September 18, 2006




To Our Stockholders, Customers, and Friends:




The Board of Directors, management, and staff of Eagle Bancorp and its wholly owned subsidiary,




American Federal Savings Bank, are pleased to present our annual
report for our fiscal year ended June 30, 2006.




Despite a challenging interest rate environment characterized by
a very flat yield curve, we were able to achieve an increase of 2.4% in net income for the fiscal year ended June 30, 2006. We were pleased that net
interest income, our main component of core earnings, increased as well, which enabled us to grow basic earnings per share by 7% from $1.55 to $1.66.
Per share earnings were enhanced by our continuing stock repurchase program ($473,000 in treasury stock was purchased during the
year).




Montanas continuing strong economy, along with our very
strong capital position, have allowed us to again increase our quarterly cash dividend to $0.22 per share, an increase of $.02 per share or 10% over
our previous quarterly dividend. At a share price of $32.00, this would be a dividend yield of 2.75%.




Last years plan was to achieve strong growth in assets by
continuing strong growth in our loan portfolio, funded by a combination of deposit growth and Federal Home Loan Bank advances. During the year, we did
increase assets by 9.6% and loans receivable by nearly 32%. This was accomplished while maintaining very sound credit quality. Our non-performing loans
as a percentage of assets actually decreased from a very low 0.24% to 0.20%.




Although we were successful in our new money market account for
higher balance customers, we were unable to grow our total deposits by more than 1.07%. We expect the funding side of our business to remain our
greatest challenge for next year as well. However, we plan to continue managing growth in assets and our capital ratios in order to improve our Return
on Equity and resulting shareholder value.




We have begun our new fiscal year by increasing our advertising
budget by 12.5% and launching a series of checking account promotions. We are spearheading the series with the introduction of our new Freedom
Rewards account. This account was designed for our higher balance customers by featuring value rather than price. It includes free ATM use,
identity theft protection, higher rates on certificates of deposit, lower rates on consumer loans, etc. We thank our stockholders who responded to our
survey to research the product features and pricing during the development process.




The PUD process in Bozeman is taking longer than originally
anticipated. Therefore, we now expect to open our new location on Oak Street in Bozeman in the spring of 2008.




We have nearly completed the remodeling of our downtown Helena
drive-in/walk-up branch with the addition of a drive-up ATM and interior changes to make the lobby and customer service/new accounts area more customer
friendly.




We recently joined the Moneypass ATM network to offer
our depositors free ATM locations nationwide.




Finally, we are very proud to have been recently selected to
receive an Independent Community Bankers of America community service award. We thank our dedicated Board of Directors, officers, and employees for
demonstrating once again that they understand the relationship between employee loyalty, customer loyalty, community loyalty, and shareholder loyalty.
We thank all of you for your confidence and support.




Very Sincerely,




Larry A. Dreyer President and
Chief Executive Officer


---



U.S. SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549




FORM 10-KSB




(Mark One)


|[X] |  | Annual report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 2006.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

|[  ] |  | Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________________ to ______________________.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



Commission file number: 0-29687




Eagle Bancorp(Name of
small business issuer in its charter)


|United
States(State or
other jurisdiction of incorporation               |  | 81-0531318(I.R.S.
Employer Identification No.) or organization)
|------------------------------------------------------------------------ |  | ---------------------------------------------------------------
|                                                                         |  |                                                                
|1400 Prospect
Avenue, Helena, MT(Address of principal executive offices) |  | 59601(Zip Code)                                                

|Issuers telephone number: | (406) 442-3080www.americanfederalsavingsbank.com
|-------------------------- | ------------------------------------------------






|Securities to be registered under Section 12(b) of the
Act:Title of
classNone |  | Name of
exchange on which registeredN/A
|----------------------------------------------------------------------------- |  | ---------------------------------------



Securities to be registered under Section 12(g) of the
Act:




Common stock, par value $0.01 per share(Title of class)




Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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




Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB.




Issuers revenues for its most recent fiscal year
are      $12,664,000




The aggregate market value of the common stock held by
non-affiliates, computed by reference to the closing price as of August 30, 2006, was $11,065,510.




As of August 30, 2006, there were 1,087,557 shares of common
stock issued and outstanding.




Documents Incorporated By Reference




1.      Portions of the proxy statements for
the annual meeting of stockholders for the fiscal years ended June 30, 2006 and June 30, 2005 and the Registration Statement on Form SB-2 filed on
December 20, 1999 are incorporated by reference in Part III hereof.




Transitional Small Business
Disclosure Format (Check one):  Yes            No    X
  TABLE OF CONTENTS


ItemNo.
     
     
     

     
     

     PageNo.Part I1
     
     
     

     Description of Business
     

     
     12
     
     
     

     Description of Property
     

     
     223
     
     
     

     Legal Proceedings
     

     
     234
     
     
     

     Submission of Matters to a Vote of Security Holders
     

     
     23Part II5
     
     
     

     Market for Common Equity, Related Stockholder Matters and Small Business Issuers Purchases of Equity Securities
     

     
     235C
     
     
     

     Small Business Issuer Purchases of Equity Securities
     

     
     246
     
     
     

     Managements Discussion and Analysis or Plan of Operation
     

     
     247
     
     
     

     Financial Statements
     

     
     318
     
     
     

     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
     

     
     318A
     
     
     

     Controls and Procedures
     

     
     318B
     
     
     

     Other Information
     

     
     31Part III9
     
     
     

     Directors, Executive Officers, Promoters and Control Persons; Compliance with Section16(a) of the Exchange Act
     

     
     3210
     
     
     

     Executive Compensation
     

     
     3211
     
     
     

     Security Ownership of Certain Beneficial Owners, and Management and Related
     

     
     32Stockholder Matters12
     
     
     

     Certain Relationships and Related Transactions
     

     
     3213
     
     
     

     Exhibits
     

     
     3214
     
     
     

     Principal Accountant Fees and Services
     

     
     32
 2

PART I

ITEM 1.    DESCRIPTION OF
BUSINESS.

General

Eagle Bancorp (Eagle or the Company), a
federally chartered stock holding company holds 100% of the Stock of American Federal Savings Bank (American Federal or the
Bank). Its charter was approved on April 4, 2000, when it became the mid-tier stock holding company for the Bank, a federally chartered stock
savings bank headquartered in Helena, Montana. Eagle Bancorps principal business is to hold the capital stock of American Federal. Upon the
reorganization and conversion to stock form of American Federal Savings Bank, Eagle Bancorp issued 575,079 shares of its common stock, par value $.01
per share (the Common Stock) to the public at a price of $8 per share. This represents approximately 47% of the issued and outstanding
shares of the Common Stock. The remaining 648,493 shares of the Common Stock are held by Eagle Financial MHC, Eagle Bancorps mutual holding
company.

American Federal was founded in 1922 as a Montana chartered
building and loan association and has conducted operations in Helena since that time. In 1975, the Bank adopted a federal thrift charter. The Bank
currently has four full service offices and one satellite branch. We also have five automated teller machines located in our market area and we
participate in the CashCard and Money Pass ATM networks. The Banks website can be found at www.americanfederalsavingsbank.com.

Business Strategy

Since our founding in Helena in 1922, we have operated in the
southcentral portion of Montana. Since the advent of NOW accounts and low and no cost checking or other transaction accounts, we have sought to operate
in a fashion similar to a commercial bank offering these kinds of deposits and changing our emphasis on home mortgage lending by broadening and
diversifying the kind of loans we offer. As a result of these efforts, we provide full retail banking services, including one- to four-family
residential mortgage loans, home equity loans, lines of credit, consumer loans, commercial real estate loans and commercial loans for businesses as
well as certificates of deposit, checking accounts, NOW accounts, savings accounts and money market accounts.

We attract deposits from the general public and use these
deposits primarily to originate loans and to purchase investment securities. The principal sources of funds for lending and investing activities are
deposits, Federal Home Loan Bank advances, the repayment, sale and maturity of loans and sale and maturity of securities. The principal sources of
income are interest on loans and investments. The principal expense is interest paid on deposits and Federal Home Loan Bank advances.

Market Area

From our headquarters in Helena, Montana, we operate four full
service offices, including our main office, and one satellite branch. Our satellite branch is located in Helena and our other full service branches are
located in Bozeman (opened 1980), Butte (opened 1979) and Townsend (opened 1979), Montana.

Montana is one of the largest states in terms of land mass but
ranks as one of the least populated states. As of the 2000 census it had a population of 902,000. Helena, where we are headquartered, is the county
seat of Lewis and Clark County, which has a population of approximately 58,500 and is located within 120 miles of four of Montanas other five
largest cities: Missoula, Great Falls, Bozeman and Butte. It is approximately midway between Yellowstone and Glacier National Parks. Helena is also
Montanas state capital. Its economy has shown moderate growth, in terms of both employment and income. State government and the numerous offices
of the federal government comprise the largest employment sector. Helena also has significant employment in the service industries. Specifically, it
has evolved into a central health care center with employment in the medical and the supporting professions as well as the medical insurance industry.
The local economy is also dependent to a lesser extent upon ranching and agriculture. These have been more cyclical in nature and remain vulnerable to
severe weather conditions, increased competition, both domestic and international, as well as commodity prices.




1

Bozeman is approximately 95 miles southeast of Helena. It is
located in Gallatin County, which has a population of approximately 78,200. Bozeman is home to Montana State University and has achieved its recent
growth in part due to the growth of the University as well as the increased tourism for resort areas in and near Bozeman. Agriculture, however, remains
an important part of Bozemans economy. Bozeman has also become an attractive location for retirees, primarily from the West Coast, owing to its
many winter and summer recreational opportunities and the presence of the University. Residential construction in Bozeman has increased more rapidly
than such construction in Helena and the other cities in which we operate.

Butte, Montana is approximately 64 miles southwest of Helena.
Butte and the surrounding Silver-Bow County have a population of approximately 33,000. Buttes population has declined as a result of the decline
in the energy and telecommunications industries, which had afforded many higher paying jobs to residents of Butte and Silver-Bow
County.

Townsend is the smallest community in which we operate. It has a
population of about 2,000. Many of its residents commute to other Montana locations for work. Other employment in Townsend is primarily in agriculture
and services. Townsend is approximately 32 miles southeast of Helena.

Competition

We face strong competition in our primary market area for the
attraction of retail deposits and the origination of loans. Historically, Montana was a unit banking state. This means that the ability of Montana
state banks to create branches was either prohibited or significantly restricted. As a result of unit banking, Montana has a significant number of
independent financial institutions serving a single community in a single location. While the states population is approximately 935,000 people,
there are approximately 66 credit unions in Montana as well as two federally chartered thrift institutions, and 77 commercial banks as of June 30,
2006. Our most direct competition for depositors has historically come from locally owned and out-of-state commercial banks, thrift institutions and
credit unions operating in our primary market area. The number of such competitor locations has increased significantly in recent years. Our
competition for loans also comes from banks, thrifts and credit unions in addition to mortgage bankers and brokers. Our principal market areas can be
characterized as markets with moderately increasing incomes, low unemployment, increasing wealth (particularly in the growing resort areas such as
Bozeman), and moderate population growth.

Lending Activities

General.

American Federal Savings Bank primarily originates one- to
four-family residential real estate loans and, to a lesser extent commercial real estate loans, real estate construction loans, home equity loans,
consumer loans and commercial loans. Commercial real estate loans include loans on multi-family dwellings, loans on nonresidential property and loans
on developed and undeveloped land. Home equity loans include loans secured by the borrowers primary residence. Typically, the property securing
such loans is subject to a prior lien. Consumer loans consist of loans secured by collateral other than real estate, such as automobiles, recreational
vehicles and boats. Personal loans and lines of credit are made on deposits held by the Bank and on an unsecured basis. Commercial loans consist of
business loans and lines of credit on a secured and unsecured basis.




2

Loan Portfolio Composition.

The following table analyzes the composition of the Banks
loan portfolio by loan category at the dates indicated.


At June 30,2006
     

     2005(Dollars in thousands)Amount
     

     Percent of Total
     

     Amount
     

     Percent of TotalFirst
mortgage loans:Residential
mortgage (1-4 family)(1)
     
     
     

     $
     75,913
     
     

     
     53.71
     %
     

     $
     56,533
     
     

     
     52.68
     %Commercial
real estate
     
     
     

     
     18,648
     
     

     
     13.20
     %
     

     
     14,779
     
     

     
     13.77
     %Real estate
construction
     
     
     

     
     6,901
     
     

     
     4.88
     %
     

     
     2,723
     
     

     
     2.54
     %Total first
mortgage loans
     
     
     

     
     101,462
     
     

     
     71.79
     %
     

     
     74,035
     
     

     
     68.99
     %Other
loans:Home
equity
     
     
     

     
     20,191
     
     

     
     14.29
     %
     

     
     16,801
     
     

     
     15.66
     %Consumer
     
     
     

     
     11,820
     
     

     
     8.36
     %
     

     
     10,909
     
     

     
     10.16
     %Commercial
     
     
     

     
     7,861
     
     

     
     5.56
     %
     

     
     5,568
     
     

     
     5.19
     %Total other
loans
     
     
     

     
     39,872
     
     

     
     28.21
     %
     

     
     33,278
     
     

     
     31.01
     %Total
loans
     
     
     

     
     141,334
     
     

     
     100.00
     %
     

     
     107,313
     
     

     
     100.00
     %Less:Deferred loan
fees:
     
     
     

     
     (59
     )
     

     
     
     
     

     
     (99
     )Allowance for
loan losses
     
     
     

     
     535
     
     

     
     
     
     

     
     573Total loans,
net
     
     
     

     $
     140,858
     
     

     
     
     
     

     $
     106,839
 (1)
     
     Excludes loans held for sale.Fee Income.

American Federal Savings Bank receives lending related fee income
from a variety of sources. Its principal source of this income is from the origination and servicing of sold mortgage loans. Fees generated from
mortgage loan servicing, which generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing for loans held by others, were $547,000 and $570,000 for the years ended June 30, 2006 and 2005, respectively. Other loan
related fee income for contract collections, late charges, credit life commissions and credit card fees were $88,000 and $103,000 for the years ended
June 30, 2006 and 2005, respectively.

Loan Maturity Schedule.

The following table sets forth the estimated maturity of the loan
portfolio of the Bank at June 30, 2006. Scheduled principal repayments of loans do not necessarily reflect the actual life of such assets. The average
life of a loan is typically substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally
give American Federal Savings Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the
real property, subject to the mortgage, and the loan is not paid off. All mortgage loans are shown to be maturing based on the date of the last payment
required by the loan agreement, except as noted.




3

Loans having no stated maturity, those without a scheduled
payment, demand loans and matured loans, are shown as due within six months.


Within 6 Months
     

     6 to 12 Months
     

     More than 1 year to 2 years
     

     More than 2 years to 5 years
     

     Over 5 years
     

     Total(In thousands)Residential
mortgage (1-4 family)(1)
     
     
     

     $
     
     
     

     $
     84
     
     

     $
     594
     
     

     $
     2,447
     
     

     $
     73,692
     
     

     $
     76,817Commercial real
estate
     
     
     

     
     68
     
     

     
     1,644
     
     

     
     629
     
     

     
     4,603
     
     

     
     11,704
     
     

     
     18,648Real estate
construction
     
     
     

     
     396
     
     

     
     5,609
     
     

     
     896
     
     

     
     
     
     

     
     
     
     

     
     6,901Home
equity
     
     
     

     
     275
     
     

     
     1,352
     
     

     
     1,293
     
     

     
     8,184
     
     

     
     9,087
     
     

     
     20,191Consumer
     
     
     

     
     213
     
     

     
     2,438
     
     

     
     719
     
     

     
     5,119
     
     

     
     3,331
     
     

     
     11,820Commercial
     
     
     

     
     555
     
     

     
     2,322
     
     

     
     203
     
     

     
     2,194
     
     

     
     2,587
     
     

     
     7,861Total Loans
(1)
     
     
     

     $
     1,507
     
     

     $
     13,449
     
     

     $
     4,334
     
     

     $
     22,547
     
     

     $
     100,401
     
     

     $
     142,238
 

(1)
     
     Includes loans held for sale.

The following table sets forth the dollar amount of all loans, at
June 30, 2006, due after June 30, 2007, which have fixed interest rates and which have floating or adjustable interest rates:


Fixed
     

     Adjustable
     

     Total(Dollars in thousands)Residential
mortgage (1-4 family)
     
     
     

     $
     66,120
     
     

     $
     10,613
     
     

     $
     76,733Commercial
real estate
     
     
     

     
     15,508
     
     

     
     1,428
     
     

     
     16,936Real estate
construction
     
     
     

     
     896
     
     

     
     
     
     

     
     896Home
equity
     
     
     

     
     14,371
     
     

     
     4,193
     
     

     
     18,564Consumer
     
     
     

     
     8,657
     
     

     
     512
     
     

     
     9,169Commercial
     
     
     

     
     3,009
     
     

     
     1,975
     
     

     
     4,984Total (1)
     
     
     

     $
     108,561
     
     

     $
     18,721
     
     

     $
     127,282Percent of
total
     
     
     

     
     85.29
     %
     

     
     14.71
     %
     

     
     100.00
     %
 

(1)
     
     Due after June 30, 2007.4

The following table sets forth information with respect to our
loan originations, purchases and sales activity for the periods indicated.


Ended June 30,2006
     

     2005(In thousands)Net loans
receivable (1) at beginning of period:
     
     
     

     $
     108,987
     
     

     $
     93,893Loans
originated:Residential
mortgage (1-4 family)
     
     
     

     
     63,311
     
     

     
     51,791Commercial
real estate
     
     
     

     
     9,266
     
     

     
     8,853Real estate
construction
     
     
     

     
     13,745
     
     

     
     6,383Home
equity
     
     
     

     
     14,409
     
     

     
     11,452Consumer
     
     
     

     
     7,904
     
     

     
     6,584Commercial
loans
     
     
     

     
     6,390
     
     

     
     3,404Total loans
originated
     
     
     

     
     115,025
     
     

     
     88,467Loans
sold:Whole
loans
     
     
     

     
     29,735
     
     

     
     29,473Participations
     
     
     

     
     
     
     

     
     Total loans
sold
     
     
     

     
     29,735
     
     

     
     29,473Principal
repayments and loan refinancings
     
     
     

     
     52,621
     
     

     
     43,968Deferred loan
fees decrease (increase)
     
     
     

     
     27
     
     

     
     13Allowance for
loans decrease (increase)
     
     
     

     
     93
     
     

     
     55Net loan
increase (decrease)
     
     
     

     
     32,789
     
     

     
     15,094Net loans
receivable (1) at end of period$
     141,776
     
     

     $
     108,987
 

(1)
     
     Includes loans held for sale.Residential Lending

The Banks primary lending activity consists of the
origination of one-to-four-family residential mortgage loans secured by property located in the Banks market area. Approximately 53.71% of the
banks loans as of June 30, 2006 were comprised of such loans. American Federal generally originates one- to four-family residential mortgage
loans in amounts up to 80% of the lesser of the appraised value or the selling price of the mortgaged property without requiring private mortgage
insurance. A mortgage loan originated by the Bank, whether fixed rate or adjustable rate, can have a term of up to 30 years. The Bank holds
substantially all of its adjustable rate and its 8, 10 and 12 year fixed rate loans in portfolio. Adjustable rate loans limit the periodic interest
rate adjustment and the minimum and maximum rates that may be charged over the term of the loan. The Banks fixed rate 15-year and 20-year loans
are held in portfolio or sold in the secondary market depending on market conditions. Generally, all 30 year fixed rate loans are sold in the secondary
market. The volume of loan sales is dependent on the volume, type and term of loan originations.




5

The Bank obtains a significant portion of its noninterest income
from servicing loans sold. The Bank offers many of the fixed rate loans it originates for sale in the secondary market on a servicing retained basis.
This means that we process the borrowers payments and send them to the purchaser. The retention of servicing enables the Bank to increase fee
income and maintain a relationship with the borrower. Servicing income was $547,000 (before adjustments to the valuation allowance on Mortgage
Servicing Rights) for the year ended June 30, 2006. At June 30, 2006, American Federal Savings Bank had $190.04 million in residential mortgage loans
sold with servicing retained. American Federal Savings Bank does not ordinarily purchase home mortgage loans from other financial
institutions.

Property appraisals on real estate securing the Banks
single-family residential loans are made by state certified and licensed independent appraisers who are approved annually by the board of directors.
Appraisals are performed in accordance with applicable regulations and policies. American Federal Savings Bank generally obtains title insurance
policies on all first mortgage real estate loans originated. On occasion, refinancings of mortgage loans are approved using title reports instead of
title insurance. Title reports are also allowed on home equity loans. Borrowers generally remit funds with each monthly payment of principal and
interest, to a loan escrow account from which American Federal Savings Bank makes disbursements for such items as real estate taxes and hazard and
mortgage insurance premiums as they become due.

Home Equity Loans.

American Federal Savings Bank also originates home equity loans.
These loans are secured by the borrowers primary real estate, but are typically subject to a prior lien, which may or may not be held by the
Bank. At June 30, 2006, $20.19 million or 14.29% of our total loans, were home equity loans. Borrowers may use the proceeds from the Banks home
equity loans for many purposes, including home improvement, debt consolidation, or other purchasing needs. The Bank offers fixed rate, fixed payment
home equity loans as well as variable and fixed rate home equity lines of credit. Fixed rate home equity loans typically have terms of no longer than
fifteen years.

