NOTE

15:

Capital Management and

Regulatory

Matters

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are

not

applicable to bank holding companies.

Beginning

January 1, 2015,

community banking organizations became subject to a new regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III). The rule established a new regulatory capital framework that incorporated revisions to the Basel capital framework, strengthened the definition of regulatory capital, increased risk-based capital requirements, and amended the methodologies for determining risk-weighted assets. These changes increased the amount of capital required by community banking organizations. Basel III included a multiyear transition period from

January 1, 2015

through

December 31, 2019.

Once fully phased in on

January 1, 2019,

the Basel III capital rules required the Bank to maintain a minimum ratio of common equity Tier

capital to risk-weighted assets of at least

4.5%,

plus a

2.5%

“capital conservation buffer” (which was added to the

4.5%

common equity Tier

capital ratio as the buffer was phased in, effectively resulting in a minimum ratio of common equity Tier

capital to risk-weighted assets of

7.0%

upon full phase in). The Bank is also required to maintain a Tier

capital to risk-weighted assets ratio of

6.0%

(

8.5%

including the capital conservation buffer), a total capital to risk-weighted assets ratio of

8.0%

(

10.5%

including the capital conservation buffer), and a Tier

capital to average assets ratio of

4.0%.

Management believes that, as of

December 31, 2019,

the Company and the Bank meet all capital adequacy requirements under the Basel III Capital rules on a fully phased-in basis.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier

capital to risk-weighted assets and Tier

capital to total assets (all as defined in the regulations). Management believes, as of

December 31, 2019

and

2018,

that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of

December 31, 2019,

the most recent notification from the FRB categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier

risk-based and Tier

leverage ratios as set forth in the table below. There are

conditions or events since the notification that management believes have changed the Banks’s category. The Bank’s actual capital amounts and ratios as of

December 31, 2019

are presented in the table below and include the capital conservation buffer of

2.500%

phased-in beginning

January 1, 2019:

											Minimum
						Minimum Required					To Be Well
						for Capital Adequacy					Capitalized Under
						Basel III					Prompt Corrective
	Actual					Fully Phased-In					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
December 31, 2019:
Total risk-based capital to risk weighted assets
Consolidated	$	126,711		15.917	%	$	83,589		10.500	%		N/A		N/A
Bank		120,313		15.231			82,944		10.500			78,994		10.000

Tier I capital to risk weighted assets
Consolidated		108,111		13.580			67,667		8.500			N/A		N/A
Bank		111,713		14.142			67,145		8.500			63,195		8.000

Common equity tier I capital to risk weighted assets
Consolidated		103,111		12.952			55,726		7.000			N/A		N/A
Bank		111,713		14.142			55,296		7.000			51,346		6.500

Tier 1 capital to adjusted total average assets
Consolidated		108,111		10.522			41,099		4.000			N/A		N/A
Bank		111,713		11.080			40,332		4.000			50,414		5.000

The Bank’s actual capital amounts and ratios as of

December 31, 2018

are presented in the table below and include the capital conservation buffer of

1.875%

phased-in beginning

January 1, 2018:

											Minimum
						Minimum Required					To Be Well
						for Capital Adequacy					Capitalized Under
						Basel III					Prompt Corrective
	Actual					Fully Phased-In					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
December 31, 2018:
Total risk-based capital to risk weighted assets
Consolidated	$	104,186		16.449	%	$	66,504		10.500	%		N/A		N/A
Bank		100,131		16.023			65,615		10.500			62,491		10.000

Tier I capital to risk weighted assets
Consolidated		87,586		13.829			53,836		8.500			N/A		N/A
Bank		93,531		14.967			53,117		8.500			49,993		8.000

Common equity tier I capital to risk weighted assets
Consolidated		82,586		13.039			44,336		7.000			N/A		N/A
Bank		93,531		14.967			43,744		7.000			40,619		6.500

Tier 1 capital to adjusted total average assets
Consolidated		87,586		10.507			33,344		4.000			N/A		N/A
Bank		93,531		11.222			33,338		4.000			41,673		5.000

Dividend Limitations

Under State of Montana banking regulation, member banks such as the Bank generally

may

declare annual cash dividends up to an amount equal to the previous

two

years’ net earnings. Dividends in excess of such amount require approval of the Division of Banking. The Bank paid dividends of

$8,000,000

and

$11,400,000

during the years ended

December 31, 2019

and

2018,

respectively, to Eagle. Eagle paid quarterly dividends of

$0.0925

per share to its shareholders for the

first

two

quarters of

2019

and

$0.095

for the last

two

quarters of

2019.

Eagle paid quarterly dividends of

$0.09

per share to its shareholders for the

first

two

quarters of

2018

and

$0.0925

for the last

two

quarters of

2018.

Stock Repurchase Program

July 18, 2019,

the Board authorized the repurchase of up to

100,000

shares of its common stock. Under the plan, shares

may

be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations.

shares were purchased under this plan during the

three

months ended

September 30

December 31, 2019.

The plan expires on

July 18, 2020.

July 19, 2018,

the Board authorized the repurchase of up to

100,000

shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations.

shares were purchased under this plan during the year ended

December 31, 2018.

However, during the

first

quarter of

2019,

42,000

shares were purchased at an average price of

$17.43

per share. In addition,

28,000

shares were purchased during the

second

quarter of

2019

at an average price of

$17.09

per share. The plan expired on

July 19, 2019.

July 20, 2017,

the Board authorized the repurchase of up to

100,000

shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions.

shares were purchased under this plan. The plan expired on

July 20, 2018.

Liquidation Rights

Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of the Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of

November 30, 2008 (

who continue to be the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund Eagle’s remaining obligations under the liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by Eagle would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation account” and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account.

After

two

years from the date of conversion and upon the written request of the FDIC, Eagle will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and

not

subject in any manner or amount to Eagle’s creditors. Also, under the rules and regulations of the FDIC,

post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which Eagle or the Bank is

not

the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution.