs Acquisition fair value adjustments New Market Tax Credits carry forward Alternative Minimum Tax carry forward Other Total deferred tax assets Deferred tax liabilities: Premises and equipment Right of use asset Federal Home Loan Bank stock Mortgage servicing rights Unrealized gains on hedging Unrealized gains on securities available-for-sale Goodwill Intangibles Other Total deferred tax liabilities Net deferred tax asset Net deferred tax (liability) asset The Company believes, based upon the available evidence, that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 Income Taxes – continued A reconciliation of the Company’s effective income tax provision (benefit) to the statutory federal income tax rate was as follows: Years Ended Years Ended December 31, December 31, 2016 2015 2019 2018 % of % of % of % of Pretax Pretax Pretax Pretax Amount Income Amount Income Amount Income Amount Income (Dollars in Thousands) (Dollars in Thousands) Federal income taxes at the statutory rate State income taxes Tax-exempt interest income Income from bank-owned life insurance New Market Tax Credits Other, net Actual tax benefit and effective tax rate Actual tax expense and effective tax rate NOTE 13: Accumulated Other Comprehensive Income (Loss) The following table includes information regarding the activity in accumulated other comprehensive income Unrealized Unrealized Gains (Losses) Gains (Losses) on Investment on Loans Securities Held-for-Sale Available for Sale Total (In Thousands) Balance, January 1, 2018 Other comprehensive income (loss), before reclassifications and income taxes Amounts reclassified from accumulated other comprehensive income, before income taxes Income tax benefit Total other comprehensive loss Balance, December 31, 2018 Other comprehensive income, before reclassifications and income taxes Amounts reclassified from accumulated other comprehensive income (loss), before income taxes Income tax benefit (provision) Total other comprehensive (loss) income Balance, December 31, 2019 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE The computations of basic and diluted earnings per share are below. Years Ended December 31, 2019 2018 (Dollars in Thousands, Except for Per Share Data) Basic weighted average shares outstanding Dilutive effect of stock compensation Diluted weighted average shares outstanding Net income available to common shareholders Basic earnings per share Diluted earnings per share Years Ended December 31, 2016 2015 (In Thousands) Supplemental cash flow information: Cash paid during the year for interest Cash paid during the year for income taxes Non-cash investing and financing activities: (Decrease) increase in marketvalue of securities available-for-sale Mortgage servicing rights recognized Loans transferred to real estate andother assets acquired in foreclosure Treasury shares reissued for compensation Employee Stock Ownership Plan shares released There were no anti-dilutive shares at December 31, 2019 or 2018. NOTE Capital Management and Regulatory The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Beginning January 1, 2015, community banking organizations became subject to a new regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III). The Once fully phased in on January 1, 2019, the Basel III capital rules required the Bank to maintain a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which was added to the 4.5% common equity Tier 1 capital ratio as the buffer was phased in, effectively resulting in a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% upon full phase in). The Bank is also required to maintain a Tier 1 capital to risk-weighted assets ratio of 6.0% (8.5% including the capital conservation buffer), a total capital to risk-weighted assets ratio of 8.0% (10.5% including the capital conservation buffer), and a Tier 1 capital to average assets ratio of 4.0%. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15: Capital Management and Regulatory Matters– continued Management believes that, as of December 31, Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to total assets (all as defined in the regulations). Management believes, as of December 31, As of December 31, Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) December 31, 2016: Total risk-based capitalto risk weighted assets Consolidated % % % Bank Tier I capital torisk weighted assets Consolidated Bank Common equity tier I capital torisk weighted assets Consolidated Bank Tier 1 capital toadjusted total average assets Consolidated Bank below and include the capital conservation buffer of 2.500% phased-in beginning January 1, 2019: Minimum Minimum Required To Be Well for Capital Adequacy Capitalized Under Basel III Prompt Corrective Actual Fully Phased-In Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) December 31, 2019: Total risk-based capital to risk weighted assets Consolidated % % Bank Tier I capital to risk weighted assets Consolidated Bank Common equity tier I capital to risk weighted assets Consolidated Bank Tier 1 capital to adjusted total average assets Consolidated Bank EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Capital Management and Regulatory The Bank’s actual capital amounts and ratios as of December 31, Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) December 31, 2015: Total risk-based capitalto risk weighted assets Consolidated % % % Bank Tier I capital torisk weighted assets Consolidated Bank Common equity tier I capital torisk weighted assets Consolidated Bank Tier 1 capital toadjusted total average assets Consolidated Bank December 31, 2016 2015 (In Thousands) Capital determined by GAAP Unrealized loss on securities available-for-sale Unrealized gain on forward delivery commitments Goodwill and core deposit intangibles, net ofassociated deferred tax liabilities Disallowed deferred tax assets Tier I capital Allowance for loan losses Total risk-based capital 1.875% phased-in beginning January 1, 2018: Minimum Minimum Required To Be Well for Capital Adequacy Capitalized Under Basel III Prompt Corrective Actual Fully Phased-In Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) December 31, 2018: Total risk-based capital to risk weighted assets Consolidated % % Bank Tier I capital to risk weighted assets Consolidated Bank Common equity tier I capital to risk weighted assets Consolidated Bank Tier 1 capital to adjusted total average assets Consolidated Bank Dividend Limitations Under State of Montana banking regulation, member banks such as the Bank generally may declare annual cash dividends up to an amount equal to the previous two years’ net earnings. Dividends in excess of such amount require approval of the Division of Banking. The Bank paid dividends of Stock Repurchase Program On July 18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the three months ended September 30 or December 31, 2019. The plan expires on July 18, 2020. On July 19, 2018, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2018. However, during the first quarter of 2019, 42,000 shares were purchased at an average price of $17.43 per share. In addition, 28,000 shares were purchased during the second quarter of 2019 at an average price of $17.09 per share. The plan expired on July 19, 2019. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15: Capital Management and Regulatory Matters– continued Stock Repurchase Program– continued On July 20, 2017, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. No shares were purchased under this plan. The plan expired on July 20, 2018. Liquidation Rights Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of the Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of November 30, 2008 (who continue to be the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund Eagle’s remaining obligations under the liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by Eagle would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation account” and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account. After two years from the date of conversion and upon the written request of the NOTE Related Party Transactions In the normal course of lending, the Bank provided a commercial line of credit to an affiliated entity that is partially owned by 2018, respectively. In addition, 2018, respectively. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Employee Benefits Profit Sharing Plan The Company provides a noncontributory profit sharing plan for eligible employees who have completed one year of service. The amount of the Company’s annual contribution The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board, the Company may match up to 50.00% of participants’ contributions up to a maximum of 4.00% of participants’ salaries. For the years ended December 31, Deferred Compensation Plans The Company has entered into deferred compensation contracts with current key employees. The contracts provide fixed benefits payable in equal annual installments upon retirement. The Company purchased life insurance contracts that may be used to fund the payments. The charge to expense is based on the present value computations of anticipated liabilities. For the years ended December 31, Employee Stock Ownership Plan The Company has established an ESOP for eligible employees who meet certain age and service requirements. Shares purchased by the ESOP are held in a suspense account by the plan trustee until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed seven years. Any forfeited shares are allocated to other participants in the same proportion as contributions. As shares are committed to be released, the Company reports compensation expense equal to the average daily market prices of the shares. The compensation expense is accrued throughout the year. Dividends on allocated ESOP shares are recorded as a reduction to retained earnings; dividends on unallocated shares are recorded as a reduction of dividends paid. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17: Employee Benefits – continued Employee Stock Ownership Plan – continued Total ESOP expenses of Stock Incentive Plan The Company adopted the stock incentive plan on November 1, The following table shows the activity of the restricted stock awards granted: Number of Shares Unvested awards as of January 1, Awards granted Awards vested Awards forfeited Unvested awards as of December 31, Awards granted Awards vested Awards forfeited Unvested awards as of December 31, 2024. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE The Derivatives are accounted for as free-standing or economic derivatives and December 31, 2019 December 31, 2018 Notional Fair Value Notional Fair Value Amount Asset Liability Amount Asset Liability (In Thousands) Interest rate lock commitments Forward TBA mortgage-backed securities 2019. The Company did not NOTE Fair Value Assets and liabilities that are measured at fair value are grouped in three levels within the fair value value. The fair value hierarchy is as follows: ■ Level 1 Inputs ■ Level 2 Inputs ■ Level 3 Inputs EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19: Fair Value of Financial Instruments – continued A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy at the reporting date, is set forth below. Available-for-Sale Securities –Securities classified as available-for-sale are reported at fair value utilizing Level 1 (nationally recognized securities exchanges) and Level 2 inputs. For 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 and forward TBA mortgage-backed securities are estimated using quoted or published market prices for similar instruments, 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 the forward TBA mortgage-backed securities are considered Level 2 inputs. Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the Other R EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Fair Value The following table summarizes financial assets and 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: December 31, 2016 December 31, 2019 Level 1 Level 2 Level 3 Total Fair Level 1 Level 2 Level 3 Total Fair Inputs Inputs Inputs Value Inputs Inputs Inputs Value (In Thousands) (In Thousands) Financial assets: Available-for-sale securities U.S. government and agency Municipal obligations Corporate obligations MBSs - government-backed CMOs - government-backed Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Loans held-for-sale Interest rate lock commitments Financial liabilities: Forward TBA mortgage-backed securities December 31, 2015 December 31, 2018 Level 1 Level 2 Level 3 Total Fair Level 1 Level 2 Level 3 Total Fair Inputs Inputs Inputs Value Inputs Inputs Inputs Value (In Thousands) (In Thousands) Financial assets: Available-for-sale securities U.S. government and agency Municipal obligations Corporate obligations MBSs - government-backed CMOs - government-backed Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Loans held-for-sale Interest rate lock commitments Financial liabilities: Forward TBA mortgage-backed securities EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Fair Value Certain financial assets The following tables December 31, 2016 December 31, 2019 Level 1 Level 2 Level 3 Total Fair Level 1 Level 2 Level 3 Total Fair Inputs Inputs Inputs Value Inputs Inputs Inputs Value (In Thousands) (In Thousands) Impaired loans Repossessed assets Real estate and other repossessed assets December 31, 2018 Level 1 Level 2 Level 3 Total Fair Inputs Inputs Inputs Value (In Thousands) Impaired loans Real estate and other repossessed assets As of December 31, December 31, 2015 Level 1 Level 2 Level 3 Total Fair Inputs Inputs Inputs Value (In Thousands) Impaired loans Repossessed assets $491,000. As of December 31, EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Fair Value Fair Value at Principal Significant Range of December 31, Valuation Unobservable Significant Input Instrument 2016 2015 Technique Inputs Values (Dollars in Thousands) Impaired loans Appraisal of collateral (1) Appraisal adjustments Repossessed assets Appraisal of collateral (1) (3) Liquidation expenses (2) Fair Value at Principal Significant Range of December 31, Valuation Unobservable Signficant Input Instrument 2019 2018 Technique Inputs Values Impaired loans Fair value of underlying collateral Discount applied to the obtained appraisal Real estate and other repossessed assets Fair value of collateral Discount applied to the obtained appraisal December 31, 2016 December 31, 2019 Level 1 Level 2 Level 3 Total Carrying Level 1 Level 2 Level 3 Total Carrying Inputs Inputs Inputs Fair Value Amount Inputs Inputs Inputs Fair Value Amount (In Thousands) (In Thousands) Financial assets: Cash and cash equivalents Federal Home Loan Bank stock Federal Reserve Bank stock Loans receivable, net Accrued interest and dividendsreceivable Accrued interest and dividends receivable Mortgage servicing rights Cash surrender value oflife insurance Financial liabilities: Non-maturing interest bearing deposits Noninterest bearing deposits Time certificates of deposit Accrued expenses and other liabilities Federal Home Loan Bank advancesand other borrowings Subordinated debentures Off-balance-sheet instruments Forward delivery commitments Commitments to extend credit Rate lock commitments Federal Home Loan Bank advances and other borrowings Other long-term debt EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES December 31, 2015 Level 1 Level 2 Level 3 Total Carrying Inputs Inputs Inputs Fair Value Amount (In Thousands) Financial assets: Cash and cash equivalents Federal Home Loan Bank stock Federal Reserve Bank stock Loans receivable, net Accrued interest and dividendsreceivable Mortgage servicing rights Cash surrender value oflife insurance Financial liabilities: Non-maturing interest bearing deposits Noninterest bearing deposits Time certificates of deposit Accrued expenses and other liabilities Federal Home Loan Bank advancesand other borrowings Subordinated debentures Off-balance-sheet instruments Forward delivery commitments Commitments to extend credit Rate lock commitments NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Fair Value December 31, 2018 Level 1 Level 2 Level 3 Total Carrying Inputs Inputs Inputs Fair Value Amount (In Thousands) Financial assets: Cash and cash equivalents Federal Home Loan Bank stock Federal Reserve Bank stock Loans receivable, net Accrued interest and dividends receivable Mortgage servicing rights Financial liabilities: Non-maturing interest bearing deposits Noninterest bearing deposits Time certificates of deposit Accrued expenses and other liabilities Federal Home Loan Bank advances and other borrowings Other long-term debt EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Condensed Parent Company Financial Statements Included below are the condensed financial statements of the Parent Company, Eagle Bancorp Montana, Inc.: December 31, December 31, 2016 2015 2019 2018 (In Thousands) (In Thousands) Assets: Cash and cash equivalents Securities available-for-sale Investment in Eagle Bancorp Statutory Trust I Investment in Opportunity Bank of Montana Other assets Total assets Liabilities and Shareholders's Equity: Accounts payable and accrued expenses Long-term subordinated debt Other long-term debt Shareholders' equity Total liabilities and shareholders' equity Years Ended 2016 2015 (In Thousands) Interest income Interest expense Noninterest income Noninterest expense Loss before income taxes Income tax benefit Loss before equity in undistributedearnings of Opportunity Bank of Montana Equity in undistributed earningsof Opportunity Bank of Montana Net income Years Ended December 31, 2019 2018 (In Thousands) Interest income Interest expense Noninterest income Noninterest expense Loss before income taxes Income tax benefit Loss before equity in undistributed earnings of Opportunity Bank of Montana Equity in undistributed earnings of Opportunity Bank of Montana Net income EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES Years Ended December 31, 2016 2015 (In Thousands) Cash Flows from Operating Activities: Net income Adjustments to reconcile net incometo net cash used in operating activities: Other adjustments, net Net cash used in operating activities Cash Flows from Investing Activities: Cash contributions from Opportunity Bank of Montana Cash distributions to Opportunity Bank of Montana Activity in available-for-sale securities: Sales Maturities, principal payments and calls Purchases Net cash provided by (used in) investing activities Cash Flows from Financing Activities: Employee Stock Ownership Plan payments and dividends Proceeds from issuance of subordinated debentures Payments for debt issuance costs Payments to purchase treasury stock Treasury shares reissued for compensation Dividends paid Net cash (used in) provided by financing activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, beginning of period Cash and Cash Equivalents, end of period NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2016 First Second Third Fourth Quarter Quarter Quarter Quarter (Dollars in Thousands, Except Per Share Data) Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Noninterest income