Although home equity loans are secured by real estate, they carry
a greater risk than first lien residential mortgages because of the existence of a prior lien on the property securing the loan, as well as the
flexibility the borrower has with respect to the loan proceeds. American Federal Savings Bank attempts to minimize this risk by maintaining
conservative underwriting policies on such loans. We generally make home equity loans for up to only 85% of appraised value of the underlying real
estate collateral, less the amount of any existing prior liens on the property securing the loan.

Commercial Real Estate.

American Federal Savings Bank originates commercial real estate
mortgage loans, including both developed and undeveloped land loans, and loans on multi-family dwellings. Commercial real estate loans make up 13.20%
of the Banks total loan portfolio, or $18.65 million at June 30, 2006. The majority of these loans are non-residential commercial real estate
loans. American Federal Savings Banks commercial real estate mortgage loans are primarily permanent loans secured by improved property such as
office buildings, retail stores, commercial warehouses and apartment buildings. The terms and conditions of each loan are tailored to the needs of the
borrower and based on the financial strength of the project and any guarantors. Generally, commercial real estate loans originated by the Bank will not
exceed 75% of the appraised value or the selling price of the property, whichever is less. The average loan size is approximately $134,000 and is
typically made with fixed rates of interest with five to 15 year maturities. Upon maturity, the loan is repaid or the terms and conditions are
renegotiated. Generally, all originated commercial real estate loans are within the market area of the Bank and all are within the state of Montana.
American Federal Savings Banks largest single commercial real estate loan had a balance of approximately $1,519,000 on June 30, 2006, and was
secured by a commercial building. This loan contains a 90 percent government guaranty under the USDA Rural Development Program.




6

Real Estate Construction Lending.

American Federal Savings Bank also lends funds for the
construction of one- to four-family homes. Real estate construction loans are made both to individual homeowners for the construction of their primary
residence and to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. Real
estate construction loans accounted for $6.90 million or 4.88% of American Federals loan portfolio at June 30, 2006.

Consumer Loans.

As part of its strategy to invest in higher yielding shorter term
loans, American Federal Savings Bank has made significant efforts to grow its consumer lending portfolio. This portfolio includes personal loans
secured by collateral other than real estate, unsecured personal loans and lines of credit, and loans secured by deposits held by the Bank. As of June
30, 2006, consumer loans totaled $11.82 million or 8.36% of the Banks total loan portfolio. These loans consist primarily of auto loans, RV
loans, boat loans, personal loans and credit lines and deposit account loans. Consumer loans are originated in the Banks market area and
generally have maturities of up to 7 years. For loans secured by savings accounts, American Federal Savings Bank will lend up to 90% of the account
balance on single payment loans and up to 100% for monthly payment loans.

Consumer loans have a shorter term and generally provide higher
interest rates than residential loans. Consumer loans can be helpful in improving the spread between average loan yield and cost of funds and at the
same time improve the matching of the maturities of rate sensitive assets and liabilities. Increasing its consumer loans has been a major part of the
Banks strategy of operating more like a commercial bank than a traditional savings bank.

The underwriting standards employed by American Federal Savings
Bank for consumer loans include a determination of the applicants credit history and an assessment of the applicants ability to meet
existing obligations and payments on the proposed loan. The stability of the applicants monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan
amount.

Commercial Loans.

Commercial loans amounted to $7.86 million, or 5.56% of the
Banks total loan portfolio at June 30, 2006. American Federal Savings Banks commercial loans are traditional business loans and are not
secured by real estate. Such loans may be structured as unsecured lines of credit or may be secured by inventory, accounts receivable or other business
assets. While the commercial loan portfolio amounts to only 5.56% of the total portfolio at June 30, 2006, American Federal Savings Bank intends to
increase such lending by focusing on market segments which it has not previously emphasized, such as business loans to doctors, lawyers, architects and
other professionals as well as to small businesses within its market area. Our management believes that this strategy provides opportunities for
growth, without significant additional cost outlays for staff and infrastructure.

Commercial loans of this nature usually involve greater risk than
1-4 family residential mortgage loans. The collateral we receive is typically related directly to the performance of the borrowers business which
means that repayment of commercial loans is dependent on the successful operations and income stream of the borrowers business. Such risks can be
significantly affected by economic conditions. In addition, commercial lending generally requires substantially greater oversight efforts compared to
residential real estate lending.

Loans to One Borrower.

Under federal law, savings institutions have, subject to certain
exemptions, lending limits to one borrower in an amount equal to the greater of $500,000 or 15% of the institutions unimpaired capital and
surplus. As of June 30, 2006, our largest aggregation of loans to one borrower was approximately $1,960,000, consisting of four commercial loans
secured by business assets and commercial real estate. This total also includes two personal loans to the business owner. This was well below our
federal legal lending limit to one borrower of approximately $3.84 million at such date. At June 30, 2006, all of these loans were
current.




7

Loan Solicitation and Processing.

Our customary sources of mortgage loan applications include
repeat customers, walk-ins, and referrals from home builders and real estate brokers. We also advertise in local newspapers and on local radio and
television. We recently added an online mortgage loan application and pre-approval feature to our website. Our branch managers and loan officers
located at our headquarters and in branches, have authority to approve certain types of loans when presented with a completed application. Other loans
must be approved at our main offices as disclosed herein. No loan consultants or loan brokers are currently used by us for either residential or
commercial lending activities.

After receiving a loan application from a prospective borrower, a
credit report and verifications are obtained to confirm specific information relating to the loan applicants employment, income and credit
standing. When required by our policies, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee
appraiser. In connection with the loan approval process, our staff analyze the loan applications and the property involved. Officers and branch
managers are granted lending authority based on the kind of loan types where they possess expertise and their level of experience. We have established
a series of loan committees to approve any loans which may exceed the lending authority of particular officers or branch managers. A quorum (four) of
the board of directors is required for approval of any loan, or aggregation of loans to a single borrower, more than $950,000.

Loan applicants are promptly notified of the decision by a letter
setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate basis,
amortization term, a brief description of real estate to be mortgaged, tax escrow and the notice of requirement of insurance coverage to be maintained.
We generally require title insurance on first mortgage loans and fire and casualty insurance on all properties securing loans, which insurance must be
maintained during the entire term of the loan.

Loan Commitments.

We generally provide commitments to fund fixed and
adjustable-rate single-family mortgage loans for periods up to 60 days at a specified term and interest rate, and other loan categories for shorter
time periods. The total amount of our commitments to extend credit as of June 30, 2006, was approximately $3.33 million, all of which was for
residential mortgage loans.

Non-performing Loans and Problem Assets

Collection Procedures

Generally, our collection procedures provide that when a loan is
15 or more days delinquent, the borrower is notified with a past due notice. If the loan becomes 30 days delinquent, the borrower is sent a written
delinquent notice requiring payment. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower, including face to
face meetings and counseling to resolve the delinquency. All collection actions are undertaken with the objective of compliance with the Fair Debt
Collection Act.

For mortgage loans and home equity loans, if the borrower is
unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions. If a foreclosure action is taken and the loan is
not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to
satisfy the debt. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such
time as it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or 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, 2006, American Federal Savings Bank had no real estate owned.

Loans are reviewed on a quarterly basis and are placed on
non-accrual status when they are more than 90 days delinquent. Loans may be placed on non-accrual status at any time if, in the opinion of management,
the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. At June 30, 2006, we had $345,000 of loans that were non-performing and held on non-accrual
status.




8

Delinquent Loans.

The following table provides information regarding the
Banks loans that are delinquent 30 to 89 days at June 30, 2006:


Number
     

     Amount
     

     Percentage of Total Delinquent Loans(Dollars in thousands)Loan
Type:Mortgage (1-4
family)
     
     
     

     
     6
     
     

     $
     342
     
     

     
     47.30
     %Real estate
construction
     
     
     

     
     
     
     

     
     
     
     

     
     0.00
     %Commercial
real estate
     
     
     

     
     3
     
     

     
     133
     
     

     
     18.40
     %Home
equity
     
     
     

     
     4
     
     

     
     46
     
     

     
     6.36
     %Consumer
     
     
     

     
     18
     
     

     
     64
     
     

     
     8.85
     %Commercial
     
     
     

     
     3
     
     

     
     138
     
     

     
     19.09
     %Total
     
     
     

     
     34
     
     

     $
     723
     
     

     
     100.00
     %
 Non-Performing Assets.

The following table sets forth information regarding American
Federal Savings Banks non-performing assets as of the dates indicated. The Bank does not have any troubled debt restructurings within the meaning
of the Statement of Financial Accounting Standards No. 114.


At June 30,2006
     

     2005(Dollars in thousands)Non-accrual
loans
     
     
     

     $
     345
     
     

     $
     434Accruing
loans delinquent 90 days or more
     
     
     

     
     114
     
     

     
     67Real estate
owned
     
     
     

     
     
     
     

     
     Total
     
     
     

     $
     459
     
     

     $
     501Total
non-performing loans as a percentage of total loan portfolio
     
     
     

     
     0.33
     %
     

     
     0.47
     %Percentage of
total assets
     
     
     

     
     0.20
     %
     

     
     0.24
     %
 The decrease in non-accrual loans during the year ended June 30,
2006, was attributable primarily to a commercial real estate property being sold after repossession. During the year ended June 30, 2006, the Bank had
one foreclosure, resulting in a loss on sale of approximately $6,000.

During the year ended June 30, 2006, approximately $30,000 of
interest would have been recorded on loans accounted for on a non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. This amount was not included in the Banks interest income for the period.

Classified Assets.

Management, in compliance with regulatory guidelines, conducts an
internal loan review program, whereby loans are placed or classified in categories depending upon the level of risk of nonpayment or loss. These
categories are special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to
establish an allowance for loan losses in an amount that is deemed prudent. When management classifies a loan as a loss asset, a reserve equal to 100%
of the loan balance is required to be established or the loan is required to be charged-off. The allowance for loan losses is composed of an allowance
for both inherent risk associated with lending activities and specific problem assets.




9

Managements evaluation of the classification of assets and
the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination
process. In addition, each loan that exceeds $500,000 and each group of loans that exceeds $500,000 is monitored more closely. The following table
reflects our classified assets.


At June 30,2006
     

     2005(Dollars in thousands)Residential
mortgages(1-4
family):Special
mention
     
     
     

     $
     
     
     

     $
     Substandard
     
     
     

     
     291
     
     

     
     237Doubtful
     
     
     

     
     
     
     

     
     Loss
     
     
     

     
     
     
     

     
     Commercial
Real Estate and Land:Special
mention
     
     
     

     
     
     
     

     
     Substandard
     
     
     

     
     
     
     

     
     87Doubtful
     
     
     

     
     
     
     

     
     Loss
     
     
     

     
     
     
     

     
     Home equity
loans:Special
mention
     
     
     

     
     
     
     

     
     Substandard
     
     
     

     
     34
     
     

     
     100Doubtful
     
     
     

     
     
     
     

     
     32Loss
     
     
     

     
     31
     
     

     
     Consumer
loans:Special
mention
     
     
     

     
     
     
     

     
     Substandard
     
     
     

     
     14
     
     

     
     5Doubtful
     
     
     

     
     
     
     

     
     Loss
     
     
     

     
     1
     
     

     
     24Commercial
loans:Special
mention
     
     
     

     
     
     
     

     
     Substandard
     
     
     

     
     318
     
     

     
     260Doubtful
     
     
     

     
     11
     
     

     
     Loss
     
     
     

     
     
     
     

     
     Real estate
owned/repossessed propertySpecial
mention
     
     
     

     
     
     
     

     
     Substandard
     
     
     

     
     
     
     

     
     10Doubtful
     
     
     

     
     
     
     

     
     Loss
     
     
     

     
     
     
     

     
     5Total
classified loans and real estate owned
     
     
     

     $
     700
     
     

     $
     760
 Allowance for Loan Losses and Real Estate
Owned.

The Bank segregates its loan portfolio for loan losses into the
following broad categories: residential mortgages (1-4 family), commercial real estate, real estate construction, commercial loans, home equity loans
and consumer loans. The Bank provides for a general allowance for losses inherent in the portfolio by the above categories, which consists of two
components. General loss percentages are calculated based on historical analyses and other factors such as peer group and national comparisons (used
primarily when recent loss history is inadequate). A supplemental portion of the allowance is calculated for inherent losses which probably exist as of
the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or
inherent imprecision in the process.




10

This portion of the allowance is particularly subjective and
requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and
non-accruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook
for the local, regional and national economy.

At least quarterly, the management of the Bank evaluates the need
to establish reserves against losses on loans and other assets based on estimated losses on specific loans and on any real estate owned when a finding
is made that a loss is estimable and probable. Such evaluation includes a review of all loans for which full collectibility may not be reasonably
assured and considers; among other matters; the estimated market value of the underlying collateral of problem loans; prior loss experience; economic
conditions; and overall portfolio quality.

Provisions for losses are charged against earnings in the period
they are established. We had $535,000 in allowances for loan losses at June 30, 2006.

While we believe we have established our existing allowance for
loan losses in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio,
will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market,
or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and
earnings.

In making loans, we recognize that credit losses will be
experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the
term of the loan and, in the case of a secured loan, the quality of the security for the loan.

It is our policy to review our loan portfolio, in accordance with
regulatory classification procedures, on at least a quarterly basis.

The following table sets forth information with respect to our
allowance for loan losses at the dates indicated:


For the Years Ended June 30,2006
     

     2005(Dollars in thousands)Balance at
beginning of period
     
     
     

     $
     573
     
     

     $
     628Loans
charged-off
     
     
     

     
     (48
     )
     

     
     (50
     )Recoveries
     
     
     

     
     25
     
     

     
     10Net loans
charged-off
     
     
     

     
     (23
     )
     

     
     (40
     )Provision for
possible loan losses
     
     
     

     
     
     
     

     
     Transfer to
repossessed property reserve
     
     
     

     
     (15
     )
     

     
     (15
     )Balance at
end of period
     
     
     

     $
     535
     
     

     $
     573Allowance for
loan losses to total loans
     
     
     

     
     0.38
     %
     

     
     0.53
     %Allowance for
loan losses to total non- performing loans
     
     
     

     
     141.91
     %
     

     
     132.03
     %Net
recoveries (charge-offs) to average loans outstanding during the period
     
     
     

     
     (0.02
     )%
     

     
     (0.05
     )%
 11

The following table presents our allocation of the allowance for
loan losses by loan category and the percentage of loans in each category to total loans at the periods indicated.


2006
     

     2005(Dollars in thousands)Amount
     

     Percentage of Allowance to Total
Allowance
     

     Loans in Each Category of Total Loans
     

     Amount
     

     Percentage of Allowance to Total
Allowance
     

     Loans in Each Category to Total LoansFirst Mortgage
Loans:Residential
mortgage (1-4 family)
     
     
     

     $
     60
     
     

     
     11.21
     %
     

     
     53.71
     %
     

     $
     51
     
     

     
     8.90
     %
     

     
     52.68
     %Commercial
real estate
     
     
     

     
     8
     
     

     
     1.50
     %
     

     
     13.20
     %
     

     
     19
     
     

     
     3.32
     %
     

     
     13.77
     %Real estate
construction
     
     
     

     
     3
     
     

     
     0.56
     %
     

     
     4.88
     %
     

     
     3
     
     

     
     0.52
     %
     

     
     2.53
     %Total
mortgage loans
     
     
     

     
     71
     
     

     
     13.27
     %
     

     
     71.79
     %
     

     
     73
     
     

     
     12.74
     %
     

     
     68.99
     %Other
loans:Home
equity
     
     
     

     
     37
     
     

     
     6.92
     %
     

     
     14.29
     %
     

     
     8
     
     

     
     1.40
     %
     

     
     15.66
     %Consumer
     
     
     

     
     245
     
     

     
     45.79
     %
     

     
     8.36
     %
     

     
     327
     
     

     
     57.06
     %
     

     
     10.17
     %Commercial
     
     
     

     
     182
     
     

     
     34.02
     %
     

     
     5.56
     %
     

     
     165
     
     

     
     28.80
     %
     

     
     5.20
     %Total other
loans
     
     
     

     
     464
     
     

     
     86.73
     %
     

     
     28.21
     %
     

     
     500
     
     

     
     87.25
     %
     

     
     31.01
     %Total
     
     
     

     $
     535
     
     

     
     100.00
     %
     

     
     100.00
     %
     

     $
     573
     
     

     
     99.99
     %
     

     
     100.00
     %
 Investment Activities

General

Federally chartered savings banks such as American Federal
Savings Bank have the authority to invest in various types of investment securities, including United States Treasury obligations, securities of
various Federal agencies (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions,
municipal securities, corporate debt securities and loans to other banking institutions.

Eagle maintains liquid assets that may be invested in specified
short-term securities and other investments. Liquidity levels may be increased or decreased depending on the yields on investment alternatives. They
may also be increased based on managements judgment as to the attractiveness of the yields then available in relation to other opportunities.
Liquidity levels can also change based on managements expectation of future yield levels, as well as managements projections as to the
short-term demand for funds to be used in the Banks loan origination and other activities. Eagle maintains an investment securities portfolio and
a mortgage-backed securities portfolio as part of its investment portfolio.

Investment Policies.

The investment policy of Eagle, which is established by the board
of directors, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing American Federals
lending activities. The policy provides for available-for-sale, held-to-maturity and trading classifications. However, Eagle does not hold any
securities for purposes of trading and does not anticipate doing so in the future. The policy permits investments in high credit quality instruments
with diversified cash flows while permitting us to maximize total return within the guidelines set forth in our interest rate risk and liquidity
management policies. Permitted investments include but are not limited to U.S. government obligations, government agency or government-sponsored agency
obligations, state, county and municipal obligations, and mortgage-backed securities. Collateralized mortgage obligations, investment grade corporate
debt securities, and commercial paper are also included. We also invest in Federal Home Loan Bank overnight deposits and federal funds, but these
instruments are not considered part of the investment portfolio.

Our investment policy also includes several specific guidelines
and restrictions to insure adherence with safe and sound activities. The policy prohibits investments in high-risk mortgage derivative products (as
defined within the policy) without prior approval from the board of directors. Management must demonstrate the business advantage of such
investments.




12

We do not participate in hedging programs, interest rate swaps,
or other activities involving the use of off-balance sheet derivative financial instruments, except certain financial instruments designated as cash
flow hedges related to loans committed to be sold in the secondary market. Further, Eagle does not invest in securities which are not rated investment
grade.

The Board, through its asset liability committee, has charged the
Chief Financial Officer to implement the investment policy. All transactions are reported to the board of directors monthly, as well as the current
composition of the portfolio, including market values and unrealized gains and losses.

Investment Securities.

We maintain a portfolio of investment securities, classified as
either available-for-sale or held-to-maturity to enhance total return on investments. At June 30, 2006, our investment securities were U.S. government
and agency obligations, Small Business Administration pools, municipal securities, mortgage-backed securities, collateralized mortgage obligations and
corporate obligations, all with varying characteristics as to rate, maturity and call provisions. Investment securities held-to-maturity represented
1.53% of Eagles total investment portfolio. Securities available-for-sale totaled 96.45% of Eagles total investment portfolio. The
remaining percentage is comprised of interest-bearing deposits in banks and stock in the Federal Home Loan Bank (FHLB). During the past year, total
investment balances have declined as a result of principal payments received on mortgage-backed securities and collateralized mortgage obligations.
Much of the cash generated by these payments has been reinvested in the loan portfolio.

The following table sets forth the carrying value of Eagles
investment and mortgage-backed securities portfolio at the dates indicated.


At June 30,2006
     

     2005(Dollars in thousands)Book Value
     

     Percentage of Total
     

     Book Value
     

     Percentage of TotalSecurities
available for sale, at fair value:U.S.
Government and agency obligations
     
     
     

     $
     7,296
     
     

     
     10.96
     %
     

     $
     7,971
     
     

     
     10.02
     %Corporate
obligations
     
     
     

     
     15,617
     
     

     
     23.46
     
     

     
     16,789
     
     

     
     21.10Municipal
obligations
     
     
     

     
     17,143
     
     

     
     25.76
     
     

     
     13,427
     
     

     
     16.87Collateralized mortgage obligations
     
     
     

     
     15,817
     
     

     
     23.76
     
     

     
     24,370
     
     

     
     30.62Mortgage-backed securities
     
     
     

     
     6,747
     
     

     
     10.14
     
     

     
     11,054
     
     

     
     13.89Common
Stock
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     Mutual
Funds
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     Corporate
preferred stock
     
     
     

     
     1,578
     
     

     
     2.37
     
     

     
     1,616
     
     

     
     2.02Total
securities available-for-sale
     
     
     

     
     64,198
     
     

     
     96.45
     
     

     
     75,227
     
     

     
     94.52Securities
held to maturity, at book value:U.S.
Government and agency obligations
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     Mortgage-backed securities
     
     
     

     
     190
     
     

     
     0.29
     
     

     
     372
     
     

     
     0.47Municipal
obligations
     
     
     

     
     828
     
     

     
     1.24
     
     

     
     829
     
     

     
     1.04Total
securities held-to-maturity
     
     
     

     
     1,018
     
     

     
     1.53
     
     

     
     1,201
     
     

     
     1.51Total
securities
     
     
     

     
     65,216
     
     

     
     97.98
     
     

     
     76,428
     
     

     
     96.03Interest-bearing deposits
     
     
     

     
     27
     
     

     
     0.04
     
     

     
     1,844
     
     

     
     2.32Federal Home
Loan Bank capital stock, at cost
     
     
     

     
     1,315
     
     

     
     1.98
     
     

     
     1,315
     
     

     
     1.65Total
     
     
     

     $
     66,558
     
     

     
     100.00
     %
     

     $
     79,587
     
     

     
     100.00
     %
 13

The following table sets forth information regarding the carrying
values, weighted average yields and maturities of Eagles investment and mortgage-backed securities portfolio at June 30, 2006.


