Edgar Filing: Eagle Bancorp Montana, Inc.

ebmt20160707_10q.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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

For the transition period from _____ to _____.

Commission file number 1-34682

Eagle Bancorp Montana, Inc.

(Exact name of small business issuer as specified in its charter)

Delaware	27-1449820
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1400 Prospect Avenue, Helena, MT 59601

(Address of principal executive offices)

(406) 442-3080

(Issuer's telephone number)

Website address: www.opportunitybank.com

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]			Accelerated filer [ ]
Non-accelerated filer [ ]			Smaller reporting company [X]
(Do not check if smaller
reporting company)

Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

Common stock, par value $0.01 per share

3,779,464 shares outstanding

As of August 10, 2016

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PART I.	Financial Information	Page

Item1.	Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition as of June 30, 2016 and December 31, 2015	1

	Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015	3

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	5

	Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2016 and 2015	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	7

	Notes to the Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	50

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52

Signatures		53

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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Note Regarding Forward-Looking Statements

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

●

statements of our goals, intentions and expectations;

●

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

●

statements regarding the asset quality of our loan and investment portfolios; and

●

estimates of our risks and future costs and benefits.

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

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

●

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

●

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

●

competition among depository and other financial institutions;

●

changes in the prices, values and sales volume of residential and commercial real estate in Montana;

●

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

●

changes or volatility in the securities markets;

●

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

●

our ability to successfully integrate acquired businesses;

●

changes in consumer spending, borrowing and savings habits;

●

our ability to continue to increase and manage our commercial and residential real estate, multi-family and commercial business loans;

●

possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;

●

the level of future deposit premium assessments;

●

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

●

the Company’s ability to develop and maintain secure and reliable information technology systems, effectively defend itself against cyberattacks, or recover from breaches to its cybersecurity infrastructure;

●

the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates;

●

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

●

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

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2015, any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	June 30, 2016		December 31, 2015
ASSETS:
Cash and due from banks	$	5,579	$	6,468
Interest bearing deposits in banks		844		970
Total cash and cash equivalents		6,423		7,438

Securities available-for-sale		140,449		145,738
Federal Home Loan Bank stock		3,735		3,397
Federal Reserve Bank stock		871		887
Investment in Eagle Bancorp Statutory Trust I		155		155
Mortgage loans held-for-sale		21,246		18,702
Loans receivable, net of deferred loan fees of $951 at June 30, 2016 and $795 at December 31, 2015 and allowance for loan losses of $4,260 at June 30, 2016 and $3,550 at December 31, 2015		439,668		403,734
Accrued interest and dividends receivable		2,274		2,278
Mortgage servicing rights, net		5,196		4,968
Premises and equipment, net		17,965		18,217
Cash surrender value of life insurance		14,683		12,514
Real estate and other repossessed assets acquired in settlement of loans, net		565		595
Goodwill		7,034		7,034
Core deposit intangible, net		449		514
Deferred tax asset, net		313		1,490
Other assets		2,310		2,686

Total assets	$	663,336	$	630,347

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	June 30, 2016			December 31, 2015
LIABILITIES:
Deposit accounts:
Noninterest bearing	$	88,327		$	77,031
Interest bearing		420,555			406,151
Total deposits		508,882			483,182

Accrued expenses and other liabilities		5,000			4,050
Federal Home Loan Bank advances and other borrowings		75,491			72,716
Subordinated debentures:
Principal amount		15,155			15,155
Unamortized debt issuance costs		(196	)		(206	)
Total subordinated debentures less unamortized debt issuance costs		14,959			14,949

Total liabilities		604,332			574,897


SHAREHOLDERS' EQUITY:
Preferred stock (no par value; 1,000,000 shares authorized; no shares issued or outstanding)		-			-
Common stock (par value $0.01 per share; 8,000,000 shares authorized; 4,083,127 shares issued; 3,779,464 shares outstanding at June 30, 2016 and December 31, 2015, respectively)		41			41
Additional paid-in capital		22,168			22,152
Unallocated common stock held by Employee Stock Ownership Plan		(891	)		(975	)
Treasury stock, at cost		(3,321	)		(3,321	)
Retained earnings		38,626			37,301
Net accumulated other comprehensive income		2,381			252
Total shareholders' equity		59,004			55,450

Total liabilities and shareholders' equity	$	663,336		$	630,347

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	4,955	$	4,255		$	9,792	$	8,217
Securities available-for-sale		740		737			1,487		1,496
Federal Home Loan Bank and Federal Reserve Bank dividends		35		20			66		20
Interest on deposits in banks		1		1			1		1
Other interest income		-		2			3		5
Total interest and dividend income		5,731		5,015			11,349		9,739

INTEREST EXPENSE:
Deposits		381		356			736		693
Federal Home Loan Bank advances and other borrowings		212		128			413		271
Subordinated debentures		195		42			389		63
Total interest expense		788		526			1,538		1,027

NET INTEREST INCOME		4,943		4,489			9,811		8,712

Loan loss provision		459		328			909		650

NET INTEREST INCOME AFTER LOAN LOSS PROVISION		4,484		4,161			8,902		8,062

NONINTEREST INCOME:
Service charges on deposit accounts		211		243			410		466
Net gain on sale of loans (includes $636 and $529 for the three months ended June 30, 2016 and 2015, respectively, and $1,271 and $1,025 for the six months ended June 30, 2016 and 2015, respectively, related to accumulated other comprehensive earnings reclassification)		2,438		1,856			4,156		3,487
Mortgage loan servicing fees		442		422			805		837
Wealth management income		159		111			295		296
Interchange and ATM fees		223		164			425		290
Appreciation in cash surrender value of life insurance		113		105			225		210
Net gain on sale of available-for-sale securities (includes $84 and $48 for the three months ended June 30, 2016 and 2015, respectively, and $84 and $234 for the six months ended June 30, 2016 and 2015, respectively, related to accumulated other comprehensive earnings reclassification)		84		48			84		234
Net gain (loss) on sale of real estate owned and other repossessed property		12		(1	)		12		(2	)
Net loss on fair value hedge		-		-			-		(93	)
Other noninterest income		124		327			290		432
Total noninterest income		3,806		3,275			6,702		6,157

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
NONINTEREST EXPENSE:
Salaries and employee benefits		3,916		3,639		7,606		7,018
Occupancy and equipment expense		671		733		1,460		1,469
Data processing		463		536		1,011		1,045
Advertising		150		174		338		393
Amortization of mortgage servicing rights		285		205		513		422
Amortization of core deposit intangible and tax credits		111		101		223		201
Federal insurance premiums		123		73		206		168
Postage		34		43		88		89
Legal, accounting and examination fees		61		133		159		289
Consulting fees		34		211		117		451
Other noninterest expense		838		624		1,513		1,288
Total noninterest expense		6,686		6,472		13,234		12,833

INCOME BEFORE INCOME TAXES		1,604		964		2,370		1,386

Income tax expense (includes $1,005 and ($1,147) for the three months ended June 30, 2016 and 2015, respectively, and $1,465 and ($600) for the six months ended June, 30, 2016 and 2015, respectively related to income tax expense (benefit) from reclassification items)		340		172		459		208

NET INCOME	$	1,264	$	792	$	1,911	$	1,178


BASIC EARNINGS PER SHARE	$	0.34	$	0.21	$	0.51	$	0.31

DILUTED EARNINGS PER SHARE	$	0.32	$	0.21	$	0.49	$	0.30

WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC EPS)		3,779,464		3,822,981		3,779,464		3,833,739

WEIGHTED AVERAGE SHARES OUTSTANDING
(DILUTED EPS)		3,873,171		3,860,236		3,873,171		3,870,994

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015

NET INCOME	$	1,264		$	792		$	1,911		$	1,178

OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS):
Change in fair value of investment securities available-for-sale, before income taxes		2,327			(2,698	)		3,454			(1,203	)
Reclassification for realized gains and losses on investment securities included in income, before income tax		(84	)		(48	)		(84	)		(234	)
Change in fair value of derivatives designated as cash flow hedges, before income taxes		859			462			1,495			991
Reclassification for realized gains on derivatives designated as cash flow hedges, before income taxes		(636	)		(529	)		(1,271	)		(1,025	)
Total other items of comprehensive income (loss)		2,466			(2,813	)		3,594			(1,471	)

Income tax (expense) benefit related to:
Investment securities		(914	)		1,120			(1,374	)		586
Derivatives designated as cash flow hedges		(91	)		27			(91	)		14
		(1,005	)		1,147			(1,465	)		600

COMPREHENSIVE INCOME (LOSS)	$	2,725		$	(874	)	$	4,040		$	307

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2016 and 2015

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

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

Balance at January 1, 2014	$	-	$	41	$	22,122	$	(1,141	)	$	(2,194	)	$	35,885		$	(215	)	$	54,498

Net income														1,178						1,178

Other comprehensive loss																	(871	)		(871	)

Dividends paid ($0.0750 per share)														(573	)					(573	)

Employee Stock Ownership Plan shares allocated or committed to be released for allocation (8,308 shares)						7		84												91

Treasury stock purchased (55,800 shares at $11.03 average cost per share)											(616	)								(616	)