Noninterest expense Income before income tax expense Income tax expense Net income Other comprehensive income (loss) Basic earnings per common share Diluted earnings per common share Year Ended December 31, 2015 First Second Third Fourth Quarter Quarter Quarter Quarter (Dollars in Thousands, Except Per Share Data) Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Noninterest income Noninterest expense Income before income tax expense Income tax expense Net income Other comprehensive income (loss) Basic earnings per common share Diluted earnings per common share NOTE 2 Condensed Parent Company Financial Statements – continued Years Ended December 31, 2019 2018 (In Thousands) Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of Opportunity Bank of Montana Other adjustments, net Net cash used in operating activities Cash Flows from Investing Activities: Cash contributions from Opportunity Bank of Montana Cash paid for acquisitions, net of cash received Activity in available-for-sale securities: Sales Maturities, principal payments and calls Net cash provided by investing activities Cash Flows from Financing Activities: Employee Stock Ownership Plan payments and dividends Payments to purchase treasury stock Treasury shares reissued for compensation Dividends paid Net cash used in financing activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, beginning of period Cash and Cash Equivalents, end of period EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21: Subsequent Events Effective January 1, 2020, Eagle completed its previously announced merger with WHC and its wholly-owned subsidiary, BW, pursuant to an Agreement and Plan of Merger, dated as of August 8, 2019. At the effective time of the Merger, WHC merged with and into Eagle, with Eagle continuing as the surviving corporation. WB operated one branch in Wolf Point, Montana. Eagle acquired approximately $102,706,000 in assets, $89,234,000 in deposits and $44,586,000 in gross loans based on WHC’s December 31, 2019 financial statements. The fair value of assets acquired and liabilities assumed is still being determined as of January 1, 2020 in regards to this merger. - 66 - (1) Includes28The following table sets forth information with respect to our loan originations, purchases and sales activity: $ 422,436 $ 333,857 Residential mortgage (1-4 family) 333,030 240,649 Commercial real estate 94,079 80,505 Real estate construction 32,149 16,561 Home equity 19,328 13,544 Consumer 8,284 8,106 Commercial 42,968 20,993 529,838 380,358 Whole loans 308,675 230,616 165,495 62,572 297 309 1,220 1,100 57,185 88,579 $ 479,621 $ 422,436 (1) Includes loans held-for-sale.2016,2019 and 2018, the Bank had $805,000$26,000 and $107,000, respectively, of real estate owned.owned and other repossessed property.SubsequentThe interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectability of the loan.reasonably assured. At December 31, 2016, we2019, the Bank had $614,000$3.64 million ($606,0003.57 million net of specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status. At December 31, 2018, the Bank had $2.29 million (there were no specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status.loans that are delinquent 30 to 89 days:loans: Residential mortgage (1-4 family) 8 $ 975 42.94 % 7 $ 702 15.26 % 3 $ 4 0.22 % 1 260 5.65 % - - 0.00 % Commercial real estate 5 513 22.59 % 5 793 17.24 % - - 0.00 % Real estate construction - - 0.00 % 3 72 1.57 % - - 0.00 % 4 1,039 22.59 % - - 0.00 % Home equity 8 365 16.07 % 7 420 9.13 % - - 0.00 % Consumer 31 169 7.44 % 43 128 2.78 % - - 0.00 % Commercial 3 249 10.96 % 10 484 10.52 % - - 0.00 % 7 702 15.26 % 2 1,805 99.78 % 55 $ 2,271 100.00 % 87 $ 4,600 100.00 % 5 $ 1,809 100.00 % Real estate loans: Residential mortgage (1-4 family) $ 221 $ 730 Commercial real estate - 667 Other loans: Home equity 297 161 Consumer 96 145 Commercial - 327 Real estate loans: Residential mortgage (1-4 family) 456 221 Commercial real estate 4 4 Real estate construction - 247 Other loans: Home equity 35 - Other loans: Home equity 43 46 1,152 2,548 825 595 Total nonperforming assets $ 1,977 $ 3,143 0.25 % 0.63 % 0.17 % 0.40 % 414.06 % 139.32 % 0.29 % 0.50 % Residential mortgage (1-4 family) non-accrual loans decreased during the year ended December 31, 2016 primarily due to one loan paid off via a short sale. Commercial real estate non-accrual loans decreased during the year ended December 31, 2016 due to one loan moving out of non-accrual status. Commercial non-accrual loans decreased due to one loan being paid off. $ 618 $ 253 $ 475 $ 221 $ 730 337 634 - - - 583 432 - - 667 50 13 - - - 323 - - - - 78 469 242 297 161 156 127 153 96 145 750 308 107 - 327 499 32 - - - 4 130 - 456 221 - - - - 247 - 1,347 - 4 4 - - - 35 - 1,805 - - - - 153 - - - - 74 - - - - 20 22 - 43 46 5,450 3,767 977 1,152 2,548 26 107 525 825 595 $ 5,476 $ 3,874 $ 1,502 $ 1,977 $ 3,143 0.70 % 0.61 % 0.19 % 0.25 % 0.63 % 0.52 % 0.44 % 0.14 % 0.17 % 0.40 % 157.80 % 175.21 % 588.54 % 414.06 % 139.32 % 0.52 % 0.45 % 0.21 % 0.29 % 0.50 % 2016,2019, the Bank sold three real estate owned and other repossessed assets resulting in a net loss of $18,000. There was one write-down on real estate owned and other repossessed assets for a loss of $66,000 during the year ended December 31, 2019. During the year ended December 31, 2018, the Bank sold five real estate owned and other repossessed assets resulting in a net gainloss of $6,000.$54,000. There were no write-downswas one write-down on fair value less cost to sell for foreclosed real estate propertyowned and other repossessed assets for a loss of $28,000 during the year ended December 31, 2016.2018. During the year ended December 31, 2016, a minimal2019 and 2018, an insignificant amount of interest was recorded on loans previously accounted for on a non-accrual basis.in an amount that isif deemed prudent.necessary. When management classifies a loan as a loss asset, an allowance equal up to 100.0% of the loan balance is required to be established or the loan is required to be charged-off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and specific problem assets.the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by regulatory agencies as part of their examination process. We also utilize a third party review as part of our loan classification process. In addition, each loan that exceeds $750,000on an annual basis or more often if needed, the Company formally reviews the ratings of all commercial real estate, real estate construction, and each group ofcommercial business loans that exceedshave a principal balance of $750,000 is monitored more closely.or more. December 31, Special mention $ - $ - Substandard 738 1,422 Doubtful - - Loss - - Special mention - - Substandard 451 667 Doubtful - - Loss - - Special mention 456 - Substandard - 782 Doubtful - - Loss - - Special mention - - Substandard 375 156 Doubtful - 82 Loss - 7 Special mention - - Substandard 95 140 Doubtful - 4 Loss 8 11 Special mention - - Substandard 236 367 Doubtful - - Loss - 30 Special mention - - Substandard - - Doubtful - - Loss - - 825 595 $ 3,184 $ 4,263 $ - $ 1,180 $ - $ - $ 1,180 - 337 - - 337 - 2,312 - - 2,312 - 50 - - 50 108 168 58 - 334 - - 78 297 - - 375 - 188 - - 188 159 707 63 - 929 138 570 467 - 1,175 483 5,809 588 - 6,880 26 $ 6,906 $ - $ 874 $ - $ - $ 874 - 635 - - 635 1,731 2,322 - - 4,053 - 13 - - 13 - - - - - - 491 - - 491 - 171 - - 171 950 244 81 - 1,275 - 404 - - 404 2,681 5,154 81 - 7,916 107 $ 8,023 31real estate loans (residential mortgages (1-4 family), real estate construction,residential 1-4 family, commercial real estate, and land) home equity, loans, consumer loans and commercial business loans.commercial. The Bank provides for a general allowance for losses inherent in the portfolio in the categories referenced above. General loss percentages which are calculated based on historical analyses and other factors such as volume and severity of delinquencies, local and national economy, underwriting standards and other factors. This portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is subjective in nature and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and non-accruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook for the local, regional and national economy.2016,2019, we had $4.77$8.60 million in allowances for loan losses.makingoriginating loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan.32 $ 3,550 $ 2,450 1,833 1,303 Residentail mortgage (1-4 family) (4 ) (137 ) Commercial real estate (298 ) - Real estate construction - - Home equity (7 ) - Consumer (204 ) (61 ) Commercial (119 ) (25 ) Residentail mortgage (1-4 family) - - Commercial real estate - - Real estate construction - - Home equity - 1 Consumer 19 18 Commercial - 1 (613 ) (203 ) $ 4,770 $ 3,550 1.02 % 0.87 % 414.06 % 139.32 % 0.13 % 0.05 % $ 6,600 $ 5,750 $ 4,770 2,627 980 1,228 (195 ) (13 ) - (75 ) (80 ) - (78 ) (72 ) (193 ) (380 ) (24 ) (118 ) 17 19 - - 1 40 26 27 20 58 12 3 (627 ) (130 ) (248 ) $ 8,600 $ 6,600 $ 5,750 1.10 % 1.07 % 1.12 % 157.80 % 175.21 % 588.54 % 0.08 % 0.02 % 0.05 % December 31, $ 997 20.90 % 24.24 % $ 911 25.66 % 28.95 % $ 1,301 15.13 % 20.23 % $ 1,301 19.71 % 23.32 % $ 1,301 22.62 % 26.29 % 2,079 43.58 % 46.00 % 1,593 44.88 % 41.15 % 4,826 56.12 % 55.60 % 3,593 54.44 % 53.13 % 2,778 48.32 % 47.60 % 244 5.12 % 4.40 % 184 5.18 % 5.63 % 3,320 69.60 % 74.64 % 2,688 75.72 % 75.73 % 6,127 71.25 % 75.83 % 4,894 74.15 % 76.45 % 4,079 70.94 % 73.89 % 460 9.64 % 10.49 % 342 9.63 % 11.11 % 477 5.55 % 7.23 % 477 7.23 % 8.44 % 506 8.80 % 10.24 % 193 4.05 % 3.16 % 66 1.86 % 3.59 % 284 3.30 % 2.42 % 190 2.88 % 2.68 % 225 3.91 % 3.06 % 797 16.71 % 11.71 % 454 12.79 % 9.57 % 1,712 19.90 % 14.52 % 1,039 15.74 % 12.43 % 940 16.35 % 12.81 % 1,450 30.40 % 25.36 % 862 24.28 % 24.27 % 2,473 28.75 % 24.17 % 1,706 25.85 % 23.55 % 1,671 29.06 % 26.11 % $ 4,770 100.00 % 100.00 % $ 3,550 100.00 % 100.00 % $ 8,600 100.00 % 100.00 % $ 6,600 100.00 % 100.00 % $ 5,750 100.00 % 100.00 % a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of deposit. We believe that our core deposits are our checking, savings, accounts, money market accounts and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits were $378.79$601.17 million or 73.87%74.3% of the Bank’s total deposits at December 31, 20162019 ($347.52575.93 million or 67.8%71.19% excluding IRA certificates of deposit). The presence of a high percentage of core deposits and, in particular, transaction accounts reflects in part our strategy to restructure our liabilities to more closely resemble the lower cost liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These certificates of deposit, if they mature and are renewed at higher rates, would result in an increase in our cost of funds. the associated weighted average interest rates for each category of deposits: December 31, $ 82,877 16.16 % 0.00 % $ 77,031 15.94 % 0.00 % 93,163 18.17 % 0.03 % 87,350 18.08 % 0.03 % 82,266 16.04 % 0.04 % 71,474 14.79 % 0.04 % 89,211 17.40 % 0.11 % 94,880 19.64 % 0.12 % 347,517 67.77 % 0.05 % 330,735 68.45 % 0.05 % 31,277 6.10 % 0.64 % 33,262 6.88 % 0.96 % 15,596 3.04 % 0.80 % 7,071 1.46 % 1.02 % 118,405 23.09 % 0.89 % 112,114 23.21 % 0.89 % 165,278 32.23 % 0.84 % 152,447 31.55 % 0.92 % $ 512,795 100.00 % 0.30 % $ 483,182 100.00 % 0.32 % $ 200,035 24.72 % 0.00 % $ 142,788 22.79 % 0.00 % $ 99,799 19.17 % 0.00 % 116,397 14.39 % 0.03 % 105,115 16.78 % 0.03 % 99,255 19.07 % 0.03 % 126,991 15.70 % 0.08 % 108,234 17.27 % 0.05 % 88,603 17.02 % 0.05 % 132,506 16.38 % 0.42 % 108,050 17.24 % 0.30 % 89,558 17.20 % 0.17 % 575,929 71.19 % 0.12 % 464,187 74.08 % 0.09 % 377,215 72.46 % 0.06 % 25,240 3.12 % 0.71 % 28,198 4.50 % 0.60 % 28,189 5.42 % 0.61 % 10,180 1.26 % 2.13 % - 0.00 % 0.00 % 4,601 0.88 % 1.28 % 197,644 24.43 % 1.81 % 134,226 21.42 % 1.46 % 110,559 21.24 % 1.04 % 233,064 28.81 % 1.70 % 162,424 25.92 % 1.31 % 143,349 27.54 % 0.96 % $ 808,993 100.00 % 0.55 % $ 626,611 100.00 % 0.41 % $ 520,564 100.00 % 0.31 % money markets. Management attributesIRA certificates. The increases were due in part to the continued organic increase inBMB acquisition which included deposits toof $92.71 million. Excluding acquired deposits, total deposits increased marketingby $89.67 million. Including acquired deposits, certificates of checking accounts as well as customers’ preference for placing funds in secure, federally insured accounts. Noninterestdeposit increased by $70.63 million, noninterest checking increased $5.85by $57.25 million, or 7.6%, to $82.88money market increased by $24.46 million, at December 31, 2016. Interestsavings increased by $18.76 million, and interest bearing checking increased $5.82 million or 6.7%, to $93.16 million at December 31, 2016. Savings increased $10.79 million or 15.1%, to $82.27 million at December 31, 2016. Money markets decreased $5.67 million, or 6.0% andby $11.28 million. As indicated above, the increase in time certificates of deposit increased $12.83was impacted by $10.18 million or 8.4%. Brokeredof fixed rate brokered certificates. In addition, other certificates increased $8.53include an increase from prior year of $16.00 million related to $15.60 million at December 31, 2016 from $7.07 million at December 31, 2015. The increase is largely due todeposits obtained through participation in the purchaseCertificate of four brokered certificates with coupon rates ranging from 0.50% to 0.70% and maturities ranging from February 2017 through November 2017, partially offset by the maturity of a $2.47 million brokered certificate in December 31, 2016.Deposit Account Registry Service (“CDARS”).2016: 2019: $250 $250 $ 16,078 $ 12,399 10,882 4,378 10,347 26,126 8,056 6,733 $ 45,363 $ 49,636 Borrowings.Borrowings. Deposits are the primary source of funds for our lending and investment activities and for general business purposes. However, as the need arises, or in order to take advantage of funding opportunities, we also borrow funds in the form of advances from FHLB of Des Moines to supplement our supply of lendable funds and to meet deposit withdrawal requirements. We also have Federal funds line of credits with PCBB, PNC, Zions Bank and StockmanUnited Bankers’ Bank.35 $ 75,620 $ 47,344 $ 97,000 $ 83,979 $ 80,759 87,661 68,261 123,512 101,357 114,769 81,548 68,261 88,350 101,357 82,104 1.05 % 1.11 % 2.41 % 1.85 % 1.45 % 1.10 % 1.08 % 2.18 % 2.21 % 1.59 % $ - $ - $ - $ - $ - - - - - - - - - - - 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % $ 3,274 $ 4,023 $ 2,307 $ 3,304 $ 3,436 8,385 12,647 6,311 5,380 7,990 865 4,455 - 865 865 0.73 % 0.57 % 2.11 % 1.91 % 1.21 % 1.00 % 0.68 % 0.00 % 1.00 % 1.00 % $ 78,894 $ 51,367 $ 99,307 $ 87,283 $ 84,195 92,436 72,716 124,377 102,222 120,804 82,413 72,716 88,350 102,222 82,969 1.03 % 1.07 % 2.40 % 1.85 % 1.44 % 1.10 % 1.05 % 2.18 % 2.20 % 1.58 % from the FHLB and other borrowings increased $9.70 million or 13.3%, to $82.41 million at December 31, 2016. The increase was primarily due to increases in net short-term advances from FHLB and other borrowings partially offsetdecreased by net long-term payments on FHLB borrowings.$13.87 million to $88.35 million at December 31, 2019 compared to $102.22 million at December 31, 2018. The borrowings were useddecrease is due in part to help fund the continued loan growth.utilizing brokered certificates and CDARS as other funding sources. $ 9,908 39.72 % $ 9,864 39.66 % 9,878 39.61 % 9,857 39.62 % 5,155 20.67 % 5,155 20.72 % $ 24,941 100.00 % $ 24,876 100.00 % $4.01$26.85 million or 7.2%28.3%, to $59.46$121.66 million at December 31, 20162019 from $55.45$94.81 million at December 31, 2015.2018. This was primarily the result of stock issued in connection with the BMB acquisition of $16.44 million. The increase is primarilywas also due to net income of $5.13$10.87 million partiallyand other comprehensive income of $2.44 million. These increases were slightly offset by dividends paid of $1.19$2.41 million and treasury stock purchased for $1.21 million. $ 138,655 $ 2,917 2.10 % $ 150,520 $ 3,058 2.03 % $ 135,904 $ 3,672 2.70 % $ 151,018 $ 4,068 2.69 % $ 126,555 $ 2,898 2.29 % 4,646 142 3.06 % 2,979 67 2.25 % 7,363 408 5.54 % 6,272 322 5.13 % 4,981 170 3.41 % 456,808 20,842 4.56 % 374,849 17,332 4.62 % 764,075 42,344 5.54 % 590,059 30,400 5.15 % 507,980 24,776 4.88 % 1,715 10 0.58 % 4,913 9 0.18 % 5,030 87 1.73 % 2,778 53 1.91 % 1,625 16 0.98 % 601,824 23,911 3.97 % 533,261 20,466 3.84 % 52,987 50,397 912,372 46,511 5.10 % 750,127 34,843 4.64 % 641,141 27,860 4.35 % 97,645 79,059 55,842 $ 654,811 $ 583,658 $ 1,010,017 $ 829,186 $ 696,983 $ 116,424 $ 44 0.04 % $ 106,845 $ 36 0.03 % $ 96,239 $ 31 0.03 % 119,674 85 0.07 % 103,519 53 0.05 % 83,947 42 0.05 % $ 90,783 $ 101 0.11 % $ 94,525 $ 107 0.11 % 124,785 449 0.36 % 107,236 229 0.21 % 90,857 131 0.14 % 75,288 32 0.04 % 67,051 30 0.04 % 88,900 27 0.03 % 81,462 27 0.03 % 158,465 1,358 0.86 % 151,472 1,293 0.85 % 212,370 3,315 1.56 % 163,750 1,738 1.06 % 153,498 1,349 0.88 % 92,985 1,600 1.72 % 61,392 998 1.63 % 506,421 3,118 0.62 % 455,902 2,455 0.54 % 123,497 3,833 3.10 % 111,264 3,046 2.74 % 107,290 2,541 2.37 % 696,750 7,726 1.11 % 592,614 5,102 0.86 % 531,831 4,094 0.77 % 84,788 70,766 184,654 135,831 94,097 4,848 2,940 12,819 9,214 4,855 596,057 529,608 894,223 737,659 630,783 58,754 54,050 115,794 91,527 66,200 $ 654,811 $ 583,658 $ 1,010,017 $ 829,186 $ 696,983 $ 20,793 3.35 % $ 18,011 3.30 % $ 38,785 3.99 % $ 29,741 3.78 % $ 23,766 3.58 % 3.46 % 3.38 % 4.25 % 3.96 % 3.71 % 118.84 % 116.97 % 130.95 % 126.58 % 120.55 % interest-earninginterest earning assets and the average rate on interest-bearinginterest bearing liabilities.interest-earninginterest earning assets.37 �� $ (241 ) $ 100 $ (141 ) $ (844 ) $ (307 ) $ (1,151 ) $ (407 ) $ 11 $ (396 ) $ 560 $ 610 $ 1,170 37 38 75 9 39 48 56 30 86 44 108 152 (1) 3,790 (280 ) 3,510 3,923 (786 ) 3,137 8,965 2,979 11,944 4,003 1,621 5,624 (4 ) 5 1 1 - 1 43 (9 ) 34 11 26 37 3,582 (137 ) 3,445 3,089 (1,054 ) 2,035 8,657 3,011 11,668 4,618 2,365 6,983 2 (6 ) (4 ) 11 (8 ) 3 49 211 260 38 76 114 61 4 65 (12 ) 128 116 517 1,060 1,577 90 299 389 511 91 602 229 73 302 335 452 787 94 411 505 574 89 663 228 193 421 901 1,723 2,624 222 786 1,008 $ 3,008 $ (226 ) $ 2,782 $ 2,861 $ (1,247 ) $ 1,614 $ 7,756 $ 1,288 $ 9,044 $ 4,396 $ 1,579 $ 5,975 20162019 and 2015201820162019 was $5.13$10.87 million compared to $2.58$4.98 million for the year ended December 31, 2015.2018. The increase of $2.55$5.89 million was primarily due to an increase of $11.72 million in noninterest income and an increase of $7.40 million in net interest income after loan loss provision, of $2.25 million and an increase in noninterest income of $4.23 million, partially offset by an increase in noninterest expense of $2.29$11.04 million and an increase in provision for income tax expensetaxes of $1.64$2.19 million. Basic and diluted earnings per share were $1.36 and $1.32, respectively,both $1.69 for the year ended December 31, 20162019 compared to $0.68$0.92 and $0.67,$0.91, respectively, for the prior period.$20.79$38.79 million for the year ended December 31, 2016,2019, from $18.01$29.74 million for the year ended December 31, 2015.2018. This increase of $2.78$9.05 million, or 15.4%30.4%, was due to an increase in interest and dividend income of $3.44$11.67 million, partially offset by an increase in interest expense of $663,000 and an increase in the loan loss provision of $530,000.$2.63 million.$23.91$46.51 million for the year ended December 31, 2016,2019, compared to $20.47$34.84 million for the year ended December 31, 2015,2018, an increase of $3.44$11.67 million, or 16.8%33.5%. Interest and fees on loans increased to $20.84$42.34 million for the year ended December 31, 20162019 from $17.33$30.40 million for the same period ended December 31, 2015.This2018. This increase of $3.51$11.94 million, or 20.3%39.3%, was due to an increase in the average balance of loans, partially offset by a decreaseas well as an increase in the average yield of loans for the year ended December 31, 2016.2019. Average balances for loans receivable, net, including loans held for sale, for the year ended December 31, 20162019 were $456.81$764.08 million, compared to $374.85$590.06 million for the prior year period. This represents an increase of $81.96$174.02 million, or 21.9%.29.5% and was due in part to the BMB acquisition. The average interest rate earned on loans receivable decreasedincreased by 639 basis points, from 4.62%5.15% to 4.56%5.54%. Interest accretion on purchased loans was $1.88 million for the year ended December 31, 2019 which resulted in a 21-basis point increase in net interest margin compared to $589,000 for the year ended December 31, 2018 which resulted in an 8-basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale decreased slightly by $141,000$396,000 or 4.6%9.7% for the year ended December 31, 20162019 compared to the same period last year. Average balances on investments decreased to $138.66$135.90 million for the year ended December 31, 2016,2019, from $150.52$151.02 million for the year ended December 31, 2015. However, the2018. The average interest rate earned on investments increased to 2.10%remained consistent period over period at 2.70% for the year ended December 31, 2016 from 2.03%2019 compared to 2.69% for the year ended December 31, 2015.2018.3820162019 to $3.12$7.73 million from $2.46$5.10 million for the year ended December 31, 2015,2018, an increase of $663,000,$2.63 million, or 27.0%51.6%. InterestThe increase was due to an increase in interest expense on deposits, as well as interest expense on borrowings. The average balance for total borrowingsdeposits was $1.60$757.91 million for the year ended December 31, 20162019 compared to $998,000$617.18 million for the same period in the prior year. This increase was due in part to the BMB acquisition which included acquired deposits of $92.71 million. The overall average rate on total deposits was 0.51% for the year ended December 31, 2015.2019 compared to 0.33% for the same period in the prior year. The average borrowing balance for borrowings was $92.99increased from $111.26 million for the year ended December 31, 2016 compared2018 to $61.39$123.50 million for the year ended December 31, 2015.2019. The average rate paid on total borrowings also increased 9 basis points, from 1.63% to 1.72%. Borrowings have been used to help fund continued loan growth. Interest expense on deposits remained fairly consistent period over period only increasing $61,000. The average balance for total deposits was $498.22 million2.74% for the year ended December 31, 2016 compared2018, to $465.28 million3.10% for the year ended December 31, 2015. The overall average rate on total deposits increased 1 basis point from 0.30% for the year ended December 31, 2015 to 0.31% for the year ended December 31, 2016.2019.as well as other assets 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 $1.83$2.63 million in provision for loan losses for the year ended December 31, 20162019 and $1.30$980,000 million for the year ended December 31, 2015. The provision for loan losses has been increased to keep pace with increasing loan production that is fueling loan growth.2018. Management believes the level of total allowances is adequate.adequate to cover estimated losses inherent in the portfolio. Total nonperforming loans, including restructured loans, net, decreased from $2.55was $5.45 million at December 31, 20152019 compared to $1.15$3.77 million at December 31, 2016.2018. The Bank has $825,000$26,000 in other real estate owned and other repossessed assets at December 31, 2016.2019 compared to $107,000 at December 31, 2018.Total noninterestNoninterest income increased to $15.99$23.84 million for the year ended December 31, 2016,2019, from $11.76$12.12 million for the year ended December 31, 2015,2018, an increase of $4.23 million or 36.0%.$11.72 million. The increase is largely due to increases in net gain on sale of loans which increased to $10.35$16.68 million for the year ended December 31, 20162019 from $6.67$7.74 million for the year ended December 31, 2015.2018. During the year ended December 31, 2016, $333.032019, $480.05 million residential mortgages were originated compared to $240.65 million for the year ended December 31, 2015. In addition, $308.68 million mortgage loans were sold during the year ended December 31, 2016 compared to $230.62$279.74 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the year ended December 31, 2019 was 3.47% compared to 2.77% for the year ended December 31, 2018.$28.02$46.03 million for the year ended December 31, 20162019 compared to $25.73$34.99 million for the year ended December 31, 2015.2018. The increase of $2.29$11.04 million, or 8.9%31.6%, is largely due to increased salaries and employee benefits expenses of $1.94$6.73 million. IncreasedThe increase in salaries expense is due in part to higher commission-based compensation related to the continuedmortgage loan growth.Income TaxIncome tax expensegrowth and additional staff related to compliance with mortgage rules. Mortgage commission-based compensation was $1.80$5.69 million for the year ended December 31, 2016,2019 compared to $163,000$3.13 million for the year ended December 31, 2015. The effective tax rate2018. Salaries and employee benefits expense was 26.0%also impacted by the addition of staff related to the BMB acquisition. Occupancy and equipment expense increased $1.06 million as a result of facility improvements and bringing in acquired branches. In addition, acquisition costs increased $1.02 million compared to prior year.2016. Income tax expense has increased with our2019, compared to $914,000 for the year ended December 31, 2018 due to increased income levels. However, tax free municipal bondbefore provision for income and Bank owned life insurance income help to lower the overall effective tax rate.taxes. The effective tax rate is further reduced by a tax credit investment entered into bywas 22.2% for the Company in fiscal year 2013. The Bank made an investment in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”). Administered byended December 31, 2019 compared to 15.5% for the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over an estimated seven-year credit allowance period.prior year.3920162019 and 2015.2018.20162019 and 20152018$12.89 million$366,000 for the year ended December 31, 20162019 compared to $4.88$13.57 million for the prior year. Net cash provided by operating activities was higherlower for the year ended December 31, 20162019 primarily due to higher net income and changesoriginations of loans held-for-sale exceeding proceeds from loans held-for-sale compared to proceeds from loans held-for-sale exceeding originations of loans held-for-sale in loans held-for-sale.the prior year.$51.13$59.70 million for the year ended December 31, 20162019 compared to $76.76$50.92 million for the year ended December 31, 2015.2018. Net cash used in investing activities for the year ended December 31, 20162019 was largely due in part to loan originations being higher than loan pay-off and principal payments during the year. Loan origination and principal collection, net was $62.20$79.89 million for the year ended December 31, 2016. In addition, there was $18.86 million in available-for-sale2019. Available-for-sale securities purchases were $51.46 million during the year ended December 31, 2016.2019. These uses of cash were partially offset by available-for-sale securities sales and maturities, principal payments and calls of $33.53$71.63 million. In addition, there was $6.90 million of cash received for the BMB acquisition, net of cash paid for the year ended December 31, 2019. Net cash used in investing activities for the year ended December 31, 20152018 was also impacted by loan originations being higher than loan pay-off and principal payments during the year. Loan origination and principal collection, net was $90.48$50.58 million for the year ended December 31, 2015. In addition, there2018. There was $28.87$45.97 million in available-for-sale securities purchases during the year ended December 31, 2015.2018. In addition, there was $5.60 million in Bank owned life insurance purchased and $4.24 million paid for the TwinCo acquisition, net of cash received for the year ended December 31, 2018. These uses of cash were partially offset by available-for-sale securities sales and maturities, principal payments and calls of $43.82$63.23 million.$38.12$73.05 million for the year ended December 31, 20162019 compared to $66.82$41.12 million for the year ended December 31, 2015.2018. Net cash provided by financing activities for the year ended December 31, 20162019 was primarily a result ofdue to a net increase in deposits of $29.61 million and$89.68 million. This was partially offset by net advances frompayments on FHLB and other borrowings of $9.70$13.01 million. Net cash provided by financing activities for the year ended December 31, 20152018 was primarily due to a net increase in deposits of $23.86 million, as well as net advances from FHLB and other borrowings of $17.72 million and a net increase in deposits of $41.78$19.25 million. In addition, there were net proceeds from the issuance of subordinated debentures of $9.79 million during the year ended December 31, 2015.40November 30, 2016 (the most recent report available),December 31, 2019, 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 2.1%10.6% compared to a decreasean increase of 1.8%2.3% at November 30, 2015 (the most recent report available for December 31, 2015).2018. The Bank is within the guidelines set forth by the Board of Directors for interest rate sensitivity.9.36%11.22% as of December 31, 20152018 to 9.23%11.08% as of December 31, 2016.2019. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.2016,2019, 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. At December 31, 2016,2019, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios amounted to 14.05%15.23%, 13.03%14.14%, 13.03%14.14% and 9.23%11.08%, respectively, compared to regulatory requirements of 8.0%10.50%, 6.0%8.50%, 4.5%7.00% and 4.0%4.00%, respectively.follows: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 a changean 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.Changes in Market Rate Sensitivity Interest Rates As of November 30, 2016Policy Policy 0.06% 0.52% -15.0% -100 -1.67% -5.90% -15.0% Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared. 0.5% -30.0% 2.1% -20.0% 2.9% -10.0% 0 0.0% 0.0% -100 -10.9% -10.0% While the Bank was technically out of policy for the EVE calculation for a shock down 100 basis points, the Board determined that no action was deemed necessary given that the EVE computation includes a highly conservative operating cost for servicing deposits. In addition, we use mandatory sell forward delivery commitments to sell whole loans to the secondary markets. These commitmentsalso usedsummarized as a hedge against exposure to interest rate risks relating from rate locked loan origination commitments on certain mortgage loans held-for-sale.follows: $ 142,785 $ 111,460 3,098 3,925 2016,2019, 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 December 31, 2016,2019, our disclosure controls and procedures were effective.not effective as of such date due to a material weakness in internal control over financial reporting as described below. , issued by the Committee of Sponsoring Organizations of the Treadway Commission.2016.2019. Based on this assessment, management concluded that, as of December 31, 2016,2019, the Company’s internal control over financial reporting was not effective.ThereExcept for the material weakness, identified above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 20162019 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.432016.2019.20172020 Annual Meeting of Stockholders (the “Proxy Statement”). The information in the Proxy Statement set forth under the captions of “Section“Delinquent Section 16 (a) Beneficial Ownership Reporting Compliance”,Reports,” “Board Meetings and Committees”,Committees,” “Structure of the Board of Directors”,Directors,” “The Board’s Role in Risk Oversight”,Oversight,” and “Code of Ethics” is incorporated herein by reference.59is also a member of the Rotary Club of Helena. He serves on the Independent Community Bankers of America’s Political Action Committee.Committee and is the current chair of St. Peter’s Health Foundation board. Senior, Executive VicePresident/Chief Financial Officer/Chief Operating Officer60SeniorExecutive Vice President and Chief Financial Officer of the Bank and Eagle since March 2014. Prior to being named the Chief Financial Officer, she had served as the Senior Vice President and Chief Financial Officer of the Bank of Bozeman since 2005. Her experience spans over 30 years and includes a variety of executive positions with First National Bancorp, Bankers Resource Center, Security Bank, Bank of Montana System and Montana Bancsystem. Ms. Clark holds a Bachelor of Arts degree in Business Administration from Montana State University in Billings, Montana.University-Billings. She currently serves as a board member of ExplorationWorks, a local Science Center that provides programs for early childhood education, STEM (science, technology, engineering and math) and healthy living.Michael C. Mundt, Executive Vice President/Chief Community Banking OfficerAge 62Mr. Mundt has served as the Chief Lending Officer of the Bank since April 1994 and was promoted to Executive Vice President/Chief Community Banking Officer in July 2014. Prior to being named the Chief Lending Officer, he served as Vice President of Consumer and Commercial Lending. He joined the bank in 1988. He recently served on the Montana Bankers Association’s board of directors and as a Past-President of the Montana Business Assistance Connection, a local economic development non-profit organization. Mr. Mundt retired effective December 31, 2016.48Mrs.Ms. Amdahl has served as Senior Vice President/Chief Operations Officer of the Bank since February 2006. Prior to being named the Senior Vice President/Chief Operations Officer, she served as Vice President/Operations since 2000. She joined the Bank in 1987. She is a past board member of the Lewis and Clark County United Way and the Women’s Leadership Network in Helena.Tracy A.Zepeda, Senior Vice President/Chief RetailOfficerAge 37Ms. Zepeda joined the Bank in December 2012 at the time of the acquisition of seven branches from Sterling Financial Corporation. She had served as Vice President/Territory Manager of Sterling Financial Corporation since January 1, 2011. Prior to that position Ms. Zepeda served as Assistant Vice President/Community Manager of Sterling Financial Corporation since July 2007. She is a board member of the Missoula chapter of Big Brothers Big Sisters.58VP/Vice President/Commercial Lender and was promoted to Vice President/Chief Credit Administration Officer in 2011. He was promoted to Senior Vice President/Chief Credit Officer in July 2014. He serves on the Helena Exchange Club board of directors and is a school board trustee in Clancy, Montana.69serves on theis a past board member of the Helena YWCA.LarryPD.. DarrylWilliams, Rensmon, Senior Vice President/Chief Information OfficerAge 58 Mark A. O’Neill, Senior Vice President/Chief Lending Officer 494WilliamsO’Neill joined Eagle as the Butte Market President in November 2014.February 2016. He was formerly with CommunityFirst Citizens Bank Inc.and Wells Fargo and served as Vice Presidentin various lending and Chief Credit Officer since January 2012.management roles. He was the Vice President/Senior Lender for Community Bank, Inc. from March 2005 through December 2011. He is currently a director of the Western Montana Chapter of Risk Management Associates.George Ballew,Senior Vice President/ChiefMortgage Lending OfficerAge 57Mr. Ballew joined Eagle in September 2015. He has served in management positions in the mortgage industry over the past 29 years. Priorpromoted to joining Eagle he was the Chief Executive Officer/Mortgage Division at First Mortgage from May 2014 through August 2015. He was the Senior Vice President/Mortgage Market Manager for BB&T MortgageChief Lending Officer in October 2018. Mr. O’Neill holds a Bachelor of Arts degree in Economics from April 2001 through April 2014.University of Montana in Missoula, Montana. He serves asis a past board member of the state CASA chapter,Silver Bow Kiwanis and the Butte Local Development Corporation.Linda M. Chilton, Senior Vice President/Chief Retail Officer Age55 child advocacy group.Montana community bank, where she was employed since 2003. She had previously worked in several positions for a regional bank. Ms. Chilton graduated from the University of Montana with a Bachelor of Science degree in Business Administration.www.opportunitybank.com.www.opportunitybank.com. We will disclose on our website any amendments to or waivers from any provision of our Code of Ethics and Conflict of Interest Policy that applies to any of the directors or executive officers.captionscaption of “Beneficial Ownership of Common Stock” is incorporated herein by reference.captionscaption of “Proposal IV2 – Ratification of Appointment of Independent Auditors” is incorporated herein by reference.20162019 and 20152018 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Shareholder Equity and Consolidated Statements of Cash Flows for the years then ended, together with the related notes and independent auditor’s reports.** 3.23.3 * *10.3Salary Continuation Agreement, dated April 18, 2002, between Larry A. Dreyer and American Federal Savings Bank.*10.4First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Larry A. Dreyer and American Federal Savings Bank. 10.510.3 *10.410.6 *10.510.7 *10.6 *10.810.92004.*10.10Summary2004 (incorporated by reference to Exhibit 10.19 of American Federal Savings Bank Bonus Plan.our Amendment No. 1 to Registration Statement on Form S-1 filed on February 1, 2010). 10.1110.9 10.1210.11 46 (b) *Incorporated by reference to the identically numbered exhibit of the Registration Statement on Form S-1 (File No. 333-163790) filed with the SEC on December 17, 2009.**Incorporated by reference to the identically numbered exhibit of the Current Report on Form 8-K filed with the SEC on February 23, 2010.(b)(c)(c) See Item 15(a)(1) and 15(a)(2) above. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.INS XBRLITEM 16.Instance Document101.SCHXBRLTaxonomy Extension Schema Document101.CALXBRLTaxonomy Extension Calculation Linkbase Document101.DEFXBRLTaxonomy Extension Definition Linkbase Document101.LABXBRLTaxonomy Extension Label Linkbase Document101.PREXBRLTaxonomy Extension Presentation Linkbase DocumentITEM16.47EAGLE BANCORP MONTANA, INC./s/ March 14, 201711, 2020 /s/ /s/ Peter J. Johnson 3/14/2017March 11, 2020 /s/ /s/ Laura F. Clark SeniorExecutive Vice President and 3/14/2017March 11, 2020 Financial Officer (Principal(Principal Financial Officer and/s/ Larry A. DreyerChairman3/14/2017Larry A. Dreyer/s/ James A. MaierleVice Chairman3/14/2017James A. Maierle DirectorChairman 3/14/2017March 11, 2020 3/14/2017March 11, 2020 3/14/2017March 11, 2020/s/ Thomas J. McCarvelDirector3/14/2017Thomas J. McCarvel 3/14/2017March 11, 2020 /s/ /s/ Tanya J. Chemodurow 3/14/2017March 11, 2020 48