At June 30, 2006One Year or Less
     

     One to Five Years
     

     More than Five Years
     

     Total Investment SecuritiesCarrying Value
     

     Annualized Weighted Average Yield
     

     Carrying Value
     

     Annualized Weighted Average Yield
     

     Carrying Value
     

     Annualized Weighted Average Yield
     

     Carrying Value
     

     Approximate Market Value
     

     Annualized Weighted Average Yield(Dollars in thousands)Securities
available for sale:U.S.
Government and agency obligations
     
     
     

     $
     1,481
     
     

     
     2.91
     %
     

     $
     4,237
     
     

     
     4.11
     %
     

     $
     1,578
     
     

     
     5.05
     %
     

     $
     7,296
     
     

     $
     7,296
     
     

     
     4.07
     %Corporate
obligations
     
     
     

     
     6,040
     
     

     
     2.99
     
     

     
     9,577
     
     

     
     3.61
     
     

     
     
     
     

     
     
     
     

     
     15,617
     
     

     
     15,617
     
     

     
     3.37Municipal
obligations
     
     
     

     
     
     
     

     
     
     
     

     
     488
     
     

     
     4.30
     
     

     
     16,655
     
     

     
     4.78
     
     

     
     17,143
     
     

     
     17,143
     
     

     
     4.77Collateralized mortgage obligations
     
     
     

     
     
     
     

     
     
     
     

     
     1,541
     
     

     
     3.71
     
     

     
     14,276
     
     

     
     4.47
     
     

     
     15,817
     
     

     
     15,817
     
     

     
     4.40Mortgage-backed securities
     
     
     

     
     222
     
     

     
     2.90
     
     

     
     2,796
     
     

     
     3.57
     
     

     
     3,729
     
     

     
     4.45
     
     

     
     6,747
     
     

     
     6,747
     
     

     
     4.03Mutual
funds
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     Corporate
preferred stock
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     1,578
     
     

     
     4.80
     
     

     
     1,578
     
     

     
     1,578
     
     

     
     4.80Common stock
(dividend yield)
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     Total
securities available for sale
     
     
     

     
     7,743
     
     

     
     2.97
     
     

     
     18,639
     
     

     
     3.74
     
     

     
     37,816
     
     

     
     4.64
     
     

     
     64,198
     
     

     
     64,198
     
     

     
     4.18Securities held
to maturity:Mortgage-backed securities
     
     
     

     
     
     
     

     
     
     
     

     
     190
     
     

     
     6.33
     
     

     
     
     
     

     
     
     
     

     
     190
     
     

     
     190
     
     

     
     6.33Municipal
obligations
     
     
     

     
     
     
     

     
     
     
     

     
     563
     
     

     
     5.42
     
     

     
     265
     
     

     
     6.61
     
     

     
     828
     
     

     
     840
     
     

     
     5.80Total
securities held to maturity
     
     
     

     
     
     
     

     
     
     
     

     
     753
     
     

     
     5.65
     
     

     
     265
     
     

     
     6.61
     
     

     
     1,018
     
     

     
     1,030
     
     

     
     5.90Total
securities
     
     
     

     
     7,743
     
     

     
     2.97
     
     

     
     19,392
     
     

     
     3.82
     
     

     
     38,081
     
     

     
     4.66
     
     

     
     65,216
     
     

     
     65,228
     
     

     
     4.21Interest-bearing deposits
     
     
     

     
     27
     
     

     
     5.15
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     27
     
     

     
     27
     
     

     
     5.15Federal Home
Loan Bank capital stock
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     1,315
     
     

     
     
     
     

     
     1,315
     
     

     
     1,315
     
     

     
     Total
     
     
     

     $
     7,770
     
     

     
     2.98
     %
     

     $
     19,392
     
     

     
     3.82
     %
     

     $
     39,396
     
     

     
     4.50
     %
     

     $
     66,558
     
     

     $
     66,570
     
     

     
     4.12
     %
 14

SOURCES OF FUNDS

General.

Deposits are the major source of our funds for lending and other
investment purposes. Borrowings (principally from the Federal Home Loan Bank of Seattle) are also used to compensate for reductions in the availability
of funds from other sources. In addition to deposits and borrowings, we derive funds from loan and mortgage-backed securities principal repayments, and
proceeds from the maturity, call and sale of mortgage-backed securities and investment securities and from the sale of loans. Loan and mortgage-backed
securities payments are a relatively stable source of funds, while loan prepayments and deposit inflows are significantly influenced by general
interest rates and money market conditions.

Deposits.

We offer a variety of deposit accounts. Deposit account terms
vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest
rate.

Our current deposit products include certificates of deposit
accounts ranging in terms from 90 days to five years as well as checking, savings and money market accounts. Individual retirement accounts (IRAs) are
included in certificates of deposit.

Deposits are obtained primarily from residents of Helena,
Bozeman, Butte and Townsend. We believe we are able to attract deposit accounts by offering outstanding service, competitive interest rates and
convenient locations and service hours. We use traditional methods of advertising to attract new customers and deposits, including radio, television,
print media advertising and sales training and incentive programs for employees. We do not utilize the services of deposit brokers and management
believes that non-residents of Montana hold an insignificant number of deposit accounts.

We pay interest rates on deposits which are competitive in our
market. Interest rates on deposits are set weekly by senior management, based on a number of factors, including: projected cash flow; a current survey
of a selected group of competitors rates for similar products; external data which may influence interest rates; investment opportunities and
loan demand; and scheduled certificate maturities and loan and investment repayments.

Core deposits are deposits that are more stable and somewhat less
sensitive to rate changes. They also represent a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of
deposit. We believe that our core deposits are our checking, as well as NOW accounts, passbook and statement savings accounts, money market accounts
and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit
the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits amounted to $118.69 million or
68.08% of the Banks deposits at June 30, 2006 ($95.71 million or 54.90% if IRA certificates of deposit are excluded). The presence of a high
percentage of core deposits and, in particular, transaction accounts, is part of our strategy to restructure our liabilities to more closely resemble
the lower cost liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These
certificates of deposit, should they mature and be renewed at higher rates, will result in an increase in our cost of funds.




15

The following table sets forth American Federals
distribution of deposit accounts at the dates indicated and the weighted average interest rate on each category of deposit
represented:


At June 30,2006
     

     2005Amount
     

     Percent of Total
     

     Weighted Average Rate
     

     Amount
     

     Percent of Total
     

     Weighted Average Rate(Dollars in thousands)Noninterest
checking
     
     
     

     $
     12,575
     
     

     
     7.21
     %
     

     
     0.00
     %
     

     $
     11,660
     
     

     
     6.76
     %
     

     
     0.00
     %Passbook
savings
     
     
     

     
     24,438
     
     

     
     14.02
     %
     

     
     0.65
     %
     

     
     25,239
     
     

     
     14.63
     %
     

     
     0.65
     %NOW
account/Interest bearing checking
     
     
     

     
     29,571
     
     

     
     16.96
     %
     

     
     0.13
     %
     

     
     30,865
     
     

     
     17.89
     %
     

     
     0.18
     %Money market
accounts
     
     
     

     
     29,129
     
     

     
     16.71
     %
     

     
     1.93
     %
     

     
     26,748
     
     

     
     15.51
     %
     

     
     1.07
     %Total
     
     
     

     
     95,713
     
     

     
     54.90
     %
     

     
     0.79
     %
     

     
     94,512
     
     

     
     54.79
     %
     

     
     0.54
     %Certificates of
deposit accounts:IRA
certificates
     
     
     

     
     22,977
     
     

     
     13.18
     %
     

     
     3.40
     %
     

     
     24,665
     
     

     
     14.30
     %
     

     
     3.08
     %Other
certificates
     
     
     

     
     55,652
     
     

     
     31.92
     %
     

     
     3.67
     %
     

     
     53,319
     
     

     
     30.91
     %
     

     
     2.54
     %Total
certificates of deposit
     
     
     

     
     78,629
     
     

     
     45.10
     %
     

     
     3.59
     %
     

     
     77,984
     
     

     
     45.21
     %
     

     
     2.71
     %Total
deposits
     
     
     

     $
     174,342
     
     

     
     100.00
     %
     

     
     2.05
     %
     

     $
     172,496
     
     

     
     100.00
     %
     

     
     1.52
     %
 The following table sets forth the amounts and maturities of our
certificates of deposit as of June 30, 2006, for the maturity dates indicated:


Certificate of Deposit Maturity(In thousands)June 30, 2007
     

     June 30, 2008
     

     June 30, 2009
     

     AfterJune 30, 2009
     

     Total1.012.00%
     
     
     

     $
     
     
     

     $
     
     
     

     $
     
     
     

     $
     
     
     

     $
     2.013.00%
     
     
     

     
     11,747
     
     

     
     527
     
     

     
     62
     
     

     
     
     
     

     
     12,3363.014.00%
     
     
     

     
     35,991
     
     

     
     10,400
     
     

     
     1,043
     
     

     
     465
     
     

     
     47,8994.015.00%
     
     
     

     
     15,901
     
     

     
     1,889
     
     

     
     36
     
     

     
     498
     
     

     
     18,3245.016.00%
     
     
     

     
     34
     
     

     
     1
     
     

     
     
     
     

     
     35
     
     

     
     706.017.00%
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     Total
     
     
     

     $
     63,673
     
     

     $
     12,817
     
     

     $
     1,141
     
     

     $
     998
     
     

     $
     78,629
 The following table shows the amount of certificates of deposit
of more than $100,000 by time remaining until maturity as of June 30, 2006:


Jumbo Certificates By MaturityMaturity Period
     
     
     

     Amount(In thousands)3 months or
less
     
     
     

     $
     3,360Over 3 to 6
months
     
     
     

     
     2,894Over 6 to 12
months
     
     
     

     
     4,773Over 12
months
     
     
     

     
     3,503Total
     
     
     

     $
     14,530
 16

The following table sets forth the net changes in deposit
accounts for the periods indicated:


Year Ended June 30,2006
     

     2005(Dollars in thousands)Opening
balance
     
     
     

     $
     172,496
     
     

     $
     170,069Deposits(Withdrawals), Net
     
     
     

     
     (1,110
     )
     

     
     115Interest
credited
     
     
     

     
     2,956
     
     

     
     2,312Ending
balance
     
     
     

     $
     174,342
     
     

     $
     172,496Net
increase
     
     
     

     $
     1,846
     
     

     $
     2,427Percent
increase
     
     
     

     
     1.07
     %
     

     
     1.43
     %Weighted
average cost of deposits during the period
     
     
     

     
     1.87
     %
     

     
     1.49
     %Weighted
average cost of deposits at end of period
     
     
     

     
     2.05
     %
     

     
     1.52
     %
 Our depositors are primarily residents of the state of Montana.
We have no brokered deposits.

Borrowings.

Deposits are the primary source of funds for our lending and
investment activities and for general business purposes. However, as the need arises, or in order to take advantage of funding opportunities, we also
borrow funds in the form of advances from the Federal Home Loan Bank of Seattle to supplement our supply of lendable funds and to meet deposit
withdrawal requirements.

During the past year, Eagle formed a special purpose subsidiary,
Eagle Bancorp Statutory Trust I (the Trust), for the purpose of issuing trust preferred securities in the amount of $5.0 million. Eagle has
issued subordinated debentures to the Trust, and the coupon on the debentures matches the dividend payment on the trust preferred securities. For
regulatory purposes, the securities qualify as Tier 1 Capital, while for accounting purposes they are recorded as long term debt. The securities have a
30 year maturity and carry a fixed coupon of 6.02% for the first five years, at which time the coupon becomes variable, at a spread of 142 basis points
over 3 month LIBOR.

The following table sets forth information concerning our
borrowing from the Federal Home Loan Bank of Seattle at the end of, and during, the periods indicated:


At or For the Year Ended June 30,2006
     

     2005(Dollars in thousands)Advances from
Federal Home Loan Bank:Average
balance
     
     
     

     $
     12,665
     
     

     $
     5,093Maximum
balance at any month-end
     
     
     

     
     22,602
     
     

     
     9,885Balance at
period end
     
     
     

     
     22,371
     
     

     
     9,885Weighted
average interest rate during the period
     
     
     

     
     4.31
     %
     

     
     3.30
     %Weighted
average interest rate at period end
     
     
     

     
     4.96
     %
     

     
     3.78
     %
 17

Subsidiary Activity

We are permitted to invest in the capital stock of, or originate
secured or unsecured loans to, subsidiary corporations. We do not have any subsidiaries, except for American Federal Savings Bank and Eagle Bancorp
Statutory Trust I.

Personnel

As of June 30, 2006, we had 66 full-time employees and 8
part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees to be
good.




18

REGULATION

Set forth below is a brief description of laws which relate to
the regulation of American Federal and Eagle Bancorp. The description does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.

Regulation of American Federal Savings
Bank

General.

As a federally chartered savings bank and a member of the
FDICs Deposit Insurance Fund, American Federal Savings Bank is subject to extensive regulation by the Office of Thrift Supervision and the FDIC.
Lending activities and other investments must comply with federal statutory and regulatory requirements. American Federal Savings Bank is also subject
to reserve requirements of the Federal Reserve System. Federal regulation and supervision establishes a comprehensive framework of activities in which
an institution can engage and is intended primarily for the protection of the Deposit Insurance Fund of the FDIC and depositors. This regulatory
structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination
policies, including policies regarding the classification of assets and the establishment of adequate loan loss reserves.

The Office of Thrift Supervision regularly examines American
Federal Savings Bank and provides a report on its examination findings to American Federals board of directors. American Federals
relationship with its depositors and borrowers is also regulated by federal law, especially in such matters as the ownership of savings accounts and
the form and content of American Federals mortgage documents.

American Federal Savings Bank must file reports with the Office
of Thrift Supervision and the FDIC concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into
transactions such as mergers with or acquisitions of other financial institutions. Any change in such regulations, whether by the Office of Thrift
Supervision, the FDIC or the United States Congress, could have a material adverse impact on Eagle and American Federal, and their
operations.

Insurance of Deposit Accounts.

The deposit accounts held by American Federal Savings Bank are
insured by the Deposit Insurance Fund of the FDIC to a maximum of $100,000 as permitted by law (qualifying retirement funds are insured up to
$250,000). Insurance on deposits may be terminated by the FDIC if it finds an institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the
institutions primary regulator.

Regulatory Capital Requirements.

Office of Thrift Supervision (OTS) capital regulations require
savings institutions to meet three capital standards. The standards for capital adequacy are tangible capital equal to 1.5% of adjusted total assets,
core capital (leverage ratio) equal to at least 4% of total adjusted assets, and risk-based capital equal to 8% of total risk-weighted assets. In order
to be deemed Well Capitalized, OTS rules require a leverage ratio of at least 5%, a Tier 1 risk-based ratio of at least 6%, and a total
risk-based ratio of at least 10%. American Federals capital ratios at June 30, 2006 are set forth below.


Actual
     

     For Capital Adequacy PurposesAmount
     

     Ratio
     

     Amount
     

     Ratio(Dollars in thousands)Tangible
     
     
     

     $
     25,087
     
     

     
     11.16
     
     

     $
     3,371
     
     

     
     1.50Leverage
     
     
     

     $
     25,087
     
     

     
     11.16
     
     

     $
     6,742
     
     

     
     3.00Tier 1
risk-based
     
     
     

     $
     25,087
     
     

     
     15.48
     
     

     $
     6,481
     
     

     
     4.00Total
risk-based
     
     
     

     $
     25,590
     
     

     
     15.79
     
     

     $
     12,961
     
     

     
     8.00
 Tangible capital is defined as core capital less all intangible
assets, less nonqualifying mortgage servicing rights and investments. Core capital is defined as common stockholders equity, noncumulative
perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, nonwithdrawable accounts and pledged deposits of
mutual savings associations and qualifying supervisory goodwill, less nonqualifying intangible assets, mortgage servicing rights and
investments.




19

The risk-based capital standard for savings institutions requires
the maintenance of total risk-based capital of 8% of risk-weighted assets. Risk-based capital is comprised of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and the portion of the allowance for loan losses not designated for specific loan
losses. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, supplementary capital is limited to 100% of core capital. A savings association must calculate its risk-weighted assets by multiplying
each asset and off-balance sheet item by various risk factors as determined by the Office of Thrift Supervision, which range from 0% for cash to 100%
for delinquent loans, property acquired through foreclosure, commercial loans, and other assets.

Office of Thrift Supervision rules require a deduction from
capital for institutions which have unacceptable levels of interest rate risk. The Office of Thrift Supervision calculates the sensitivity of an
institutions net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the
interest rate risk measurement model adopted by the Office of Thrift Supervision. The amount of the interest rate risk component, if any, is deducted
from an institutions total capital in order to determine if it meets its risk-based capital requirement. Federal savings institutions with less
than $300 million in assets and a risk-based capital ratio above 12% are exempt from filing the interest rate risk schedule. However, the Office of
Thrift Supervision may require any exempt institution to file such schedule on a quarterly basis and may be subject to an additional capital
requirement based on its level of interest rate risk as compared to its peers.

Dividend and Other Capital Distribution
Limitations.

The Office of Thrift Supervision imposes various restrictions or
requirements on the ability of savings institutions to make capital distributions, including dividend payments.

Office of Thrift Supervision regulations impose limitations on
all capital distributions by savings institutions, such as cash dividends, payment to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger, and other distributions charged against capital. The rule establishes three tiers of
institutions based primarily on an institutions capital level. An institution that exceeds all capital requirements before and after a proposed
capital distribution and has not been advised by the Office of Thrift Supervision that it is in need of more than the normal supervision has the
greatest amount of flexibility for determining dividends. Such institutions can, after prior notice but without the approval of the Office of Thrift
Supervision, make capital distributions during a calendar year. These distributions can be equal to the greater of 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its excess capital divided by its fully phased-in capital requirements at the
beginning of the calendar year. At the institutions discretion, dividends can also be 75% of its net income over the most recent four-quarter
period. Any additional capital distributions require prior regulatory notice. As of June 30, 2006, American Federal Savings Bank had this level of
flexibility with respect to dividends.

Qualified Thrift Lender Test.

Federal savings institutions must meet a qualified thrift lender
test or they become subject to operating restrictions. The Bank anticipates that it will maintain an appropriate level of investments consisting
primarily of residential mortgages, mortgage-backed securities and other mortgage-related investment, and otherwise qualify as a qualified thrift
lender. The required percentage of these mortgage-related investments is 65% of portfolio assets. Portfolio assets are all assets minus intangible
assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets. Compliance with the qualified
thrift lender test is determined on a monthly basis in nine out of every twelve months.

Transactions With Affiliates.

Generally, federal banking law requires that transactions between
a savings institution or its subsidiaries and its affiliates must be on terms as favorable to the savings institution as comparable transactions with
non-affiliates. In addition, some transactions can be restricted to an aggregate percentage of the savings institutions capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive loans from the savings institution. In addition, a savings institution may
not extend credit to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate that is
not a subsidiary. The Office of Thrift Supervision has the discretion to treat subsidiaries of a savings institution as affiliates on a case-by-case
basis.

Liquidity Requirements.

The Bank is required to maintain minimum levels of liquid assets
as defined by the Office of Thrift Supervision regulations. The OTS states that the liquidity requirement is retained for safety and soundness
purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the bank engages.




20

Federal Home Loan Bank System.

We are a member of the Federal Home Loan Bank of Seattle, which
is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from funds deposited by financial institutions and proceeds derived from the sale of consolidated obligations of the
Federal Home Loan Bank System. It makes loans to members pursuant to policies and procedures established by the board of directors of the Federal Home
Loan Bank.

As a member, we are required to purchase and maintain stock in
the Federal Home Loan Bank of Seattle in an amount equal to at least 1% of our aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year, or 5% of our outstanding advances, whichever is larger. We are in compliance with this requirement.
The Federal Home Loan Bank imposes various limitations on advances such as limiting the amount of real estate related collateral to 30% of a
members capital and limiting total advances to a member. As a federal savings bank, we were mandatory members of the Federal Home Loan Bank of
Seattle. Under the Gramm-Leach-Bliley Financial Modernization Act of 1999, we are now voluntary members of the Federal Home Loan Bank of Seattle. We
could withdraw or significantly reduce our required stock ownership in the Federal Home Loan Bank of Seattle.

Federal Reserve System.

The Federal Reserve System requires all depository institutions
to maintain noninterest-bearing reserves at specified levels against their checking, NOW and Super NOW checking accounts and non-personal time
deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy the Office of Thrift
Supervision liquidity requirements.

Savings institutions have authority to borrow from the Federal
Reserve System discount window, but Federal Reserve System policy generally requires savings institutions to exhaust all other sources
before borrowing from the Federal Reserve System.

Regulation of Eagle Bancorp

General.

Eagle Bancorp, as a federal stock corporation in a mutual holding
company structure, is deemed a federal mutual holding company within the meaning of Section 10(o) of the Home Owners Loan act (HOLA). Eagle
is registered and files reports with the Office of Thrift Supervision and is subject to regulation and examination by the Office of Thrift Supervision.
In addition, the Office of Thrift Supervision has enforcement authority over Eagle and any nonsavings institution subsidiary of Eagle. The Office of
Thrift Supervision can restrict or prohibit activities that it determines to be a serious risk to us. This regulation is intended primarily for the
protection of our depositors and not for the benefit of stockholders of Eagle.

