September 21, 2009




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,
2009.




Throughout the year there has been extensive media coverage
of the significant challenges facing the banking industry and the extraordinary measures taken by the Federal Reserve Bank and the U.S. Treasury
Department to stabilize the financial markets. The coverage at times has been confusing, with the large national banks and Wall Street investment firms
experiencing much of the problem as well as garnering much attention from the government. Community banks such as American Federal have at times been lumped in with the
larger banks by the media coverage, yet have not been major contributors to the banking industrys problems. Still, credit quality problems and
the housing related slowdown continue to be significant areas of concern in parts of the country. However, I am pleased to report that the Company has
performed well notwithstanding these national developments. Montana in general, and our local markets specifically, have avoided much of the economic
downturn experienced in other parts of the country. Our credit quality remains excellent, with low loan delinquency rates compared to institutions in
other, more distressed markets.




The Companys performance marks another successful
year, with an increase in net income of $278,000, or 13.2% over the previous year. Basic earnings per share also increased from $1.97 to $2.23. Three
main factors should be taken into consideration when reviewing this years results.


| |  | Short-term interest rates continued to decline over the past
year, with long-term interest rates also declining. Interest rates on mortgages fell significantly in early 2009, which sparked a significant increase
in mortgage refinance activity. This in turn led to two reasons for the strong performance by the Company. First, the decline in short-term interest
rates allowed the Company to lower its interest expense, leading to an increase in its net interest income of over 24% (before provision for loan
losses). Secondly, the decline in mortgage rates, and corresponding increase in mortgage refinance activity, led to an increase in gain on sale of
loans of $1.415 million over the previous year.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | As mentioned in last years letter, the Company adopted
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, at the beginning of the 2008 fiscal year to account for its
holdings of FNMA and FHLMC preferred stock. Changes in market value of these securities flow through the income statement. In September 2008, the
federal government placed FNMA and FHLMC into conservatorship and eliminated the dividends on the preferred stock, which caused a dramatic reduction in
the market value of the stock. The Company wrote down the value of the stock by $1.296 million during the year, leaving only a small residual value
($25,000). FNMA and FHLMC will be restructured in the future but it is unlikely that any significant recovery will be made of the value of the
preferred stock.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company increased its loan loss provision by $257,000 during
the year, after taking $175,000 of its reserve back into income in the previous year. While the Companys level of non-performing loans is lower
than its peers, we have experienced a small increase in loan delinquencies. Delinquencies still remain relatively low, however the other quantitative
and qualitative factors considered by management led to the decision to increase the provision. For example, national and state unemployment numbers
have increased during the year and home sale activity has slowed. Also, the Companys level of non-performing loans as a percentage of
assets
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| |  | increased slightly, from 0.01% to 0.43%. Our continued
conservative underwriting and strong local economies will serve us well during the coming year.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



Growth in assets slowed to 3.50% (compared to last
years growth of 14.39%), with loans receivable decreasing slightly. The slower asset growth coupled with our strong earnings increased our core
capital ratio from 9.16% to 9.59%. Deposit growth was stronger than in recent years, with an increase of 4.67%. The funding side of our business
continues to be a challenge, with this years success attributable to our increased marketing efforts and expanded deposit product line. We have
many sources of additional liquidity available to us and have used these to manage our interest costs and to manage our balance sheet.




Our plan for the coming year includes continuing to manage
the growth in our balance sheet by funding growth in the loan portfolio with modest deposit growth and maturities and repayments from our investment
portfolio. We continue to place an emphasis on growing the Companys commercial and commercial real estate loan portfolios.




Our retail branch operations continue to grow and improve.
We are pleased to announce that our new full service branch in the Skyway Mall in Helena opened in January and has been a very active location.
Also, construction is nearly complete on our new Oak Street location in Bozeman, with the opening expected next month (October). We will maintain our
current location on North 7th Avenue as a drive-up only facility. The remodel of our
Townsend office was also completed this year and we have seen an increase in activity at our drive-up ATM there as well.




We sincerely appreciate the continuing trust and loyalty of
our constituencies  Stockholders, Customers, Employees and Communities. We will work to earn your continued confidence as we thank you for
the privilege of serving you!