Balance at June 30, 2015	$	-	$	41	$	22,129	$	(1,057	)	$	(2,810	)	$	36,490		$	(1,086	)	$	53,707


Balance at January 1, 2016	$	-	$	41	$	22,152	$	(975	)	$	(3,321	)	$	37,301		$	252		$	55,450

Net income														1,911						1,911

Other comprehensive income																	2,129			2,129

Dividends paid ($0.0775 per share)														(586	)					(586	)

Employee Stock Ownership Plan shares allocated or committed to be released for allocation (8,308 shares)						16		84												100

Balance at June 30, 2016	$	-	$	41	$	22,168	$	(891	)	$	(3,321	)	$	38,626		$	2,381		$	59,004

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Six Months Ended June 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,911		$	1,178
Adjustments to reconcile net income to net cash provided by operating activities:
Loan loss provision		909			650
Depreciation		541			605
Net amortization of investment securities premium and discounts		983			1,033
Amortization of mortgage servicing rights		513			422
Amortization of core deposit intangible and tax credits		223			201
Deferred income tax benefit		(288	)		(40	)
Net gain on sale of loans		(4,156	)		(3,487	)
Net gain on sale of available-for-sale securities		(84	)		(234	)
Net (gain) loss on sale of real estate owned and other repossessed assets		(12	)		2
Net loss on fair value hedge		-			93
Net loss (gain) on sale/disposal of premises and equipment		6			(304	)
Net appreciation in cash surrender value of life insurance		(169	)		(163	)
Net change in:
Accrued interest and dividends receivable		4			(19	)
Loans held-for-sale		1,836			3,856
Other assets		228			(1,404	)
Accrued expenses and other liabilities		1,050			954
Net cash provided by operating activities		3,495			3,343

CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales		3,162			31,043
Maturities, principal payments and calls		6,129			6,008
Purchases		(1,531	)		(26,266	)
Federal Home Loan Bank stock purchased		(338	)		(358	)
Federal Reserve Bank stock redeemed		16			(1	)
Loan origination and principal collection, net		(37,618	)		(40,633	)
Purchase of Bank owned life insurance		(2,000	)		-
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans		76			21
Proceeds from sale of premises and equipment		7			1,437
Additions to premises and equipment		(302	)		(246	)
Net cash used in investing activities		(32,399	)		(28,995	)

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

	Six Months Ended June 30,
	2016			2015
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	25,700		$	24,598
Net short-term advances (payments) on Federal Home Loan Bank and other borrowings		4,083			(17,220	)
Long-term advances from Federal Home Loan Bank and other borrowings		5,000			13,000
Payments on long-term Federal Home Loan Bank and other borrowings		(6,308	)		(7,162	)
Proceeds from issuance of subordinated debentures		-			10,000
Payment for debt issuance costs		-			(150	)
Dividends paid		(586	)		(573	)
Purchase of treasury stock, at cost		-			(616	)
Net cash provided by financing activities		27,889			21,877

NET DECREASE IN CASH AND CASH EQUIVALENTS		(1,015	)		(3,775	)

CASH AND CASH EQUIVALENTS, beginning of period		7,438			12,502

CASH AND CASH EQUIVALENTS, end of period	$	6,423		$	8,727


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest	$	1,554		$	1,017

Cash paid during the period for income taxes	$	590		$	50

NON-CASH INVESTING ACTIVITIES:
Increase (decrease) in market value of securities available-for-sale	$	3,370		$	(1,437	)

Mortgage servicing rights recognized	$	741		$	824

Loans transferred to real estate and other assets acquired in foreclosure	$	34		$	9

Employee Stock Ownership Plan shares released	$	100		$	91

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

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

The results of operations for the six month period ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or any other period. The unaudited consolidated financial statements and notes presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Eagle Bancorp Montana, Inc.’s (“the Company” or “Eagle”) Form 10-K for the year ended December 31, 2015.

Certain prior period amounts have been reclassified to conform to the presentation for 2016. These reclassifications had no impact on net income or total shareholders’ equity. Certain loan amounts were reclassified for prior periods to be consistent with loan category classification for June 30, 2016. Interchange and ATM fees and appreciation in cash surrender value of life insurance were previously included in other noninterest income on the Consolidated Statements of Income. These amounts were presented on their own lines for the three and six months ended June 30, 2016 and prior year amounts were reclassed to be consistent with the current year presentation.

The Company evaluated subsequent events for potential recognition and/or disclosure through August 10, 2016 the date the unaudited consolidated financial statements were issued.

NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

As disclosed in the Company's Form 8-K, filed with the Securities and Exchange Commission on July 27, 2016, the Board of Directors (“the Board”) of Eagle determined that the Company had incorrectly reported interest income for the quarter ended March 31, 2016 included in the Company’s Form 10-Q for the first quarter of 2016. As a result, the Board concluded that the Company will restate the unaudited consolidated financial statements for the quarter ended March 31, 2016 and that previously issued unaudited consolidated financial statements included in the Company’s Form 10-Q for the first quarter of 2016 should no longer be relied upon.

Management recently determined that mortgage loans sold with servicing retained continued to accrue interest income even after they were not on the Company’s books. It was also determined that the effective date of certain mortgage loans sold was posted as of the first of the following month, instead of on the settlement date of the sale. As a result of these matters, the Company’s interest and fees on loans was overstated, and custodial deposit accounts were understated.

The effects of this restatement are a reduction of interest and fees on loans as well as net income and equity, as presented in the tables below. The corrected net income is $647,000, or $0.17 per diluted share, which is lower by $176,000, or $0.04 per diluted share, as previously reported.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS - continued

The following table presents the impact of the restatement adjustments on the consolidated statement of financial condition at March 31, 2016:

	March 31, 2016
	As Reported		Adjustments			As Restated
	(In Thousands)
ASSETS:
Other assets	$	2,210	$	33		$	2,243
Total assets		642,971		33			643,004

LIABILITIES:
Noninterest bearing deposits		90,308		209			90,517
Total deposits		494,185		209			494,394
Total liabilities		586,276		209			586,485

SHAREHOLDERS' EQUITY:
Retained earnings		37,831		(176	)		37,655
Total shareholders' equity		56,695		(176	)		56,519
Total liabilities and shareholders' equity		642,971		33			643,004

The following table presents the impact of the restatement adjustments on the consolidated statement of income for the three months ended March 31, 2016:

	Three Months Ended March 31, 2016
	As Reported		Adjustments			As Restated
	(In Thousands, Except Per Share Data)
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	5,063	$	(226	)	$	4,837
Total interest and dividend income		5,844		(226	)		5,618
NET INTEREST INCOME		5,094		(226	)		4,868
NET INTEREST INCOME AFTER LOAN LOSS PROVISION		4,644		(226	)		4,418

NONINTEREST INCOME:
Mortgage loan servicing fees		346		17			363
Total noninterest income		2,879		17			2,896

INCOME BEFORE INCOME TAXES		975		(209	)		766
Income tax expense		152		(33	)		119
NET INCOME		823		(176	)		647

BASIC EARNINGS PER SHARE	$	0.22	$	(0.05	)	$	0.17
DILUTED EARNINGS PER SHARE	$	0.21	$	(0.04	)	$	0.17

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS – continued

The following table presents the impact of the restatement adjustments on the consolidated statement of comprehensive income for the three months ended March 31, 2016:

	Three Months Ended March 31, 2016
	As Reported		Adjustments			As Restated
	(In Thousands)
NET INCOME	$	823		(176	)	$	647
COMPREHENSIVE INCOME		1,491		(176	)		1,315

The following table presents the impact of the restatement adjustments on the consolidated statement of cash flows for the three months ended March 31, 2016:

	Three Months Ended March 31, 2016
	As Reported		Adjustments			As Restated
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	823	$	(176	)	$	647
Net change in other assets		402		(33	)		369
Net cash provided by operating activities		4,958		(209	)		4,749

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		11,003		209			11,212
Net cash provided by financing activities		9,198		209			9,407

NOTE 3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

	June 30, 2016									December 31, 2015
			Gross									Gross
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
	(In Thousands)
Available-for-Sale:
U.S. government and agency obligations	$	8,791	$	167	$	-		$	8,958	$	10,684	$	26	$	(95	)	$	10,615
Municipal obligations		64,917		2,550		(24	)		67,443		66,606		1,041		(578	)		67,069
Corporate obligations		9,534		7		(159	)		9,382		9,615		-		(165	)		9,450
MBSs - government-backed		31,525		511		(99	)		31,937		32,810		111		(186	)		32,735
CMOs - government backed		22,522		213		(6	)		22,729		26,233		40		(404	)		25,869
Total	$	137,289	$	3,448	$	(288	)	$	140,449	$	145,948	$	1,218	$	(1,428	)	$	145,738

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES - continued

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015
	(In Thousands)

Proceeds from sale of available-for-sale securities	$	3,162	$	22,096		$	3,162	$	31,043

Gross realized gain on sale of available-for-sale securities	$	84	$	292		$	84	$	534
Gross realized loss on sale of available-for-sale securities		-		(244	)		-		(300	)
Net realized gain on sale of available-for-sale securities	$	84	$	48		$	84	$	234

The amortized cost and fair value of securities at June 30, 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.