Federal Taxation

Savings institutions are subject to the Internal Revenue Code of
1986, as amended, in the same general manner as other corporations. Prior to changes to the Internal Revenue Code in 1996, thrift institutions enjoyed
a tax advantage over banks with respect to determining additions to its bad debt reserves.

The Internal Revenue Code was revised in August 1996 to equalize
the taxation of thrift institutions and banks, effective for taxable years beginning after 1995. All thrift institutions are now subject to the same
provisions as banks with respect to deductions for bad debt. Now only thrift institutions that are treated as small banks under the Internal Revenue
Code may continue to account for bad debts under the reserve method; however such institutions may only use the experience method for determining
additions to their bad debt reserve. Thrift institutions that are not treated as small banks may no longer use the reserve method to account for their
bad debts but must now use the specific charge-off method.

The revisions to the Internal Revenue Code in 1996 also provided
that all thrift institutions must generally recapture any applicable excess reserves into their taxable income, over a six year period
beginning in 1996; however, such recapture may be delayed up to two years if a thrift institution meets a residential-lending test. Generally, a thrift
institutions applicable excess reserves equals the excess of the balance of its bad debt reserves as of the close of its taxable year beginning
before January 1, 1996, over the balance of such reserves as of the close of its last taxable year beginning before January 1, 1988. These are known as
pre-1988 reserves. American Federal Savings Bank had recaptured all of its remaining applicable excess reserve as of June 30,
2006.




21

In addition, all thrift institutions must continue to keep track
of their pre-1988 reserves because this amount remains subject to recapture in the future under the Internal Revenue Code. A thrift institution such as
American Federal, would generally be required to recapture into its taxable income its pre-1988 reserves in the case of excess distributions, and
redemptions of American Federals stock and in the case of a reduction in American Federals outstanding loans when comparing loans currently
outstanding to loans outstanding at the end of the base year. For taxable years after 1995, American Federal Savings Bank will continue to account for
its bad debts under the reserve method. The balance of American Federals pre-1988 reserves equaled $915,000.

Eagle may exclude from its income 100% of dividends received from
American Federal Savings Bank as a member of the same affiliated group of corporations. A 70% dividends received deduction generally applies with
respect to dividends received from corporations that are not members of such affiliated group.

American Federals federal income tax returns for the last
five tax years have not been audited by the IRS.

State Taxation

American Federal Savings Bank files Montana tax returns. For
Montana tax purposes, savings institutions are presently taxed at a rate equal to 6.75% of taxable income which is calculated based on federal taxable
income, subject to adjustments (including the addition of interest income on state and municipal obligations).

American Federals state tax returns have not been audited
for the past five years by the state of Montana.

ITEM 2.    DESCRIPTION OF
PROPERTY.

The Companys business activities consist of its ownership
of 100% of the common stock of the Bank. The Banks executive office is located at 1400 Prospect Avenue in Helena, Montana. American Federal
conducts its business through five offices, which are located in Helena, Bozeman, Butte, and Townsend, Montana. All of its offices are owned. Its
principal banking office in Helena also serves as its executive headquarters and operations center. This office houses over 50% of American Federal
full-time employees. The following table sets forth the location of each of American Federals offices, the year the office was opened, and the
net book value including land, buildings, computer software and its related equipment and furniture. The square footage at each location is also
shown.

Location
     
     
     

     Address
     

     Opened
     

     Value At June 30, 2005 (In thousands)
     

     Square FootageHelena
Main
     
     
     

     1400 Prospect
Ave.
     

     1997
     

     $
     4,447
     
     

     
     32,304Office
     
     
     

     Helena, MT
59601Helena
Downtown
     
     
     

     28 Neill
Ave.
     

     1987
     

     $
     387
     
     

     
     1,391Drive-up
     
     
     

     Helena, MT
59601Butte
Office
     
     
     

     3401 Harrison
Ave.
     

     1979
     

     $
     532
     
     

     
     3,890Butte, MT
59701Bozeman
Office
     
     
     

     606 North
Seventh
     

     1980
     

     $
     545
     
     

     
     5,886Bozeman, MT
59715Townsend
Office
     
     
     

     416
Broadway
     

     1979
     

     $
     48
     
     

     
     1,973Townsend, MT
59644











 As of June 30, 2006, the net book value of land, buildings,
furniture, and equipment owned by American Federal, less accumulated depreciation, totaled $5.96 million. Eagle has an earnest money deposit for the
purchase of land in Bozeman for potential branch relocation and has spent approximately $23,000 on architect fees for preliminary building
plans.




22

ITEM 3.    LEGAL
PROCEEDINGS.

American Federal, from time to time, is a party to routine
litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which American
Federal Savings Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the
business of American Federal. There were no lawsuits pending or known to be contemplated against Eagle or American Federal at June 30,
2006.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders in the
fourth quarter of the fiscal year ended June 30, 2006.

PART II

ITEM 5.    MARKET FOR COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUERS PURCHASES OF EQUITY SECURITIES.

The common stock is traded on the OTC Bulletin Board under the
symbol EBMT. At the close of business on June 30, 2006, there were 1,091,722 shares of common stock outstanding, held by approximately 600
shareholders of record. Eagle Financial MHC, Eagles mutual holding company, held 648,493 shares (or 59.4%) of the outstanding common
stock.

The high bid and asked prices noted below for the four quarters
of fiscal 2005 and the four quarters of the current fiscal year were obtained from the OTC Bulletin Board. The quotations reflect interdealer prices
without retail markup, markdown or commission, and may not represent actual transactions.


High Bid
     

     Low BidFourth
quarter 2006
     
     
     

     $
     33.00
     
     

     $
     30.30Third quarter
2006
     
     
     

     $
     34.50
     
     

     $
     31.50Second
quarter 2006
     
     
     

     $
     36.00
     
     

     $
     32.15First quarter
2006
     
     
     

     $
     35.00
     
     

     $
     30.00Fourth
quarter 2005
     
     
     

     $
     35.00
     
     

     $
     30.00Third quarter
2005
     
     
     

     $
     37.00
     
     

     $
     34.00Second
quarter 2005
     
     
     

     $
     38.00
     
     

     $
     31.50First quarter
2005
     
     
     

     $
     33.00
     
     

     $
     31.50
 The closing price of the common stock on June 30, 2006, was
$31.60. The company had paid four quarterly dividends during the year, all in the amount of $0.20 per share. Eagle Financial MHC waived receipt of its
dividends during the year.




23

ITEM 5 (c)    SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES


Period
     
     
     

     (a) Total Number of Shares Purchased*
     

     (b) Average Price Paid Per Share
     

     (c) Total Number of Shares Purchased as Part
of Publicly Announced Plans or Programs
     

     (d) Maximum Number of Shares that May Yet
Be Purchased Under the Plans or ProgramsApril
20064-1-06 to
4-30-06
     
     
     

     
     None
     
     

     
     N/A
     
     

     
     N/A
     
     

     
     N/AMay
20065-1-06 to
5-31-06
     
     
     

     
     1,600
     
     

     $
     31.00
     
     

     
     1,600
     
     

     
     11,900June
20066-1-06 to
6-30-06
     
     
     

     
     None
     
     

     
     N/A
     
     

     
     N/A
     
     

     
     N/ATotal
     
     
     

     
     1,600
     
     

     $
     31.00
     
     

     
     1,600
     
     

     
     N/A
 *  The Company publicly announced a stock repurchase
program on July 21, 2005. The Company is authorized to acquire up to 28,750 shares of common stock with the price subject to market conditions. No
expiration date was set for the repurchase program. As of September 1, 2006, 21,015 shares had been purchased.

ITEM 6.    MANAGEMENTS DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION.

Note Regarding Forward-Looking Statements

This report contains certain forward-looking
statements. Eagle desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and
is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all such forward-looking
statements. These forward-looking statements, which are included in Managements Discussion and Analysis, describe future plans or strategies and
include Eagles expectations of future financial results. The words believe, expect, anticipate,
estimate, project, and similar expressions identify forward-looking statements. Eagles ability to predict results or the
effect of future plans or strategies or qualitative or quantitative changes based on market risk is inherently uncertain. Factors which could affect
actual results but are not limited to include (i) change in general market interest rates, (ii) general economic conditions, (iii) local economic
conditions, (iv) legislative/regulatory changes, (v) monetary and fiscal policies of the U.S. Treasury and Federal Reserve, (vi) changes in the quality
or composition of Eagles loan and investment portfolios, (vii) demand for loan products, (viii) deposit flows, (ix) competition, and (x) demand
for financial services in Eagles markets. These factors should be considered in evaluating the forward-looking statements. You are cautioned not
to place undue reliance on these forward-looking statements that speak only as of their dates.

General

Eagle Bancorps subsidiary, American Federal Savings Bank,
operates as a community savings bank. It raises money by offering FDIC-insured deposit products and lending this money, primarily for the purpose of
home financing. As of June 30, 2006, 46.20% of its total loans were residential mortgage loans with fixed rates and 7.51% were residential mortgage
loans with adjustable rates. Total first lien mortgage loans at June 30, 2006, were $101.46 million or 71.79% of the total loan portfolio. Other loan
products include home equity loans, consumer and commercial loans. These loans totaled $39.87 million or 28.21% of the total loan
portfolio.

The consolidated financial condition and operating results of
Eagle are primarily dependent on its wholly owned subsidiary, American Federal Savings Bank. All references to the Company prior to April 4, 2000,
except where otherwise indicated, are to the Bank.




24

Analysis of Net Interest Income

The Banks earnings have historically depended primarily
upon net interest income, which is the difference between interest income earned on loans and investments and interest paid on deposits and any
borrowed funds. It is the single largest component of Eagles operating income. Net interest income is affected by (i) the difference between
rates of interest earned on loans and investments and rates paid on interest-bearing deposits and borrowings (the interest rate spread) and
(ii) the relative amounts of loans and investments and interest-bearing deposits and borrowings.

The following table presents the average balances of and the
interest and dividends earned or paid on each major class of loans and investments and interest-bearing deposits and borrowings. Nonaccruing loans are
included in balances for all periods. Average balances are daily average balances. The yields and costs include fees, which are considered adjustments
to yields.


For the twelve months ended June 30,2006
     

     2005(Dollars in thousands)Average Daily Balance
     

     Interest and Dividends
     

     Yield/ Rate
     

     Average Daily Balance
     

     Interest and Dividends
     

     Yield/ RateAssets:Interest-earning assets:FHLB
stock
     
     
     

     $
     1,315
     
     

     $
     
     
     

     
     0.00
     %
     

     $
     1,421
     
     

     $
     20
     
     

     
     1.41
     %Loans
receivable, net
     
     
     

     
     124,282
     
     

     
     7,799
     
     

     
     6.28
     
     

     
     97,889
     
     

     
     6,117
     
     

     
     6.25Investment
securities
     
     
     

     
     69,700
     
     

     
     2,641
     
     

     
     3.79
     
     

     
     83,087
     
     

     
     2,872
     
     

     
     3.46Interest-bearing deposits with banks
     
     
     

     
     1,473
     
     

     
     59
     
     

     
     4.01
     
     

     
     1,992
     
     

     
     34
     
     

     
     1.71Total
interest-earning assets
     
     
     

     
     196,770
     
     

     
     10,499
     
     

     
     5.34
     
     

     
     184,389
     
     

     
     9,043
     
     

     
     4.90Noninterest-earning assets
     
     
     

     
     18,274
     
     

     
     
     
     

     
     
     
     

     
     17,393Total
assets
     
     
     

     $
     215,044
     
     

     
     
     
     

     
     
     
     

     $
     201,782Liabilities and
Equity:Interest-bearing liabilities:Deposit
accounts:Money
market
     
     
     

     $
     29,388
     
     

     $
     492
     
     

     
     1.67
     
     

     $
     29,369
     
     

     $
     291
     
     

     
     0.99Passbooks
     
     
     

     
     24,994
     
     

     
     164
     
     

     
     0.66
     
     

     
     26,154
     
     

     
     170
     
     

     
     0.65Checking
     
     
     

     
     31,024
     
     

     
     55
     
     

     
     0.18
     
     

     
     29,753
     
     

     
     54
     
     

     
     0.18Certificates
of deposit
     
     
     

     
     75,842
     
     

     
     2,300
     
     

     
     3.03
     
     

     
     75,526
     
     

     
     1,880
     
     

     
     2.49Advances from
FHLB & subordinated debt
     
     
     

     
     16,573
     
     

     
     774
     
     

     
     4.67
     
     

     
     5,093
     
     

     
     168
     
     

     
     3.30Total
interest-bearing liabilities
     
     
     

     
     177,821
     
     

     
     3,785
     
     

     
     2.13
     
     

     
     165,895
     
     

     
     2,563
     
     

     
     1.54Non-interest
checking
     
     
     

     
     12,612
     
     

     
     
     
     

     
     
     
     

     
     10,707Other
noninterest-bearing liabilities
     
     
     

     
     1,956
     
     

     
     
     
     

     
     
     
     

     
     1,877Total
liabilities
     
     
     

     
     192,389
     
     

     
     
     
     

     
     
     
     

     
     178,479Total
equity
     
     
     

     
     22,655
     
     

     
     
     
     

     
     
     
     

     
     23,303Total
liabilities and equity
     
     
     

     $
     215,044
     
     

     
     
     
     

     
     
     
     

     $
     201,782Net interest
income/interest rate spread(1)
     
     
     

     
     
     
     

     $
     6,714
     
     

     
     3.21
     %
     

     
     
     
     

     $
     6,480
     
     

     
     3.36
     %Net interest
margin(2)
     
     
     

     
     
     
     

     
     
     
     

     
     3.41
     %
     

     
     
     
     

     
     
     
     

     
     3.51
     %Total
interest-earning assets to interest-bearing liabilities
     
     
     

     
     
     
     

     
     
     
     

     
     110.66
     %
     

     
     
     
     

     
     
     
     

     
     111.15
     %

(1)
     
     Interest rate spread represents the difference between the
average yield on interest-earning assets and the average rate on interest-bearing liabilities.(2)
     
     Net interest margin represents income before the provision for
loan losses divided by average interest-earning assets.25

Rate/Volume Analysis

The following table sets forth information regarding changes in
interest income and interest expense for the periods indicated. For each category of our loans and investments and our interest-bearing deposits and
borrowings, information is provided on changes attributable to change in volume (change in volume multiplied by the old rate). The table also provides
information on change in rate (changes in rate multiplied by old volume). The combined effects of changes in rate and volume have been allocated
proportionately to the change due to rate and the change due to volume.


For the Years Ended June 30, Increase (Decrease)Volume
     

     2006 vs 2005 Due to Rate
     

     Net
     

     Volume
     

     2005 vs 2004 Due to Rate
     

     Net(In thousands)Interest
earning assets:Loans
receivable, net
     
     
     

     $
     1,645
     
     

     $
     37
     
     

     $
     1,682
     
     

     $
     212
     
     

     $
     (361
     )
     

     $
     (149
     )Investment
securities
     
     
     

     
     (462
     )
     

     
     231
     
     

     
     (231
     )
     

     
     (230
     )
     

     
     221
     
     

     
     (9
     )Interest-bearing deposits with banks
     
     
     

     
     (9
     )
     

     
     34
     
     

     
     25
     
     

     
     (31
     )
     

     
     16
     
     

     
     (15
     )Other earning
assets
     
     
     

     
     
     
     

     
     (20
     )
     

     
     (20
     )
     

     
     (13
     )
     

     
     (45
     )
     

     
     (58
     )Total interest
earning assets
     
     
     

     
     1,174
     
     

     
     282
     
     

     
     1,456
     
     

     
     (62
     )
     

     
     (169
     )
     

     
     (231
     )Interest-bearing liabilities:Passbook,
money market and checking accounts
     
     
     

     
     1
     
     

     
     195
     
     

     
     196
     
     

     
     (2
     )
     

     
     (89
     )
     

     
     (91
     )Certificates
of deposit
     
     
     

     
     8
     
     

     
     412
     
     

     
     420
     
     

     
     (32
     )
     

     
     (113
     )
     

     
     (145
     )Borrowings
     
     
     

     
     379
     
     

     
     227
     
     

     
     606
     
     

     
     (247
     )
     

     
     (148
     )
     

     
     (395
     )Total
interest-bearing liabilities
     
     
     

     
     388
     
     

     
     834
     
     

     
     1,222
     
     

     
     (281
     )
     

     
     (350
     )
     

     
     (631
     )Change in net
interest income
     
     
     

     $
     786
     
     

     $
     (552
     )
     

     $
     234
     
     

     $
     219
     
     

     $
     181
     
     

     $
     400
 Interest Rate Risk Analysis

In addition to the asset/liability committee, the board of
directors reviews our asset and liability policies. The board of directors reviews interest rate risk and interest rate trends quarterly, as well as
liquidity and capital ratio requirements. Management administers the policies and determinations of the board of directors with respect to our asset
and liability goals and strategies. 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.

Overview

The Companys primary activity is its ownership of its
wholly owned subsidiary, American Federal Savings Bank (the Bank). The Bank is a federally chartered savings bank, engaging in typical
banking activities: acquiring deposits from local markets and investing in loans and investment securities. 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
moves in interest rates. Noninterest income in the form of fee income and gain on sale of loans adds to the Banks income.

The Bank has a strong mortgage lending focus, with the majority
of its loans in single-family residential mortgages. This has led to successfully marketing home equity loans to its customers, 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. The purpose of this diversification is to mitigate the Banks dependence
on the mortgage market, as well as to improve its ability to manage its spread. The Banks management recognizes the need for sources of fee
income to complement its margin, and the Bank now maintains a significant loan serviced portfolio, which provides a steady source of fee income. The
gain on sale of loans also provides significant fee income in periods of high mortgage loan origination volumes. 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 do not automatically reprice as interest rates rise, as do
certificates of deposit.




26

For the past year, 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 serviced portfolio. In the fiscal years ended June 30, 2003 and June 30, 2004, the Bank experienced very
strong mortgage loan origination volume due to low interest rates and large refinancing activity. The fiscal year ended June 30, 2005 saw a decline in
mortgage loan originations, as mortgage rates rose slightly and refinancing volume declined. The year ended June 30, 2006 had increased loan
origination volume compared to last year, but not as high as in 2004. Management believes that the Bank will need to focus on increasing net interest
income, other areas of fee income, and control 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: loans typically earn higher rates of return than investments; a
larger deposit base will yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs.

The level and movement of interest rates impacts the Banks
earnings as well. The yield curve continues to be flat, i.e. short-term interest rates are approximately at the same level as long-term interest rates.
This can have a negative impact on the Banks net interest margin as its deposits are typically priced relative to short-term rates, while the
majority of its loan products are priced relative to long-term rates. The Bank has been able to partially offset this effect by reinvesting investment
proceeds in the loan portfolio, because as noted earlier, loans typically earn higher rates of return than investments.

Another factor which has impacted recent earnings has been the
volatility in the value of the Banks mortgage servicing rights. The value declined significantly in fiscal year 2003, only to recover almost the
entire amount in fiscal year 2004. Fiscal year 2005 saw only a slight change in the value of the mortgage servicing rights, and the current fiscal year
has seen the value increase to the point where no valuation allowance is required at the present time. If long-term interest rates hold at their
current level or rise in the future, the value of the servicing rights should remain relatively stable. A decline in long-term interest rates, however,
could lead to a need for a valuation allowance.

Financial Condition

Introduction.

Total assets increased $19.76 million, or 9.57%, to $226.18
million at June 30, 2006, compared to $206.42 million at June 30, 2005. Total liabilities increased by $19.48 million, or 10.58%, to $203.63 million at
June 30, 2006, from $184.15 million at June 30, 2005. The loan portfolio grew over $34 million during the year, due to increased originations. The rate
of deposit growth was down slightly from the previous years pace, with money market accounts showing the largest increase. Much of the asset
growth was funded by increased borrowings.

Balance Sheet Details.

Loans receivable increased $34.02 million, or 31.84% to $140.86
million from $106.84 million. Increased originations in every loan category contributed to the higher loan balances, and consequently all categories
showed an increase in balances compared to last year. Residential mortgage loans increased $19.38 million during the year, and construction loans
increased $4.18 million. The available-for-sale (AFS) investment portfolio decreased $11.03 million, or 14.66%, to $64.20 million at June 30, 2006 from
$75.23 million at June 30, 2005. This is the second consecutive year the AFS portfolio has decreased. The investment category with the largest decline
was collateralized mortgage obligations, which decreased $8.55 million.

Total deposits increased $1.84 million. Non-interest checking
increased $920,000, to $12.58 million at June 30, 2006 from $11.66 million at June 30, 2005. Interest-bearing deposits also increased $920,000, to
$161.76 million at June 30, 2006 from $160.84 million at June 30, 2005. Money market accounts increased $2.38 million and certificates of deposit
increased $650,000 while interest-earning checking accounts declined $1.30 million. Deposit growth is expected to continue to be difficult to achieve
due to fierce competition among financial institutions in our markets. Advances from the Federal Home Loan Bank increased to $22.37 million at year-end
2006 from $9.89 million at year-end 2005, an increase of $12.48 million. This increase was needed to help fund loan growth. The issuance during the
year of the trust preferred securities also provided $5.00 million in funds.

