Eagle Bancorp Montana, Inc.

NOTE

Income Taxes

The components of the Company’s income tax expense (benefit) were as follows:

	Years Ended
	December 31,
	2017		2016
	(In Thousands)
Current
U.S. federal	$	1,509	$	1,369
Montana		417		450
Total current income tax expense		1,926		1,819
Deferred
U.S. federal		198		(13	)
Montana		4		(7	)
Total deferred income tax expense (benefit)		202		(20	)
Total income tax expense	$	2,128	$	1,799

The nature and components of deferred tax assets and liabilities

were as follows:

	December 31,
	2017		2016
	(In Thousands)
Deferred tax assets:
Loans receivable	$	1,596	$	1,805
Deferred loan fees		334		500
Deferred compensation		583		786
Employee benefits		319		419
Unrealized losses on securities available-for-sale		-		510
Acquisition costs		358		580
New Market Tax Credits carry forward		626		624
Alternative Minimum Tax carry forward		466		466
Other		272		245
Total deferred tax assets		4,554		5,935
Deferred tax liabilities:
Premises and equipment		715		821
Federal Home Loan Bank stock		138		551
Mortgage servicing rights		1,318		1,230
Unrealized gains on securities available-for-sale		30		-
Unrealized gains on hedging		91		228
Goodwill		659		776
Other		243		364
Total deferred tax liabilities		3,194		3,970
Net deferred tax asset	$	1,360	$	1,965

The Company believes, based upon the available evidence, that all deferred tax assets will be realized in the normal course of operations

. Accordingly, these assets have

not

been reduced by a valuation allowance.

A reconciliation of the Company’s effective income tax provision (benefit) to the statutory federal income tax rate was as follows:

	Years Ended
	December 31,
	2017						2016
				% of						% of
				Pretax						Pretax
	Amount			Income			Amount			Income
	(Dollars in Thousands)
Federal income taxes at the statutory rate	$	2,119			34.00	%	$	2,357			34.00	%
State income taxes		421			6.75	%		468			6.75	%
Tax-exempt interest income		(466	)		-7.48	%		(458	)		-6.61	%
Income from bank-owned life insurance		(170	)		-2.73	%		(235	)		-3.39	%
New Market Tax Credits		(456	)		-7.32	%		(456	)		-6.58	%
Impact due to tax rate change		715			11.47	%		-			0.00	%
Other, net		(35	)		-0.54	%		123			1.79	%
Actual tax expense and effective tax rate	$	2,128			34.15	%	$	1,799			25.96	%

As a result of the Tax Cuts and Job Act enacted

December 22, 2017,

Eagle revalued its deferred tax assets and liabilities to account for the future impact of lower corporate tax rates and other provisions of the legislation. Based on its preliminary analysis, Eagle recorded a

one

-time net tax charge of

$715,000

related to the revaluation of these deferred tax items. This increase in income tax expense was reflected in Eagle’s operating results for the

fourth

quarter of

2017

and was in addition to the normal provision for income tax related to pre-tax net operating income. The income tax effects from accumulated other comprehensive income were considered insignificant.

The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits. Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are

expected to be

$2,964,000

and will be claimed over an estimated

seven

-year credit allowance period. The cumulative federal tax credit benefits were

$2,280,000

as of

December 31, 2017.

Due to

not

having sufficient taxable income only

$1,654,000

of the federal tax credit benefits were utilized as of

December 31, 2017.

The remaining federal tax credit benefits of

$626,000

are recorded as deferred tax assets and will be used in future periods.