	Amortized Cost		Fair Value
	(In Thousands)

Due in one year or less	$	-	$	-
Due from one to five years		8,234		8,272
Due from five to ten years		15,130		15,395
Due after ten years		59,878		62,116
		83,242		85,783
MBSs - government-backed		31,525		31,937
CMOs - government-backed		22,522		22,729
Total	$	137,289	$	140,449

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES - continued

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

	June 30, 2016
	Less Than 12 Months					12 Months or Longer
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In Thousands)

U.S. government and agency	$	-	$	-		$	-	$	-
Municipal obligations		353		(6	)		1,500		(18	)
Corporate obligations		997		(3	)		4,933		(156	)
MBSs and CMOs - government-backed		2,542		(8	)		10,379		(97	)
Total	$	3,892	$	(17	)	$	16,812	$	(271	)

	December 31, 2015
	Less Than 12 Months					12 Months or Longer
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In Thousands)

U.S. government and agency	$	3,173	$	(24	)	$	5,986	$	(71	)
Municipal obligations		15,913		(132	)		21,163		(446	)
Corporate obligations		5,283		(80	)		3,915		(85	)
MBSs and CMOs - government-backed		23,164		(249	)		13,886		(341	)
Total	$	47,533	$	(485	)	$	44,950	$	(943	)

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. INVESTMENT SECURITIES - continued

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of June 30, 2016 and December 31, 2015, there were, respectively, 19 and 85 securities in an unrealized loss position that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

At June 30, 2016, 4 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 1.28% from the Company’s amortized cost basis of these securities. At December 31, 2015, 52 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 1.43% 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.

At June 30, 2016, 7 corporate obligations had an unrealized loss of approximately 2.61% 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 June 30, 2016, 8 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses with aggregate depreciation of approximately 0.81% from the Company’s amortized cost basis of these securities. At December 31, 2015, 20 MBSs and CMOs had unrealized losses with aggregate depreciation of approximately 1.57% from the Company’s amortized cost basis of these securities. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability 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 considers 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 has been no disruption of the scheduled cash flows on any of the securities. Management’s analysis as of June 30, 2016 revealed no expected credit losses on the securities and therefore, declines are not deemed to be other than temporary.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE

Loans receivable consisted of the following:

	June 30, 2016			December 31, 2015
	(In Thousands)
First mortgage loans:
Residential mortgage (1-4 family)	$	116,207		$	118,133
Commercial real estate		200,848			167,930
Real estate construction		16,382			22,958

Other loans:
Home equity		47,842			45,345
Consumer		14,618			14,641
Commercial		48,982			39,072

Total		444,879			408,079

Allowance for loan losses		(4,260	)		(3,550	)
Deferred loan fees, net		(951	)		(795	)
Total loans, net	$	439,668		$	403,734

Within the commercial real estate loan category above, $11,853,000 and $12,117,000 was guaranteed by the United States Department of Agriculture Rural Development, at June 30, 2016 and December 31, 2015, respectively. In addition, within the commercial loan category above, $1,832,000 and $1,917,000 were in loans originated through a syndication program where the business resides outside of Montana, at June 30, 2016, and December 31, 2015, respectively.

The following table includes information regarding nonperforming assets.

	June 30, 2016			December 31, 2015
	(Dollars in Thousands)

Non-accrual loans	$	2,040		$	2,030
Accruing loans delinquent 90 days or more		89			472
Restructured loans, net		44			46
Total nonperforming loans		2,173			2,548
Real estate owned and other repossessed assets, net		565			595
Total nonperforming assets	$	2,738		$	3,143

Total nonperforming assets as a percentage of total assets		0.41	%		0.50	%

Allowance for loan losses	$	4,260		$	3,550

Percent of allowance for loan losses to nonperforming loans		196.04	%		139.32	%

Percent of allowance for loan losses to nonperforming assets		155.59	%		112.95	%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - 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, April 1, 2016	$	981	$	1,735	$	244	$	365		$	165		$	450		$	3,940
Charge-offs		-		-		-		-			(76	)		(72	)		(148	)
Recoveries		-		-		-		-			9			-			9
Provision		-		272		-		-			76			111			459
Ending balance, June 30, 2016	$	981	$	2,007	$	244	$	365		$	174		$	489		$	4,260

Allowance for loan losses:
Beginning balance, January 1, 2016	$	911	$	1,593	$	184	$	342		$	66		$	454		$	3,550
Charge-offs		-		-		-		(7	)		(100	)		(104	)		(211	)
Recoveries		-		-		-		-			12			-			12
Provision		70		414		60		30			196			139			909
Ending balance, June 30, 2016	$	981	$	2,007	$	244	$	365		$	174		$	489		$	4,260

Ending balance, June 30, 2016 allocated to loans individually evaluated for impairment	$	-	$	-	$	-	$	-		$	25		$	-		$	25

Ending balance, June 30, 2016 allocated to loans collectively evaluated for impairment	$	981	$	2,007	$	244	$	365		$	149		$	489		$	4,235

Loans receivable:
Ending balance, June 30, 2016	$	116,207	$	200,848	$	16,382	$	47,842		$	14,618		$	48,982		$	444,879

Ending balance, June 30, 2016 of loans individually evaluated for impairment	$	1,000	$	374	$	-	$	332		$	117		$	261		$	2,084

Ending balance, June 30, 2016 of loans collectively evaluated for impairment	$	115,207	$	200,474	$	16,382	$	47,510		$	14,501		$	48,721		$	442,795

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

	Residential Mortgage (1-4 Family)			Commercial Real Estate		Real Estate Construction		Home Equity		Consumer			Commercial		Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, April 1, 2015	$	645		$	1,226	$	40	$	306	$	50		$	358	$	2,625
Charge-offs		-			-		-		-		(4	)		-		(4	)
Recoveries		-			-		-		-		1			-		1
Provision		40			199		5		20		5			59		328
Ending balance, June 30, 2015	$	685		$	1,425	$	45	$	326	$	52		$	417	$	2,950

Allowance for loan losses:
Beginning balance, January 1, 2015	$	684		$	1,098	$	35	$	270	$	46		$	317	$	2,450
Charge-offs		(137	)		-		-		-		(15	)		-		(152	)
Recoveries		-			-		-		-		2			-		2
Provision		138			327		10		56		19			100		650
Ending balance, June 30, 2015	$	685		$	1,425	$	45	$	326	$	52		$	417	$	2,950

Ending balance, June 30, 2015 allocated to loans individually evaluated for impairment	$	-		$	-	$	-	$	-	$	1		$	25	$	26

Ending balance, June 30, 2015 allocated to loans collectively evaluated for impairment	$	685		$	1,425	$	45	$	326	$	51		$	392	$	2,924

Loans receivable:
Ending balance, June 30, 2015	$	109,005		$	136,384	$	13,348	$	41,511	$	14,480		$	44,247	$	358,975

Ending balance, June 30, 2015 of loans individually evaluated for impairment	$	632		$	-	$	575	$	263	$	42		$	587	$	2,099

Ending balance, June 30, 2015 of loans collectively evaluated for impairment	$	108,373		$	136,384	$	12,773	$	41,248	$	14,438		$	43,660	$	356,876

The Company utilizes a 5 point internal loan rating system, largely based on regulatory classifications, as follows:

Loans rated Pass – Loans that are considered to be protected by the current net worth and paying capacity of the obligor, or by the value of the asset or the underlying collateral.

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

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

Loans rated Doubtful – Loans that have all the weaknesses inherent in those classified Substandard with the added characteristic of weaknesses making collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

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

Internal classification of the loan portfolio was as follows:

	June 30, 2016
	Residential Mortgage (1-4 Family)		Commercial Real Estate		Real Estate Construction		Home Equity		Consumer		Commercial		Total
	(In Thousands)
Grade:
Pass	$	114,743	$	200,012	$	15,926	$	47,503	$	14,485	$	48,618	$	441,287
Special mention		-		-		456		-		-		97		553
Substandard		1,464		836		-		339		57		267		2,963
Doubtful		-		-		-		-		51		-		51
Loss		-		-		-		-		25		-		25
Total	$	116,207	$	200,848	$	16,382	$	47,842	$	14,618	$	48,982	$	444,879

Credit risk profile based on payment activity
Performing	$	115,207	$	200,470	$	16,382	$	47,510	$	14,501	$	48,636	$	442,706
Restructured loans		-		-		-		44		-		-		44
Nonperforming		1,000		378		-		288		117		346		2,129
Total	$	116,207	$	200,848	$	16,382	$	47,842	$	14,618	$	48,982	$	444,879

	December 31, 2015
	Residential Mortgage (1-4 Family)		Commercial Real Estate		Construction		Home Equity		Consumer		Commercial		Total
	(In Thousands)
Grade:
Pass	$	116,711	$	167,263	$	22,176	$	45,100	$	14,486	$	38,675	$	404,411
Special mention		-		-		-		-		-		-		-
Substandard		1,422		667		782		156		140		367		3,534
Doubtful		-		-		-		82		4		-		86
Loss		-		-		-		7		11		30		48
Total	$	118,133	$	167,930	$	22,958	$	45,345	$	14,641	$	39,072	$	408,079