Total shareholders equity was $22.55 million at June 30,
2006, an increase of $280,000. This increase was the result of net income for the year, partially offset by the purchase of treasury stock, dividends
paid during the year, and the increase in accumulated other comprehensive loss (caused by an increase in unrealized losses on the AFS investment
portfolio).




27

Comparison of Operating Results for the Years Ending June 30,
2006 and 2005

Net Income.

Eagles net income was $1.785 million and $1.743 million for
the years ended June 30, 2006 and 2005 respectively. This increase of $42,000, or 2.41%, was the result of increase in net interest income of $234,000
and noninterest income of $106,000, offset by an increase in noninterest expense of $284,000. Eagles tax provision was $14,000 higher in 2006.
Basic earnings per share for the year ended June 30, 2006 were $1.66, compared to $1.55 for the year ended June 30, 2005. Diluted earnings per share
were $1.48 and $1.45 for 2006 and 2005, respectively.

Net Interest Income.

Net interest income (before provision for loan losses) increased
to $6.714 million for the year ended June 30, 2006, from $6.480 million for the previous year. This increase of $234,000, or 3.61%, was the result of
an increase in interest and dividend income of $1.456 million, partially offset by an increase in interest expense of $1.222 million.

Interest and Dividend Income.

Total interest and dividend income was $10.506 million for the
year ended June 30, 2006, compared to $9.043 million for the year ended June 30, 2005, an increase of $1.463 million, or 16.18%. Interest and fees on
loans increased to $7.799 million for 2006 from $6.117 million for 2005. This increase of $1.682 million, or 27.50%, was due primarily to the increase
in the average balances on loans receivable for the year ended June 30, 2006. The average interest rate earned on loans receivable increased by only 3
basis points, to 6.28% from 6.25%. Average balances for loans receivable, net, for the year ended June 30, 2006 were $124.28 million, compared to
$97.89 million for the previous year. This represents an increase of $26.39 million, or 26.96% and reflects managements plan to grow the loan
portfolio. Interest and dividends on investment securities available-for-sale (AFS) decreased to $2.589 million for the year ended June 30, 2006 from
$2.807 million for the year ended June 30, 2005, a decrease of $218,000, or 7.77%. This decrease was the result of lower average balances on the AFS
portfolio during the year. Interest earned from deposits at other banks increased to $59,000 for the year ended June 30, 2006 from $34,000 for the year
ended June 30, 2005. Higher interest rates contributed to the increase. Interest and dividends on investments held-to-maturity (HTM) decreased $13,000,
to $52,000 in 2006 compared to $65,000 in 2005 due to lower balances.

Interest Expense.

Total interest expense increased to $3.792 million for the year
ended June 30, 2006 from $2.563 million for the year ended June 30, 2005, an increase of $1.229 million, or 47.95%. Interest on deposits increased to
$3.011 million for the year ended June 30, 2006 from $2.394 million for the year ended June 30, 2005. This increase of $617,000, or 25.77%, was the
result of an increase on average rates paid, while average balances increased slightly on deposit accounts. The average cost of deposits increased 38
basis points, to 1.87% in 2006 from 1.49% in 2005. Passbook savings accounts showed a decrease in average balances, while other categories showed
slight increases. An increase in the average balance of borrowings as well as an increase in the average rate paid resulted in an increase in interest
paid on borrowings to $781,000 for the year ended June 30, 2006 from $169,000 for the year ended June 30, 2005. The average balance of borrowings
increased to $16.573 million for the year ended June 30, 2006, compared to $5.093 million for the year ended June 30, 2005. The average rate paid on
borrowings increased to 4.67% in 2006 from 3.30% in 2005.

Provision for Loan Losses.

Provisions for loan losses are charged to earnings to maintain
the total allowance for loan losses at a level considered adequate by American Federal Savings Bank to provide for probable loan losses based on prior
loss experience, volume and type of lending conducted by American Federal, available peer group information, and past due loans in portfolio. The
Banks policies require the 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. No provision was made for loan losses for either year ended June 30, 2006 or June 30,2005. This is a reflection of
the continued strong asset quality of American Federals loan portfolio, as non-performing loan ratios continue to be low. Total classified assets
decreased to $700,000 at June 30, 2006 from $760,000 at June 30, 2005. Total non-performing loans as a percentage of the total loan portfolio is 0.33%.
As of June 30, 2006, American Federal Savings Bank had no real estate owned.




28

Noninterest Income.

Total noninterest income increased to $2.165 million for the year
ended June 30, 2006, from $2.059 million for the year ended June 30, 2005, an increase of $106,000 or 5.15%. This increase was primarily due to
increases in other noninterest income and net gain on sale of loans. Other noninterest income increased $68,000 to $548,000, primarily due to increased
income on bank owned life insurance and higher fee income on loan products. Net gain on sale of loans increased $50,000 to $492,000, due primarily to
the sale of the Banks credit card portfolio in the fourth quarter.

Noninterest Expense.

Noninterest expense increased by $284,000 or 4.59% to $6.465
million for the year ended June 30, 2006 from $6.181 million for the year ended June 30, 2005. This increase was primarily due to increases in salaries
and benefits of $207,000 and other noninterest expense of $40,000. The increase in salaries and benefits was due to normal pay raises. The increase in
other noninterest expense was due to increases in several categories. These increases were partially offset by a decrease in the amortization of
mortgage servicing fees of $25,000. This decrease was due to decreased prepayment activity on mortgage loans. Other categories of noninterest expense
showed modest changes.

Income Tax Expense.

Eagles income tax expense was $629,000 for the year ended
June 30, 2006, compared to $615,000 for the year ended June 30, 2005. The effective tax rate for the year ended June 30, 2006 was 26.06% as opposed to
26.08% for the year ended June 30, 2005.

Liquidity and Capital Resources

The companys subsidiary, American Federal Savings Bank, is
required to maintain minimum levels of liquid assets as defined by the Office of Thrift Supervision (OTS) regulations. The OTS has eliminated the
statutory requirement based upon a percentage of deposits and short-term borrowings. The OTS states that the liquidity requirement is retained for
safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. For
internal reporting purposes, the Bank uses the previous regulatory definitions of liquidity. The Banks average liquidity ratio average was 16.27%
and 16.18% for the months ended June 30, 2006 and 2005, respectively.

The Banks primary sources of funds are deposits, repayment
of loans and mortgage-backed securities, maturities of investments, funds provided from operations, and advances from the Federal Home Loan Bank of
Seattle. Scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are generally predictable. However, other
sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and
competition. The Bank uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing
certificates of deposit, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity, and meet operating
expenses.

Net cash provided by the Companys operating activities,
which is primarily comprised of cash transactions affecting net income was $4.90 million for the year ended June 30, 2006 and $3.62 million for the
year ended June 30, 2005. The change was primarily a result of a decrease in the amount of loans held for sale.

Net cash used in the Companys investing activities, which
is primarily comprised of cash transactions from the investment securities and mortgage-backed securities portfolios and the loan portfolio, was $25.57
million for the year ended June 30, 2006, and $3.59 million for the year ended June 30, 2005. The increase in cash used was primarily due to the
significant growth of the loan portfolio.

Net cash provided by the Companys financing activities,
which is primarily cash transactions from net increases in deposits and net Federal Home Loan Bank advances, totaled $18.57 million for the year ended
June 30, 2006, and $596,000 for the year ended June 30, 2005. This increase in cash provided was the result of additional FHLB advances and proceeds
from the issuance of trust preferred securities, offset by purchases of treasury stock.

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 our commitments to make loans and managements assessment of our ability to generate funds.




29

At March 31, 2006 (the most recent report available), the
Banks measure of sensitivity to interest rate movements, as measured by the OTS, increased slightly from the previous quarter. The market value
of the Banks capital position has decreased slightly from the previous year. The Bank is well within the guidelines set forth by the Board of
Directors for interest rate sensitivity.

As of June 30, 2006, the Banks regulatory capital was in
excess of all applicable regulatory requirements. At June 30, 2006, the Banks tangible, core, and risk-based capital ratios amounted to 11.2%,
11.2%, and 15.8%, respectively, compared to regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively.

Impact of Inflation and Changing Prices

Our financial statements and the accompanying notes, which are
found in Item 7, 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.

Recent Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities an Interpretation of ARB No. 51 (FIN 46R). This Interpretation, which replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, for certain entities in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support.

On September 28, 2005, the Company issued trust-preferred
securities through a wholly-owned subsidiary trust, further described in Note 9 of the audited financial statements. Under the provisions of FIN 46R,
the Company accounts for its investment in the trust as an asset and its junior subordinated debentures as a liability. Additionally, the Company
reports the dividends paid and received on the securities in the statement of income as interest income and expense.

Application of Critical Accounting
Policies

There are a number of accounting estimates performed by the
Company in preparing its financial statements. Some of the estimates are developed internally, while others are obtained from independent third
parties. Examples of estimates using external sources are the fair market value of investment securities, fair value of mortgage servicing rights,
deferred compensation, and appraised value of foreclosed properties. It is managements assertion that the external sources have access to
resources, methodologies, and markets that provide adequate assurances that no material impact would occur due to changes in assumptions. The following
accounting estimates are performed internally:

Allowance for Loan and Lease Losses
(ALLL).

Management applies its knowledge of current local economic and
real estate market conditions, historical experience, loan portfolio composition, and the assessment of delinquent borrowers situations, to
determine the adequacy of its ALLL reserve. These factors are reviewed by the Banks federal banking regulator and the Companys external
auditors on a regular basis. The current level of the ALLL reserve is deemed to be more than adequate given the above factors, with no material impact
expected due to a difference in the assumptions.

Deferred Loan Fees.

Management applies time study and statistical analysis to
determine loan origination costs to be capitalized under FAS 91. The analysis is reviewed by the Companys external auditors for reasonableness.
No material impact is expected if different assumptions are used, as many of our loans have a short duration.




30

Deferred Tax Assets.

Management expects to realize the deferred tax assets due to the
continued profitability of the Company.

Fair Value of Other Financial
Instruments.

Management uses an internal model to determine fair value for its
loan portfolio and certificates of deposit. The assumptions entail spreads over the Treasury yield curve at appropriate maturity benchmarks.
Assumptions incorporating different spreads would naturally deliver varying results, however due to short-term nature of the loan portfolio and
certificates of deposit, changes in the results would be mitigated. Currently, the fair value is only presented as footnote information, and changes
due to new assumptions would not, in managements opinion, affect the readers opinion of the Companys financial
condition.

Economic Life of Fixed Assets.

Management determines the useful life of its buildings,
furniture, and equipment for depreciation purposes. These estimates are reviewed by the Companys external auditors for reasonableness. No
material impact is expected if different assumptions were to be used.

ITEM 7.    FINANCIAL
STATEMENTS.

Eagle Bancorps audited financial statements, notes thereto,
and auditors reports are found immediately following Part III of this report.

ITEM 8.    CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

On March 16, 2006 the Company accepted the resignation of
Anderson ZurMuehlen & Co. effective after the review of the March 31, 2006 Form 10-QSB filing date. Davis Kinard served as the Companys
independent registered public accounting firm for the quarter beginning April 2006. The change in auditors was described in an 8-K filing made in March
2006 with the Securities and Exchange Commission. The change in auditors is also detailed in the Proxy dated September 18, 2006. Letters from Anderson
ZurMuehlen & Co. are contained in Exhibit 16 to the Form 8-K Report filed in March 2006 and as Exhibits 16.1 and 16.2 to this Form
10-KSB.

ITEM 8A.    CONTROLS AND
PROCEDURES

Based on their evaluation, the registrants Chief Executive
Officer, Larry A. Dreyer, and Chief Financial Officer, Peter J. Johnson, have concluded the registrants disclosure controls and procedures are
effective as of June 30, 2006 to ensure that information required to be disclosed in the reports that the registrant files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. During the last fiscal quarter, there have been no changes in the registrants internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, the registrants internal control over financial
reporting.

ITEM 8B.    OTHER
INFORMATION

None.




31

PART III

The information required by Items 9, 10, 11, 12 and 14 of this
part is presented in the proxy statement issued by the Board of Directors in connection with the annual meeting of stockholders to be held October 20,
2006, which is hereby incorporated by reference into this annual report.

Item 13.    Exhibits.

A.  (1)    The
following documents are filed as part of this report: The audited Consolidated Statements of Financial Condition of Eagle Bancorp and subsidiary as of
June 30, 2006, and June 30, 2005, and the related Consolidated Statements of Income, Consolidated Statements of Changes in Stockholder Equity, and
Consolidated Statements of Cash Flows for the years then ended, together with the related notes and independent auditors
reports.

(2)    Schedules omitted as they are not
applicable.B.
     
     Exhibits*
     

     
     2.1
     

     Amended and Restated Plan of Mutual Holding Company Reorganization and Stock Issuance*
     

     
     3.1
     

     Charter of Eagle Bancorp*
     

     
     3.2
     

     Bylaws of Eagle Bancorp*
     

     
     4
     

     Form
of Stock Certificate of Eagle Bancorp*
     

     
     10.1
     

     Employee Stock Ownership Plan and Trust*
     

     
     10.2
     

     Employment Contract of Larry A. Dreyer**
     

     
     10.3
     

     Stock Plan11
     

     Computation of per share earnings (incorporated by reference to Note 3 to Notes To Consolidated Statements of Financial Condition dated June
30, 2006)***
     

     
     14
     

     Code
of Ethics16.1
     

     Letter from Anderson ZurMuehlen & Co., P.C. dated March 20, 200616.2
     

     Letter from Anderson ZurMuehlen & Co., P.C. dated August 24, 200621.1
     

     Subsidiaries of Registrant (incorporated by reference to Part I, Subsidiary Activity)23.1
     

     Consent of Davis, Kinard & Co., P.C.31.1
     

     Certification by Larry A. Dreyer, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
     

     Certification by Peter J. Johnson, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
     

     Certification by Larry A. Dreyer, Chief Executive Officer and Peter J. Johnson, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99
     

     Consolidated Statements of Financial Condition
 

*
     
     Incorporated by reference to the identically numbered exhibit of
the Registration Statement on Form SB-2 (File No. 333-93077) filed with the SEC on December 20, 1999.**
     
     Incorporated by reference to the proxy statement for 2000 Annual
Meeting filed with the SEC on September 19, 2000.***
     
     Incorporated by reference to the 10-KSB filed with the SEC on
September 16, 2004.




32

EAGLE BANCORP 1400 Prospect Avenue Helena, MT
59601



AND SUBSIDIARY



CONSOLIDATED
FINANCIALSTATEMENTS

and

REPORT OF INDEPENDENTREGISTERED
PUBLICACCOUNTING FIRM



June 30, 2006 and 2005



EAGLE BANCORP AND SUBSIDIARY

Contents


PageReport of
Independent Registered Public Accounting Firm
     
     
     

     
     1Predecessor
auditors Independent Auditors Report
     
     
     

     
     2Financial
StatementsConsolidated
Statements of Financial Condition
     
     
     

     
     3Consolidated
Statements of Income
     
     
     

     
     4Consolidated
Statements of Changes in Stockholders Equity
     
     
     

     
     5Consolidated
Statements of Cash Flows
     
     
     

     
     6Notes to
Consolidated Financial Statements
     
     
     

     
     7
 Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders ofEagle Bancorp and Subsidiary

We have audited the accompanying consolidated statement of
financial condition of Eagle Bancorp and Subsidiary as of June 30, 2006, and the related consolidated statements of income, stockholders
equity and cash flows for year then ended. These financial statements are the responsibility of the companys management. Our responsibility is to
express an opinion on these financial statements based on our audit. The financial statements of Eagle Bancorp and Subsidiary as of June 30,
2005, were audited by other auditors whose report dated August 11, 2005, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the 2006 financial statements referred to above
present fairly, in all material respects, the financial position of Eagle Bancorp and Subsidiary as of June 30, 2006, and the results of its
operations and its cash flows for year then ended in conformity with accounting principles generally accepted in the United States of
America.

DAVIS, KINARD & CO., P.C.

Abilene, Texas July 28, 2006




-1-

INDEPENDENT AUDITORS REPORT

To the Board of Directors and StockholdersEagle BancorpHelena, Montana 59601

We have audited the accompanying consolidated statement of financial condition of Eagle Bancorp and subsidiary as of June 30, 2005 and the
related consolidated statement of income, changes in stockholders equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Eagle Bancorp and subsidiary as of June 30, 2005 and the results of its
operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.



/s/ Anderson Zurmuehlen & Co., P.C.

Helena, MontanaAugust 11, 2005




-2-

EAGLE BANCORP AND SUBSIDIARYConsolidated
Statements of Financial Condition June 30, 2006 and 2005(Dollars in Thousands, Except for Per Share Data)


2006
     

     2005AssetsCash and due
from banks
     
     
     

     $
     2,844
     
     

     $
     3,122Interest
bearing deposits in banks
     
     
     

     
     27
     
     

     
     1,844Cash and cash
equivalents
     
     
     

     
     2,871
     
     

     
     4,966Securities
available for sale
     
     
     

     
     64,198
     
     

     
     75,227Securities
held to maturity (fair value approximates $1,030 in 2006 and $1,249 in 2005)
     
     
     

     
     1,018
     
     

     
     1,201Federal Home
Loan Bank Stock restricted, at cost
     
     
     

     
     1,315
     
     

     
     1,315Investment in
Eagle Bancorp Statutory Trust I
     
     
     

     
     155
     
     

     
     Mortgage
loans held for sale
     
     
     

     
     918
     
     

     
     2,148Loans
receivable, net of deferred loan fees and allowance for loan losses of $535 in 2006 and $573 in 2005
     
     
     

     
     140,858
     
     

     
     106,839Accrued
interest and dividend receivable
     
     
     

     
     1,211
     
     

     
     1,102Mortgage
servicing rights, net
     
     
     

     
     1,722
     
     

     
     1,857Premises and
equipment, net
     
     
     

     
     5,962
     
     

     
     6,242Cash
surrender value of life insurance
     
     
     

     
     5,230
     
     

     
     5,049Other
assets
     
     
     

     
     720
     
     

     
     468$
     226,178
     
     

     $
     206,414Liabilities and Shareholders EquityNoninterest
bearing
     
     
     

     $
     12,575
     
     

     $
     11,660Interest
bearing
     
     
     

     
     161,767
     
     

     
     160,837Total
deposits
     
     
     

     
     174,342
     
     

     
     172,497Accrued
expenses and other liabilities
     
     
     

     
     1,765
     
     

     
     1,767FHLB
advances
     
     
     

     
     22,371
     
     

     
     9,885Subordinated
debentures
     
     
     

     
     5,155
     
     

     
     Total
liabilities
     
     
     

     
     203,633
     
     

     
     184,149Shareholders equityPreferred
stock, no par value; 1,000,000 shares authorized, no shares issued or outstanding
     
     
     

     
     
     
     

     
     Common stock,
$0.01 par value; 9,000,000 shares authorized, 1,223,572 shares issued; 1,091,722 and 1,103,972 shares outstanding in 2006 and 2005,
respectively
     
     
     

     
     12
     
     

     
     12Capital
surplus
     
     
     

     
     4,274
     
     

     
     4,188Unallocated
common stock held by ESOP
     
     
     

     
     (129
     )
     

     
     (165
     )Treasury
stock, at cost
     
     
     

     
     (4,521
     )
     

     
     (4,048
     )Retained
earnings
     
     
     

     
     24,056
     
     

     
     22,630Net
accumulated other comprehensive loss
     
     
     

     
     (1,147
     )
     

     
     (352
     )Total
shareholders equity
     
     
     

     
     22,545
     
     

     
     22,265$
     226,178
     
     

     $
     206,414
 The accompanying notes are an integral part of these
consolidated financial statements.


-3-

EAGLE BANCORP AND SUBSIDIARYConsolidated
Statements of IncomeYears Ended June 30, 2006 and 2005(Dollars in Thousands, Except for Per Share Data)


2006
     

     2005Interest
and dividend incomeLoans,
including fees
     
     
     

     $
     7,799
     
     

     $
     6,117Available for
sale securities
     
     
     

     
     2,589
     
     

     
     2,807Held to
maturity securities
     
     
     

     
     52
     
     

     
     65Trust
preferred securities
     
     
     

     
     7
     
     

     
     Federal Home
Loan Bank stock dividends
     
     
     

     
     
     
     

     
     20Deposits with
banks
     
     
     

     
     59
     
     

     
     34Total
interest income
     
     
     

     
     10,506
     
     

     
     9,043Interest
expenseDeposits
     
     
     

     
     3,011
     
     

     
     2,394Federal Home
Loan Bank advances
     
     
     

     
     546
     
     

     
     169Subordinated
debentures
     
     
     

     
     235
     
     

     
     Total
interest expense
     
     
     

     
     3,792
     
     

     
     2,563Net
interest income
     
     
     

     
     6,714
     
     

     
     6,480Provision for
loan losses
     
     
     

     
     
     
     

     
     Net
interest income after provision for loan losses
     
     
     

     
     6,714
     
     

     
     6,480Noninterest incomeService
charges on deposit accounts
     
     
     

     
     532
     
     

     
     549Net gain on
sale of loans
     
     
     

     
     492
     
     

     
     442Mortgage loan
service fees
     
     
     

     
     593
     
     

     
     584Net realized
gain on sales of available for sale securities
     
     
     

     
     
     
     

     
     4Other
income
     
     
     

     
     548
     
     

     
     480Total
noninterest income
     
     
     

     
     2,165
     
     

     
     2,059Noninterest expensesSalaries and
employee benefits
     
     
     

     
     3,519
     
     

     
     3,312Occupancy and
equipment expense
     
     
     

     
     848
     
     

     
     826Data
processing
     
     
     

     
     274
     
     

     
     262Advertising
     
     
     

     
     201
     
     

     
     190Amortization
of mortgage servicing rights
     
     
     

     
     355
     
     

     
     380Federal
insurance premiums
     
     
     

     
     23
     
     

     
     24Postage
     
     
     

     
     86
     
     

     
     102Legal,
accounting, and examination fees
     
     
     

     
     182
     
     

     
     157Consulting
fees
     
     
     

     
     58
     
     

     
     51ATM
processing
     
     
     

     
     51
     
     

     
     49Other
expense
     
     
     

     
     868
     
     

     
     828Total
noninterest expenses
     
     
     

     
     6,465
     
     

     
     6,181Income
before income taxes
     
     
     

     
     2,414
     
     

     
     2,358Income tax
expense
     
     
     

     
     629
     
     

     
     615Net
income
     
     
     

     $
     1,785
     
     

     $
     1,743Basic
earnings per share
     
     
     

     $
     1.66
     
     

     $
     1.55Diluted
earnings per share
     
     
     

     $
     1.48
     
     

     $
     1.45
 The accompanying notes are an integral part of these
consolidated financial statements.