Very Sincerely,






Peter J. Johnson President/CEO


---










UNITED STATES SECURITIES AND EXCHANGE
COMMISSION




Washington, D.C. 20549









FORM 10-K




(Mark One)


|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2009
|--- |  | ---------------------------------------------------------------------------------------------------------------------------



or


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



For the transition period from _________________________
to _________________________




Commission file number 0-29687




Eagle Bancorp




(Exact name of registrant as specified in its charter)







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



Registrants telephone number, including area code
406-442-3080




Securities registered pursuant to Section 12(b) of the
Act:







|Title of each
class |  |  |  | Name of each
exchange on which registered
|------------------- |  |  |  | -----------------------------------------
|                   
|                    |  |  |  |                                          








Securities registered pursuant to section 12(g) of the
Act:




Common stock, par value $0.01 per share




(Title of Class)




(Title of
Class)




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.




[  ] Yes    [X] No




Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.




[  ] Yes    [X] No




Note  Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.


---



Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.




[X] Yes     [  ]
No




Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).




[  ] Yes
    [  ] No


|Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. |  | [  ]
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----



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







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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).




[  ] Yes    [X] No




State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrants most recently completed second fiscal quarter.




Note.  If a determination as to whether a particular
person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held
by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this
Form.




APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:




Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.




[  ] Yes    [  ]
No




(APPLICABLE ONLY TO CORPORATE
REGISTRANTS)




Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest practicable date. There were 1,074,507 shares outstanding as of August 31,
2009.




DOCUMENTS INCORPORATED BY REFERENCE




Portions of the registrants Proxy Statement involving
the election of directors, which is expected to be filed within 120 days after the end of the registrants fiscal year, are incorporated by
reference in Part III of this Report.


---



TABLE OF CONTENTS







|Item No. |  |  |  |                                                                                                                  |  | Page No.
|-------- |  |  |  | ---------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |  |  | Part
I                                                                                                          
|1        |  |  |  | Description of
Business                                                                                          |  |         
|2        |  |  |  | Description of
Property                                                                                          |  |         
|3        |  |  |  | Legal
Proceedings                                                                                                |  |         
|4        |  |  |  | Submission of
Matters to a Vote of Security Holders                                                              |  |         
|         |  |  |  | Part
II                                                                                                         
|5        |  |  |  | Market for
Common Equity, Related Stockholder Matters and Small Business Issuers Purchases of Equity Securities |  |         
|7        |  |  |  | Managements Discussion and Analysis or Plan of Operation                                                        |  |         
|8        |  |  |  | Financial
Statements                                                                                             |  |         
|9A       |  |  |  | Controls and
Procedures                                                                                          |  |         
|9B       |  |  |  | Other
Information                                                                                                |  |         
|         |  |  |  | Part
III                                                                                                        
|10       |  |  |  | Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act  |  |         
|11       |  |  |  | Executive
Compensation                                                                                           |  |         
|12       |  |  |  | Security
Ownership of Certain Beneficial Owners, and Management and Related Stockholder Matters                  |  |         
|13       |  |  |  | Certain
Relationships and Related Transactions                                                                   |  |         
|14       |  |  |  | Principal
Accountant Fees and Services                                                                           |  |         
|         |  |  |  | Part
IV                                                                                                         
|15       |  |  |  | Exhibits                                                                                                         |  |         

---





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. That represented 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 five full service offices and one satellite branch. We also have seven 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 by 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 and other borrowings, 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 and other borrowings.




Market Area




From our headquarters in Helena, Montana, we operate five
full service retail banking 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 Helena  Skyway (opened 2009), Bozeman (opened 1980), Butte (opened 1979) and Townsend (opened 1979), Montana. A
seventh branch will be opening in Bozeman approximately during the second quarter of fiscal year 2010.




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 59,300 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 80,900. Bozeman is home to Montana State University and has achieved its 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.




Butte, Montana is approximately 64 miles southwest of
Helena. Butte and the surrounding Silver-Bow County have a population of approximately 32,800. Buttes economy is somewhat reliant on the mining
industry. Buttes economy has been volatile from the fluctuations in metal and mineral commodity prices.