Credit risk profile based on payment activity
Performing	$	117,182	$	167,259	$	22,711	$	45,138	$	14,496	$	38,745	$	405,531
Restructured loans		-		-		-		46		-		-		46
Nonperforming		951		671		247		161		145		327		2,502
Total	$	118,133	$	167,930	$	22,958	$	45,345	$	14,641	$	39,072	$	408,079

Table Of Contents

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

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

	June 30, 2016
	30-89 Days Past Due		90 Days and Greater		Total Past Due		Current		Total Loans		Recorded Investment >90 Days and Still Accruing
	(In Thousands)
Residential mortgage (1-4 family)	$	1,621	$	1,000	$	2,621	$	113,586	$	116,207	$	-
Commercial real estate		1,374		378		1,752		199,096		200,848		4
Real estate construction		478		-		478		15,904		16,382		-
Home equity		433		288		721		47,121		47,842		-
Consumer		126		117		243		14,375		14,618		-
Commercial		125		346		471		48,511		48,982		85
Total	$	4,157	$	2,129	$	6,286	$	438,593	$	444,879		89

	December 31, 2015
	30-89 Days Past Due		90 Days and Greater		Total Past Due		Current		Total Loans		Recorded Investment >90 Days and Still Accruing
	(In Thousands)
Residential mortgage (1-4 family)	$	1,163	$	951	$	2,114	$	116,019	$	118,133	$	221
Commercial real estate		177		671		848		167,082		167,930		4
Real estate construction		662		247		909		22,049		22,958		247
Home equity		319		161		480		44,865		45,345		-
Consumer		184		145		329		14,312		14,641		-
Commercial		173		327		500		38,572		39,072		-
Total	$	2,678	$	2,502	$	5,180	$	402,899	$	408,079	$	472

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

The following tables include information regarding impaired loans.

	June 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
With no related allowance:
Residential mortgage (1-4 family)	$	1,000	$	1,000	$	-
Commercial real estate		374		374		-
Construction		-		-		-
Home equity		332		373		-
Consumer		92		93		-
Commercial		261		261		-

With a related allowance:
Residential mortgage (1-4 family)		-		-		-
Commercial real estate		-		-		-
Construction		-		-		-
Home equity		-		-		-
Consumer		25		25		25
Commercial		-		-		-

Total:
Residential mortgage (1-4 family)		1,000		1,000		-
Commercial real estate		374		374		-
Construction		-		-		-
Home equity		332		373		-
Consumer		117		118		25
Commercial		261		261		-
Total	$	2,084	$	2,126	$	25

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. LOANS RECEIVABLE - continued

	December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
With no related allowance:
Residential mortgage (1-4 family)	$	730	$	730	$	-
Commercial real estate		667		667		-
Construction		-		-		-
Home equity		200		234		-
Consumer		134		134		-
Commercial		297		297		-

With a related allowance:
Residential mortgage (1-4 family)		-		-		-
Commercial real estate		-		-		-
Construction		-		-		-
Home equity		7		7		7
Consumer		11		11		11
Commercial		30		30		30

Total:
Residential mortgage (1-4 family)		730		730		-
Commercial real estate		667		667		-
Construction		-		-		-
Home equity		207		241		7
Consumer		145		145		11
Commercial		327		327		30
Total	$	2,076	$	2,110	$	48

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	Average Recorded Investment
	(In Thousands)

Residential mortgage (1-4 family)	$	834	$	640	$	865	$	1,052
Commercial real estate		518		-		520		-
Construction		-		288		-		288
Home equity		284		243		270		295
Consumer		118		47		131		49
Commercial		214		577		294		408
Total	$	1,968	$	1,795	$	2,080	$	2,092

Interest income recognized on impaired loans for the three and six months ended June 30, 2016 and 2015 are considered insignificant.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. TROUBLED DEBT RESTRUCTURINGS

The Company adopted the amendments in Accounting Standards Update No. 2011-02 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 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.

As of June 30, 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 $44,000 (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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. TROUBLED DEBT RESTRUCTURINGS - continued

The following tables present troubled debt restructurings.

	June 30, 2016
	Accrual Status		Non-Accrual Status		Total Modification
	(In Thousands)
Residential mortgage (1-4 family)	$	-	$	-	$	-
Commercial real estate		-		-		-
Real estate construction		-		-		-
Home equity		44		-		44
Consumer		-		-		-
Commercial		-		-		-
Total	$	44	$	-	$	44

	December 31, 2015
	Accrual Status		Non-Accrual Status		Total Modification
	(In Thousands)
Residential mortgage (1-4 family)	$	-	$	-	$	-
Commercial real estate		-		-		-
Real estate construction		-		-		-
Home equity		46		-		46
Consumer		-		-		-
Commercial		-		-		-
Total	$	46	$	-	$	46

The Bank’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

During the three and six months ended June 30, 2016 and 2015, there were no new restructured loans.

There were no loans modified as a troubled debt restructured loan within the previous six months for which there was a payment default during the six months ended June 30, 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 June 30, 2016 and December 31, 201, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. DEPOSITS

Deposits are summarized as follows:

	June 30, 2016		December 31, 2015
	(In Thousands)

Noninterest checking	$	88,327	$	77,031
Interest bearing checking		86,103		87,350
Savings		85,823		71,474
Money market		90,026		94,880
Time certificates of deposit		158,603		152,447
Total	$	508,882	$	483,182

NOTE 7. SUBORDINATED DEBENTURES

Subordinated debentures consisted of the following:

	June 30, 2016					December 31, 2015
	Principal Amount		Unamortized Debt Issuance Costs			Principal Amount		Unamortized Debt Issuance Costs
	(In Thousands)
Subordinated debentures:
Variable at 3-Month Libor plus 1.42%, due 2035	$	5,155	$	-		$	5,155	$	-
Fixed at 6.75%, due 2025		10,000		(196	)		10,000		(206	)
Total	$	15,155	$	(196	)	$	15,155	$	(206	)

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.

In September 2005, the Company completed the private placement of $5,155,000 in subordinated debentures to Eagle Bancorp Statutory Trust I (“the Trust”). The Trust funded the purchase of the subordinated debentures through the sale of trust preferred securities to First Tennessee Bank, N.A. with a liquidation value of $5,155,000. Using interest payments made by the Company on the debentures, the Trust began paying quarterly dividends to preferred security holders in December 2005. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred securities was fixed at 6.02% until December 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 2.074% and 2.033% as of June 30, 2016 and December 31, 2015, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8. EARNINGS PER SHARE

Basic earnings per share for the three months ended June 30, 2016 was computed using 3,779,464 weighted average shares outstanding. Basic earnings per share for the three months ended June 30, 2015 was computed using 3,822,981 weighted average shares outstanding. Diluted earnings per share was computed using the treasury stock method by adjusting the number of shares outstanding by the shares purchased. The weighted average shares outstanding for the diluted earnings per share calculations was 3,873,171 for the three months ended June 30, 2016 and 3,860,236 for the three months ended June 30, 2015.

Basic earnings per share for the six months ended June 30, 2016 was computed using 3,779,464 weighted average shares outstanding. Basic earnings per share for the six months ended June 30, 2015 was computed using 3,833,739 weighted average shares outstanding. Diluted earnings per share was computed using the treasury stock method by adjusting the number of shares outstanding by the shares purchased. The weighted average shares outstanding for the diluted earnings per share calculations was 3,873,171 for the six months ended June 30, 2016 and 3,870,994 for the six months ended June 30, 2015.

NOTE 9. DIVIDENDS AND STOCK REPURCHASE PROGRAM

For the year ended December 31, 2015, Eagle paid dividends of $0.075 per share for the quarters ended March 31 and June 30, 2015. Eagle paid dividends of $0.0775 per share for the quarters ended September 30 and December 31, 2015. A dividend of $0.0775 per share was declared on January 21, 2016, and paid March 4, 2016 to shareholders of record on February 12, 2016. A dividend of $0.0775 per share was declared on April 28, 2016, payable on June 3, 2016 to shareholders of record on May 13, 2016. A dividend of $0.08 per share was declared on July 21, 2016, payable on September 2, 2016 to shareholders of record on August 12, 2016.

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. The plan expires on July 21, 2017.