-4-

EAGLE BANCORP AND SUBSIDIARYConsolidated
Statements of Changes in Stockholders EquityYears Ended June 30, 2006 and 2005(Dollars in Thousands, Except for Per Share
Data)


Preferred Stock
     

     Common Stock
     

     Additional Paid-In Capital
     

     Unallocated ESOP Shares
     

     Treasury Stock
     

     Retained Earnings
     

     Accumulated Other Comprehensive Loss
     

     TotalBalance at
July 1, 2004
     
     
     

     $
     
     
     

     $
     12
     
     

     $
     4,073
     
     

     $
     (202
     )
     

     $
     (199
     )
     

     $
     21,250
     
     

     $
     (910
     )
     

     $
     24,024Net
income
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     1,743
     
     

     
     
     
     

     
     1,743Other
comprehensive income
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     558
     
     

     
     558Total
comprehensive income
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     2,301Dividends paid
($.72 per share)
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     (363
     )
     

     
     
     
     

     
     (363
     )Restricted
stock plan shares allocated (4,600)
     
     
     

     
     
     
     

     
     
     
     

     
     (1
     )
     

     
     
     
     

     
     54
     
     

     
     
     
     

     
     
     
     

     
     53Treasury stock
purchased (22,000 shares at $32.55/shr;33,500 shares
at $34.55/shr; 57,500 shares at $35.30/shr)
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     (3,903
     )
     

     
     
     
     

     
     
     
     

     
     (3,903
     )ESOP shares
allocated or committed to be released for allocation (4,600) shares
     
     
     

     
     
     
     

     
     
     
     

     
     116
     
     

     
     37
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     153Balance at
June 30, 2005
     
     
     

     
     
     
     

     
     12
     
     

     
     4,188
     
     

     
     (165
     )
     

     
     (4,048
     )
     

     
     22,630
     
     

     
     (352
     )
     

     
     22,265Net
income
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     1,785
     
     

     
     
     
     

     
     1,785Other
comprehensive loss
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     (795
     )
     

     
     (795
     )Total
comprehensive income
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     990Dividends paid
($.80 per share)
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     (359
     )
     

     
     
     
     

     
     (359
     )Restricted
stock plan shares allocated (4,600)
     
     
     

     
     
     
     

     
     
     
     

     
     (27
     )
     

     
     
     
     

     
     80
     
     

     
     
     
     

     
     
     
     

     
     53Treasury stock
purchased(2,500 shares @ $31.75;1,200 shares @
$32.20; 1,000 shares @ $32.50;1,400 shares @
$34.45; 2,500 shares @ $34.25;1,300 shares @
$32.50; 4,000 shares @ $33.25;1,350 shares @
$33.10; 1,600 shares @ $31.00)
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     (553
     )
     

     
     
     
     

     
     
     
     

     
     (553
     )ESOP shares
allocated or committed to be released for allocation (4,600) shares
     
     
     

     
     
     
     

     
     
     
     

     
     113
     
     

     
     36
     
     

     
     
     
     

     
     
     
     

     
     
     
     

     
     149Balance at
June 30, 2006
     
     
     

     $
     
     
     

     $
     12
     
     

     $
     4,274
     
     

     $
     (129
     )
     

     $
     (4,521
     )
     

     $
     24,056
     
     

     $
     (1,147
     )
     

     $
     22,545
 The accompanying notes are an integral part of these
consolidated financial statements.


-5-

EAGLE BANCORP AND SUBSIDIARYConsolidated
Statements of Cash FlowsYears Ended June 30, 2006 and 2005(Dollars in Thousands, Except for Per Share Data)


2006
     

     2005Cash flows
from operating activitiesNet
income
     
     
     

     $
     1,785
     
     

     $
     1,743Adjustments
to reconcile net income to net cash provided by operating activitiesProvision for
mortgage servicing rights valuation losses
     
     
     

     
     (46
     )
     

     
     (14
     )Depreciation
     
     
     

     
     509
     
     

     
     509Net
amortization of securities
     
     
     

     
     924
     
     

     
     1,330Amortization
of capitalized mortgage servicing rights
     
     
     

     
     355
     
     

     
     380Loss on sale
of foreclosed assets
     
     
     

     
     6
     
     

     
     Loss on sale
of property & equipment
     
     
     

     
     
     
     

     
     12Net gain on
sale of loans
     
     
     

     
     (492
     )
     

     
     (442
     )Net realized
gain on sales of available for sale securities
     
     
     

     
     
     
     

     
     (4
     )FHLB
dividends reinvested
     
     
     

     
     
     
     

     
     (20
     )Appreciation
in cash surrender value of life insurance, net
     
     
     

     
     (181
     )
     

     
     (172
     )Restricted
stock awards
     
     
     

     
     53
     
     

     
     53Deferred
income taxes
     
     
     

     
     (45
     )
     

     
     (36
     )Net change
inLoans held
for sale
     
     
     

     
     1,711
     
     

     
     (261
     )Accrued
interest receivable
     
     
     

     
     (111
     )
     

     
     (22
     )Other
assets
     
     
     

     
     (192
     )
     

     
     50Accrued
expenses and other liabilities
     
     
     

     
     622
     
     

     
     510Net cash
provided by operating activities
     
     
     

     
     4,898
     
     

     
     3,616Cash flows
from investing activitiesActivity in
available for sale securitiesSales
     
     
     

     
     1,627
     
     

     
     5,536Maturities,
prepayments and calls
     
     
     

     
     15,845
     
     

     
     18,093Purchases
     
     
     

     
     (8,616
     )
     

     
     (10,743
     )Activity in
held to maturity securitiesMaturities,
prepayments and calls
     
     
     

     
     164
     
     

     
     361Investment in
Eagle Bancorp Statutory Trust I
     
     
     

     
     (155
     )
     

     
     Loan
originations and principal collections, net
     
     
     

     
     (34,273
     )
     

     
     (14,612
     )FHLB stock
redeemed
     
     
     

     
     
     
     

     
     377Purchase of
bank owned life insurance
     
     
     

     
     
     
     

     
     (2,400
     )Proceeds from
sale of foreclosed assets
     
     
     

     
     69
     
     

     
     Additions to
premises and equipment
     
     
     

     
     (229
     )
     

     
     (206
     )Net cash used
in investing activities
     
     
     

     
     (25,568
     )
     

     
     (3,594
     )Cash flows
from financing activitiesNet increase
in deposits
     
     
     

     
     1,848
     
     

     
     2,428Net change in
advances from the FHLB
     
     
     

     
     12,484
     
     

     
     2,435Purchase of
treasury stock
     
     
     

     
     (553
     )
     

     
     (3,903
     )Proceeds from
subordinated debentures
     
     
     

     
     5,155
     
     

     
     Dividends
paid
     
     
     

     
     (359
     )
     

     
     (363
     )Net cash
provided by financing activities
     
     
     

     
     18,575
     
     

     
     597Net change
in cash and cash equivalents
     
     
     

     
     (2,095
     )
     

     
     619Cash and cash
equivalents at beginning of year
     
     
     

     
     4,966
     
     

     
     4,347Cash and
cash equivalents at end of year
     
     
     

     $
     2,871
     
     

     $
     4,966
 The accompanying notes are an integral part of these
consolidated financial statements.


-6-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005



NOTE 1:  Summary of Significant Accounting
Policies

Nature of Operations

Eagle Bancorp was organized in 2000 as the majority-owned
subsidiary of Eagle Financial, MHC, (the Mutual Holding Company) and the sole parent of American Federal Savings Bank (the
Bank). Collectively, Eagle Bancorp and the Bank are referred to herein as the Company.

The Bank is a federally chartered savings bank subject to the
regulations of the Office of Thrift Supervision (OTS). The Bank is a member of the Federal Home Loan Bank System and its deposit accounts
are insured to the applicable limits by the Federal Deposit Insurance Corporation (FDIC).

The Bank is headquartered in Helena, Montana, and operates
additional branches in Butte, Bozeman, and Townsend, Montana. The Banks market area is concentrated in south central Montana, to which it
primarily offers commercial, residential, and consumer loans. The Banks principal business is accepting deposits and, together with funds
generated from operations and borrowings, investing in various types of loans and securities.

Principles of Consolidation

The consolidated financial statements include the accounts of
Eagle Bancorp and the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with U.S.
generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the
allowance for loan losses, mortgage servicing rights, and the valuation of foreclosed assets. In connection with the determination of the estimated
losses on loans, foreclosed assets, and mortgage servicing rights management obtains independent appraisals and valuations.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of
cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions cash and due from banks, and
interest-bearing deposits in banks.

The Bank is required to maintain a reserve balance with the
Federal Reserve Bank. The Bank properly maintained amounts in excess of required reserves of $488,000 and $391,000 as of June 30, 2006 and 2005,
respectively.




-7-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 1:  Summary of Significant Accounting Policies  continued


Investment Securities

The Company designates debt and equity securities as
held-to-maturity, available-for-sale, or trading.

Held-to-maturity  Debt investment securities that
management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid
principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method
over the period remaining until maturity.

Available-for-sale  Investment securities that will
be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, need for
liquidity, and changes in the availability of and the yield of alternative investments, are classified as available-for-sale. These assets are carried
at fair value. Unrealized gains and losses, net of tax, are reported as other comprehensive income. Gains and losses on the sale of available-for-sale
securities are recorded on the trade date and determined using the specific identification method.

Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary are recognized by write-downs of the individual securities to their fair
value. Such write-downs would be included in earnings as realized losses.

Trading  No investment securities were designated as
trading at June 30, 2006 and 2005.

Federal Home Loan Bank Stock

The Companys investment in Federal Home Loan Bank
(FHLB) stock is a restricted investment carried at cost ($100 per share par value), which approximates its fair value. As a member of the
FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB
advances. The Company may request redemption at par value of any stock in excess of the amount it is required to hold. Stock redemptions are made at
the discretion of the FHLB. The FHLB redeemed no shares during the year ended June 30, 2006 and 3,765 shares ($376,500) during the year ended June 30,
2005.




-8-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 1:  Summary of Significant Accounting Policies  continued


Mortgage Loans Held-for-Sale

Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value, determined in aggregate, plus the fair value of associated derivative financial
instruments. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to income.

Loans

The Company grants mortgage, commercial and consumer loans to
customers. A substantial portion of the loan portfolio is represented by mortgage loans in south central Montana. The ability of the Companys
debtors to honor their contracts is dependent upon the general economic conditions in this area.

Loans receivable that management has the intent and ability to
hold until maturity are reported at the outstanding principal balance adjusted for any charge-offs, allowance for loan losses, and any deferred fees or
costs on originated loans and unamortized premiums or unaccreted discounts on purchased loans. Loan origination fees, net of certain direct origination
costs are deferred and amortized over the contractual life of the loan, as an adjustment of the yield, using the interest method.

The accrual of interest on loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well secured and in process of collection. Personal loans are typically charged off no later than 180
days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered
doubtful.

All interest accrued but not collected for loans that are placed
on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery
method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses represents the amount which
management estimates is adequate to provide for potential losses in its loan portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a
provision for loan losses charged to operations. The provision for loan losses is based on managements periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The allowance is based
upon market factors and trends which extend beyond the Companys control, and which may result in losses or recoveries differing significantly
from those provided for in the financial statements.




-9-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 1:  Summary of Significant Accounting Policies  continued


Allowance for Loan
Lossescontinued

Impaired loans are loans for which it is probable that the Bank
will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for
impairment and does not aggregate loans by major risk classifications.

The definition of impaired loans is not the same as
the definition of nonaccrual loans, although the two categories may overlap. The Company may choose to place a loan on nonaccrual status
due to payment delinquency or uncertain collectibility. Factors considered by management in determining impairment include payment status and
collateral value.

The amount of impairment of impaired loans is determined by the
difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a
practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans.
When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment
disclosures.

Mortgage Servicing Rights

The Company allocates its total cost in mortgage loans between
mortgage servicing rights and loans, based upon their relative fair values, when loans are subsequently sold or securitized, with the servicing rights
retained. Fair values are generally obtained through market survey data. Impairment of mortgage servicing rights is measured quarterly based upon the
characteristics of the individual loans, including note rate, term, underlying collateral, current market conditions, and estimates of net servicing
income. The Company accounts for its recorded value on a loan-by-loan basis and possible impairment of mortgage servicing rights on a portfolio basis.
Impairment is recorded through a valuation allowance and a charge to mortgage loan servicing fees.

Mortgage servicing rights are amortized in proportion to, and
over the estimated period of, net servicing income, adjusted for actual loan prepayments.

Cash Surrender Value of Life
Insurance

Life insurance policies are initially recorded at cost at the
date of purchase. Subsequent to purchase, the policies are periodically adjusted for fair value. The adjustment to fair value increases or decreases
the carrying value of the policies and is recorded as an income or expense on the consolidated statement of income. For the years ended June 30, 2006
and 2005 there were no adjustments to fair value that were outside the normal appreciation in cash surrender value.




-10-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 1:  Summary of Significant Accounting Policies  continued


Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are
initially recorded at the lower of the Companys carrying amount or fair value less estimated selling cost at the date of foreclosure. All
write-downs based on the assets fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property
held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are
measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized,
whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are
recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to
sell.

Premises and Equipment

Land is carried at cost. Property and equipment is recorded at
cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the assets, ranging from
3 to 35 years. The costs of maintenance and repairs are expensed as incurred, while major expenditures for renewals and betterments are
capitalized.

Income Taxes

Income taxes are accounted for under the asset and liability
method. Accordingly, deferred taxes are recognized for the estimated future tax effects attributable to temporary differences between the
financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the
enactment date of the change.

A deferred tax liability is recognized for all temporary
differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax
deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be
realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect managements judgment about the
realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income
tax expense.

Treasury Stock

Treasury stock is accounted for on the cost method and consists
of 131,850 shares in 2006 and 119,600 shares in 2005.




-11-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 1:  Summary of Significant Accounting Policies  continued


Advertising

The Company expenses advertising costs as they are incurred.
Advertising costs were approximately $201,000 and $190,000 for the years ended June 30, 2006 and 2005, respectively.

Employee Stock Ownership Plan

Compensation expense recognized for the Companys ESOP
equals the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair
value of the shares at the time and the ESOPs original acquisition cost is charged or credited to stockholders equity (capital surplus).
The cost of ESOP shares that have not yet been allocated or committed to be released is deducted from stockholders equity.

Earnings Per Share

Basic earnings per share (EPS) is calculated by
dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income by the
weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury
stock method. For purposes of computing EPS, outstanding common shares include all shares issued to the Mutual Holding Company but exclude ESOP shares
that have not been allocated or committed to be released for allocation to participants.

Financial Instruments

All derivative financial instruments that qualify for hedge
accounting are recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the
fair value of derivative financial instruments used as cash flow hedges are recognized as a component of comprehensive income. At June 30, 2006 and
2005, the Company was holding forward delivery commitments that qualify as derivative financial instruments.

The carrying value of the Companys financial instruments
approximates fair value. The fair value of the Companys financial instruments is generally determined by a third partys valuation of the
underlying asset.

Recent Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities an Interpretation of ARB No. 51 (FIN 46R). This Interpretation, which replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, for certain entities in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support.




-12-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 1:  Summary of Significant Accounting Policies  continued


Recent Accounting
Pronouncementscontinued

On September 28, 2005, the Company issued trust-preferred
securities through a wholly-owned subsidiary trust, further described in Note 9. Under the provisions of FIN 46R, the Company accounts for its
investment in the trust as an asset and its junior subordinated debentures as a liability. Additionally, the Company reports the dividends paid and
received on the securities in the statement of income as interest income and expense.

Reclassifications

Certain 2005 amounts have been reclassified to conform to the
2006 presentation.

NOTE 2:  Earnings Per Share

The following table sets forth the
computation of basic and diluted earnings per share for the years ended June 30:


2006
     

     2005(In
Thousands)Weighted
average shares outstanding during the year on which basic earnings per share is calculated
     
     
     

     
     1,078
     
     

     
     1,126Add: weighted
average of stock held in treasury
     
     
     

     
     127
     
     

     
     74Average
outstanding shares on which diluted earnings per share is calculated
     
     
     

     
     1,205
     
     

     
     1,200Net income
applicable to common stockholders
     
     
     

     $
     1,785
     
     

     $
     1,743Basic
earnings per share
     
     
     

     $
     1.66
     
     

     $
     1.55Diluted
earnings per share
     
     
     

     $
     1.48
     
     

     $
     1.45
 NOTE 3:  Securities

The Companys investment policy
requires that the Company purchase only high-grade investment securities. Municipal obligations are categorized as AAA or better by a
nationally recognized statistical rating organization. These ratings are achieved because the securities are backed by the full faith and credit of the
municipality and also supported by third-party credit insurance policies. Mortgage backed securities and collateralized mortgage obligations are issued
by government sponsored corporations, including Federal Home Loan Mortgage Corporation, Fannie Mae, and the Guaranteed National Mortgage Association.
The amortized cost and estimated fair values of securities, together with unrealized gains and losses, are as follows:




-13-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 3:  Securities  continued




June 30, 2006(Dollars in Thousands)
     
     
     

     Amortized Cost
     

     Gross Unrealized Gains
     

     Gross Unrealized Losses
     

     Estimated Market ValueAvailable for SaleU.S.
Government and agency
     
     
     

     $
     7,448
     
     

     $
     6
     
     

     $
     (158
     )
     

     $
     7,296Municipal
obligations
     
     
     

     
     17,471
     
     

     
     67
     
     

     
     (395
     )
     

     
     17,143Corporate
obligations
     
     
     

     
     16,059
     
     

     
     
     
     

     
     (442
     )
     

     
     15,617Mortgage-backed securites
     
     
     

     
     6,949
     
     

     
     2
     
     

     
     (204
     )
     

     
     6,747CMOs
     
     
     

     
     16,330
     
     

     
     
     
     

     
     (513
     )
     

     
     15,817Corporate
preferred stock
     
     
     

     
     1,800
     
     

     
     
     
     

     
     (222
     )
     

     
     1,578Total
securities available for sale
     
     
     

     $
     66,057
     
     

     $
     75
     
     

     $
     (1,934
     )
     

     $
     64,198Held to
MaturityMunicipal
obligations
     
     
     

     $
     828
     
     

     $
     14
     
     

     $
     (2
     )
     

     $
     840Mortgage-backed securites
     
     
     

     
     190
     
     

     
     
     
     

     
     
     
     

     
     190Total
securities held to maturity
     
     
     

     $
     1,018
     
     

     $
     14
     
     

     $
     (2
     )
     

     $
     1,030
 June 30, 2005(Dollars in Thousands)
     
     
     

     Amortized Cost
     

     Gross Unrealized Gains
     

     Gross Unrealized Losses
     

     Estimated Market ValueAvailable for SaleU.S.
Government and agency
     
     
     

     $
     8,012
     
     

     $
     14
     
     

     $
     (55
     )
     

     $
     7,971Municipal
obligations
     
     
     

     
     13,239
     
     

     
     221
     
     

     
     (33
     )
     

     
     13,427Corporate
obligations
     
     
     

     
     17,020
     
     

     
     2
     
     

     
     (233
     )
     

     
     16,789Mortgage-backed securites
     
     
     

     
     11,164
     
     

     
     18
     
     

     
     (128
     )
     

     
     11,054CMOs
     
     
     

     
     24,583
     
     

     
     9
     
     

     
     (222
     )
     

     
     24,370Corporate
preferred stock
     
     
     

     
     1,800
     
     

     
     
     
     

     
     (184
     )
     

     
     1,616Total
securities available for sale
     
     
     

     $
     75,818
     
     

     $
     264
     
     

     $
     (855
     )
     

     $
     75,227Held to
MaturityMunicipal
obligations
     
     
     

     $
     829
     
     

     $
     37
     
     

     $
     
     
     

     $
     866Mortgage-backed securites
     
     
     

     
     372
     
     

     
     11
     
     

     
     
     
     

     
     383Total
securities held to maturity
     
     
     

     $
     1,201
     
     

     $
     48
     
     

     $
     
     
     

     $
     1,249
 -14-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 3:  Securities  continued


The Company has not entered into any
interest rate swaps, options, or futures contracts relating to investment securities.