20162019 and 2015PagePage Report of Independent Registered Public Accounting Firm 2 3 4 5 6 7
First Financial Bank Building400 Pine Street, Ste. 600, Abilene, TX 79601325.672.4000 / 800.588.2525 / f: 325.672.7049www.dkcpa.com
Eagle BancorpMontana, Inc. and Subsidiaries
Helena, Montana(Eagle)(the Company) as of December 31, 20162018 and December 31, 20152017, and the related consolidated statements of income, comprehensive income, change in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2016. Eagle’s2018, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in 2013 Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).statements. statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on thesethe entity’s consolidated financial statements and an opinion on the entity’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration oferror or fraud, and whether effective internal control over financial reporting as a basis for designing auditwas maintained in all material respects.are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesresponds to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.In our opinion,Definition and Limitations of Internal Control Over Financial Reportingreferred to above present fairly,for external purposes in all material respects, the financial position ofEagle Bancorp Montana, Inc.and Subsidiaries as of December 31, 2016 and December 31, 2015 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016, in conformityaccordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the consolidated financial statements.
Certified Public AccountantsWe have served as the Company’s auditor since 2017.24, 201721, 2019 $ 6,531 $ 6,468 $ 18,094 $ 10,144 787 970 4,284 1,057 2,540 - 7,318 7,438 24,918 11,201 128,436 145,738 126,875 142,165 4,012 3,397 871 887 155 155 18,230 18,702 461,391 403,734 4,683 5,011 2,526 2,033 25,612 7,318 770,635 610,333 2,123 2,278 4,577 3,479 5,853 4,968 8,739 7,100 19,393 18,217 40,082 29,343 14,095 12,514 825 595 23,608 20,545 7,034 7,034 15,836 12,124 384 514 2,786 1,498 1,965 1,490 - 1,190 1,840 2,686 3,383 563 $ 673,925 $ 630,347 $ 1,054,260 $ 853,903 $ 82,877 $ 77,031 $ 200,035 $ 142,788 429,918 406,151 608,958 483,823 512,795 483,182 808,993 626,611 4,291 4,050 9,825 5,388 82,413 72,716 492 - 88,350 102,222 15,155 15,155 25,155 25,155 (185 ) (206 ) (214 ) (279 ) 14,970 14,949 24,941 24,876 614,469 574,897 932,601 759,097 - - 41 41 - - 67 57 22,366 22,152 68,826 52,051 (809 ) (975 ) (311 ) (477 ) (2,971 ) (3,321 ) (3,643 ) (2,640 ) 41,240 37,301 55,391 46,926 (411 ) 252 1,329 (1,111 ) 59,456 55,450 121,659 94,806 $ 673,925 $ 630,347 $ 1,054,260 $ 853,903 The accompanying notes are an integral part of these consolidated financial statements.EAGLEBANCORP MONTANA, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Dollars in Thousands, Except for Per Share Data) $ 20,842 $ 17,332 2,917 3,058 142 67 3 3 1 1 6 5 23,911 20,466 1,518 1,457 815 550 785 448 3,118 2,455 20,793 18,011 1,833 1,303 18,960 16,708 865 1,009 10,346 6,672 1,835 1,718 601 625 873 580 484 426 249 234 - (93 ) 6 (13 ) 731 603 15,990 11,761 16,286 14,350 2,815 2,988 1,980 2,259 696 800 1,249 799 445 432 404 332 194 181 394 520 202 576 3,354 2,489 28,019 25,726 6,931 2,743 1,799 163 $ 5,132 $ 2,580 $ 1.36 $ 0.68 $ 1.32 $ 0.67 -3-COMPREHENSIVE INCOMEThousands)Thousands, Except for Per Share Data) $ 5,132 $ 2,580 (792 ) 883 (249 ) (234 ) 2,861 2,046 (2,938 ) (1,907 ) (1,118 ) 788 424 (264 ) 31 (57 ) 455 (321 ) $ 4,469 $ 3,047 $ 42,344 $ 30,400 3,672 4,068 408 322 87 53 46,511 34,843 3,893 2,056 2,387 1,614 1,446 1,432 7,726 5,102 38,785 29,741 2,627 980 36,158 28,761 1,219 943 16,675 7,743 2,321 1,092 258 536 1,327 1,042 720 609 69 (187 ) 486 9 766 335 23,841 12,122 27,633 20,899 4,422 3,355 3,722 2,842 1,028 1,158 �� 812 700 805 632 81 246 289 248 1,052 767 2,198 1,169 3,989 2,971 46,031 34,987 13,968 5,896 3,096 914 $ 10,872 $ 4,982 $ 1.69 $ 0.92 $ 1.69 $ 0.91 -4-CHANGES IN SHAREHOLDERS' EQUITYCOMPREHENSIVE INCOMEThousands, Except for Per Share Data)Thousands) $ - $ 41 $ 22,122 $ (1,141 ) $ (2,194 ) $ 35,885 $ (215 ) $ 54,498 2,580 2,580 467 467 (1,164 ) (1,164 ) 204 204 (1,320 ) (1,320 ) (193 ) 193 - 19 166 185 $ - $ 41 $ 22,152 $ (975 ) $ (3,321 ) $ 37,301 $ 252 $ 55,450 5,132 5,132 (663 ) (663 ) (1,193 ) (1,193 ) 500 500 (350 ) 350 - 64 166 230 $ - $ 41 $ 22,366 $ (809 ) $ (2,971 ) $ 41,240 $ (411 ) $ 59,456 $ 10,872 $ 4,982 3,689 (2,113 ) (69 ) 187 296 1,207 (605 ) (1,223 ) 3,311 (1,942 ) (953 ) 509 82 9 (871 ) 518 $ 13,312 $ 3,558 -5-CASH FLOWCHANGES IN SHAREHOLDERS’ EQUITYThousands)Thousands, Except for Per Share Data) $ 5,132 $ 2,580 1,833 1,303 1,058 1,231 1,838 1,988 1,249 799 445 432 (20 ) (344 ) (10,346 ) (6,672 ) (249 ) (234 ) (6 ) 13 - 93 6 (305 ) (466 ) (329 ) 155 40 10,741 5,696 552 (1,603 ) 971 196 12,893 4,884 23,649 31,301 9,882 12,515 (18,859 ) (28,872 ) (615 ) (1,429 ) 16 (246 ) (62,201 ) (90,477 ) 885 - (2,000 ) (450 ) 353 87 7 1,438 (2,247 ) (630 ) (51,130 ) (76,763 ) 29,613 41,782 15,313 (1,723 ) 5,000 33,000 (10,616 ) (13,554 ) - 10,000 - (206 ) - (1,320 ) (1,193 ) (1,164 ) 38,117 66,815 (120 ) (5,064 ) 7,438 12,502 $ 7,318 $ 7,438 $ - $ 57 $ 52,051 $ (477 ) $ (2,640 ) $ 46,926 $ (1,111 ) $ 94,806 - - - - - 10,872 - 10,872 - - - - - - 2,440 2,440 - - - - - (2,407 ) - (2,407 ) - 10 16,425 - - - 16,435 - - 429 - - - - 429 - - (207 ) - 207 - - - - - 128 166 - - - 294 - - - - (1,210 ) - - (1,210 ) $ - $ 67 $ 68,826 $ (311 ) $ (3,643 ) $ 55,391 $ 1,329 $ 121,659 $ - $ 53 $ 42,780 $ (643 ) $ (2,826 ) $ 43,939 $ 313 $ 83,616 - - - - - 4,982 - 4,982 - - - - - - (1,424 ) (1,424 ) - - - - - (1,995 ) - (1,995 ) - 4 9,026 - - - - 9,030 - - 281 - - - - 281 - - (186 ) - 186 - - - - - 150 166 - - - 316 $ - $ 57 $ 52,051 $ (477 ) $ (2,640 ) $ 46,926 $ (1,111 ) $ 94,806 -6- $ 10,872 $ 4,982 2,627 980 66 28 1,786 1,282 866 1,237 1,637 1,203 812 700 474 - 429 281 294 316 739 880 (16,675 ) (7,743 ) (498,604 ) (279,927 ) 496,675 289,285 (69 ) 187 18 54 (486 ) (9 ) (720 ) (486 ) 158 (219 ) (1,037 ) (7 ) 504 547 366 13,571 58,027 51,319 13,646 11,908 (51,464 ) (45,970 ) 592 (814 ) (493 ) (568 ) 6,901 (4,243 ) (79,888 ) (50,581 ) 519 205 - (5,600 ) 352 475 2,650 9 (10,543 ) (7,062 ) (59,701 ) (50,922 ) 89,676 23,857 (13,184 ) 46,687 33,000 4,000 (32,823 ) (31,434 ) (1,210 ) - (2,407 ) (1,995 ) 73,052 41,115 13,717 3,764 11,201 7,437 $ 24,918 $ 11,201 $ 6,968 $ 4,824 2,777 395 100,614 90,392 94,666 82,209 $ 3,620 $ (1,926 ) 3,276 1,725 2,374 - 132 4 16,435 9,030 Operations On April 5, 2010, Eagle Bancorp completed its second-step conversion from a partially-public mutual holding company structure to a fully publicly-owned stock holding company structure. As part of that transaction it also completed a related stock offering. As a result of the conversion and offering, Eagle Bancorp Montana, Inc. (“Eagle” or the Company”“Company”), is a Delaware corporation that holds 100% of the capital stock of Opportunity Bank of Montana (“OBMT” or “Eagle”) became the stock holding company for“Bank”), formerly American Federal Savings Bank (“AFSB”), and Eagle Financial MHC and Eagle Bancorp ceased to exist.. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per shareBank was founded in the offering for gross proceeds of $24,643,000. Concurrent with the completion of the offering, shares of Eagle Bancorp common stock owned by the public were exchanged. Shareholders of Eagle Bancorp received 3.80 shares of the Company's common stock for each share of Eagle Bancorp common stock that they owned immediately prior to completion of the transaction.The Company’s Employee Stock Ownership Plan (“ESOP”), which purchased shares in the offering, was authorized to purchase up to 8.00% of the shares sold in the offering, or 197,142 shares. The ESOP completed its purchase of all such authorized shares in the offering, at a total cost of $1,971,000.In 2014, the Board of Directors (the “Board”) determined that it was in the Company’s best interests to adopt1922 as a Montana community bankchartered 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 the Company applied to the State of Montana to form an interim bank for the purpose of facilitating the conversion of AFSB from a federally chartered savings bankin October 2014 converted to a Montana-charteredMontana chartered commercial bank. Upon receiving required approvals of the Montana Division of Bankingbank and Financial Institutions and the federal banking agencies for the conversion the conversion became effective on October 14, 2014. Concurrent with the conversion, the Bank applied, and was approved, for membershipa member bank in the Federal Reserve SystemSystem.BoardU.S. Department of Governors. Treasury, the NMTC program is aimed at stimulating economic, community development and job creation in low-income communities. The federal income tax credits received were claimed over an estimated seven-year credit allowance period. The AFSB NMTC Investment Fund, LLC entity was divested in November 2019, after completion of the seven-year period.connectionSeptember 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, Inc. ("TwinCo"), a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire 100% of TwinCo’s equity voting interests. On January 31, 2018, TwinCo merged with and into Eagle, with Eagle continuing as the conversion, AFSB changed its name to Opportunitysurviving corporation. Ruby Valley Bank operated two branches in Madison County, Montana.(“chartered commercial bank to acquire 100% of BMB’s equity voting interests. On January 1, 2019, BMB merged with and into Eagle, with Eagle continuing as the Bank”). As a result of the conversion, the Bank is regulated by the Montana Division of Bankingsurviving corporation. SBOT operated four branches in Townsend, Dutton, Denton and Financial Institutions. As a Federal Reserve Board (“FRB”) member bank, its primary federal regulator is the FRB, andChoteau, Montana.isentered into an Agreement and Plan of Merger with Western Holding Company of Wolf Point (“WHC”), a registeredMontana corporation, and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point, a Montana chartered commercial bank holding company regulated by(“WB”). The Merger Agreement provided that, upon the FRB. The Bank is a member of the Federal Home Loan Bank Systemterms and its deposit accounts are insuredsubject to the applicable limits byconditions set forth in the Federal Deposit Insurance Corporation (“FDIC”).Merger Agreement, WHC would merge with and into Eagle, with Eagle continuing as the surviving corporation. The deal closed on January 1, 2020.operateshas additional branches in Butte, Bozeman, Billings, Big Timber, Billings, Bozeman, Butte, Choteau, Denton, Dutton, Great Falls, Hamilton, Livingston, Missoula, HamiltonSheridan, Townsend and Townsend,Twin Bridges, Montana. It also operateshas a separate mortgage loan origination location in Missoula, Montana. The Bank opened a Loan Production Office in Great Falls, Montana in January 2015. The Bank’s market area is concentrated in southern Montana, to which it primarily offers commercial, residential and consumer loans. 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. Collectively, Eagle Bancorp Montana Inc. and its subsidiaries are referred to herein as “the Company.”NOTE 2:Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe consolidated financial statements include the accounts of Eagle Bancorp Montana Inc., the Bank, Eagle Bancorp Statutory Trust I and AFSB NMTC Investment Fund, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.-7-2: Consolidated Basis of Financial Statement Presentation and Use of Estimatesthose estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the valuationfair value of financial instruments, the valuation of goodwill and deferred tax assets and liabilities, and the valuation of foreclosed assets.liabilities. In connection with the determination of the estimated losses on loans foreclosed assets,and valuation of mortgage servicing rights, and valuation of the interest rate swap (terminated during the quarter ended March 31, 2015), management obtains independent appraisals and valuations.eventsto December 31, 2019 for potential recognition and/or disclosure through the date the consolidated financial statements were issued.disclosure.4:3: Investment Securities discusses the types of securities that the Company invests in. Note 5:4: Loans discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer.The Company carries certain assets with other financial institutions which are subject to credit risk by the amount such assets exceed federal deposit insurance limits. At December 31, 2016 and 2015, no account balances were held with correspondent banks that were in excessManagement monitors the financial stability of correspondent banks and considers amounts advanced in excess of FDIC insurance limits to present no significant additional risk to the Company. NOTE 1: Organization and Summary of Significant Accounting Policies – continued properly maintains amounts in excesswas required to maintain cash reserves with the Federal Reserve Bank (“FRB”) of reserve balances as required by the FRB.$1,297,000 and $1,036,000 at December 31, 2019 and 2018, respectively. The Bank had vault cash reserveswas in excess of the requiredcompliance with these reserve amount of $676,000 as ofrequirements at December 31, 2016. 2019 and 2018.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 2:Summary of Significant Accounting Policies – continued20162019 and 20152018 all securities were designated as available-for-sale.Held-to-Held-to-Maturity – Debt investment securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the period remaining until maturity.Available-for-Available-for-Sale – Investment securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, need for liquidity and changes in the availability of and the yield of alternative investments, are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses, net of tax, are reported as other comprehensive income. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific identification method. In general, premiums are amortized and discounts are accreted over the period remaining to maturity, except for premiums on callable bonds which are amortized to the earliest call date. held-to-maturity and available-for-sale securities below their cost that are other than temporary are recognized by write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses.Trading – Investments that are purchased with the intentNOTE 1: Organization and Summary of Significant Accounting Policies – continued FHLBFederal Home Loan Bank (“FHLB”) of Des Moines stock is a restricted investment carried at cost ($100 per share par value), which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on total assets and a specific percentage of its outstanding FHLB advances. The Company had 40,12146,827 and 33,96950,114 FHLB shares at December 31, 20162019 and 2015,2018, respectively. Dividends are paid quarterly and are subject to FHLB board approval. Management evaluates FHLB stock for impairment as needed.17,41550,512 and 40,650 FRB shares at December 31, 20162019 and 2015.2018, respectively. Dividends are received semi-annually at a fixed rate of 6.00% on the total number of shares.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 2: Summary of Significant Accounting Policies – continuedin aggregate, plus the fair value of associated derivative financial instruments. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to income.commitments from investors or current secondary market prices for loans with similar coupons and maturities.grantsoriginates mortgage, commercial, agricultural and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in Montana. The ability of the Bank’s debtors to honor their contracts is dependent upon the general economic conditions in this area.Loan Origination/Risk ManagementThe Bank selectively extends credit continuedthe purposeeach class of establishing long-term relationships with its customers. The Bank mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment,loans, the Bank considers tangiblethe borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Bank's collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and personal guarantees as secondary sourcesin the process of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Bankcollection or (ii) full payment of principal and interest is engaged and require all lenders to obtain appropriate approvals for the extension of credit. The Bank also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discoverednot expected. Loans may be reduced.placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.reporting system supplementsloan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan review processagreement. Factors considered by providing management with frequent reports related toin determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan production,by loan quality, concentrationsbasis for commercial, agricultural and construction loans by either the present value of credit, loan delinquencies and nonperforming and potential problem loans. Diversification inexpected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan portfolio is a meanscollateral dependent. Large groups of managing risk associated with fluctuations in economic conditions.smaller balance homogeneous loans are collectively evaluated for impairment.The Bank regularly contracts for independent loan reviews that validate the credit risk program. Results of these reviews are presented to management. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as, the Company’s policies and procedures.Mortgages (1-4 Family) Loans –The Bank originates 1-4 family residential mortgage loans collateralized by owner-occupied and non-owner-occupied real estate. Repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts up to 80.00% of appraised values before requiring private mortgage insurance. The underwriting analysis includes credit verification, appraisals and a review of the financial condition of the borrower. The Company will either hold these loans in its portfolio or sell them on the secondary market, depending upon market conditions and the type and term of the loan originations. Generally, all 30-year fixed rate loans are sold in the secondary market.-10-2:1:Mortgages and Land Loans–The Bank makes commercial real estate loans, and land loans (both developed and undeveloped) and loans on multi-family dwellings. Commercial real estate loans are collateralized by owner-occupied and non-owner-occupied real estate. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. When underwriting these loans, the Bank seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower.Real EstateConstruction Loans–The Bank makes loans to finance the construction of residential properties. The majority of the Bank’s residential construction loans are made to individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. The Bank also originates commercial construction and development loans. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the CompanymayCompany may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Bank has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 2:Summary of Significant Accounting Policies – continuedLoans – continuedand Industrial Loans–A broad array of commercial lending products are made available to businesses for working capital (including inventory and accounts receivable), purchases of equipment and machinery and business. Bank’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Bank also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans.Non-Accrual and Past Due Loans–Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Bank considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Bank's collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.confirmed.probable. Subsequent recoveries, if any, are credited to the allowance.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: Summary of Significant Accounting Policies – continuedAllowance for Loan Losses – continuedgeneral and unallocatedgeneral components. For such loans that are classified as impaired, ana specific allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to coverfactors, as well as uncertainties that could affect management's estimate of probable losses.The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.A troubled debt restructured loan would generally be consideredTDR’s are included in impaired in the year of modification and will be assessed periodically for continued impairment.loans.purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on a market price valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2:Summary of Significant Accounting Policies –continuedMortgage ServicingRights – continuedinto noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.Cash Surrender ValueLife insurance policies are initially recorded at cost at the date of purchase. Subsequent to purchase, the policies are periodically adjusted for fair value. The adjustment to fair value increases or decreases the carrying value of the policies and is recorded as an income or expense on the consolidated statement of income. For the years ended December 31, 2016 and 2015, there were no adjustments to fair value that were outside the normal appreciation in cash surrender value.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSForeclosed AssetsAssets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure. All write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property held-for-sale is carried at fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: Summary of Significant Accounting Policies –continuedNOTE 1: Organization and Summary of Significant Accounting Policies – continued 20162019 and 20152018 the Company recognized no interest and penalties. Based on management’s analysis, the Company did not have any uncertain tax positions as of December 31, 20162019 or 2015.2018. The Company files tax returns in the U.S. federal jurisdiction and the State of Montana. There are currently no income tax examinations underway for these jurisdictions. The Company’s income tax returns are subject to examination by relevant taxing authorities as follows: U.S. Federal income tax returns for tax years 20132016 and forward; Montana income tax returns for tax years 20132016 and forward.Treasury StockTreasury stock is accounted for on the cost method and consists of 271,718 and 303,663 shares at December 31, 2016 and 2015, respectively.On July 21, 2016, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during 2016. The plan expires on July 21, 2017.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2:Summary of Significant Accounting Policies –continuedTreasury Stock– continuedOn July 23, 2015, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. During the three months ended December 31, 2015, 15,000 shares were purchased at an average price of $11.75 per share. During the three months ended September 30, 2015, 46,065 shares were purchased at an average price of $11.47 per share. The plan expired on July 23, 2016.On July 1, 2014, the Board authorized the repurchase of up to 200,000 shares of its common stock. Under this plan, shares could be purchased on the open market or in privately negotiated transactions. Under this plan, 55,800 shares were purchased at an average price of $11.03 per share during the six months ended June 30, 2015. In addition, under this plan, 55,000 shares were purchased at an average price of $10.66 per share during the six month transition period ended December 31, 2014. The plan expired on June 30, 2015.Advertising CostsThe Company expenses advertising costs as they are incurred. Advertising costs were $696,000 and $800,000 for the years ended December 31, 2016 and 2015, respectively.ESOPEmployee Stock Ownership Plan (“ESOP”) equals the fair value of shares that have been allocated or committed to be released for allocation to participants.participants during the year. Any difference between the fair value of the shares at the time and the ESOP’s original acquisition cost is charged or credited to shareholders’ equity (capital surplus)(additional paid-in capital). The cost of ESOP shares that have not yet been allocated or committed to be released is deducted from shareholders’ equity.Earnings per common share is computed using the two-class method prescribed under ASC Topic 260, “Earnings Per Share.” ASC Topic 260 provides that unvested share based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has determined that its outstanding non-vested stock awards are participating securities. Under the two-class method, basicBasic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities.period. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. A reconciliationweighted-average shares usedderivatives are recorded in calculating basic earnings per common sharenoninterest income on the consolidated statements of income within mortgage banking.weighted average common shares usedabsence of broad markets for particular items. Changes in calculating diluted earnings per common shareassumptions or in market conditions could significantly affect the estimates. See Note 19. Fair value of Financial Instruments for the reported periods is provided in Note 3: Earnings Per Share.-16-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 2:Summary of Significant Accounting Policies –continuedDerivativesDerivatives are recognized as assets and liabilities on the consolidated statement of financial condition and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation.Mortgage Loan Commitments– Mortgage loan commitments that relate to the origination of a mortgage that will be held-for-sale upon funding are considered derivative instruments. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time after inception of the rate lock.Interest Rate Lock Commitments –The Company enters into agreements to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the lender commits to lend funds to a potential borrower (subject to the lender’s approval of the loan) on a fixed or adjustable rate basis, regardless of whether interest rates change in the market, or on a floating rate basis.ForwardDelivery Commitments–The Company uses mandatory sell forward delivery commitments to sell whole loans. These commitments are used as a hedge against exposure to interest rate risks resulting from rate locked loan origination commitments on certain mortgage loans held-for-sale. Gains and losses on the items hedged are deferred and recognized in accumulated other comprehensive income until the commitments are completed. At the point of completion of the commitments the gains and losses are recognized in the Company’s income statement.Interest Rate Swap Agreements–For asset/liability management purposes, the Company may use interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s fixed-rate loans to a variable rate.The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings. For fair value hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized over the life of the loans.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES2:1:SignificantSignificant Accounting Policies –continuedCompany—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivershipCompany, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.maturity. Business Combinations, Goodwill and Other Intangible AssetsAuthoritative guidance requires that all business combinations initiated after December 31, 2001, be accounted for under the purchase method and addresses the initial recognition and measurementGoodwill is recorded upon completion of goodwill and other intangible assets acquired in a business combination. The guidance also addresses the initial recognition and measurement of intangible assets acquired in a business combination as the difference between the purchase price and the accountingfair value of net identifiable assets acquired. Subsequent to initial recognition, the Company tests goodwill for impairment as of June 30 each year, or more often if events or circumstances, such as adverse changes in the business climate indicate there may be impairment. There was no goodwill and other intangible assets subsequent to their acquisition. The guidance provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be testedimpairment at least annually for impairment.December 31, 2019 or 2018.The goodwillGoodwill recorded for the 2012 acquisition of the branches of Sterling Financial Corporation (“Sterling”) in 2012 was $6,890,000 and is not subject to amortization in accordance with accounting guidance.$7,034,000. Goodwill recorded for the TwinCo acquisition during the first quarter of 2018 was $5,090,000. Goodwill recorded for the BMB acquisition during the first quarter of 2019 was $3,586,000. Final valuation adjustments recorded during the year ended December 31, 2019 were recorded in 2013 for $144,000$126,000 and impacted goodwill. The final goodwill recorded related to the acquisition was $7,034,000. The Company performs a goodwill impairment test annually as of June 30. There have been no reductions of recorded goodwill resulting from the impairment tests.$3,712,000. Other identifiable intangible assets recorded by the Company represent the future benefit associated with the acquisition of the core deposits of the Sterling branches anddeposits. Core deposit intangible assets are being amortized over 710 years utilizing a methodmethods that approximatesapproximate the expected attrition of the deposits. ThisThe amortization expense is included in the noninterest expense section of the consolidated statements of income.RecentRecently Adopted Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update No. 2014-9,Codification (“ASC”) 606, Revenue from Contracts with Customers, (Topic 606). This guidance is a comprehensive newestablishes principles for reporting information about the nature, amount, timing and uncertainty of revenue recognition standard that will supersede substantially all existing revenue recognition guidance.and cash flows arising from the entity’s contracts to provide goods or services to customers. The new standard’s core principle is that a company willrequires an entity to recognize revenue when it transfers promisedto depict the transfer of goods or services to customers in an amount that reflects the consideration to which the companythat it expects to be entitled to receive in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifyingservices recognized as performance obligations inare satisfied. The new revenue recognition standards became effective for the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. On July 9, 2015, the FASB agreed to delay the effective date of the standard by one year. Therefore, the new standard will be effective in the first quarter of 2018 and is not expected to have a significant impact to the Company’s consolidated financial statements.-18-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES2:1:SignificantSignificant Accounting Policies –continuedIn January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendment has a number of provisions including the requirements that public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, a separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans receivables), and eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendment is effective for annual and interim reporting periods beginning after December 15, 2017 and is not expected to have a significant impact to the Company’s consolidated financial statements.2016-2,2016-02, Leases (Topic 842) intended to improve financial reporting regarding leasing transactions. The new standard affects all companies and organizations that lease assets. The standard will requirerequires organizations to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases if the lease terms are more than 12 months. The guidance also will requirerequires qualitative and quantitative disclosures providing additional information about the amounts recorded in the financial statements. The amendments in this update arewere effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.years and was adopted by the Company in the first quarter of 2019. The Company is evaluating the potential impactadoption of the amendmentstandard did not have a significant impact on our consolidated financial statements. The Company’s operating leases primarily relate to branch locations. We currently lease six locations that are full-service branches and one mortgage lending branch. The leases expire on various dates through 2028. As a result of adopting the lease standard on January 1, 2019, the Company recorded right of use assets of $2,374,000 and corresponding lease liabilities. The right of use assets are included in premises and equipment, net and the lease liabilities are included in accrued expenses and other liabilities on the Company’s consolidated statement of financial statements.condition.JuneMarch 2017, the FASB issued ASU No. 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20) to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this standard in the first quarter of 2019 did not have a significant impact on our consolidated financial statements, as we typically do not invest in these types of securities.2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018,2022, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). workingcontinuing to evaluate the significance of that impact.impact, even though the adoption date has been deferred. In that regard, we have established a working group under the direction of our Chief Financial Officer and Chief Credit Officer. The group is composed of individuals from the finance and credit administration areas of the Company. We are currently developing an implementation plan, including assessment of processes, segmentation of the loan portfolio and identifying and adding data fields necessary for analysis. The adoption of this standard is likely to result in an increase in the allowance for loan and lease losses as a result of changing from an “incurred loss” model to an “expected loss” model. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.-19-3: 2:Earnings Per ShareMergers and Acquisitions $ 6,902 $ 5,657 2,096 30,728 89,204 55,057 2,246 1,605 2,862 - 223 135 1,988 1,609 1,995 1,258 $ 107,516 $ 96,049 $ 92,706 $ 82,190 1,960 19 $ 94,666 $ 82,209 $ 12,850 $ 13,840 $ 1 $ 9,900 16,435 9,030 $ 16,436 $ 18,930 $ 3,586 $ 5,090 computationstotal accretable discount on BMB acquired loans was $2,813,000 as of basic and diluted earnings per share wereJanuary 1, 2019. During the year ended December 31, 2019, accretion of the loan discount was $1,480,000. The remaining accretable loan discount was $1,333,000 as follows:of December 31, 2019. 3,784,788 3,813,090 88,801 46,535 3,873,589 3,859,625 $ 5,132 $ 2,580 $ 1.36 $ 0.68 $ 1.32 $ 0.67 $ 33,462 12,986 39,422 7,026 1,405 $ 5,621 $ 1.04 $ 1.02 5,426,605 5,490,347 4: 3:-20-Table Asset-backed securities (“ABSs”) are financial securities collateralized by a pool of ContentsEAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Investment Securities – continued $ 5,673 $ 7 $ (72 ) $ 5,608 $ 13,318 $ 279 $ - $ 13,597 68,493 575 (1,404 ) 67,664 50,699 1,616 (93 ) 52,222 9,454 15 (162 ) 9,307 8,356 40 (8 ) 8,388 29,537 283 (308 ) 29,512 16,530 15 (200 ) 16,345 9,460 56 (21 ) 9,495 33,129 297 (92 ) 33,334 10,110 - (271 ) 9,839 $ 129,687 $ 895 $ (2,146 ) $ 128,436 $ 125,072 $ 2,288 $ (485 ) $ 126,875 $ 10,684 $ 26 $ (95 ) $ 10,615 66,606 1,041 (578 ) 67,069 9,615 - (165 ) 9,450 32,810 111 (186 ) 32,735 26,233 40 (404 ) 25,869 $ 145,948 $ 1,218 $ (1,428 ) $ 145,738 The Company has not entered into any interest rate swaps, options or futures contracts relating to investment securities. $ 23,649 $ 31,301 $ 272 $ 534 (23 ) (300 ) $ 249 $ 234 $ 9,333 $ 58 $ (44 ) $ 9,347 69,024 244 (990 ) 68,278 11,411 8 (300 ) 11,119 19,635 86 (373 ) 19,348 24,229 6 (360 ) 23,875 10,350 6 (158 ) 10,198 $ 143,982 $ 408 $ (2,225 ) $ 142,165 -21-4: 3: $ 58,027 $ 51,319 $ 576 $ 191 (507 ) (378 ) $ 69 $ (187 ) at December 31, 2016 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. $ 1,042 $ 1,040 $ 9,116 $ 9,134 8,116 8,058 10,005 10,085 15,223 15,038 8,738 9,078 59,239 58,443 54,624 55,749 83,620 82,579 82,483 84,046 29,537 29,512 16,530 16,345 9,460 9,495 33,129 33,334 $ 129,687 $ 128,436 $ 125,072 $ 126,875 Maturities of securities do not reflect repricing opportunities present in adjustable rate securities.20162019 and 2015,2018, securities with a fair value of $18,626,001$18,897,000 and $11,389,000,$21,408,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. $ 4,420 $ (72 ) $ - $ - $ - $ - $ - $ - 39,786 (1,392 ) 634 (12 ) 11,142 (93 ) - - 3,375 (15 ) 4,918 (147 ) - - 992 (8 ) 18,113 (405 ) 7,855 (103 ) 9,868 (35 ) 7,968 (78 ) 940 (33 ) 8,900 (238 ) $ 65,694 $ (1,884 ) $ 13,407 $ (262 ) $ 21,950 $ (161 ) $ 17,860 $ (324 ) $ 3,173 $ (24 ) $ 5,986 $ (71 ) 15,913 (132 ) 21,163 (446 ) 5,283 (80 ) 3,915 (85 ) 23,164 (249 ) 13,886 (341 ) $ 47,533 $ (485 ) $ 44,950 $ (943 ) $ - $ - $ 3,385 $ (44 ) 17,887 (140 ) 32,712 (850 ) 2,890 (110 ) 7,220 (190 ) 5,575 (98 ) 22,559 (635 ) 8,200 (158 ) - - $ 34,552 $ (506 ) $ 65,876 $ (1,719 ) -22-Table of ContentsEAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4:Investment Securities – continued97Unrealized losses associated with investments are believed to be caused by changing market conditions, primarily spreads related to U.S. treasuries, that are considered to be temporary and 85the Company does not intend to sell the securities, were in an unrealized loss position asand it is not likely to be required to sell these securities prior to maturity. Based on the Company’s evaluation of these securities, no other-than-temporary impairment was recorded for the year ended December 31, 2019, or 2018. As of December 31, 20162019 and 2015, respectively.December 31, 2018, there were, respectively, 28 and 108 securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the lengthAs of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.At December 31, 2016, 702019, 10 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 3.19%0.83% from the Company'sCompany’s amortized cost basis of these securities. At December 31, 2015, 522018, 74 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 1.43%1.88% from the Company’s amortized cost basis of these securities. As of December 31, 2019, 1 corporate obligation had unrealized losses of approximately 0.80% from the Company’s amortized cost basis of these securities. At December 31, 2018, 11 corporate obligations had an unrealized loss with aggregate depreciation of approximately 2.88% from the Company's amortized cost basis of these securities. These unrealized losses are principally due to changes in interest rates and credit spreads. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts' reports. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.At2016, 13 corporate2019, 12 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses with aggregate depreciation of approximately 1.92% from the Company's amortized cost basis of these securities. At December 31, 2015, 13 corporate obligations had an unrealized loss with aggregate depreciation of approximately 1.76% from the Company's amortized cost basis of these securities. These unrealized losses are principally due to changes in interest rates. No credit issues have been identified that cause management to believe the declines in market value are other than temporary. In analyzing the issuer's financial condition, management considers industry analysts' reports, financial performance and projected target prices of investment analysts within a one-year time frame. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.At December 31, 2016, 14 MBSs and CMOs had unrealized losses with aggregate depreciation of approximately 1.92%0.63% from the Company’s amortized cost basis of these securities. At December 31, 2015, 202018, 19 MBSs and CMOs had unrealized losses with aggregate depreciation of approximately 1.57%2.54% from the Company’s amortized cost basis of these securities. We believeManagement believes that these unrealized lossessecurities are principallyonly temporarily impaired due to changes in market interest rates or the credit market’swidening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the stabilityunderlying credit of the mortgage market, changes in interest rates and credit spreads and uncertainty of future prepayment speeds. Management considers available evidence to assess whether it is more likely-than-not that all amounts due would not be collected. In such assessment, management considersissuers or the severity and duration of the impairment, the credit ratings of the security, the overall deal and payment structure, including the Company's position within the structure, underlying obligor, financial condition and near term prospects of the issuer, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates. There was no disruption of the scheduled cash flows on any of the securities. Management’s analysis ascollateral. 2016 revealed no expected credit2019, 5 asset-backed securities (“ABSs”) had unrealized losses onwith aggregate depreciation of approximately 2.68% from the Company’s amortized cost basis of these securities. At December 31, 2018, 4 ABSs had unrealized losses with aggregate depreciation of approximately 1.89% from the Company’s amortized cost basis of these securities. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and therefore, declines are not deemeddue to be other than temporary.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS54: $ 113,262 $ 118,133 $ 157,898 $ 144,107 214,927 167,930 434,025 328,438 20,540 22,958 49,018 45,345 56,414 52,159 14,800 14,641 18,882 16,565 54,706 39,072 113,319 76,762 467,253 408,079 780,538 618,031 (1,303 ) (1,098 ) (4,770 ) (3,550 ) (8,600 ) (6,600 ) (1,092 ) (795 ) $ 461,391 $ 403,734 $ 770,635 $ 610,333 commercial real estate loan categorycategories above, $11,586,000$13,602,000 and $12,117,000$12,476,000 was guaranteed by the United States Department of Agriculture Rural Development at December 31, 20162019 and 2015,2018, respectively. In addition,Also within the commercial loan categorycategories above, $1,588,000$5,701,000 and $1,917,000 were in loans originated through a syndication program where$3,878,000 was guaranteed by the business resides outsideUnited States Department of MontanaAgriculture Farm Service Agency at December 31, 20162019 and 2015,2018, respectively.The following table includes information regarding nonperforming assets. $ 614 $ 2,030 495 472 43 46 1,152 2,548 825 595 $ 1,977 $ 3,143 0.29 % 0.50 % $ 4,770 $ 3,550 414.06 % 139.32 % 241.27 % 112.95 % -24-54: $ 911 $ 1,593 $ 184 $ 342 $ 66 $ 454 $ 3,550 (4 ) (298 ) - (7 ) (204 ) (119 ) (632 ) - - - - 19 - 19 90 784 60 125 312 462 1,833 $ 997 $ 2,079 $ 244 $ 460 $ 193 $ 797 $ 4,770 $ - $ - $ - $ - $ 8 $ - $ 8 $ 997 $ 2,079 $ 244 $ 460 $ 185 $ 797 $ 4,762 $ 113,262 $ 214,927 $ 20,540 $ 49,018 $ 14,800 $ 54,706 $ 467,253 $ 221 $ - $ - $ 340 $ 96 $ - $ 657 $ 113,041 $ 214,927 $ 20,540 $ 48,678 $ 14,704 $ 54,706 $ 466,596 $ 1,301 $ 3,593 $ 477 $ 190 $ 1,039 $ 6,600 - (195 ) (75 ) (78 ) (380 ) (728 ) - 17 - 26 58 101 - 1,411 75 146 995 2,627 $ 1,301 $ 4,826 $ 477 $ 284 $ 1,712 $ 8,600 $ - $ - $ - $ - $ 74 $ 74 $ 1,301 $ 4,826 $ 477 $ 284 $ 1,638 $ 8,526 $ 157,898 $ 434,025 $ 56,414 $ 18,882 $ 113,319 $ 780,538 $ 955 $ 1,109 $ 98 $ 156 $ 1,323 $ 3,641 $ 156,943 $ 432,916 $ 56,316 $ 18,726 $ 111,996 $ 776,897 $ 684 $ 1,098 $ 35 $ 270 $ 46 $ 317 $ 2,450 (137 ) - - - (61 ) (25 ) (223 ) - - - 1 18 1 20 364 495 149 71 63 161 1,303 $ 911 $ 1,593 $ 184 $ 342 $ 66 $ 454 $ 3,550 $ - $ - $ - $ 7 $ 11 $ 30 $ 48 $ 911 $ 1,593 $ 184 $ 335 $ 55 $ 424 $ 3,502 $ 118,133 $ 167,930 $ 22,958 $ 45,345 $ 14,641 $ 39,072 $ 408,079 $ 730 $ 667 $ - $ 207 $ 145 $ 327 $ 2,076 $ 117,403 $ 167,263 $ 22,958 $ 45,138 $ 14,496 $ 38,745 $ 406,003 $ 1,301 $ 2,778 $ 506 $ 225 $ 940 $ 5,750 - (13 ) (80 ) (72 ) (24 ) (189 ) - 19 1 27 12 59 - 809 50 10 111 980 $ 1,301 $ 3,593 $ 477 $ 190 $ 1,039 $ 6,600 $ - $ - $ - $ - $ - $ - $ 1,301 $ 3,593 $ 477 $ 190 $ 1,039 $ 6,600 $ 144,107 $ 328,438 $ 52,159 $ 16,565 $ 76,762 $ 618,031 $ 887 $ 445 $ 491 $ 127 $ 340 $ 2,290 $ 143,220 $ 327,993 $ 51,668 $ 16,438 $ 76,422 $ 615,741 -25-54:Internal classification of the loan portfolio was as follows: $ 112,524 $ 214,476 $ 20,084 $ 48,643 $ 14,697 $ 54,470 $ 464,894 - - 456 - - - 456 738 451 - 375 95 236 1,895 - - - - - - - - - - - 8 - 8 $ 113,262 $ 214,927 $ 20,540 $ 49,018 $ 14,800 $ 54,706 $ 467,253 $ 112,585 $ 214,923 $ 20,540 $ 48,643 $ 14,704 $ 54,706 $ 466,101 - - - 43 - - 43 677 4 - 332 96 - 1,109 $ 113,262 $ 214,927 $ 20,540 $ 49,018 $ 14,800 $ 54,706 $ 467,253 $ 116,711 $ 167,263 $ 22,176 $ 45,100 $ 14,486 $ 38,675 $ 404,411 - - - - - - - 1,422 667 782 156 140 367 3,534 - - - 82 4 - 86 - - - 7 11 30 48 $ 118,133 $ 167,930 $ 22,958 $ 45,345 $ 14,641 $ 39,072 $ 408,079 $ 117,182 $ 167,259 $ 22,711 $ 45,138 $ 14,496 $ 38,745 $ 405,531 - - - 46 - - 46 951 671 247 161 145 327 2,502 $ 118,133 $ 167,930 $ 22,958 $ 45,345 $ 14,641 $ 39,072 $ 408,079 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5:Loans – continued8 point8-point internal loan rating system, largely based on regulatory classifications, as follows:8 point8-point rating system. They are of such small value that their continuance as assets without establishment of a specific reserve is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather, that it is not practical or desirable to defer writing off a basically worthless asset even though practical recovery may be effectedaffected in the future.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 5: Loans – continuedManagement usesThe loan review process compliments and reinforces the results of these reviewsrisk identification and assessment decisions made by lenders and credit personnel, as part of its annual review process.well as, the Company’s policies and procedures.The following tables include information regarding impaired loans. $ 221 $ 221 $ - $ 476 - - - 334 - - - - 340 390 - 270 88 135 - 111 - - - 148 - - - - - - - - - - - - - - - 3 8 8 8 10 - - - 15 221 221 - 476 - - - 334 - - - - 340 390 - 273 96 143 8 121 - - - 163 $ 657 $ 754 $ 8 $ 1,367 -28-54: $ 730 $ 730 $ - $ 690 667 667 - 334 - - - - 200 234 - 264 134 134 - 91 297 297 - 263 - - - 411 - - - - - - - - 7 7 7 3 11 11 11 9 30 30 30 15 730 730 - 1,101 667 667 - 334 - - - - 207 241 7 267 145 145 11 100 327 327 30 278 $ 2,076 $ 2,110 $ 48 $ 2,080 Interest income recognized on impaired loans forInternal classification of the years ended December 31, 2016 and 2015 is considered insignificant. loan portfolio was as follows: $ 118,116 $ - $ 1,180 $ - $ - $ 119,296 38,265 - 337 - - 38,602 328,750 - 2,312 - - 331,062 52,620 - 50 - - 52,670 49,959 108 168 58 - 50,293 56,039 78 297 - - 56,414 18,694 - 188 - - 18,882 71,868 159 707 63 - 72,797 39,347 138 570 467 - 40,522 $ 773,658 $ 483 $ 5,809 $ 588 $ - $ 780,538 $ 116,065 $ - $ 874 $ - $ - $ 116,939 26,533 - 635 - - 27,168 252,731 1,731 2,322 - - 256,784 41,726 - 13 - - 41,739 29,915 - - - - 29,915 51,668 - 491 - - 52,159 16,394 - 171 - - 16,565 57,778 950 244 81 - 59,053 17,305 - 404 - - 17,709 $ 610,115 $ 2,681 $ 5,154 $ 81 $ - $ 618,031 -29-54: $ 702 $ 4 $ 706 $ 618 $ 117,972 $ 119,296 260 - 260 337 38,005 38,602 793 - 793 583 329,686 331,062 72 - 72 50 52,548 52,670 1,039 - 1,039 476 48,778 50,293 420 - 420 98 55,896 56,414 128 - 128 156 18,598 18,882 484 - 484 824 71,489 72,797 702 1,805 2,507 499 37,516 40,522 $ 4,600 $ 1,809 $ 6,409 $ 3,641 $ 770,488 $ 780,538 $ 975 $ 677 $ 1,652 $ 111,610 $ 113,262 $ 456 $ 381 $ 130 $ 511 $ 253 $ 116,175 $ 116,939 118 - 118 634 26,416 27,168 513 4 517 214,410 214,927 4 975 1,347 2,322 432 254,030 256,784 - - - 20,540 20,540 - 9 - 9 13 41,717 41,739 - - - - 29,915 29,915 365 332 697 48,321 49,018 35 39 - 39 491 51,629 52,159 169 96 265 14,535 14,800 - 135 - 135 127 16,303 16,565 249 - 249 54,457 54,706 - 284 - 284 308 58,461 59,053 91 - 91 32 17,586 17,709 $ 2,271 $ 1,109 $ 3,380 $ 463,873 $ 467,253 $ 495 $ 2,032 $ 1,477 $ 3,509 $ 2,290 $ 612,232 $ 618,031 $ 1,163 $ 951 $ 2,114 $ 116,019 $ 118,133 $ 221 $ 618 $ 657 $ - $ 435 337 387 - 485 177 671 848 167,082 167,930 4 583 766 - 507 662 247 909 22,049 22,958 247 50 225 - 32 476 513 - 238 - - - - 319 161 480 44,865 45,345 - 98 115 - 295 184 145 329 14,312 14,641 - 156 169 - 142 173 327 500 38,572 39,072 - 824 887 74 566 499 756 - 266 $ 2,678 $ 2,502 $ 5,180 $ 402,899 $ 408,079 $ 472 $ 3,641 $ 4,475 $ 74 $ 2,966 $ 253 $ 277 $ - $ 364 634 684 - 317 432 527 - 216 13 26 - 6 - - - - 491 522 - 367 127 181 - 140 308 310 - 208 32 32 - 16 $ 2,290 $ 2,559 $ - $ 1,634 not accruedrecognized on theseimpaired loans and cash interest income was immaterial for the years ended December 31, 20162019 and 2015.2018 is considered insignificant. Interest payments received related to impaired loans was $394,000 and $211,000 for the year ended December 31, 2019 and 2018, respectively.allowancerecorded investments at time of restructure were $76,000 for a commercial loan lossesand $153,000 for a farmland loan. No charge-offs were incurred and the loans are on non-accrual status. The recorded investments were $74,000 and $153,000, respectively at December 31, 2019.2016 and 2015 was $8,000 and $48,000, respectively. Impaired loans with a carrying value of $657,000 were reduced by specific valuation allowance allocations totaling $8,0002019, the Company had no commitments to a total reported fair value of $649,000. Impaired loans with a carrying value of $2,076,000 were reduced by specific valuation allowance allocations totaling $48,000lend additional funds to a total reported fair value of $2,028,000.loan customers whose terms had been modified in troubled debt restructures.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 5: Loans – continuedseniorexecutive officers and their related parties were as follows: $ 7,435 $ 3,137 1,073 853 (6,132 ) (864 ) $ 2,376 $ 3,126 726 1,477 (688 ) (1,604 ) $ 2,414 $ 2,999 Principal payments for 2015 include $5,849,000 related to a previously affiliated entity loan. See Note 19: Related Party Transactions for further information. $ 1,327 $ 1,220 $ 45 $ 14 NOTE6: Troubled Debt RestructuringsThe Company adopted the amendments in Accounting Standards Update No. 2011-02 (ASC Topic 310) during the quarter ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the previous fiscal year (July 1, 2011) for identification as troubled debt restructurings. The Company identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC Subtopic 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC Subtopic 310-10-35. The amendments in the guidance require prospective application of the impairment measurement for those receivables newly identified as impaired. $ 2,087 $ 1,797 -31-6: :Troubled Debt RestructuringsLoans – continuedAs of December 31, 2016, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under ASC Subtopic 310-10-35 was $43,000 (ASC Subtopic 310-40-65-1(b)), and there was no allowance for credit losses associated with these receivables, on the basis of a current evaluation of loss (ASC Subtopic 310-40-65-1(b)). There was $34,000 charged-off at the time of restructure related to these receivables.The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:Rate Modification – A modification in which the interest rate is changed.Term Modification – A modification in which the maturity date, timing of payments or frequency of payments is changed.Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.Combination Modification – Any other type of modification, including the use of multiple categories above.The following tables present troubled debt restructurings. $ - $ - $ - - - - - - - 43 - 43 - - - - - - $ 43 $ - $ 43 -32-Table of Contents �� $ 65 $ 58 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 6: Troubled Debt Restructurings - continued $ - $ - $ - - - - - - - 46 - 46 - - - - - - $ 46 $ - $ 46 During the year ended December 31, 2016, there were no new restructured loans.There were no loans modified as a troubled debt restructured loan within the previous 12 months for which there was a payment default during the year ended December 31, 2016. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.As of December 31, 2016 and 2015, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures.7:Foreclosed AssetsForeclosed assets are presented net of an allowance for losses. A summary of the balance of foreclosed assets is presented below: $ 202 $ - 603 595 20 - $ 825 $ 595 Expenses applicable to foreclosed assets included the following: $ 6 $ (13 ) (33 ) (23 ) $ (27 ) $ (36 ) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 8: 5:totaling approximately $808,898,000which are not included in the consolidated statements of financial condition, have unpaid principal balances of $1,169,869,000 and $693,343,000$964,967,000 at December 31, 20162019 and 2015,2018, 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 $2,620,000 and $2,295,000 for the years ended December 31, 2019 and 2018, respectively. These fees, net of amortization, are included in mortgage banking which is a component of noninterest income on the consolidated statement of income. escrow balances maintained in connection with the foregoing loan servicing, and included in demandnoninterest checking deposits, were approximately $4,775,000$8,402,000 and $4,171,000$5,618,000 at December 31, 20162019 and 2015,2018, respectively.rightsrights: $ 7,100 $ 6,578 3,276 1,725 (1,637 ) (1,203 ) $ 8,739 $ 7,100 the valuation allowance.2018. $ 4,968 $ 4,115 2,134 1,652 (1,249 ) (799 ) 5,853 4,968 - - - - - - $ 5,853 $ 4,968 $6,741,000$9,835,000 and $6,452,000$8,700,000 at December 31, 20162019 and 2015,2018, respectively. The fair value of servicing rights was determined using discount rates ranging from 13.00% to 15.00%, prepayment speeds ranging from 104.00% to 277.00% PSA,at loan level, depending on stratificationthe interest rate and term of the specific loan. The fair value was also adjusted forloan, using the effect of potential past dues and foreclosures. Individual mortgage servicing rights values were capped at a maximum of 1.00% for private investors and at a maximum of 1.25% for agency investors.following valuation assumptions: 12% 12% 110 - 246% 83 - 226% 171% 119% 96: $ 4,086 $ 3,803 $ 8,118 $ 7,257 20,832 19,055 34,917 26,011 6,300 6,035 10,026 8,428 111 230 424 1,787 31,329 29,123 53,485 43,483 (11,936 ) (10,906 ) (15,303 ) (14,140 ) (1) $ 19,393 $ 18,217 $ 38,182 $ 29,343 $1,058,000$1,786,000 and $1,231,000$1,282,000 for the years ended December 31, 20162019 and 2015,2018, respectively.-34- $ 1,900 1,900 6.90 3.24 % $ 544 97 $ 641 $ 479 350 206 206 206 684 $ 2,131 (231 ) $ 1,900 107:othercore deposit intangible assets were recorded as part of the Sterling acquisition.The carrying amount of goodwill was as follows: $ 7,034 $ 7,034 othercore deposit intangible assets were as follows: $ 1,031 $ 1,031 $ 4,628 $ 2,640 (647 ) (517 ) (1,842 ) (1,142 ) $ 384 $ 514 $ 2,786 $ 1,498 $130,000$698,000 and $149,000$385,000 for the years ended December 31, 20162019 and 2015.2018. The estimated aggregate future amortization expense for core deposit intangible assets remaining as of December 31, 20162019 was as follows: $ 614 530 446 363 298 535 $ 2,786 $ 111 92 73 55 36 17 $ 384 118: $ 82,877 0.00 % $ 77,031 0.00 % $ 200,035 0.00 % $ 142,788 0.00 % 93,163 0.03 % 87,350 0.03 % 116,397 0.03 % 105,115 0.03 % 82,266 0.04 % 71,474 0.04 % 126,991 0.08 % 108,234 0.05 % 89,211 0.11 % 94,880 0.12 % 132,506 0.42 % 108,050 0.30 % 165,278 0.84 % 152,447 0.92 % 233,064 1.70 % 162,424 1.31 % $ 512,795 0.30 % $ 483,182 0.32 % $ 808,993 0.55 % $ 626,611 0.41 % depositdeposits include $15,596,000$10,180,000 and $7,071,000$0 related to fixed rate brokered CDs at December 31, 20162019 and 2015,2018, respectively.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 11:Deposits– continued20162019 and 2018, the Company held $111,049,000$201,398,000 and $148,331,000, respectively, in deposit accounts that met or exceeded the FDICFederal Deposit Insurance Corporation (“FDIC”) requirements of $250,000 and greater.