On 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. The Company did not purchase any of its common stock during the six months ended June 30, 2016. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

	Unrealized Gains (Losses) on Derivatives Designated as Cash Flow Hedges			Unrealized Gains (Losses) on Investment Securities Available for Sale			Total
				(In Thousands)

Balance, January 1, 2016	$	376		$	(124	)	$	252
Other comprehensive income, before reclassifications and income taxes		636			1,127			1,763
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes		(635	)		-			(635	)
Income tax expense		-			(460	)		(460	)
Total other comprehensive income		1			667			668
Balance, March 31, 2016		377			543			920
Other comprehensive income, before reclassifications and income taxes		859			2,327			3,186
Amounts reclassified from accumulated other comprehensive income, before income taxes		(636	)		(84	)		(720	)
Income tax expense		(91	)		(914	)		(1,005	)
Total other comprehensive income		132			1,329			1,461
Balance, June 30, 2016	$	509		$	1,872		$	2,381

Balance, January 1, 2015	$	294		$	(509	)	$	(215	)
Other comprehensive income, before reclassifications and income taxes		529			1,495			2,024
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes		(496	)		(186	)		(682	)
Income tax expense		(13	)		(534	)		(547	)
Total other comprehensive income		20			775			795
Balance, March 31, 2015		314			266			580
Other comprehensive income (loss), before reclassifications and income taxes		462			(2,698	)		(2,236	)
Amounts reclassified from accumulated other comprehensive income, before income taxes		(529	)		(48	)		(577	)
Income tax benefit		27			1,120			1,147
Total other comprehensive income		(40	)		(1,626	)		(1,666	)
Balance, June 30, 2015	$	274		$	(1,360	)	$	(1,086	)

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. DERIVATIVES AND HEDGING ACTIVITIES

The 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 into an interest rate swap agreement on August 27, 2010 with a third party to manage interest rate risk associated with a fixed-rate loan. The interest rate swap agreement effectively converted the loan’s fixed rate into a variable rate. The derivatives and hedging accounting guidance (ASC Subtopic 815-10) requires that the Company recognize all derivative instruments as either assets or liabilities at fair value in the statement 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.

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.

If 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 that the derivative was hedging a fixed-rate item, that the hedge exposure was to the changes in the fair value of the hedged item, and that the strategy was to eliminate fair value variability by converting fixed-rate interest payments to variable-rate interest payments.

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as 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. At December 31, 2014, 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, the interest rate swap on the fixed-rate loan was ineffective. The Bank recorded a loss of $317,000 in noninterest income during the quarter 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 $127,000 at June 30, 2016.

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 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, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Company to 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 increases 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 amount of interest rate lock commitments was $41,242,000 and $24,378,000 at June 30, 2016 and December 31, 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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE DISCLOSURES

FASB ASC 820 defines fair value as the price that would be received to sell 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 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 price in the principal (or most advantageous) market used to measure the fair value 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.

FASB ASC 820 requires the use of 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 is based on the amount that currently would be required to replace the service capacity 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, FASB ASC 820 establishes a 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.

The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, or convert to cash in the short term.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that 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 or corroborated by observable market data by correlation or other means.

Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

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, is set forth below.

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.

Available-for-Sale Securities – Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include 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.

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE DISCLOSURES – continued

Loans Held-for-Sale – These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds based on sales contracts and commitments and are considered Level 2 inputs.

Repossessed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based upon primary third party appraisals, less costs to sell. The appraisals 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 in Level 3 classification of the inputs for determining fair value. Repossessed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on same or similar factors above.

Loan Subject to Fair Value Hedge – The Company previously had one loan that was carried at fair value subject to a fair value hedge. Fair value was determined utilizing valuation models that considered the scheduled cash flows through anticipated maturity and was considered a Level 2 input. The interest rate swap was terminated during the quarter ended March 31, 2015. See Note 11 – Derivatives and Hedging Activities for more information.

Derivative Financial Instruments – Fair values for interest rate swap agreements were based upon the amounts required to settle the contracts. These instruments were valued using Level 3 inputs utilizing valuation models that considered: (a) time value, (b) volatility factors and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures.

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

	June 30, 2016
	Level 1 Inputs		Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency	$	-	$	8,958	$	-	$	8,958
Municipal obligations		-		67,443		-		67,443
Corporate obligations		-		9,382		-		9,382
MBSs - government-backed		-		31,937		-		31,937
CMOs - government backed		-		22,729		-		22,729
Loans held-for-sale		-		21,246		-		21,246

	December 31, 2015
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency	$	-	$	10,615	$	-	$	10,615
Municipal obligations		-		67,069		-		67,069
Corporate obligations		-		9,450		-		9,450
MBSs - government-backed		-		32,735		-		32,735
CMOs - government backed		-		25,869		-		25,869
Loans held-for-sale		-		18,702		-		18,702

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE DISCLOSURES - continued

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	June 30, 2016
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans	$	-	$	-	$	2,059	$	2,059
Repossessed assets		-		-		565		565

	December 31, 2015
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans	$	-	$	-	$	2,028	$	2,028
Repossessed assets		-		-		595		595

As of June 30, 2016, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $2,084,000 were reduced by specific valuation allowance allocations totaling $25,000 to a total reported fair value of $2,059,000 based on collateral valuations utilizing Level 3 valuation inputs.

As of December 31, 2015, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $2,076,000 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.

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.

	Fair Value at				Principal	Significant	Range of
Instrument	June 30, 2016		December 31, 2015		Valuation Technique	Unobservable Inputs	Signficant Input Values
(Dollars In Thousands)

Impaired loans	$	2,059	$	2,028	Appraisal collateral (1)	Appraisal adjustments	10	-	30%

Repossessed assets	$	565	$	595	Appraisal collateral (1)(3)	Liquidation expenses (2)	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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE DISCLOSURES - continued

FASB ASC Topic 825 requires disclosure of the 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 at June 30, 2016 and December 31, 2015, followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.

The estimated 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.

	June 30, 2016
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Estimated Fair Value		Carrying Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	6,423	$	-	$	-	$	6,423	$	6,423
Federal Home Loan Bank stock		3,735		-		-		3,735		3,735
Federal Reserve Bank stock		871		-		-		871		871
Loans receivable, net		-		-		445,180		445,180		437,609
Accrued interest and dividends receivable		2,274		-		-		2,274		2,274
Mortgage servicing rights		-		-		6,252		6,252		5,196
Cash surrender value of life insurance		14,683		-		-		14,683		14,683
Financial liabilities:
Non-maturing interest bearing deposits		-		261,952		-		261,952		261,952
Noninterest bearing deposits		88,327		-		-		88,327		88,327
Time certificates of deposit		-		-		158,857		158,857		158,603
Accrued expenses and other liabilities		5,000		-		-		5,000		5,000
Federal Home Loan Bank advances and other borrowings		-		-		75,687		75,687		75,491
Subordinated debentures		-		-		14,583		14,583		15,155
Off-balance-sheet instruments
Forward loan sales commitments		-		-		-		-		-
Commitments to extend credit		-		-		-		-		-
Rate lock commitments		-		-		-		-		-

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE DISCLOSURES – continued

	December 31, 2015
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Estimated Fair Value		Carrying Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	7,438	$	-	$	-	$	7,438	$	7,438
Federal Home Loan Bank stock		3,397		-		-		3,397		3,397
Federal Reserve Bank stock		887		-		-		887		887
Loans receivable, net		-		-		408,414		408,414		401,706
Accrued interest and dividends receivable		2,278		-		-		2,278		2,278
Mortgage servicing rights		-		-		6,452		6,452		4,968
Cash surrender value of life insurance		12,514		-		-		12,514		12,514
Financial liabilities:
Non-maturing interest bearing deposits		-		253,704		-		253,704		253,704
Noninterest bearing deposits		77,031		-		-		77,031		77,031
Time certificates of deposit		-		-		152,691		152,691		152,447
Accrued expenses and other liabilities		4,050		-		-		4,050		4,050
Federal Home Loan Bank advances and other borrowings		-		-		72,811		72,811		72,716
Subordinated debentures		-		-		14,306		14,306		15,155
Off-balance-sheet instruments
Forward loan sales commitments		-		-		-		-		-
Commitments to extend credit		-		-		-		-		-
Rate lock commitments		-		-		-		-		-

The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments. However, the Form 10-K for the year ended December 31, 2015 provides additional description of valuation methodologies used in estimating fair value of these financial instruments.

Cash, Interest Bearing 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 Federal Home Loan Bank of Des Moines (“FHLB”) and Federal Reserve Bank (“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.

Mortgage Servicing Rights – the fair value of servicing rights was determined using discount rates ranging from approximately 10.00% to 12.00%, prepayment speeds ranging from approximately 105.00% to 369.00% PSA, depending on stratification of the specific right. The fair value was also adjusted for the effect of potential past dues and foreclosures.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE DISCLOSURES - continued

Cash 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.

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 FHLB and 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 June 30, 2015 and December 31, 2014, 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.

NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update No. 2014-9, Revenue from Contracts with Customers (Topic 606). This guidance is a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled 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 identifying performance obligations in 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 financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendment is effective for annual and interim reporting periods beginning after December 15, 2015 and is not expected to have a significant impact to the Company’s financial statements.

In 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. The Company is evaluating the potential impact of the amendment on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-2, 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 require 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 require qualitative and quantitative disclosures providing additional information about the amounts recorded in the financial statements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the potential impact of the amendment on the Company’s financial statements.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS - continued

In June 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. 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, 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 financial statements and is working to evaluate the significance of that impact.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

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

Overview

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

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

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

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee (“FOMC”) changed the federal funds target rate from 0.25% to 0.50% in December 2015. The rate remained at 0.50% during the six months ended June 30, 2016.

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, the Bank has experienced an increase in mortgage loan originations due to the Sterling branch acquisition which closed in December 2012. Deposit fee income has also increased due to the increase in the number of accounts. The addition of the wealth management division from the acquisition has also increased noninterest income and furthered the Bank’s strategy to increase fee income to complement margin. Operating expenses, primarily salaries and employee benefits also increased as a result of the acquisition.

