NOTE

Mergers and Acquisitions

Effective

January 1, 2019,

Eagle completed its previously announced merger with BMB, pursuant to an Agreement and Plan of Merger, dated as of

August 21, 2018,

by and among Eagle, Opportunity Bank of Montana, BMB and BMB’s wholly-owned subsidiary, SBOT, a Montana chartered commercial bank. BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. SBOT operated

four

branches in Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities throughout the state. The acquisition closed after receipt of approvals from regulatory authorities, approval of BMB shareholders and the satisfaction of other closing conditions. The total consideration paid was

$16,436,000

and included cash consideration of

$1,000

and common stock issued of

$16,435,000.

September 5, 2017,

the Company entered into an Agreement and Plan of Merger with TwinCo, a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire

100%

of TwinCo’s equity voting interests. The merger agreement provided that Ruby Valley Bank would merge with and into Opportunity Bank of Montana and that TwinCo would merge with and into the Company. Ruby Valley Bank operated

two

branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. The acquisition closed

January 31, 2018,

after receipt of approvals from regulatory authorities, approval of TwinCo shareholders and the satisfaction of other closing conditions. The total consideration paid was

$18,930,000

and included cash consideration of

$9,900,000

and common stock issued of

$9,030,000.

These transactions were accounted for under the acquisition method of accounting.

All of the assets acquired and liabilities assumed were recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. Determining the fair value of assets and liabilities is a complicated process involving significant judgement regarding methods and assumptions used to calculate estimated fair values. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The goodwill recorded is

not

deductible for federal income tax purposes.

The following table summarizes the fair values of the assets acquired and liabilities assumed, consideration paid and the resulting goodwill.

	BMB		TwinCo
	January 1,		January 31,
	2019		2018
	(In Thousands, Except Share Data)
Assets acquired:
Cash and cash equivalents	$	6,902	$	5,657
Investment securities		2,096		30,728
Loans		89,204		55,057
Premises and equipment		2,246		1,605
Cash surrender value of life insurance		2,862		-
Other real estate owned		223		135
Core deposit intangible		1,988		1,609
Other assets		1,995		1,258
Total assets acquired	$	107,516	$	96,049

Liabilities assumed:
Deposits	$	92,706	$	82,190
Accrued expenses and other liabilities		1,960		19
Total liabilities assumed	$	94,666	$	82,209

Net assets acquired	$	12,850	$	13,840

Consideration paid:
Cash	$	1	$	9,900
Common stock issued (996,041 shares BMB and 446,774 shares TwinCo)		16,435		9,030
Total consideration paid	$	16,436	$	18,930

Goodwill resulting from acquisition	$	3,586	$	5,090

Goodwill recorded for the BMB acquisition during the

first

quarter of

2019

was

$3,586,000.

Certain estimates that existed at

January 1, 2019

were realized and a final true up of

$126,000

of goodwill occurred in the

fourth

quarter. The final goodwill recorded related to the acquisition was

$3,712,000.

TwinCo investments were written down

$941,000

to fair value on the date of acquisition based on market prices obtained from a

third

party. BMB investment fair value adjustments were considered insignificant.

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

The total accretable discount on BMB acquired loans was

$2,813,000

as of

January 1, 2019.

During the year ended

December 31, 2019,

accretion of the loan discount was

$1,480,000.

The remaining accretable loan discount was

$1,333,000

as of

December 31, 2019.

The total accretable discount on TwinCo acquired loans was

$1,834,000

as of

January 31, 2018.

During the year ended

December 31, 2019,

accretion of the loan discount was

$409,000.

During the year ended

December 31, 2018,

accretion of the loan discount was

$589,000.

The remaining accretable loan discount was

$836,000

as of

December 31, 2019.

Four impaired loans were acquired through the BMB acquisition with a net balance of

$556,000

as of

January 1, 2019.

The balance of the acquired impaired loans as of

December 31, 2019

was

$175,000.

Two impaired loans were acquired through the TwinCo acquisition with a balance of

$1,188,000

as of

January 31, 2018.

The balance of the acquired impaired loans as of

December 31, 2019

was

$1,061,000.

The Company determined that applying the guidance in ASC

310

was

not

significant, however, the aforementioned loans are disclosed as impaired loans at

December 31, 2019

and

2018.

Fair value adjustments of

$276,000

and

$446,000

were recorded for BMB and TwinCo, respectively, related to premises and equipment. The Company used

third

party appraisals in the determination of the higher fair value compared to the book value of these acquired assets.

Core deposit intangible assets of

$1,988,000

were recorded for BMB and are being amortized using an accelerated method over the estimated useful lives of the related deposits of

years. Core deposit intangible assets of

$1,609,000

were recorded for TwinCo and are being amortized using an accelerated method over the estimated useful lives of the related deposits of

years.

For both the BMB and TwinCo acquisition, the core deposit intangible value is a function of the difference between the cost of the acquired core deposits and the alternative cost of funds. These cash flow streams were discounted to present value. The fair value of other deposit accounts acquired were valued by estimating future cash flows to be received or paid from individual or homogenous groups of assets and liabilities and then discounting those cash flows to a present value using rates of return that were available in financial markets for similar financial instruments on or near the acquisition date.

Direct costs related to the acquisitions were expensed as incurred. The Company recorded acquisition costs related to BMB of

$1,380,000

and

$804,000

during the years ended

December 31, 2019

and

2018,

respectively. The Company recorded total acquisition costs related to the TwinCo acquisition of

$1,041,000,

of which

$365,000

was recognized during the year ended

December 31, 2018.

Acquisition costs included legal and professional fees and data processing expenses incurred related to the acquisitions.

Operations of BMB have been included in the consolidated financial statements since

January 1, 2019.

The Company does

not

consider BMB a separate reporting segment and does

not

track the amount of revenues and net income attributable to BMB since acquisition. As such, it is impracticable to determine such amounts for the period from

January 1, 2019

through

December 31, 2019.

Operations of TwinCo have been included in the consolidated financial statements since

February 1, 2018.

The Company does

not

consider TwinCo a separate reporting segment and does

not

track the amount of revenues and net income attributable to TwinCo since acquisition. As such, it is impracticable to determine such amounts for the period from

February 1, 2018

through

December 31, 2019.

The accompanying consolidated statements of income include the results of operations of the BMB acquired entity since the

January 1, 2019

acquisition date. The following table presents unaudited pro forma results of operations for the year ended

December 31, 2018

as if the acquisition had occurred on

January 1, 2018.

This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. The pro forma information does

not

necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of BMB on

January 1, 2018.

Cost savings are also

not

reflected in the unaudited pro forma amounts for the year ended

December 31, 2018.

	Year Ended
	December 31, 2018
	(Dollars in Thousands,
	Except Per Share Data)
Pro forma net income (1)
Net interest income after loan loss provision	$	33,462
Noninterest income		12,986
Noninterest expense		39,422
Income before income taxes		7,026
Income tax expense		1,405
Net income	$	5,621

Pro forma earnings per share (1)
Basic earnings per share	$	1.04
Diluted earnings per share	$	1.02

Weighted average shares outstanding, basic		5,426,605
Weighted average shares outstanding, diluted		5,490,347

(

)

Significant assumptions utilized include the acquisition cost noted above and a

20.00%

effective tax rate.