$45,363,000$49,636,000 and $24,443,000$33,635,000 at December 31, 20162019 and 2015,2018, respectively.2016,2019, the scheduled maturities of time deposits were as follows: $ 116,561 32,039 8,182 4,546 3,950 $ 165,278 $ 202,266 21,027 4,943 1,864 1,579 1,385 $ 233,064 $ 27 $ 27 $ 44 $ 36 30 30 85 53 101 107 448 229 1,360 1,293 3,316 1,738 $ 1,518 $ 1,457 $ 3,893 $ 2,056 20162019 and 2015,2018, the Company reclassified $51,000$420,000 and $75,000,$70,000, respectively, in overdrawn deposits as loans.Directors’Related party deposits, including directors’ and seniorexecutive officers’ deposit accounts at December 31, 20162019 and 20152018 were $1,390,000$4,757,000 and $983,000,$8,104,000, respectively.12:9: Other BorrowingsOther Borrowings2016,2019, advances from the FHLB of Des Moines and other borrowings mature as follows: $ 55,406 12,767 10,649 3,446 145 - $ 82,413 $ 83,780 4,570 - - - - $ 88,350 -36-12:9:The FHLB advances include both fixed and amortizing advances. The fixedFixed advances are due at maturity. The advancesAdvances are subject to prepayment penalties. The interestInterest rates on these advances are fixed. The advancesAdvances are collateralized by a blanket pledge of the Bank’s loan portfolio. At December 31, 2016 and 2015, the Company exceeded the collateral requirements of the FHLB. The Company’s investment in FHLB stock is also pledged as collateral on these advances. The total FHLB funding line available to the Company at December 31, 2016,2019, was 35.00%45.00% of total Bank assets as determined by FHLB, or approximately $234,217,000.$455,537,000. The balance of advances was $81,548,000$88,350,000 and $68,261,000$101,357,000 at December 31, 20162019 and 2015,2018, respectively. The Bank also has a contingent letter of credit with FHLB for $570,000 and $620,000 at December 31, 2019 and 2018, respectively.The Bank had no structured repurchase agreements with PNC Financial Service Group, Inc. (“PNC”) at December 31, 2016 and 2015.2016 and 2015,2018, the Bank’s previous subsidiary, AFSB NMTC Investment Fund, LLC had an $865,000 borrowing related to New Markets Tax Credits. The borrowing iswas interest only at 1.00% through November 2019. The Bank divested its interest in AFSB NMTC Investment Fund, LLC in November 2019 and matures in 2019.the loan was assumed by the new owner.$7,000,000$10,000,000 Federal funds line of credit with PNC.PNC Financial Services Group, Inc. The balance was $0 as of December 31, 20162019 and 2015.2018.$10,000,000$20,000,000 Federal funds line of credit with Zions Bank. The balance was $0 as of December 31, 20162019 and 2015,2018, respectively.haspreviously had a $7,000,000 Federal funds line of credit with Stockman Bank. The balanceline of credit was $0 and $3,590,000 as of December 31, 2016 and 2015, respectively.terminated during 2018.During 2016, theThe Bank establishedhas a $10,000,000 Federal funds line of credit with PCBB.Pacific Coast Bankers Bank. The balance was $0 as of December 31, 2016.2019 and 2018, respectively.Federal Reserve Bank Discount WindowFor additional liquidity sources, theThe Bank has a $5,000,000 Federal funds line of credit facility at the Federal Reserve Bank’s Discount Window.with United Bankers’ Bank. The amount available to the Bank is limited by various collateral requirements. There were no pledged securities at the Federal Reserve Bankbalance was $0 as of December 31, 20162019 and 2015. The credit facility account had $0 balance as of December 31, 2016 and 2015.2018, respectively.20162019 and 20152018 was 1.10%2.18% and 1.05%2.20%, respectively. The weighted average amount outstanding was $78,894,000$99,307,000 and $51,367,000$87,283,000 for 20162019 and 2015,2018, respectively.$92,436,000$124,377,000 and $72,716,000$102,222,000 for 20162019 and 2015,2018, respectively.-37-1310:Subordinated DebenturesOther Long-Term DebtSubordinated debenturesOther long-term debt consisted of the following: $ 5,155 $ - $ 5,155 $ - 10,000 (185 ) 10,000 (206 ) $ 15,155 $ (185 ) $ 15,155 $ (206 ) $ 10,000 $ (92 ) $ 10,000 $ (136 ) 10,000 (122 ) 10,000 (143 ) 5,155 - 5,155 - $ 25,155 $ (214 ) $ 25,155 $ (279 ) Eagle Bancorp Statutory Trust I (“the Trust”).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 on December 15, 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 3-Month LIBOR plus 1.42%, making the rate 2.418%3.328% and 2.033%4.228% as of December 31, 20162019 and 2015,2018, respectively. Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date. The subordinated debentures qualify as Tier 1 capital for regulatory capital purposes.20162019 and 2015,2018, interest expense on the subordinated debenturesall other long-term debt was $785,000$1,446,000 and $448,000,$1,432,000, respectively.-38- $ 142,785 $ 111,460 3,098 3,925 4:1:Contingencies– continuedThe Company leases certain office branches under short-term operating leases. Some of these leases have renewal options. Total lease expenditures were $473,000 and $559,000 for the years ended December 31, 2016 and 2015, respectively. The future payments of all lease obligations are as follows: $ 427 393 375 332 242 93 $ 1,862 NOTE 15:Accumulated Other Comprehensive Income (Loss)The following table includes information regarding the activity in accumulated other comprehensive income (loss): $ 294 $ (509 ) $ (215 ) 2,046 883 2,929 (1,907 ) (234 ) (2,141 ) (57 ) (264 ) (321 ) 82 385 467 $ 376 $ (124 ) $ 252 2,861 (792 ) 2,069 (2,938 ) (249 ) (3,187 ) 31 424 455 (46 ) (617 ) (663 ) $ 330 $ (741 ) $ (411 ) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS16:12: $ 1,445 $ (123 ) 912 349 2,357 226 690 609 49 79 739 688 $ 3,096 $ 914 $ 1,369 $ 424 450 83 1,819 507 (13 ) (426 ) (7 ) 82 (20 ) (344 ) $ 1,799 $ 163 $ 1,805 $ 1,204 $ 2,265 $ 1,738 500 381 424 314 500 - 786 698 833 630 419 321 320 268 510 86 - 479 580 633 271 306 595 346 624 633 - 459 466 445 - 233 245 267 429 364 5,935 4,668 5,637 5,137 821 931 841 796 500 - 551 529 7 26 1,230 595 2,483 1,680 228 259 474 - 776 585 872 748 706 347 364 279 246 350 3,970 3,178 6,129 3,947 $ 1,965 $ 1,490 $ (492 ) $ 1,190 -40-62: $ 2,357 34.00 % $ 933 34.00 % $ 2,933 21.00% $ 1,238 21.00% 468 6.75 % 185 6.75 % 943 6.75% 398 6.75% (458 ) -6.61 % (440 ) -16.03 % (264 ) -1.89% (365 ) -6.19% (235 ) -3.39 % (174 ) -6.33 % (151 ) -1.08% (128 ) -2.17% (456 ) -6.58 % (418 ) -15.24 % (456 ) -3.26% (456 ) -7.73% 123 1.79 % 77 2.79 % 91 0.64% 227 3.84% $ 1,799 25.96 % $ 163 5.94 % $ 3,096 22.16% $ 914 15.50% The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits. Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the program is aimed at stimulating economic and community development and job creation in low-income communities. The federalFederal income tax credits received are expectedrelated to beNew Market Tax Credits were $2,964,000 and will bewere claimed over a seven-year credit allowance period. The cumulative federal tax credit benefits were $1,824,000period starting in November 2012, and completed as of December 31, 2016. Due to not having sufficient taxableNovember 2019.only $1,200,000 of the federal tax credit benefits were utilized as of December 31, 2016. The remaining federal tax credit benefits of $624,000 are recorded as deferred tax assets and will be used in future periods.(loss): $ 234 $ 79 $ 313 1,207 (2,113 ) (906 ) (1,223 ) 187 (1,036 ) 9 509 518 (7 ) (1,417 ) (1,424 ) $ 227 $ (1,338 ) $ (1,111 ) 296 3,689 3,985 (605 ) (69 ) (674 ) 82 (953 ) (871 ) (227 ) 2,667 2,440 $ - $ 1,329 $ 1,329 17: 14:Supplemental Cash Flow InformationEarnings Per Share 6,419,654 5,426,605 17,950 63,742 6,437,604 5,490,347 $ 10,872 $ 4,982 $ 1.69 $ 0.92 $ 1.69 $ 0.91 $ 3,129 $ 2,442 1,640 845 (1,041 ) 649 2,134 1,652 577 58 350 193 230 185 18:15:Capital RequirementsMattersnew rule establishesestablished a new regulatory capital framework that incorporatesincorporated revisions to the Basel capital framework, strengthensstrengthened the definition of regulatory capital, increasesincreased risk-based capital requirements, and amendsamended the methodologies for determining risk-weighted assets. These changes are expected to increaseincreased the amount of capital required by community banking organizations. Basel III includesincluded a multiyear transition period from January 1, 2015 through December 31, 2019.2016,2019, the Company and the Bank would meet all capital adequacy requirements under the Basel III Capital rules on a fully phased-in basis as if such requirements were currently in effect; however, final rules are subject to regulatory discretion and could result in the need for additional capital levels in the future.basis.20162019 and 2015,2018, that the Company and the Bank met all capital adequacy requirements to which they are subject.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 18:Regulatory Capital Requirements – continued2016,2019, the most recent notification from the FRB categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Banks’s category. The Bank’s actual capital amounts and ratios as of December 31, 20162019 are presented in the table below: $ 72,145 15.36 $ 37,566 8.00 $ N/A N/A 65,630 14.05 37,379 8.00 46,723 10.00 57,375 12.22 28,174 6.00 N/A N/A 60,860 13.03 28,034 6.00 37,379 8.00 52,724 11.23 21,131 4.50 N/A N/A 60,860 13.03 21,025 4.50 30,370 6.50 57,375 8.60 26,683 4.00 N/A N/A 60,860 9.23 26,364 4.00 32,954 5.00 $ 126,711 15.917 $ 83,589 10.500 N/A N/A 120,313 15.231 82,944 10.500 78,994 10.000 108,111 13.580 67,667 8.500 N/A N/A 111,713 14.142 67,145 8.500 63,195 8.000 103,111 12.952 55,726 7.000 N/A N/A 111,713 14.142 55,296 7.000 51,346 6.500 108,111 10.522 41,099 4.000 N/A N/A 111,713 11.080 40,332 4.000 50,414 5.000 -43-18: 15:Capital RequirementsMatters– continued20152018 are presented in the table below: $ 66,725 15.39 $ 34,685 8.00 $ N/A N/A 60,957 14.09 34,607 8.00 43,259 10.00 53,175 12.26 26,014 6.00 N/A N/A 57,407 13.27 25,955 6.00 34,607 8.00 48,112 11.10 19,511 4.50 N/A N/A 57,407 13.27 19,466 4.50 28,118 6.50 53,175 9.22 23,063 4.00 N/A N/A 57,407 9.36 24,530 4.00 30,662 5.00 A reconciliationbelow and include the capital conservation buffer of the Bank’s capital determined by GAAP to capital defined for regulatory purposes is as follows: $ 67,610 $ 64,726 724 142 (330 ) (376 ) (6,490 ) (6,654 ) (654 ) (431 ) 60,860 57,407 4,770 3,550 $ 65,630 $ 60,957 -44-Table of Contents $ 104,186 16.449 $ 66,504 10.500 N/A N/A 100,131 16.023 65,615 10.500 62,491 10.000 87,586 13.829 53,836 8.500 N/A N/A 93,531 14.967 53,117 8.500 49,993 8.000 82,586 13.039 44,336 7.000 N/A N/A 93,531 14.967 43,744 7.000 40,619 6.500 87,586 10.507 33,344 4.000 N/A N/A 93,531 11.222 33,338 4.000 41,673 5.000 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 18:Regulatory Capital Requirements – continued$2,400,000$8,000,000 and $1,240,000$11,400,000 during the years ended December 31, 20162019 and 2015,2018, respectively, to Eagle. Eagle paid quarterly dividends of $0.0775$0.0925 per share to its shareholders for the first two quarters of 20162019 and $0.08$0.095 for the last two quarters of 2016.2019. Eagle paid quarterly dividends of $0.075$0.09 per share to its shareholders for the first two quarters of 20152018 and $0.0775$0.0925 for the last two quarters of 2015.2018.Office of the Comptroller of the Currency (“OCC”),FDIC, Eagle will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and not subject in any manner or amount to Eagle’s creditors. Also, under the rules and regulations of the OCC,FDIC, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which Eagle or the Bank is not the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS19:16:a one of the Company’s directors. The commercial line of credit had a balance of $0 as of December 31, 20162019 and 2015.the Bank has contracted with a subsidiary of another company which was previously partially owned by one of the Company’s directors. The director retired from the affiliated entity at the end of 2013. In 2007, the Bank made a construction loan,also in the normal course of lending, the Bank provided a commercial real estate loan to this samea separate affiliated entity forthat is partially owned by the constructionsame director. The commercial real estate loan had a balance of an office building. In 2008, the construction was completed$272,000 and the loan was refinanced into $7,500,000 permanent financing. Also in 2008, 80.00%, or $6,000,000 was sold to the Montana Board of Investments. As$296,000 as of December 31, 2014 this loan’s principal balance was $5,849,000 ($1,170,000 net of participation sold). The loan is no longer considered a related party transaction due to the director’s retirement from the affiliated entity. See the disclosure for loans receivable from directors2019 and senior officers and their related parties in Note 5: Loans for further information.20:17:limited to a maximum of 15.00% of qualified employees’ salaries, is determined by the Board. Profit sharing expense was $451,000$825,000 and $452,000$573,000 for the years ended December 31, 20162019 and 2015,2018, respectively.20162019 and 2015,2018, the Company’s match totaled $203,000$397,000 and $162,000,$270,000, respectively.20162019 and 2015,2018, the total expense was $361,000$395,000 and $293,000,$382,000, respectively. The Company has recorded a liability for the deferred compensation plan of $1,682,000$2,858,000 and $1,423,000$2,093,000 at December 31, 20162019 and 2015,2018, respectively, which are included in accrued expenses and other liabilities in the consolidated statements of financial condition.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20:Employee Benefits – continuedAt inception, in April 2000, the ESOP borrowed $368,000 from Eagle Bancorp and used the funds to purchase 46,006 shares of common stock, at $8 per share, in the initial offering. This borrowing was fully paid on December 31, 2009. Again, inIn conjunction with the subsequent offering in April 2010, the ESOP borrowed $1,971,420 from Eagle Bancorp Montana, Inc. and used the funds to purchase 197,142 shares of common stock, at $10 per share. The Bank makes periodicannual contributions to the ESOP sufficient to satisfy the debt service requirements of the loan that has a twelve-year term and bears interest at 8.00%. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan.loan to the Company.$189,000$276,000 and $168,000$293,000 were recognized for the years ended December 31, 20162019 and 2015,2018, respectively. Shares totaling 16,616 were released and allocated to participants during the years ended December 31, 20162019 and 2015.2018. The cost of the 80,82830,978 ESOP shares ($809,000311,000 at December 31, 2016)2019) that have not yet been allocated or committed to be released to participants is deducted from shareholders’ equity. The fair value of these shares was approximately $1,705,000$663,000 at December 31, 2016.2019.2011 and the original number of shares of restricted stock for issuance under the plan was 98,571.2011. The plan provides for different types of awards including stock options, restricted stock and performance shares. The original number of shares of restricted stock for issuance under the plan was 98,571. Under the plan, 98,571 shares of restricted stock were granted to directors and certain officers during November 2011. The plan was amended during the year ended December 31, 2015 and again during 2017 to increase the number of shares of restricted stock for issuance under the plan from 98,571 to 168,571. Shares218,571. The number of shares of restricted stock vest in equal installments over five years beginning one year fromavailable to award under the grant date.plan was 20,560 as of December 31, 2019.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 20:Employee Benefits – continuedStock Incentive Plan – continued 20152018 37,25664,460 74,00012,900 ( 17,54817,200) - 20152018 93,70860,160 2,9004,000 ( 31,94519,340) ( 395880) 20162019 64,26843,940 $478,000The Company recognized $429,000 and $232,000 was recognized as$287,000 of compensation expense during the years ended December 31, 20162019 and 2015, respectively, and is included in salaries and employee benefits in the consolidated statements of income. As of2018, respectively. At December 31, 2016, 64,268 shares of restricted stock remain unvested, for which2019, the Company estimates to recognizehas unrecognized expense of approximately $1,166,000 by$697,000, which it expects to recognize ratably through November 2021.NOTE 21:Financial Instruments and Off-Balance-Sheet ActivitiesAll financial instruments held or issued by the Company are held orThe plan includes shares of stock which may be issued for purposes other than trading. Inawards of stock options totaling 246,427. However, no stock options have been awarded under the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary market.In response to marketplace demands, the Bank routinely makes commitments to extend credit for fixed rate and variable rate loans with or without rate lock guarantees. When rate lock guarantees are made to customers, the Bank becomes subject to market risk for changes in interest rates that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor.Generally, as interest rates increase, the market value of the loan commitment goes down. The opposite effect takes place when interest rates decline.Commitments to extend credit are agreements to lend to a customer as long as the borrower satisfies the Bank’s underwriting standards and related provisions of the borrowing agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans, and normally consists of real property. The Bank’s experience has been that substantially all loan commitments are completed or terminated by the borrower within 3 to 12 months.plan.-48-2118:Financial Instruments and OffD-Balance-Sheet Activities – continuederivativesBank has remaining available balances for lines of credit representing credit risk of approximately $86,259,000 and $78,554,000 at December 31, 2016 and 2015, respectively. The Bank had credit cards issued representing credit risk of approximately $1,239,000 at December 31, 2015, of which approximately $96,000 had been drawn at December 31, 2015. As of December 31, 2016, the Bank no longer issues credit cards. The Bank has letters of credits issued representing credit risk of approximately $3,165,000 and $3,124,000 at December 31, 2016 and 2015, respectively.Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held-for-sale upon funding. The BankCompany enters into commitments to fund residentialoriginate and sell mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds theloans. The Bank uses derivatives to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.Outstanding derivative loan commitments expose the Bank tohedge the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increaseschanges in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amountfair values of interest rate lock commitments was $19,738,000 and $24,378,000mortgage loans held-for-sale. An optimal amount of mortgage loans are sold directly into bulk commitments with investors at December 31, 2016 and 2015, respectively. Fixed rate commitments are extended at rates ranging from 2.88% to 5.00% and 2.88% to 5.13%at December 31, 2016 and 2015, respectively. The fair value of such commitments was insignificant.The Company has no other off-balance-sheet arrangements or transactions with unconsolidated, special purpose entities that would expose the Company to liability that is not reflected on the face of the financial statements.NOTE 22: Derivatives and Hedging ActivitiesInterest Rate Swap AgreementsThe Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company entered intotime an interest rate swap agreementis locked, other loans are sold on August 27, 2010 with a third party to managean individual best efforts basis at the time an interest rate risk associated with a fixed-rate loan. The interest rate swap agreement effectively convertedis locked, and the loan’s fixed rate into a variable rate. Theremaining balance of locked loans are hedged using TBA mortgage-backed securities.hedging accounting guidance (ASC Subtopic 815-10) requires that the Company recognize all derivative instrumentsare measured at fair value. Derivatives are recorded as either other assets or other liabilities at fair value inon the statementconsolidated statements of financial position. In accordance with this guidance, the Company designated the interest rate swap on this fixed-rate loan as a fair value hedge.condition.The Company was exposed to credit-related losses in the event of nonperformance by the counterparties to this agreement. The Company controlled the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and did not expect any counterparties to fail their obligations. The Company deals only with primary dealers.Derivatives are summarized as follows: $ 48,303 $ 554 $ - $ 18,745 $ - $ - 67,000 - 201 16,000 - - -49-Table of ContentsEAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 22:Derivatives and Hedging Activities – continuedInterest Rate Swap Agreements– continuedIf certain hedging criteria specified in derivatives and hedging accounting guidance are met, including testing for hedge effectiveness, hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships.The hedge documentation specified the terms of the hedged item and the interest rate swap. The documentation also indicated the derivative was hedging a fixed-rate item, the hedge exposure was to the changesChanges in the fair value of the hedged item, and the strategy was to eliminate fair value variability by converting fixed-rate interest payments to variable-rate interest payments.For derivative instruments thatderivatives are designated and qualify as a fair value hedge, the gain or lossrecorded in mortgage banking within noninterest income on the derivative as well asconsolidated statements of income. A net gain of $353,000 was recorded for the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items in the same line item—noninterest income—as the offsetting loss or gain on the related interest rate swap.The fixed rate loan hedged had an original maturity of 20 years and was not callable. This loan was hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount, maturity and fixed rate coupons. The swap was not callable. The loan had an outstanding principal balance of $10,641,000 and the interest rate swap had a notional value of $10,673,000 at December 31, 2014.At December 31, 2014, the interest rate swap on the fixed-rate loan was ineffective. The Bank recorded a loss of $317,000 in noninterest income during the quarteryear ended December 31, 2014 related to the ineffectiveness. The interest rate swap was terminated during the quarter ended March 31, 2015. The Bank recorded a loss of $93,000 in noninterest income during the quarter ended March 31, 2015 related to the swap termination. The loan fair value adjustment of $138,000 at March 31, 2015 will be amortized over the remaining life of the loan which matures September 1, 2030. The remaining balance was $123,000 and $132,000 at December 31, 2016 and 2015, respectively.Forward Delivery CommitmentsThe Company uses mandatory sell forward delivery commitments to sell whole loans. These commitments are also used as a hedge against exposure to interest rate risks resulting from rate locked loan origination commitments on certain mortgage loans held-for-sale. Gains and losses on the items hedged are deferred and recognized in accumulated other comprehensive income until the commitments are completed. At the completion of the commitments the gains and losses are recognized in the Company’s income statement.As of December 31, 2016 and 2015, the Company had entered into commitments to deliver approximately $17,808,000 and $18,208,000, respectively, in loans to various investors, all at fixed interest rates ranging from 1.87% to 4.63% and 2.25% to 5.13% at December 31, 2016 and 2015, respectively. The Company had approximately $558,000 and $635,000 of gains deferred as a result of the forward delivery commitments entered into as of December 31, 2016 and 2015, respectively.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 22:Derivatives and Hedging Activities – continuedForward Delivery Commitments– continuedhave any gains or losses reclassified into earnings as a result ofrecord the ineffectiveness of its hedging activities. The Company considers its hedging activitiesaforementioned derivatives related to be highly effective.The Company did not have any gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur by the end of the originally specified time frame as ofmortgage banking at December 31, 2016.2018 as they were not considered significant.Refer to Note 21 for additional information regarding the Company’s use of derivative loan commitments. These derivative instruments are not designated as hedging instruments.23:19:Disclosuresof Financial InstrumentsThe Company defines fairFair value asis the exchange price that would be received to sellfor an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs(exit price) in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The priceliability in an orderly transaction between market participants on the principal (or most advantageous) market used to measuremeasurement date. of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach ishierarchy based on the amount that currently would be required to replacemarkets in which the service capacityassets and liabilities are traded and the reliability of an asset (replacement costs). Valuation techniques should be consistently applied.Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the Company establishes aused to determine fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 23:Fair Value Disclosures– continued - Unadjusted– Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.liabilities. - Inputs other than quoted prices included in Level 1 that– Valuations are observable for the asset or liability, either directly or indirectly. These includebased on quoted prices for similar assets or liabilitiesinstruments in active markets, quoted prices for identical or similar assets or liabilitiesinstruments in markets that are not active inputs other than quoted prices thatand model-based valuations for which all significant assumptions are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from orcan be corroborated by observable market data by correlation or other means.data. - Significant– Valuations are based on unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.may include significant management judgement and estimation.In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.theselevel 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, among other things.conditions.collateral.collateral or using a discounted cash flow if the loan is not collateral dependent. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.Loans Held-for-SaleR– These loans are reported at fair value. Fair value is determined based on expected proceeds based on sales contractseal Estate and commitments and are considered Level 2 inputs.Repossessedepossessed Assets– Fair values are valueddetermined at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based upon primaryprimarily on third party appraisals, less costs to sell. The appraisalssell and are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result inconsidered Level 3 classification of the inputs for determining fair value. Repossessed assets are reviewed and evaluated on at least a quarterly basisperiodically for additional impairment and adjusted accordingly, based on same or similar factors above.accordingly.-52-23:19:Disclosuresof Financial Instruments – continuedDerivative Financial Instruments –Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts. These instruments are valued using Level 2 inputs utilizing valuation models that consider: (a) time value, (b) volatility factors and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. $ - $ 5,608 $ - $ 5,608 $ - $ 13,597 $ - $ 13,597 - 67,664 - 67,664 - 52,222 - 52,222 - 9,307 - 9,307 - 8,388 - 8,388 - 29,512 - 29,512 - 16,345 - 16,345 - 9,495 - 9,495 - 33,334 - 33,334 - 9,839 - 9,839 - 18,230 - 18,230 - 25,612 - 25,612 - - 554 554 201 - 201 $ - $ 10,615 $ - $ 10,615 $ - $ 9,347 $ - $ 9,347 - 67,069 - 67,069 - 68,278 - 68,278 - 9,450 - 9,450 - 11,119 - 11,119 - 32,735 - 32,735 - 25,869 - 25,869 - 19,348 - 19,348 - 23,875 - 23,875 - 10,198 - 10,198 - 18,702 - 18,702 - 7,318 - 7,318 - - - - - - - - -53-23:19:Disclosuresof Financial Instruments – continuedand liabilities aremay be measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis butbasis. These assets are subject to fair value adjustments in certain circumstances (for example, when there is evidencethat result from the application of impairment).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.summarizessummarize financial assets and liabilities measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within thefor which a nonrecurring change in fair value hierarchy utilized to measure fair value:has been recorded during the reporting periods presented: $ - $ - $ 649 $ 649 $ - $ - $ 491 $ 491 - - 825 825 - - 25 25 $ - $ - $ 15 $ 15 - - 107 107 2016, certain2019, impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based on the fair value of the underlying collateral. Impaired loans with a carrying value of $657,000$565,000 after charge-offs of $440,000 were reduced by specific valuation allowance allocations totaling $8,000 toof $74,000 and resulted in a total reported fair value of $649,000 based on collateral valuations utilizing Level 3 valuation inputs. $ - $ - $ 2,028 $ 2,028 - - 595 595 2015, certain2018, impaired loans were remeasured and reported at fair value throughhad a specific valuation allowance allocation of the allowance for possible loan losses based on the fair value of the underlying collateral. Impaired loans with a carrying value$15,000 after charge-offs of $2,076,000$58,000 were reduced by specific valuation allowance allocations totaling $48,000 to a total reported fair value of $2,028,000 based on collateral valuations utilizing Level 3 valuation inputs.incurred.-54-23:19:Disclosures of Financial Instruments – continuedQuantitativeInformationaboutSignificantUnobservableInputsUsedinLevel3FairValueMeasurements –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: $ 649 $ 2,028 10 - 30% $ 825 $ 595 10 - 30% (1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable, less associated allowance.(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.(3)Includes qualitative adjustments by management and estimated liquidation expenses.-55-Table of Contents (Dollars In Thousands) $ 491 $ 15 10 - 30% $ 25 $ 107 10 - 30% EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 23:Fair Value Disclosures – continuedASC Topic 825 requires disclosure ofThe tables below summarize the estimated fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. Below is a table that summarizes the fair market values of all financial instruments of the Company, whether or not recognized at December 31, 2016 and 2015,fair value on the consolidated statements of condition. The tables are followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.The fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. $ 7,318 $ - $ - $ 7,318 $ 7,318 $ 24,918 $ - $ - $ 24,918 $ 24,918 4,012 - - 4,012 4,012 4,683 - - 4,683 4,683 871 - - 871 871 2,526 - - 2,526 2,526 - - 464,797 464,797 460,742 - - 770,327 770,327 770,635 2,123 - - 2,123 2,123 4,577 - - 4,577 4,577 - - 6,741 6,741 5,853 - - 9,835 9,835 8,739 14,095 - - 14,095 14,095 - 264,640 - 264,640 264,640 - 375,894 - 375,894 375,894 82,877 - - 82,877 82,877 200,035 - - 200,035 200,035 - - 165,129 165,129 165,278 - - 233,041 233,041 233,064 4,291 - - 4,291 4,291 9,825 - - 9,825 9,825 - - 82,462 82,462 82,413 - - 14,291 14,291 15,155 - - - - - - - - - - - - - - - - - 88,447 88,447 88,350 - - 24,661 24,661 25,155 -56-NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 23: Fair Value Disclosures – continued $ 7,438 $ - $ - $ 7,438 $ 7,438 3,397 - - 3,397 3,397 887 - - 887 887 - - 408,414 408,414 401,706 2,278 - - 2,278 2,278 - - 6,452 6,452 4,968 12,514 - - 12,514 12,514 - 253,704 - 253,704 253,704 77,031 - - 77,031 77,031 - - 152,691 152,691 152,447 4,050 - - 4,050 4,050 - - 72,811 72,811 72,716 - - 14,306 14,306 15,155 - - - - - - - - - - - - - - - The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments.Cash, InterestBearing Accounts, Accrued Interest and Dividend Receivable and Accrued Expenses and Other Liabilities – The carrying amounts approximate fair value due to the relatively short period of time between the origination of these instruments and their expected realization.Stock in the FHLB and FRB – The fair value of stock approximates redemption value.Loans Receivable –Fair values are estimated by stratifying the loan portfolio into groups of loans with similar financial characteristics. Loans are segregated by type such as real estate, commercial, and consumer, with each category further segmented into fixed and adjustable rate interest terms. For mortgage loans, the Company uses the secondary market rates in effect for loans that have similar characteristics. The fair value of other fixed rate loans is calculated by discounting scheduled cash flows through the anticipated maturities adjusted for prepayment estimates. Adjustable interest rate loans are assumed to approximate fair value because they generally reprice within the short term.Fair values are adjusted for credit risk based on assessment of risk identified with specific loans, and risk adjustments on the remaining portfolio based on credit loss experience.Assumptions regarding credit risk are judgmentally determined using specific borrower information, internal credit quality analysis, and historical information on segmented loan categories for non-specific borrowers.EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES2319:Disclosures of Financial Instruments – continuedCash Surrender Value of Life Insurance–The carrying amount for cash surrender value of life insurance approximates fair value as policies are recorded at redemption value.Mortgage Servicing Rights– The fair value of servicing rights was determined using discount rates ranging from 13.00% to 15.00%, prepayment speeds ranging from 104.00% to 277.00% PSA, depending on stratification of the specific right. The fair value was also adjusted for the effect of potential past dues and foreclosures. Individual mortgage servicing rights values were capped at a maximum of 1.00% for private investors and at a maximum of 1.25% for agency investors.Deposits and Time Certificates of Deposit – The fair value of deposits with no stated maturity, such as checking, passbook, and money market, is equal to the amount payable on demand. The fair value of time certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities.Advances from the FHLBand Subordinated Debentures – The fair value of the Company’s advances and debentures are estimated using discounted cash flow analysis based on the interest rate that would be effective December 31, 2016 and 2015, respectively if the borrowings repriced according to their stated terms.Off-Balance-Sheet Instruments -Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these financial instruments are considered insignificant. Additionally, those financial instruments have no carrying value. $ 11,201 $ - $ - $ 11,201 $ 11,201 5,011 - - 5,011 5,011 2,033 - - 2,033 2,033 - - 603,361 603,361 608,043 3,479 - - 3,479 3,479 - - 8,670 8,670 7,100 - 321,399 - 321,399 321,399 142,788 - - 142,788 142,788 - - 160,735 160,735 162,424 5,388 - - 5,388 5,388 - - 101,885 101,885 102,222 - - 24,002 24,002 25,155 -58-24:20:Eagle Bancorp Montana, Inc.Condensed Statements of Financial Condition $ 953 $ 243 $ 8,916 $ 1,216 3,727 3,810 5,152 10,783 155 155 155 155 67,609 64,726 130,165 105,963 2,003 1,469 2,473 1,813 $ 74,447 $ 70,403 $ 146,861 $ 119,930 $ 21 $ 4 $ 261 $ 248 14,970 14,949 24,941 24,876 59,456 55,450 121,659 94,806 $ 74,447 $ 70,403 $ 146,861 $ 119,930 Eagle Bancorp Montana, Inc.Condensed Statements of Income December 31, $ 98 $ 99 (785 ) (448 ) - 14 (515 ) (593 ) (1,202 ) (928 ) (423 ) (374 ) (779 ) (554 ) 5,911 3,134 $ 5,132 $ 2,580 $ 273 $ 292 (1,452 ) (1,432 ) (6 ) (20 ) (2,582 ) (1,712 ) (3,767 ) (2,872 ) (1,065 ) (557 ) (2,702 ) (2,315 ) 13,574 7,297 $ 10,872 $ 4,982 -59-NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 24:Condensed Parent Company Financial Statements – continuedEagle Bancorp Montana, Inc.Condensed Statements of Cash Flow $ 5,132 $ 2,580 (5,911 ) (3,134 ) Equity in undistributed earningsof Opportunity Bank of Montana (415 ) (204 ) (1,194 ) (758 ) 2,400 1,240 - (8,000 ) - 790 420 330 (405 ) (1,194 ) 2,415 (6,834 ) 182 174 - 10,000 - (206 ) - (1,320 ) 500 204 (1,193 ) (1,164 ) (511 ) 7,688 710 96 243 147 $ 953 $ 243 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIESNOTE 25:Quarterly Results of Operations (Unaudited)The following is a condensed summary of quarterly consolidated results of operations: $ 5,618 $ 5,731 $ 6,208 $ 6,354 750 788 787 793 4,868 4,943 5,421 5,561 450 459 472 452 4,418 4,484 4,949 5,109 2,896 3,806 4,689 4,599 6,548 6,686 7,159 7,626 766 1,604 2,479 2,082 119 340 707 633 $ 647 $ 1,264 $ 1,772 $ 1,449 $ 668 $ 1,461 $ (496 ) $ (2,296 ) $ 0.17 $ 0.34 $ 0.46 $ 0.39 $ 0.17 $ 0.32 $ 0.46 $ 0.37 $ 4,724 $ 5,015 $ 5,154 $ 5,573 501 526 721 707 4,223 4,489 4,433 4,866 322 328 310 343 3,901 4,161 4,123 4,523 2,882 3,275 2,912 2,692 6,361 6,472 6,492 6,401 422 964 543 814 36 172 22 (67 ) $ 386 $ 792 $ 521 $ 881 $ 795 $ (1,666 ) $ 975 $ 363 $ 0.10 $ 0.21 $ 0.14 $ 0.23 $ 0.10 $ 0.21 $ 0.14 $ 0.22 60: $ 10,872 $ 4,982 (13,574 ) (7,297 ) (578 ) 480 (3,280 ) (1,835 ) 8,000 11,400 - (9,895 ) 5,291 1,465 620 607 13,911 3,577 317 310 (1,210 ) - 369 281 (2,407 ) (1,995 ) (2,931 ) (1,404 ) 7,700 338 1,216 878 $ 8,916 $ 1,216 On February 13, 2017, Eagle completed the issuance, through a private placement, of $10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes due February 15, 2022. The Company estimates that the net cash proceeds from the sale of the notes will be approximately $9,800,000. The Company intends to use the net proceeds from the offering for general corporate purposes, including but not limited to, contribution of capital to the Bank, to support both organic growth as well as opportunistic acquisitions, should appropriate opportunities arise.-61-