The Bank completed a core systems conversion during the year ended December 31, 2015. Future cost savings are anticipated due to the core systems conversion.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition

Comparisons of financial condition in this section are between June 30, 2016 and December 31, 2015.

Total assets at June 30, 2016 were $663.34 million, an increase of $32.99 million, or 5.2%, from $630.35 million at December 31, 2015. Loans receivable increased by $35.94 million, or 8.9%, to $439.67 million at June 30, 2016. Securities available-for-sale decreased by $5.29 million, or 3.6%, to $140.45 million at June 30, 2016. Total liabilities at June 30, 2016 were $604.33 million, an increase of $29.43 million, or 5.1%, from $574.90 million at December 31, 2015. Total deposits increased $25.70 million or 5.3%, to $508.88 at June 30, 2016. Federal Home Loan Bank (“FHLB”) advances and other borrowings increased $2.77 million, or 3.8%, to $75.49 million at June 30, 2016.

Balance Sheet Details

Investment Activities

The following table summarizes investment activities:

	June 30, 2016					December 31, 2015
	Fair Value		Percentage of Total			Fair Value		Percentage of Total
	(Dollars in Thousands)
Securities available-for-sale:
U.S. government and agency	$	8,958		6.14	%	$	10,615		7.03	%
Municipal obligations		67,443		46.22	%		67,069		44.42	%
Corporate obligations		9,382		6.43	%		9,450		6.26	%
MBSs - government-backed		31,937		21.89	%		32,735		21.68	%
CMOs - government-backed		22,729		15.58	%		25,869		17.13	%
Total securities available-for-sale		140,449		96.26	%		145,738		96.52	%


Interest bearing deposits		844		0.58	%		970		0.64	%

FHLB capital stock, at cost		3,735		2.56	%		3,397		2.25	%

FRB capital stock, at cost		871		0.60	%		887		0.59	%
Total	$	145,899		100.00	%	$	150,992		100.00	%

Securities available-for-sale were $140.45 million at June 30, 2016, a decrease of $5.29 million, or 3.6%, from $145.74 million at December 31, 2015. The largest decrease in securities available-for-sale was in CMOs which decreased by $3.14 million largely due to a security sale. U.S. government and agency securities decreased $1.66 million largely due to a called security.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Lending Activities

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

	June 30, 2016						December 31, 2015
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in Thousands)
Real estate loans:

Residential mortgage (1-4 family) ⁽¹⁾	$	116,207			26.12	%	$	118,133			28.95	%
Commercial real estate		200,848			45.15	%		167,930			41.15	%
Real estate construction		16,382			3.68	%		22,958			5.63	%
Total real estate loans		333,437			74.95	%		309,021			75.73	%

Other loans:
Home equity		47,842			10.75	%		45,345			11.11	%
Consumer		14,618			3.29	%		14,641			3.59	%
Commercial		48,982			11.01	%		39,072			9.57	%
Total other loans		111,442			25.05	%		99,058			24.27	%

Total loans		444,879			100.00	%		408,079			100.00	%

Deferred loan fees, net		(951	)					(795	)
Allowance for loan losses		(4,260	)					(3,550	)

Total loans, net	$	439,668					$	403,734

⁽¹⁾ Excludes loans held-for-sale.

Loans receivable increased $35.94 million to $439.67 million at June 30, 2016. The increase was largely due to an increase in commercial real estate loans of $32.92 million. Commercial loans also increased by $9.91 million and home equity loans increased by $2.49 million. These increases were partially offset by decreases in construction loans of $6.58 million and decreases in residential mortgage loans of $1.92 million. Total loan originations were $184.46 million for the six months ended June 30, 2016, with residential mortgages accounting for $136.04 million of the total. Commercial real estate and land loan originations were $34.60 million. Home equity and construction loan originations were $75,000 and $303,000, respectively, for the same period. Consumer loan originations were $3.85 million. Commercial loan originations were $9.59 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale increased to $21.25 million at June 30, 2016 from $18.70 million at December 31, 2015.

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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Lending Activities– continued

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. As of June 30, 2016, the Bank had $546,000 of real estate owned.

The following table sets forth information regarding nonperforming assets:

	June 30, 2016			December 31, 2015
	(Dollars in Thousands)
Non-accrual loans
Real estate loans:
Residential mortgage (1-4 family)	$	1,000		$	730
Commercial real estate		374			667
Other loans:
Home equity		288			161
Consumer		117			145
Commercial		261			327
Accruing loans delinquent 90 days or more
Real estate loans:
Residential mortgage (1-4 family)		-			221
Commercial real estate		4			4
Real estate construction		-			247
Other loans:
Commercial		85			-
Restructured loans:
Other loans:
Home equity		44			46
Total nonperforming loans		2,173			2,548
Real estate owned and other repossed property, net		565			595
Total nonperforming assets	$	2,738		$	3,143

Total nonperforming loans to total loans		0.49	%		0.63	%
Total nonperforming loans to total assets		0.33	%		0.40	%
Total allowance for loan loss to nonperforming loans		196.04	%		139.32	%
Total nonperforming assets to total assets		0.41	%		0.50	%

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Financial Condition – continued

Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

	June 30, 2016					December 31, 2015
	Amount		Percent of Total			Amount		Percent of Total
	(Dollars in Thousands)
Noninterest checking	$	88,327		17.36	%	$	77,031		15.94	%
Interest bearing checking		86,103		16.92	%		87,350		18.08	%
Savings		85,823		16.86	%		71,474		14.79	%
Money market accounts		90,026		17.69	%		94,880		19.64	%
Total		350,279		68.83	%		330,735		68.45	%
Certificates of deposit accounts:
IRA certificates		32,633		6.41	%		33,262		6.88	%
Brokered certificates		18,066		3.55	%		7,071		1.46	%
Other certificates		107,904		21.21	%		112,114		23.21	%
Total certificates of deposit		158,603		31.17	%		152,447		31.55	%
Total deposits	$	508,882		100.00	%	$	483,182		100.00	%

Deposits. Deposits increased $25.70 million, or 5.3%, to $508.88 million at June 30, 2016 from $483.18 million at December 31, 2015. The increase was largely due to an increase in savings of $14.35 million and an increase in noninterest checking of $11.30 million. Certificates of deposit also increased by $6.16 million. This increase was impacted by additional brokered certificates obtained in the amount of $11.00 million. Money market accounts decreased $4.85 million. Interest bearing checking decreased slightly from December 31, 2015 to June 30, 2016.

Borrowings. Advances from FHLB and other borrowings increased slightly by $2.77 million, or 3.8%, to $75.49 million at June 30, 2016 from $72.72 million at December 31, 2015.

Shareholders’ Equity

Total shareholders’ equity increased $3.55 million, or 6.4%, to $59.00 million at June 30, 2016 from $55.45 million at December 31, 2015. This was a result of an increase in accumulated other comprehensive income of $2.13 million mainly due to an increase in net unrealized gains on securities available-for-sale and net income of $1.91 million, partially offset by dividends paid of $586,000.

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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Analysis of Net Interest Income – continued

The following tables include 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.

	For the Three Months Ended June 30,
		2016							2015
	Average Daily Balance		Interest and Dividends		Yield/ Cost⁽⁴⁾			Average Daily Balance		Interest and Dividend		Yield/ Cost⁽⁴⁾
	(Dollars in Thousands)
Assets:
Interest earning assets:
Investment securities	$	143,265	$	740		2.07	%	$	149,902	$	737		1.97	%
FHLB and FRB stock		4,670		35		3.00	%		3,222		20		2.45	%
Loans receivable, net⁽¹⁾		448,158		4,955		4.42	%		360,782		4,255		4.72	%
Other earning assets		386		1		1.04	%		4,385		3		0.29	%
Total interest earning assets		596,479		5,731		3.84	%		518,291		5,015		3.87	%
Noninterest earning assets		53,106							49,262
Total assets	$	649,585						$	567,553

Liabilities and equity:
Interest bearing liabilities:
Deposit accounts:
Money market	$	91,469	$	26		0.11	%	$	92,965	$	27		0.12	%
Savings		73,738		8		0.04	%		66,791		7		0.04	%
Checking		88,353		7		0.03	%		80,388		6		0.03	%
Certificates of deposit		153,270		340		0.89	%		149,993		316		0.84	%
Advances from FHLB and other borrowings including subordinated debt		93,777		407		1.74	%		53,402		170		1.28	%
Total interest bearing liabilities		500,607		788		0.63	%		443,539		526		0.47	%
Noninterest checking		87,049							67,606
Other noninterest bearing liabilities		4,183							3,215
Total liabilities		591,839							514,360

Total equity		57,746							53,193

Total liabilities and equity	$	649,585						$	567,553
Net interest income/interest rate spread⁽²⁾			$	4,943		3.21	%			$	4,489		3.40	%

Net interest margin⁽³⁾						3.31	%						3.46	%
Total interest earning assets to interest bearing liabilities						119.15	%						116.85	%

⁽¹⁾	Includes loans held-for-sale.