Gross recognized gains on securities available-for-sale were
$9,286 and $23,747 for the years ended June 30, 2006 and 2005, respectively. Gross recognized losses on securities
available-for-sale were $9,893 and $19,763 for the years ended June 30, 2006 and 2005, respectively.

The amortized cost and estimated fair
value of securities at June 30, 2006 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.


June 30, 2006Held to Maturity
     

     Available for Sale(Dollars in Thousands)
     
     
     

     Amortized Cost
     

     Estimated Market Value
     

     Amortized Cost
     

     Estimated Market ValueDue in one
year or less
     
     
     

     $
     
     
     

     $
     
     
     

     $
     7,626
     
     

     $
     7,521Due from one
to five years
     
     
     

     
     563
     
     

     
     567
     
     

     
     14,819
     
     

     
     14,302Due from five
to ten years
     
     
     

     
     265
     
     

     
     273
     
     

     
     2,419
     
     

     
     2,363Due after ten
years
     
     
     

     
     
     
     

     
     
     
     

     
     16,114
     
     

     
     15,870828
     
     

     
     840
     
     

     
     40,978
     
     

     
     40,056Mortgage-backed
     
     
     

     
     190
     
     

     
     190
     
     

     
     6,949
     
     

     
     6,747CMOs
     
     
     

     
     
     
     

     
     
     
     

     
     16,330
     
     

     
     15,817Corporate
preferred stock
     
     
     

     
     
     
     

     
     
     
     

     
     1,800
     
     

     
     1,578Total
     
     
     

     $
     1,018
     
     

     $
     1,030
     
     

     $
     66,057
     
     

     $
     64,198
 Maturities of securities do not reflect
repricing opportunities present in adjustable rate securities.

At June 30, 2006 and 2005, securities
with a carrying value of $9,055,000 and $13,039,000, respectively, were pledged to secure public deposits and for other purposes required or permitted
by law.




-15-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 3:  Securities  continued


The following table discloses, as of
June 30, 2006 and 2005, the Companys investment securities that have been in a continuous unrealized-loss position for less than 12 months and
those that have been in a continuous unrealized loss position for 12 or more months:


June 30, 2006Less than 12 months
     

     12 months or longer(Dollars in Thousands)
     
     
     

     Estimated Market Value
     

     Gross Unrealized Losses
     

     Estimated Market Value
     

     Gross Unrealized LossesU.S.
Government and agency
     
     
     

     $
     1,319
     
     

     $
     12
     
     

     $
     4,755
     
     

     $
     146Municipal
obligations
     
     
     

     
     10,619
     
     

     
     305
     
     

     
     2,052
     
     

     
     92Corporate
obligations
     
     
     

     
     
     
     

     
     
     
     

     
     15,617
     
     

     
     441Mortgage-backed & CMOs
     
     
     

     
     3,826
     
     

     
     67
     
     

     
     18,433
     
     

     
     651Corporate
preferred stock
     
     
     

     
     
     
     

     
     
     
     

     
     1,578
     
     

     
     222Total
     
     
     

     $
     15,764
     
     

     $
     384
     
     

     $
     42,435
     
     

     $
     1,552
 June 30, 2005U.S.
Government and agency
     
     
     

     $
     3,074
     
     

     $
     21
     
     

     $
     2,787
     
     

     $
     34Municipal
obligations
     
     
     

     
     727
     
     

     
     5
     
     

     
     1,501
     
     

     
     28Corporate
obligations
     
     
     

     
     8,848
     
     

     
     101
     
     

     
     6,848
     
     

     
     132Mortgage-backed & CMOs
     
     
     

     
     13,109
     
     

     
     104
     
     

     
     15,261
     
     

     
     246Corporate
preferred stock
     
     
     

     
     789
     
     

     
     11
     
     

     
     827
     
     

     
     173Total
     
     
     

     $
     26,547
     
     

     $
     242
     
     

     $
     27,224
     
     

     $
     613
 The table above shows the
Companys investment gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities
have been in a continuous unrealized loss position at June 30, 2006 and 2005. 180 and 119 securities are in an unrealized loss position as of June 30,
2006 and 2005, respectively. Management has evaluated these securities and believes the loss position to be temporary as a result of the current
interest rate environment and not from any particular credit quality of any specific security.




-16-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 4: Loans

A summary of the balances of loans
follows:


June 30,2006
     

     2005(Dollars in Thousands)First
mortgage loans:Residential
mortgage (1-4 family)
     
     
     

     $
     75,913
     
     

     $
     56,533Commercial
real estate
     
     
     

     
     18,648
     
     

     
     14,779Real estate
construction
     
     
     

     
     6,901
     
     

     
     2,723Other
loans:Home
equity
     
     
     

     
     20,191
     
     

     
     16,801Consumer
     
     
     

     
     11,820
     
     

     
     10,909Commercial
     
     
     

     
     7,861
     
     

     
     5,568Subtotal
     
     
     

     
     141,334
     
     

     
     107,313Less:
Allowance for loan losses
     
     
     

     
     (535
     )
     

     
     (573
     )Deferred loan
fees, net
     
     
     

     
     59
     
     

     
     99Total loans,
net
     
     
     

     $
     140,858
     
     

     $
     106,839
 Loans net of related allowance for loan
losses on which the accrual of interest has been discontinued were $345,000 and $434,000 at June 30, 2006 and 2005, respectively. Interest income not
accrued on these loans and cash interest income was immaterial for the years ended June 30, 2006 and 2005. The allowance for loan losses on nonaccrual
loans as of June 30, 2006 and 2005 was $31,488 and $10,686, respectively. The Company expects to collect all amounts due on nonaccrual loans, including
interest accrued at contractual rates. Accordingly, there are no loans considered impaired at June 30, 2006 and 2005. As of June 30, 2006 and 2005, the
Company had $114,000 and $67,000, respectively, of loans past due greater than ninety days that were still accruing interest.

The following is a summary of changes
in the allowance for loan losses:


June 30,2006
     

     2005(Dollars
in Thousands)Balance at
beginning of period
     
     
     

     $
     573
     
     

     $
     628Reclassification to repossessed property reserve
     
     
     

     
     (15
     )
     

     
     (15
     )Provision for
loan losses
     
     
     

     
     
     
     

     
     Loans charged
off
     
     
     

     
     (48
     )
     

     
     (50
     )Recoveries of
loans previously charged off
     
     
     

     
     25
     
     

     
     10Balance at
end of period
     
     
     

     $
     535
     
     

     $
     573
 -17-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 4: Loans  continued


Loans are granted to directors and
officers of the Company in the ordinary course of business. Such loans are made in accordance with policies established for all loans of the Company,
except that directors, officers, and employees may be eligible to receive discounts on loan origination costs.

Loans receivable from directors and
senior officers of the Company at June 30, 2006 and 2005, were $135,172 and $148,411, respectively. During the year ended June 30, 2006, total
principal additions amounted to $94,451 and total principal payments amounted to $107,690. Interest income from these loans was $11,136 and $6,366 for
the years ended June 30, 2006 and 2005, respectively.

NOTE 5: Mortgage Servicing Rights

The Company is servicing loans for the
benefit of others totaling approximately $197,773,000 and $207,806,000 at June 30, 2006 and 2005, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing.

Custodial escrow balances maintained in
connection with the foregoing loan servicing, and included in demand deposits, were approximately $1,518,000 and $2,165,000 at June 30, 2006 and 2005,
respectively.

The following is a summary of activity
in mortgage servicing rights and the valuation allowance:


Years Ended June 30,2006
     

     2005(Dollars
in Thousands)Mortgage
servicing rightsBalance at
beginning of period
     
     
     

     $
     1,903
     
     

     $
     2,064Mortgage
servicing rights capitalized
     
     
     

     
     174
     
     

     
     219Amortization
of mortgage servicing rights
     
     
     

     
     (355
     )
     

     
     (380
     )Balance at
end of period
     
     
     

     
     1,722
     
     

     
     1,903Valuation
allowanceBalance at
beginning of period
     
     
     

     
     46
     
     

     
     60Provision
(credited) to operations
     
     
     

     
     (46
     )
     

     
     (14
     )Balance at
end of period
     
     
     

     
     
     
     

     
     46Net mortgage
servicing rights
     
     
     

     $
     1,722
     
     

     $
     1,857
 -18-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 6: Premises and Equipment

A summary of the cost and accumulated
depreciation of premises and equipment follows:


June 30,2006
     

     2005(Dollars
in Thousands)Land,
buildings, and improvements
     
     
     

     $
     7,991
     
     

     $
     7,915Furniture and
equipment
     
     
     

     
     4,042
     
     

     
     3,96612,033
     
     

     
     11,881Accumulated
depreciation
     
     
     

     
     (6,071
     )
     

     
     (5,639
     )$
     5,962
     
     

     $
     6,242
 Depreciation expense totaled $509,170
and $509,372 for the years ended June 30, 2006 and 2005, respectively.

NOTE 7: Deposits

Deposits are summarized as
follows:


June 30,2006
     

     2005(Dollars
in Thousands)Noninterest
checking
     
     
     

     $
     12,575
     
     

     $
     11,660Interest
bearing checking (0.20%, 0.20%)
     
     
     

     
     29,571
     
     

     
     30,865Passbook
savings (0.65%, 0.65%)
     
     
     

     
     24,438
     
     

     
     25,239Money market
accounts (1.93%, 1.07%)
     
     
     

     
     29,129
     
     

     
     26,749Time
certificates of deposits(20062.13%  5.07%, 20051.60%  6.30%)
     
     
     

     
     78,629
     
     

     
     77,984$
     174,342
     
     

     $
     172,497
 The weighted average cost of funds was
2.05% and 1.52% at June 30, 2006 and 2005, respectively.




-19-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 7: Deposits  continued


At June 30, 2006, the scheduled
maturities of time deposits are as follows:


(Dollars
in Thousands)Within one
year
     
     
     

     $
     63,673One to two
years
     
     
     

     
     12,817Two to three
years
     
     
     

     
     1,141Three to four
years
     
     
     

     
     778Thereafter
     
     
     

     
     220Total
     
     
     

     $
     78,629
 Interest expense on deposits is
summarized as follows:


Years Ended June 30,2006
     

     2005(Dollars
in Thousands)Checking
     
     
     

     $
     55
     
     

     $
     55Passbook
savings
     
     
     

     
     164
     
     

     
     170Money market
accounts
     
     
     

     
     492
     
     

     
     290Time
certificates of deposits
     
     
     

     
     2,300
     
     

     
     1,879$
     3,011
     
     

     $
     2,394
 At June 30, 2006 and 2005, the Company
held $34,467,000 and $33,095,000, respectively, in deposit accounts in excess of $100,000 or more. Deposit amounts in excess of $100,000 may not be
insured by the FDIC, depending upon the underlying ownership of the account.

At June 30, 2006 and 2005 the Company
reclassified $20,260 and $31,820, respectively, in overdrawn deposits as loans.

Directors and senior
officers deposit accounts at June 30, 2006 and 2005, were $543,063 and $399,421, respectively.




-20-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 8: Advances from the Federal Home Loan
Bank

Advances from the Federal Home Loan
Bank of Seattle mature as follows:


June 30,2006
     

     2005(Dollars
in Thousands)Within one
year
     
     
     

     $
     16,371
     
     

     $
     1,189One to two
years
     
     
     

     
     2,000
     
     

     
     4,696Two to three
years
     
     
     

     
     2,000
     
     

     
     2,000Three to four
years
     
     
     

     
     2,000
     
     

     
     Four to five
years
     
     
     

     
     
     
     

     
     2,000Thereafter
     
     
     

     
     
     
     

     
     Total
     
     
     

     $
     22,371
     
     

     $
     9,885
 One advance requires annual principal
payments totaling $666,667. The remaining advances are due at maturity. The advances are subject to prepayment penalties. With the exception of one
advance which is adjustable (tied to the prime rate), the interest rates on advances are fixed. The weighted average interest rate for advances at June
30, 2006 and 2005 was 4.96% and 3.78% respectively. The weighted average amount outstanding was $12,665,000 and $5,093,000 for the years ended June 30,
2006 and 2005, respectively.

The maximum amount outstanding at any
month-end was $22,602,000 and $9,885,185 during the years ended June 30, 2006 and 2005, respectively.

The advances are collateralized by
investment securities pledged to the FHLB of Seattle and a blanket pledge of the Banks 1-4 family residential mortgage portfolio. At June 30,
2006 and 2005, the Company exceeded the collateral requirements of the FHLB. The Companys investment in FHLB stock is also pledged as collateral
on these advances. The total FHLB funding line available to the Company at June 30, 2006, was 25% of total Bank assets, or approximately
$55,748,000.

NOTE 9: Subordinated Debentures

On September 28, 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 on
December 15, 2005. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred
securities is fixed at 6.02% until December 15, 2010 then becomes variable at 3-Month LIBOR plus 1.42%. 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 15, 2035 unless the Company elects
and obtains regulatory approval to accelerate the maturity date to as early as December 15, 2010.




-21-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 9: Subordinated Debentures  continued


For the year ended June 30, 2006,
interest expense on the subordinated debentures was $234,472.

Subordinated debt may be included in
regulatory Tier 1 capital subject to a limitation that such amounts not exceed 25% of Tier 1 capital. The remainder of subordinated debt is included in
Tier II capital. There is no limitation for inclusion of subordinated debt in total risk-based capital and, as such, all subordinated debt was included
in total risk-based capital.

NOTE 10: Legal Contingencies

Various legal claims also arise from
time to time in the normal course of business which, in the opinion of management, will have no material effect on the Companys financial
statements.

NOTE 11: Income Taxes

The components of the Companys
income tax provision are as follows:


Years Ended June 30,2006
     

     2005(Dollars
in Thousands)CurrentU.S.
federal
     
     
     

     $
     531
     
     

     $
     519Montana
     
     
     

     
     143
     
     

     
     132674
     
     

     
     651DeferredU.S.
federal
     
     
     

     
     (37
     )
     

     
     (30
     )Montana
     
     
     

     
     (8
     )
     

     
     (6
     )(45
     )
     

     
     (36
     )Total
     
     
     

     $
     629
     
     

     $
     615
 The nature and components of deferred
tax assets and liabilities, which are a component of other assets (in 2006) and accrued liabilities (in 2005) in the accompanying statement of
financial condition, are as follows:




-22-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 11: Income Taxes  continued





June 30,2006
     

     2005(Dollars
in Thousands)Deferred tax
assets:Deferred
compensation
     
     
     

     $
     307
     
     

     $
     289Loans
receivable
     
     
     

     
     56
     
     

     
     45Mortgage
servicing rights
     
     
     

     
     
     
     

     
     17Securities
available for sale
     
     
     

     
     702
     
     

     
     225Other
     
     
     

     
     18
     
     

     
     18Total
deferred tax assets
     
     
     

     
     1,083
     
     

     
     594Deferred tax
liabilities:Premises and
equipment
     
     
     

     
     227
     
     

     
     246Deferred loan
fees
     
     
     

     
     22
     
     

     
     35FHLB
stock
     
     
     

     
     490
     
     

     
     490Unrealized
gain on hedging
     
     
     

     
     6
     
     

     
     10Other
     
     
     

     
     17
     
     

     
     20Total
deferred tax liabilities
     
     
     

     
     762
     
     

     
     801Net deferred
tax asset (liability)
     
     
     

     $
     321
     
     

     $
     (207
     )
 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 to the statutory federal income tax rate is as follows:


Years Ended June 30,2006
     

     2005(Dollars
in Thousands)Federal
income taxes at the statutory rate of 34%
     
     
     

     $
     821
     
     

     $
     802State income
taxes
     
     
     

     
     135
     
     

     
     126Nontaxable
income
     
     
     

     
     (312
     )
     

     
     (237
     )Other,
net
     
     
     

     
     (15
     )
     

     
     (76
     )Income tax
expense
     
     
     

     $
     629
     
     

     $
     615Effective tax
rate
     
     
     

     
     26.1
     %
     

     
     26.1
     %
 -23-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 11: Income Taxes  continued


Prior to January 1, 1987, the Company
was allowed a special bad debt deduction limited generally in the current year to 32% (net of preference tax) of otherwise taxable income and subject
to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amounts that qualified as deductions for
federal income tax purposes are later used for purposes other than for bad debt losses, they will be subject to federal income tax at the then current
corporate rate. Retained earnings include approximately $915,000 at June 30, 2006 and 2005, for which federal income tax has not been
provided.

NOTE 12: Comprehensive Income

Comprehensive income represents the sum
of net income and items of other comprehensive income that are reported directly in stockholders equity, such as the change during
the period in the after-tax net unrealized gain or loss on securities available-for-sale.

The Companys other comprehensive
(loss) income is summarized as follows for the years ended June 30:


2006
     

     2005(Dollars
in Thousands)Net unrealized holding gain or loss arising during the year:Available for
sale securities, net of related income tax (benefit) expense of $(480) and $337, respectively
     
     
     

     $
     (788
     )
     

     $
     555Forward
delivery commitments, net of related income tax (benefit) expense of $(5) and $3, respectively
     
     
     

     
     (7
     )
     

     
     5Reclassification adjustment for net realized gain included in net income, net of related income tax expense of $0 and $2,
respectively
     
     
     

     
     
     
     

     
     (2
     )Other
comprehensive (loss) income
     
     
     

     $
     (795
     )
     

     $
     558
 -24-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 13: Supplemental Cash Flow
Information


2006
     

     2005(Dollars
in Thousands)Supplemental
Cash Flow InformationCash paid
during the year for interest
     
     
     

     $
     3,948
     
     

     $
     2,558Cash paid
during the year for income taxes
     
     
     

     
     640
     
     

     
     451Non-Cash
Investing ActivitiesDecrease
(increase) in market value of securities available for sale
     
     
     

     $
     1,265
     
     

     $
     (888
     )Mortgage
servicing rights capitalized
     
     
     

     
     174
     
     

     
     219ESOP shares
released
     
     
     

     
     113
     
     

     
     116
 NOTE 14: Regulatory Capital Requirements

The Bank is 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 Banks
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Banks capital amounts and classifications are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core
capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as
defined). Management believes, as of June 30, 2006 and 2005, that the Bank meets all capital adequacy requirements to which it is
subject.

The most recent notification from the
Office of Thrift Supervision (OTS) (as of January 3, 2006) 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 tangible, core, and risk-based ratios as set forth in
the table below. The Banks actual capital amounts (in thousands) and ratios are presented in the table below:




-25-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 14: Regulatory Capital Requirements  continued




(Dollars in Thousands)ActualMinimum Capital RequirementMinimum To Be Well Capitalized Under Prompt
Corrective Action ProvisionsJune 30, 2006:AmountRatioAmountRatioAmountRatioTotal Risk-based Capital to Risk Weighted AssetsConsolidated
     
     
     

     $
     29,212
     
     

     
     17.93
     %
     

     $
     13,035
     
     

     
     8.00
     %
     

     $
     N/A
     
     

     
     N/A
     %Bank
     
     
     

     
     25,590
     
     

     
     15.79
     
     

     
     12,961
     
     

     
     8.00
     
     

     
     16,202
     
     

     
     10.00Tier
I Capital to Risk Weighted AssetsConsolidated
     
     
     

     
     28,709
     
     

     
     17.62
     
     

     
     6,518
     
     

     
     4.00
     
     

     
     N/A
     
     

     
     N/ABank
     
     
     

     
     25,087
     
     

     
     15.48
     
     

     
     6,481
     
     

     
     4.00
     
     

     
     9,721
     
     

     
     6.00Tier
I Capital to Adjusted Total AssetsConsolidated
     
     
     

     
     28,709
     
     

     
     12.59
     
     

     
     6,481
     
     

     
     3.00
     
     

     
     N/A
     
     

     
     N/ABank
     
     
     

     
     25,087
     
     

     
     11.16
     
     

     
     6,742
     
     

     
     3.00
     
     

     
     11,237
     
     

     
     5.00Tangible Capital to Adjusted Total AssetsConsolidated
     
     
     

     
     23,554
     
     

     
     10.33
     
     

     
     3,420
     
     

     
     1.50
     
     

     
     N/A
     
     

     
     N/ABank
     
     
     

     
     25,087
     
     

     
     11.16
     
     

     
     3,371
     
     

     
     1.50
     
     

     
     N/A
     
     

     
     N/AJune 30, 2005:Total Risk-based Capital to Risk Weighted AssetsConsolidated
     
     
     

     
     23,050
     
     

     
     16.19
     
     

     
     11,393
     
     

     
     8.00
     
     

     
     N/A
     
     

     
     N/ABank
     
     
     

     
     25,161
     
     

     
     17.69
     
     

     
     11,391
     
     

     
     8.00
     
     

     
     14,239
     
     

     
     10.00Tier
I Capital to Risk Weighted AssetsConsolidated
     
     
     

     
     22,502
     
     

     
     15.80
     
     

     
     5,697
     
     

     
     4.00
     
     

     
     N/A
     
     

     
     N/ABank
     
     
     

     
     24,613
     
     

     
     17.29
     
     

     
     5,696
     
     

     
     4.00
     
     

     
     8,543
     
     

     
     6.00Tier
I Capital to Adjusted Total AssetsConsolidated
     
     
     

     
     22,502
     
     

     
     10.87
     
     

     
     6,209
     
     

     
     3.00
     
     

     
     N/A
     
     

     
     N/ABank
     
     
     

     
     24,613
     
     

     
     11.77
     
     

     
     6,275
     
     

     
     3.00
     
     

     
     10,459
     
     

     
     5.00Tangible Capital to Adjusted Total AssetsConsolidated
     
     
     

     
     22,502
     
     

     
     10.87
     
     

     
     3,105
     
     

     
     1.50
     
     

     
     N/A
     
     

     
     N/ABank
     
     
     

     
     24,613
     
     

     
     11.77
     
     

     
     3,138
     
     

     
     1.50
     
     

     
     N/A
     
     

     
     N/A
 -26-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 14: Regulatory Capital Requirements  continued


A reconciliation of the Banks
capital (in thousands) determined by generally accepted accounting principles to capital defined for regulatory purposes, is as
follows:


June 30,2006
     

     2005(Dollars
in Thousands)Capital
determined by generally accepted accounting principles
     
     
     

     $
     24,144
     
     

     $
     24,375Unrealized
loss on securities available-for-sale
     
     
     

     
     1,091
     
     

     
     369Unrealized
loss on equity securities
     
     
     

     
     (138
     )
     

     
     (115
     )Unrealized
gain on forward delivery commitments
     
     
     

     
     (10
     )
     

     
     (16
     )Tier I (core)
capital
     
     
     

     
     25,087
     
     

     
     24,613General
allowance for loan losses
     
     
     

     
     503
     
     

     
     548Total risk
based capital
     
     
     

     $
     25,590
     
     

     $
     25,161
 Dividend Limitations

Under OTS regulations that became effective April 1, 1999,
savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to net income for the current year plus net
income retained for the two preceding years. Dividends in excess of such amount requires OTS approval. The Bank has paid dividends totaling $1,433,000
and $363,000 to the Company during the years ended June 30, 2006, and 2005, respectively. The Company had paid four quarterly dividends of $0.20 per
share to its shareholders for the year ended June 30, 2006, and four quarterly dividends of $0.18 per share to its shareholders for the year ended June
30, 2005.

Liquidation Rights

All depositors who had liquidation rights with respect to the
Bank as of the effective date of the Reorganization continue to have such rights solely with respect to the Mutual Holding Company, as long as they
continue to hold deposit accounts with the Bank. In addition, all persons who become depositors of the Bank subsequent to the Reorganization will have
liquidation rights with respect to the Mutual Holding Company.




-27-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 15: Employee Benefits

Profit Sharing Plan

The Company provides a noncontributory profit sharing plan for
eligible employees who have completed one year of service. The amount of the Companys annual contribution, limited to a maximum of 15% of
qualified employees salaries, is determined by the Board of Directors. Profit sharing expense was $145,230 and $143,336 for the years ended June
30, 2006 and 2005, respectively.

The Companys profit sharing plan includes a 401(k) feature.
At the discretion of the Board of Directors, the Company may match up to 50% of participants contributions up to a maximum of 4% of
participants salaries. For the years ended June 30, 2006 and 2005, the Companys match totaled $39,484 and $39,534,
respectively.

Deferred Compensation Plans

The Company has entered into deferred compensation contracts with
current key employees. The contracts provide fixed benefits payable in equal annual installments upon retirement. The Company purchased life insurance
contracts that may be used to fund the payments. The charge to expense is based on the present value computations of anticipated liabilities. For the
years ended June 30, 2006 and 2005, the total expense was $92,159 and $92,006, respectively.

Employee Stock Ownership Plan

The Company has established an ESOP for eligible employees who
meet certain age and service requirements. The ESOP borrowed $368,048 from Eagle Bancorp and used the funds to purchase 46,006 shares of common stock
in the offering. The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan that has a ten-year
term and bears interest at 8%. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and
interest payments on the loan.

Shares purchased by the ESOP are held in a suspense account by
the plan trustee until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their
relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed seven years. Any
forfeited shares are allocated to other participants in the same proportion as contributions.

Total ESOP expenses of $134,832 and $135,311 were recognized in
fiscal 2006 and 2005, respectively, for 4,600 shares committed to be released to participants during the years ended June 30, 2006 and 2005 with
respect to the plan years ending December 31, 2005 and 2004. The cost of the 16,106 ESOP shares ($128,848 at June 30, 2006) that have not yet been
allocated or committed to be released to participants is deducted from stockholders equity. The fair value of these shares was approximately
$508,950 at that date.




-28-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 15: Employee Benefits  continued


Stock Incentive Plan

The Company adopted the Stock Incentive Plan (the
Plan) on October 19, 2000. The Plan provides for different types of awards including stock options, restricted stock and performance shares.
Under the Plan, 23,000 shares of restricted stock were granted to directors and certain officers during fiscal 2001. These shares of restricted stock
vest in equal installments over five years beginning one year from the grant date.

During fiscal 2006 and 2005, 4,600 and 4,600 shares vested and
were removed from treasury stock resulting in compensation expense of $26,450 and $52,900, respectively.

There were no stock options granted under the Plan as of June 30,
2006.

NOTE 16: Financial Instruments and Off-Balance-Sheet
Activities

All financial instruments held or
issued by the Company are held or issued for purposes other than trading. In the ordinary course of business, the Company enters into off-balance-sheet
financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary
market.

Commitments to extend credit
 In response to marketplace demands, the Company routinely makes commitments to extend credit for fixed rate and variable rate loans with or
without rate lock guarantees. When rate lock guarantees are made to customers, the Company becomes subject to market risk for changes in interest rates
that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor.

Generally, as interest rates increase,
the market value of the loan commitment goes down. The opposite effect takes place when interest rates decline.

Commitments to extend credit are
agreements to lend to a customer as long as the borrower satisfies the Companys underwriting standards and related provisions of the borrowing
agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company uses the same
credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans,
and normally consists of real property. The Companys experience has been that substantially all loan commitments are completed or terminated by
the borrower within 3 to 12 months.




-29-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 16: Financial Instruments and Off-Balance-Sheet
Activities  continued


The notional amount of the
Companys commitments to extend credit at fixed and variable interest rates were approximately $3,326,000 and $6,549,000 at June 30, 2006 and
2005, respectively. Fixed rate commitments are extended at rates ranging from 5.00% to 7.90% and 4.875% to 7.875% at June 30, 2006 and 2005,
respectively. The Company has lines of credit representing credit risk of approximately $29,793,000 and $24,351,000 at June 30, 2006 and 2005,
respectively, of which approximately $14,263,000 and $12,516,000 had been drawn at June 30, 2006 and 2005, respectively. The Company has credit cards
issued representing credit risk of approximately $596,000 and $3,180,000 at June 30, 2006 and 2005, respectively, of which approximately $21,000 and
$525,000 had been drawn at June 30, 2006 and 2005, respectively. The Company has letters of credits issued representing credit risk of approximately
$1,226,000 and $74,000 at June 30, 2006 and 2005, respectively.

Forward delivery commitments
 The Company uses mandatory sell forward delivery commitments to sell whole loans. These commitments are also used as a hedge against exposure to
interest-rate risks resulting from rate locked loan origination commitments on certain mortgage loans held-for-sale. Gains and losses in the items
hedged are deferred and recognized in other comprehensive income until the commitments are completed. At the completion of the commitments the gains
and losses are recognized in the Companys income statement

As of June 30, 2006 and 2005, the
Company had entered into commitments to deliver approximately $918,000 and $2,129,000 respectively, in loans to various investors, all at fixed
interest rates ranging from 5.00% to 6.50% and 5.00% to 5.75%, at June 30, 2006 and 2005, respectively. The Company had approximately $15,000 and
$27,000 of gains deferred as a result of the forward delivery commitments entered into as of June 30, 2006 and 2005, respectively. The total amount of
the gain is expected to be taken into income within the next twelve months.

The Company did not have any gains or
losses reclassified into earnings as a result of the ineffectiveness of its hedging activities. The Company considers its hedging activities to be
highly effective.

The Company did not have any gains or
losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted
transaction would not occur by the end of the originally specified time frame as of June 30, 2006.

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.




-30-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 17: Fair Value 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 necessarily 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 30,20062005(Dollars in Thousands)Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair ValueFinancial Assets:Cash and cash
equivalents
     
     
     

     $
     2,871
     
     

     $
     2,871
     
     

     $
     4,966
     
     

     $
     4,966Securities
available-for-sale
     
     
     

     
     64,198
     
     

     
     64,198
     
     

     
     75,227
     
     

     
     75,227Securities
held-to-maturity
     
     
     

     
     1,018
     
     

     
     1,030
     
     

     
     1,201
     
     

     
     1,249Federal Home
Loan Bank Stock
     
     
     

     
     1,315
     
     

     
     1,315
     
     

     
     1,315
     
     

     
     1,315Mortgage
loans held-for-sale
     
     
     

     
     918
     
     

     
     918
     
     

     
     2,148
     
     

     
     2,148Loans
receivable, net
     
     
     

     
     140,858
     
     

     
     139,720
     
     

     
     106,839
     
     

     
     108,740Mortgage
servicing rights
     
     
     

     
     1,722
     
     

     
     2,043
     
     

     
     1,857
     
     

     
     1,857Cash value of
life insurance
     
     
     

     
     5,230
     
     

     
     5,230
     
     

     
     5,049
     
     

     
     5,049Financial Liabilities:Deposits
     
     
     

     
     95,713
     
     

     
     95,713
     
     

     
     94,513
     
     

     
     94,513Time
certificates of deposit
     
     
     

     
     78,629
     
     

     
     77,125
     
     

     
     77,984
     
     

     
     77,320Advances from
FHLB
     
     
     

     
     22,371
     
     

     
     22,216
     
     

     
     9,885
     
     

     
     10,119Subordinated
debentures
     
     
     

     
     5,155
     
     

     
     4,451
     
     

     
     
     
     

     
     
 The following methods and assumptions
were used by the Company in estimating the fair value of the following classes of financial instruments.

Cash and interest-bearing
accounts  The carrying amounts approximate fair value due to the relatively short period of time between the origination of these instruments
and their expected realization.

Investment securities and stock in
the FHLB  The fair value of investment securities is estimated based on bid quotations received from securities dealers. The fair value of
stock in the FHLB approximates redemption value.




-31-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 17: Fair Value of Financial Instruments  continued


Loans receivable and mortgage loans
held-for-sale  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, including loans
held-for-sale, 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 
Fair values are estimated by stratifying the mortgage servicing portfolio into groups of loans with similar financial characteristics, such as loan
type, interest rate, and expected maturity. The Company obtains market survey data estimates and bid quotations from secondary market investors who
regularly purchase mortgage servicing rights. Assumptions regarding loan payoffs are determined using historical information on segmented loan
categories for nonspecific borrowers.

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 &
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, 2006, if the borrowings repriced according to their stated terms.




-32-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 18 Significant Group Concentrations of Credit Risk

Most of the Companys business
activity is with customers located within the South-central Montana area. As of June 30, 2006 and 2005, the Companys commercial and residential
real estate loans approximated $101,462,000 and $74,035,000, respectively. The Company is also active in lending to small business owners. As of June
30, 2006 and 2005, the Bank was creditor for approximately $7,861,000 and $5,568,000, respectively, in business loans. In most cases, these loans are
secured by equipment, inventory, and accounts receivable.

Generally, the Companys policy is
to require collateral on all loans. Ordinarily, the Company will finance 80% of the appraisal value in real estate. Collateral requirements for other
financings vary depending on the type of collateral involved, the equity of the borrower or project, and other subjective factors. Unsecured credit is
granted to business concerns and individuals only if supported by satisfactory current financial statements and credit history.

The distribution of commitments to
extend credit approximates the distribution of loans outstanding. The Company, as a matter of policy, does not extend credit in excess of its legal
lending limit, calculated in accordance with applicable banking regulations, to any single borrower or group of related borrowers. The contractual
amounts of credit-related financial instruments such as commitments to extend credit and letters of credit represent the amounts of potential
accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral becomes
worthless.

The Company carries certain assets with
other financial institutions which are subject to credit risk by the amount such assets exceed federal deposit insurance limits. At June 30, 2006 and
June 30, 2005, no account balances were held with correspondent banks that were in excess of FDIC insured levels. Also, from time to time, the Company
is due amounts in excess of FDIC insurance limits for checks and transit items. Management monitors the financial stability of correspondent banks and
considers amounts advanced in excess of FDIC insurance limits to present no significant additional risk to the Company.




-33-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 19: Condensed Parent Company Financial Statements

Set forth below is the condensed
statements of financial condition as of June 30, 2006 and 2005, of Eagle Bancorp together with the related condensed statements of income and cash
flows for the years ended June 30, 2006 and 2005.

Condensed Statements of Financial
Condition(Dollars in Thousands)




2006
     

     2005AssetsCash and cash
equivalents
     
     
     

     $
     315
     
     

     $
     157Securities
available for sale
     
     
     

     
     2,778
     
     

     
     125Investment in
Eagle Bancorp Statutory Trust I
     
     
     

     
     155
     
     

     
     Investment in
American Federal Savings Bank
     
     
     

     
     24,145
     
     

     
     24,375Other
assets
     
     
     

     
     320
     
     

     
     116Total
assets
     
     
     

     $
     27,713
     
     

     $
     24,773Liabilities and stockholders equityAccounts
payable and accrued expenses
     
     
     

     
     13
     
     

     
     8Notes
Payable
     
     
     

     
     
     
     

     
     2,500Long-term
subordinated debt
     
     
     

     
     5,155
     
     

     
     Stockholders Equity
     
     
     

     
     22,545
     
     

     
     22,265Total
liabilities and stockholders equity
     
     
     

     $
     27,713
     
     

     $
     24,773
 Condensed Statements of Income(Dollars in Thousands)




2006
     

     2005Interest
income
     
     
     

     $
     88
     
     

     $
     17Other
income
     
     
     

     
     
     
     

     
     15Interest
expense
     
     
     

     
     (257
     )
     

     
     (44
     )Noninterest
expense
     
     
     

     
     (114
     )
     

     
     (103
     )Loss before
income taxes
     
     
     

     
     (283
     )
     

     
     (115
     )Income tax
benefit
     
     
     

     
     (135
     )
     

     
     (47
     )Loss before
equity in undistributed earnings of American Federal Savings Bank
     
     
     

     
     (148
     )
     

     
     (68
     )Equity in
undistributed earnings of American Federal Savings Bank
     
     
     

     
     1,933
     
     

     
     1,811Net
income
     
     
     

     $
     1,785
     
     

     $
     1,743
 -34-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 19: Condensed Parent Company Financial Statements  continued


Condensed Statements of Cash Flow(Dollars in Thousands)




2006
     

     2005Cash flows from operating activitiesNet
income
     
     
     

     $
     1,785
     
     

     $
     1,743Adjustments to reconcile net income to net cash used in operating activities:Equity in
undistributed earnings of American Federal Savings Bank
     
     
     

     
     (1,933
     )
     

     
     (1,811
     )Restricted
stock awards
     
     
     

     
     53
     
     

     
     53Other
adjustments, net
     
     
     

     
     (158
     )
     

     
     21Net cash
(used in) provided by operating activities
     
     
     

     
     (253
     )
     

     
     6Cash flows from investing activitiesCash
contribution from American Federal Savings Bank
     
     
     

     
     1,433
     
     

     
     414Activity in
available for sale securitiesSales
     
     
     

     
     
     
     

     
     1,095Maturities,
prepayments and calls
     
     
     

     
     34
     
     

     
     57Purchases
     
     
     

     
     (2,795
     )
     

     
     Investment in
Eagle Bancorp Statutory Trust I
     
     
     

     
     (155
     )
     

     
     Net cash
(used in) provided by investing activities
     
     
     

     
     (1,483
     )
     

     
     1,566Cash flows from financing activitiesESOP payments
and dividends
     
     
     

     
     152
     
     

     
     160Payments to
purchase treasury stock
     
     
     

     
     (554
     )
     

     
     (3,903
     )Net changes
in notes payable advances
     
     
     

     
     (2,500
     )
     

     
     2,500Proceeds from
subordinated debentures
     
     
     

     
     5,155
     
     

     
     Dividends
paid
     
     
     

     
     (359
     )
     

     
     (363
     )Net cash
provided by (used in) financing activities
     
     
     

     
     1,894
     
     

     
     (1,606
     )Net change in
cash and cash equivalents
     
     
     

     
     158
     
     

     
     (34
     )Cash and cash
equivalents at beginning of period
     
     
     

     
     157
     
     

     
     191Cash and
cash equivalents at end of period
     
     
     

     $
     315
     
     

     $
     157
 -35-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 20: Quarterly Results of Operations
(Unaudited)

The following is a condensed summary of
quarterly results of operations for the years ended June 30, 2006 and 2005:


Year ended June 30, 2006First Quarter
     

     Second Quarter
     

     Third Quarter
     

     Fourth Quarter(Dollars in Thousands, except per share data)Interest and
dividend income
     
     
     

     $
     2,438
     
     

     $
     2,586
     
     

     $
     2,661
     
     

     $
     2,814Interest
expense
     
     
     

     
     768
     
     

     
     896
     
     

     
     981
     
     

     
     1,140Net interest
income
     
     
     

     
     1,670
     
     

     
     1,690
     
     

     
     1,680
     
     

     
     1,674Non interest
income
     
     
     

     
     643
     
     

     
     517
     
     

     
     474
     
     

     
     531Non interest
expense
     
     
     

     
     1,592
     
     

     
     1,637
     
     

     
     1,634
     
     

     
     1,602Income before
income tax expense
     
     
     

     
     721
     
     

     
     570
     
     

     
     520
     
     

     
     603Income tax
expense
     
     
     

     
     222
     
     

     
     125
     
     

     
     117
     
     

     
     165Net
income
     
     
     

     $
     499
     
     

     $
     445
     
     

     $
     403
     
     

     $
     438Comprehensive
income (loss)
     
     
     

     $
     (183
     )
     

     $
     (226
     )
     

     $
     (33
     )
     

     $
     (353
     )Basic
earnings per common share
     
     
     

     $
     0.46
     
     

     $
     0.41
     
     

     $
     0.37
     
     

     $
     0.41Diluted
earnings per common share
     
     
     

     $
     0.41
     
     

     $
     0.37
     
     

     $
     0.33
     
     

     $
     0.36
 Year ended June 30, 2005Interest and
dividend income
     
     
     

     $
     2,207
     
     

     $
     2,273
     
     

     $
     2,261
     
     

     $
     2,302Interest
expense
     
     
     

     
     639
     
     

     
     621
     
     

     
     629
     
     

     
     674Net interest
income
     
     
     

     
     1,568
     
     

     
     1,652
     
     

     
     1,632
     
     

     
     1,628Non interest
income
     
     
     

     
     432
     
     

     
     622
     
     

     
     548
     
     

     
     457Non interest
expense
     
     
     

     
     1,499
     
     

     
     1,558
     
     

     
     1,559
     
     

     
     1,565Income before
income tax expense
     
     
     

     
     501
     
     

     
     716
     
     

     
     621
     
     

     
     520Income tax
expense
     
     
     

     
     144
     
     

     
     147
     
     

     
     176
     
     

     
     148Net
income
     
     
     

     $
     357
     
     

     $
     569
     
     

     $
     445
     
     

     $
     372Comprehensive
income (loss)
     
     
     

     $
     866
     
     

     $
     (246
     )
     

     $
     (482
     )
     

     $
     420Basic
earnings per common share
     
     
     

     $
     0.31
     
     

     $
     0.50
     
     

     $
     0.40
     
     

     $
     0.34Diluted
earnings per common share
     
     
     

     $
     0.30
     
     

     $
     0.48
     
     

     $
     0.37
     
     

     $
     0.30
 NOTE 21: Related Party Transactions

The Bank has contracted with a
subsidiary of a company which is partially owned by one of the Companys directors. The Bank paid $33,500 during the year ended June 30, 2006 for
support services, and an additional $20,454 for computer hardware and software used by the Bank for its computer network. For the year ended June 30,
2005, expenditures were $21,540 for support services and $21,445 for computer hardware.




-36-

EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2006 and 2005


NOTE 22: Subsequent Events

The Board announced on July 20, 2006
the declaration of a cash dividend of $0.22 per share for the fourth quarter. It is payable August 25, 2006 to shareholders of record at the close of
business August 4, 2006. Eagle Financial MHC, Eagle Bancorps mutual holding company, has waived its right to receive dividends on the 648,493
shares of Eagle Bancorp that Eagle Financial MHC holds.




-37-

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant causes this report to be signed on its behalf by the undersigned, thereunto duly authorized.




EAGLE BANCORP/s/ Larry A. Dreyer Larry A. Dreyer President and Chief Executive Officer
 In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.




Signatures
     
     
     

     Title
     

     Date/s/ Larry A.
Dreyer Larry A. Dreyer
     
     
     

     President, Chief Executive Officer and Director (Principal Executive Officer)
     

     9/15/06/s/ Peter J.
Johnson Peter J. Johnson
     
     
     

     Executive Vice President And Chief Financial Officer
     

     9/15/06/s/ Robert
L. Pennington Robert L. Pennington
     
     
     

     Chairman
     

     9/15/06/s/ Charles
G. Jacoby Charles G. Jacoby
     
     
     

     Vice
Chairman
     

     9/15/06/s/ Don O.
Campbell Don O. Campbell
     
     
     

     Director
     

     9/15/06/s/ Lynn
Dickey Lynn Dickey
     
     
     

     Director
     

     9/15/06/s/ James A.
Maierle James A. Maierle
     
     
     

     Director
     

     9/15/06/s/ Thomas
McCarvel Thomas McCarvel
     
     
     

     Director
     

     9/15/06
 38