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Analysis of Net Interest Income – continued

	For the Six Months Ended June 30,
	2016								2015
	Average Daily Balance		Interest and Dividends		Yield/ Cost⁽⁴⁾			Average Daily Balance		Interest and Dividends		Yield/ Cost⁽⁴⁾
	(Dollars in Thousands)
Assets:
Interest earning assets:
Investment securities	$	144,594	$	1,487		2.06	%	$	153,679	$	1,496		1.95	%
FHLB and FRB stock		4,625		66		2.85	%		2,915		20		1.39	%
Loans receivable, net⁽¹⁾		438,283		9,792		4.47	%		349,895		8,217		4.70	%
Other earning assets		1,930		4		0.41	%		4,867		6		0.24	%
Total interest earning assets		589,432		11,349		3.85	%		511,356		9,739		3.81	%
Noninterest earning assets		51,756							48,168
Total assets	$	641,188						$	559,524

Liabilities and equity:
Interest bearing liabilities:
Deposit accounts:
Money market	$	92,613	$	53		0.11	%	$	93,354	$	51		0.11	%
Savings		72,122		15		0.04	%		65,510		13		0.04	%
Checking		87,825		13		0.03	%		77,929		13		0.03	%
Certificates of deposit		152,480		655		0.86	%		149,655		616		0.82	%
Advances from FHLB and other borrowings including subordinated debt		91,561		802		1.75	%		50,960		334		1.31	%
Total interest bearing liabilities		496,601		1,538		0.62	%		437,408		1,027		0.47	%
Noninterest checking		82,423							65,484
Other noninterest bearing liabilities		4,907							2,990
Total liabilities		583,931							505,882

Total equity		57,257							53,642

Total liabilities and equity	$	641,188						$	559,524
Net interest income/interest rate spread⁽²⁾			$	9,811		3.23	%			$	8,712		3.34	%

Net interest margin⁽³⁾						3.33	%						3.41	%
Total interest earning assets to interest bearing liabilities						118.69	%						116.91	%

⁽¹⁾	Includes loans held-for-sale.

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

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

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis

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

	For the Three Months Ended June 30,
	2016										2015
	Volume			Due to Rate			Net			Volume			Due to Rate			Net
	(In Thousands)
Interest earning assets:
Investment securities	$	(33	)	$	36		$	3		$	(255	)	$	(125	)	$	(380	)
FHLB and FRB stock		9			6			15			-			19			19
Loans receivable, net		1,030			(330	)		700			951			(75	)		876
Other earning assets		(3	)		1			(2	)		-			1			1
Total interest earning assets		1,003			(287	)		716			696			(180	)		516

Interest bearing liabilities:
Savings, money market and checking accounts		1			(1	)		-			3			(4	)		(1	)
Certificates of deposit		7			18			25			(7	)		32			25
Advances from FHLB and other borrowingsincluding subordinated debentures		129			108			237			36			(34	)		2
Total interest bearing liabilities		137			125			262			32			(6	)		26

Change in net interest income	$	866		$	(412	)	$	454		$	664		$	(174	)	$	490

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Rate/Volume Analysis – continued

	For the Six Months Ended June 30,
	2016									2015
	Volume			Due to Rate			Net			Volume			Due to Rate			Net
	(In Thousands)
Interest earning assets:
Investment securities	$	(88	)	$	79		$	(9	)	$	(465	)	$	(222	)	$	(687	)
FHLB and FRB stock		12			34			46			-			20			20
Loans receivable, net		2,076			(501	)		1,575			1,897			(313	)		1,584
Other earning assets		(4	)		2			(2	)		1			1			2
Total interest earning assets		1,996			(386	)		1,610			1,433			(514	)		919

Interest bearing liabilities:
Savings, money market and checking accounts		3			1			4			5			(13	)		(8	)
Certificates of deposit		12			27			39			(18	)		59			41
Advances from FHLB and other borrowings including subordinated debentures		267			201			468			129			(137	)		(8	)
Total interest bearing liabilities		282			229			511			116			(91	)		25

Change in net interest income	$	1,714		$	(615	)	$	1,099		$	1,317		$	(423	)	$	894

Results of Operations for the Three Months Ended June 30, 2016 and 2015

Net Income. Eagle’s net income for the three months ended June 30, 2016 was $1.26 million compared to $792,000 for the three months ended June 30, 2015. The increase of $472,000, or 59.6%, was due to an increase in net interest income after loan loss provision of $323,000 and an increase in noninterest income of $531,000, partially offset by an increase in noninterest expense of $214,000 and an increase in income tax expense of $168,000. Basic and diluted earnings per share were $0.34 and $0.32, respectively, for the current period. Basic and diluted earnings per share were $0.21 per share for the prior year comparable period.

Net Interest Income. Net interest income increased to $4.94 million for the three months ended June 30, 2016, from $4.49 million for the same quarter in the prior year. This increase of $454,000, or 10.1%, was the result of an increase in interest and dividend income of $716,000, partially offset by an increase in interest expense of $262,000.

Interest and Dividend Income. Interest and dividend income was $5.73 million for the three months ended June 30, 2016, compared to $5.02 million for the three months ended June 30, 2015, an increase of $716,000, or 14.3%. Interest and fees on loans increased to $4.96 million for the three months ended June 30, 2016 from $4.26 million for the three months ended June 30, 2015. This increase of $700,000, or 16.5%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended June 30, 2016. Average balances for loans receivable, net, including loans held-for-sale, for the three months ended June 30, 2016 were $448.16 million, compared to $360.78 million for the prior year period. This represents an increase of $87.38 million, or 24.2%. The average interest rate earned on loans receivable decreased by 30 basis points, from 4.72% to 4.42%. Interest and dividends on investment securities available-for-sale increased slightly period over period. Average interest rates earned on investments increased to 2.07% from 1.97%. However, average balances for investments decreased to $143.27 million for the three months ended June 30, 2016, from $149.90 million for the three months ended June 30, 2015.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Three Months Ended June 30, 2016 and 2015 – continued

Interest Expense. Total interest expense was $788,000 for the three months ended June 30, 2016 compared to $526,000 for the three months ended June 30, 2015. The increase of $262,000 or 49.8% was largely attributable to an increase in interest expense on FHLB advances and other borrowings and subordinated debentures. The average borrowing balance increased from $53.40 million for the three months ended June 30, 2015 to $93.78 million for the three months ended June 30, 2016. The average rate paid increased from 1.28% for the three months ended June 30, 2015, to 1.74% for the three months ended June 30, 2016. Borrowings have been used to help fund the robust loan growth. Also, in June 2015, the Company completed the issuance of $10.00 million in aggregate principal amount of subordinated notes due in 2025. The slight increase in interest on deposits is due to higher overall average balances for interest-bearing deposits. The overall average rate on interest-bearing deposits was consistent with the prior year quarter.

Loan Loss Provision. Loan loss provisions are charged to earnings to maintain total allowance for loan losses at a level considered adequate by management of the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank and past due loans in the portfolio. The Bank’s policies require review of assets on a quarterly basis. The Bank classifies loans 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. The Bank recorded $459,000 in provision for loan losses for the three months ended June 30, 2016 and $328,000 for the three months ended June 30, 2015. The provision for loan losses has been increased to keep pace with increasing loan production that is fueling loan growth.

Noninterest Income. Total noninterest income increased to $3.81 million for the three months ended June 30, 2016, from $3.28 million for the three months ended June 30, 2015, an increase of $531,000 or 16.2%. The increase is primarily due to an increase in net gain on sale of loans which increased to $2.44 million for the three months ended June 30, 2016 from $1.86 million for the three months ended June 30, 2015. During the quarter ended June 30, 2016, $80.23 million residential mortgages were originated compared to $65.07 million for the quarter ended June 30, 2015. In addition, $68.78 million mortgage loans were sold during the current quarter compared to $64.74 million in the same quarter in the prior year.

Noninterest Expense. Noninterest expense was $6.69 million for the three months ended June 30, 2016 compared to $6.47 million for the three months ended June 30, 2015. The increase of $214,000 or 3.3% is largely due to increased salaries and employee benefits expense of $277,000, partially offset by a decrease in consulting fees of $177,000. This increase in salaries expense is due to higher mortgage commissions for the quarter ended June 30, 2016 compared to the quarter ended June 30, 2015.

Income Tax Expense. Income tax expense was $340,000 for the three months ended June 30, 2016, compared to $172,000 for the three months ended June 30, 2015. The effective tax rate for the three months ended June 30, 2016 was 21.2%.

Results of Operations for the Six Months Ended June 30, 2016 and 2015

Net Income. Eagle’s net income for the six months ended June 30, 2016 was $1.91 million compared to $1.18 million of net income for the six months ended June 30, 2015. The increase of $733,000, or 62.2%, was primarily due to an increase in net interest income after loan loss provision of $840,000 and an increase in noninterest income of $545,000, partially offset by an increase in noninterest expense of $401,000 and an increase in income tax expense of $251,000. Basic and diluted earnings per share were $0.51 and $0.49, respectively, for the current period. Basic and diluted earnings per share were $0.31 and $0.30, respectively, for the prior year comparable period.

Net Interest Income. Net interest income increased to $9.81 million for the six months ended June 30, 2016, from $8.71 million for the previous year’s six month period. This increase of $1.10 million was the result of an increase in interest and dividend income of $1.61 million partially offset by an increase in interest expense of $511,000.

Interest and Dividend Income. Interest and dividend income was $11.35 million for the six months ended June 30, 2016, compared to $9.74 million for the six months ended June 30, 2015, an increase of $1.61 million, or 16.5%. Interest and fees on loans increased to $9.79 million for the six months ended June 30, 2016 from $8.22 million for the same period ended June 30, 2015. This increase of $1.57 million, or 19.1%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the six months ended June 30, 2015. Average balances for loans receivable, net, including loans held-for-sale, for the six months ended June 30, 2016 were $438.28 million, compared to $349.90 million for the prior year period. This represents an increase of $88.39 million, or 25.3%. The average interest rate earned on loans receivable decreased by 23 basis points, from 4.70% to 4.47%. Interest and dividends on investment securities available-for-sale decreased slightly period over period. Average balances for investments decreased to $144.59 million for the six months ended June 30, 2016, from $153.68 million for the six months ended June 30, 2015. However, average interest rates earned on investments increased to 2.06% from 1.95%.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Results of Operations for the Six Months Ended June 30, 2016 and 2015 – continued

Interest Expense. Total interest expense for the six months ended June 30, 2016 was $1.54 million compared to $1.03 million for the six months ended June 30, 2015. The increase of $511,000 or 49.8% was largely attributable to an increase in interest expense on FHLB advances and other borrowings and subordinated debentures. The average borrowing balance increased from $50.96 million for the six months ended June 30, 2015 to $91.56 million for the six months ended June 30, 2016. The average rate paid increased from 1.31% for the six months ended June 30, 2015, to 1.75% for the six months ended June 30, 2016. Borrowings have been used to help fund the robust loan growth. Also, in June 2015, the Company completed the issuance of $10.00 million in aggregate principal amount of subordinated notes due in 2025. The slight increase in interest on deposits is due to higher overall average balances for interest-bearing deposits. The overall average rate on interest-bearing deposits was consistent with the prior year quarter.

Loan Loss Provision. Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by management of the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank and past due loans in the portfolio. The Bank’s policies require a review of assets on a quarterly basis. The Bank classifies loans 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. The Bank recorded $909,000 in provision for loan losses for the six months ended June 30, 2016 and $650,000 in the six months ended June 30, 2015. The provision for loan losses has been increased to keep pace with increasing loan production that is fueling loan growth. Total nonperforming loans, including restructured loans, was $2.17 million at June 30, 2016. As of June 30, 2016, the Bank had $565,000 in foreclosed real estate property and other repossessed property.

Noninterest Income. Total noninterest income increased to $6.70 million for the six months ended June 30, 2016, from $6.16 million for the six months ended June 30, 2015, an increase of $545,000 or 8.9%. The increase is primarily due to an increase in net gain on sale of loans which increased $669,000 or 19.2%. During the six months ended June 30, 2016, $136.04 million residential mortgages were originated compared to $122.67 million for the six months ended June 30, 2015. In addition, $121.11 million mortgage loans were sold during the six months ended June 30, 2016 compared to $119.61 million in the same period in the prior year. Interchange and ATM fees also increased $135,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. These increases were partially offset by a decrease in net gain on sale of available for sale securities of $150,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

Noninterest Expense. Noninterest expense was $13.23 million for the six months ended June 30, 2016 compared to $12.83 million for the six months ended June 30, 2015. The increase of $401,000 or 3.1% is largely due to increased salaries and employee benefits expense of $588,000, partially offset by a decrease in consulting fees of $334,000. The increase in salaries expense is due to higher mortgage commissions for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

Income Tax Expense. Income tax expense was $459,000 for the six months ended June 30, 2016, compared to $208,000 for the six months ended June 30, 2015. The effective tax rate for the six months ended June 30, 2016 was 19.4%. Tax free municipal bond income and Bank owned life insurance income contribute to the lower effective tax rates. The effective tax rate is further reduced by a tax credit investment entered into by 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 by 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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

Liquidity

The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and Federal Reserve Bank (“FRB”) regulations. The liquidity requirement is retained for safety and soundness purposes, and 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 both June 30, 2016 and December 31, 2015.

The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed and collateralized mortgage obligation securities, maturities of investments, funds provided from operations and advances from the FHLB and other borrowings. Scheduled repayments of loans and mortgage-backed and collateralized mortgage obligation 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 commitments to make loans and management’s assessment of the Bank’s ability to generate funds.

Capital Resources

At May 31, 2016 (the most recent report available for June 30, 2016), 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 2.5% compared to a decrease of 1.8% at November 30, 2015 (the most recent report available for December 31, 2015). The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

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 new rule establishes a new regulatory capital framework that incorporates revisions to the Basel capital framework, strengthens the definition of regulatory capital, increases risk-based capital requirements, and amends the methodologies for determining risk-weighted assets. These changes are expected to increase the amount of capital required by community banking organizations. Basel III includes a multiyear transition period from January 1, 2015 through December 31, 2019.

The Banks’s Tier I leverage ratio, as measured under State of Montana and FRB rules, decreased slightly from 9.36% as of December 31, 2015 to 9.17% as of June 30, 2016. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

As of June 30, 2016, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. As of June 30, 2016, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 13.86%, 12.92%, 12.92% and 9.17%, respectively, compared to regulatory requirements of 8.0%, 6.0%, 4.5% and 4.0%, respectively.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources – continued

	June 30, 2016 (Unaudited)
	Dollar Amount		of Assets
	(Dollars in Thousands)
Total risk-based capital to risk weighted assets:
Capital level	$	62,754		13.86	%
Requirement		36,224		8.00
Excess	$	26,530		5.86	%

Tier I capital to risk weighted assets:
Capital level	$	58,494		12.92	%
Requirement		27,168		6.00
Excess	$	31,326		6.92	%

Common equity tier I capital to risk weighted assets:
Capital level	$	58,494		12.92	%
Requirement		20,376		4.50
Excess	$	38,118		8.42	%

Tier I capital to adjusted total assets:
Capital level	$	58,494		9.17	%
Requirement		25,527		4.00
Excess	$	32,967		5.17	%

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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

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

Interest Rate Risk – continued

The Bank has established acceptable levels of interest rate risk as follows: Projected net interest income over the next twelve months will not be reduced by more than 15.0% given a change in interest rates of up to 200 basis points (+ or -).

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

Changes in Market Interest Rates	Rate Sensitivity As of May 31, 2016		Policy
(Basis Points)	Year 1	Year 2	Limits

+200	-0.81%	0.82%	-15.00%
-100	-1.39%	-4.93%	-15.00%

Impact of Inflation and Changing Prices

Our financial statements and the accompanying notes 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.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONTROLS AND PROCEDURES

Item 4. Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting.

Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of June 30, 2016, nor were they effective as of March 31, 2016, as a result of the significant deficiency described below. This resulted in our principal executive officer and principal financial officer revising their prior conclusions of effectiveness of our disclosure controls and procedures contained in the Company’s Form 10-Q for the quarter ended March 31, 2016, and determining that our disclosure controls and procedures were not effective as of March 31, 2016.

In connection with the preparation of our financial statements for inclusion in this quarterly report, we identified a significant deficiency in our internal control over financial reporting. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting. As a result of this significant deficiency, the Board of Directors concluded that the Company would restate the unaudited condensed consolidated financial statements for the quarter ended March 31, 2016, originally included in our Quarterly Report on Form 10-Q for the first quarter of 2016 (as described in detail in Note 2 to the unaudited consolidated financial statements included herein).

The significant deficiency consisted of two separate issues that resulted in the overstatement of interest income on mortgage loans for the quarter ended March 31, 2016. Management has determined that the misstatement occurred because of errors that occurred during loan setup for mortgage loans that were sold with servicing retained. The issue had been identified, but the severity had not been properly determined in a timely manner which allowed the misstatement to cross a quarterly reporting period.

To remediate the significant deficiency in our internal control over financial reporting noted above (and consequent deficiencies in our disclosure controls and procedures), we have continued to implement certain changes to the design of our internal controls. Specifically, we have provided additional training and strengthened the oversight and review of loan transactions, particularly relative to the sold mortgage loans. We are also in the process of formulating a management level disclosure committee to review and certify accuracy of public filings, providing additional training to executive management regarding the escalation of issues to those involved in financial reporting, and creating a written escalation process. While our remediation efforts are in process, they have not been completed.

Except as described above, during the last quarter, there were no changes in the Company’s internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION

Item 1.

Legal Proceedings.

Neither the Company nor the Bank is involved in any pending legal proceeding other than non-material legal proceedings occurring in the ordinary course of business.

Item 1A.

Risk Factors.

There have not been any material changes in the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION (CONTINUED)

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibit Number	Description

31.1	Certification by Peter J. Johnson, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

31.2	Certification by Laura F. Clark, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

32.1	Certification by Peter J. Johnson, Chief Executive Officer, and Laura F. Clark, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	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

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

SIGNATURES

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


	EAGLE BANCORP MONTANA, INC.

Date: August 10, 2016	By:	/s/ Peter J. Johnson
		Peter J. Johnson
		President/CEO



Date: August 10, 2016	By:	/s/ Laura F. Clark
		Laura F. Clark
		Senior Vice President/CFO