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 945,000 people,
there are 59 credit unions in Montana as well as two federally chartered thrift institutions, and 77 commercial banks as of June 30, 2009. 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, relatively 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, |        
|------------------------------------- |  |  |  | ----------- | -------
|
|
|
|First mortgage loans:                
|Residential
mortgage (1-4 family) (1) |  |  |  | $           | 79,216 
|Commercial
real estate                |  |  |  |             | 36,713 
|Real estate
construction              |  |  |  |             | 4,642  
|Total first
mortgage loans            |  |  |  |             | 120,571
|Other loans:                         
|Home
equity                           |  |  |  |             | 28,676 
|Consumer                              |  |  |  |             | 10,835 
|Commercial                            |  |  |  |             | 7,541  
|Total other
loans                     |  |  |  |             | 47,052 
|Total
loans                           |  |  |  |             | 167,623
|Less:                                
|Deferred loan
fees                    |  |  |  |             | (99    
|Allowance for
loan losses             |  |  |  |             | 525    
|Total loans,
net                      |  |  |  | $           | 167,197

|(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 $628,000 and $542,000 for the years ended June 30, 2009 and 2008, respectively. Other loan
related fee income for contract collections, late charges, credit life commissions and credit card fees were $78,000 and $61,000 for the years ended
June 30, 2009 and 2008, respectively.




Loan Maturity Schedule.




The following table sets forth the estimated maturity of
the loan portfolio of the Bank at June 30, 2009. 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.


|                                      |  |  |  | Within6 Months |        | 6 to 12Months |  | More than1 year to2 years |       | More than2 years to5 years |  | Over5 years |        | Total
|------------------------------------- |  |  |  | -------------- | ------ | ------------- |  | ------------------------- | ----- | -------------------------- |  | ----------- | ------ | -----
|
|Residential
mortgage (1-4 family) (1) |  |  |  | $              | 206    |               |  | $                         | 22    |                            |  | $           | 181    |      
|Commercial
real estate and land       |  |  |  |                | 1,942  |               |  |                           | 1,156 |                            |  |             | 5,206  |      
|Real estate
construction              |  |  |  |                | 3,608  |               |  |                           | 954   |                            |  |             |       |      
|Home
equity                           |  |  |  |                | 1,112  |               |  |                           | 1,975 |                            |  |             | 4,278  |      
|Consumer                              |  |  |  |                | 1,302  |               |  |                           | 397   |                            |  |             | 824    |      
|Commercial                            |  |  |  |                | 2,607  |               |  |                           | 983   |                            |  |             | 311    |      
|Total loans
(1)                       |  |  |  | $              | 10,777 |               |  | $                         | 5,487 |                            |  | $           | 10,800 |      

|(1) |  | Includes loans held for sale.
|--- |  | -----------------------------



The following table sets forth the dollar amount of all
loans, at June 30, 2009, due after June 30, 2010, which have fixed interest rates and which have floating or adjustable interest
rates:


|                                  |  |  |  | Fixed |         | Adjustable |  | Total
|--------------------------------- |  |  |  | ----- | ------- | ---------- |  | -----
|
|Residential
mortgage (1-4 family) |  |  |  | $     | 63,918  |            |  | $    
|Commercial
real estate and land   |  |  |  |       | 31,096  |            |  |      
|Real estate
construction          |  |  |  |       |        |            |  |      
|Home
equity                       |  |  |  |       | 22,434  |            |  |      
|Consumer                          |  |  |  |       | 8,640   |            |  |      
|Commercial                        |  |  |  |       | 3,030   |            |  |      
|Total loans
(1)                   |  |  |  | $     | 129,118 |            |  | $    
|Percent of
total                  |  |  |  |       | 82.39   | %          |  |      

|(1) |  | Due after June 30, 2010.
|--- |  | ------------------------



4


---



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


|                                                 |  |  |  | Ended June 30, |        
|------------------------------------------------ |  |  |  | -------------- | -------
|
|
|Net loans
receivable at beginning of period (1): |  |  |  | $              | 175,519
|Loans
originated:                                |  |  |  |                |        
|Residential
mortgage (1-4 family)                |  |  |  |                | 164,657
|Commercial
real estate and land                  |  |  |  |                | 21,500 
|Real estate
construction                         |  |  |  |                | 4,672  
|Home
equity                                      |  |  |  |                | 20,043 
|Consumer                                         |  |  |  |                | 8,341  
|Commercial                                       |  |  |  |                | 8,789  
|Total loans
originated:                          |  |  |  |                | 228,002
|Loans
sold:                                      |  |  |  |                |        
|Whole
loans                                      |  |  |  |                | 125,232
|Commercial
construction                          |  |  |  |                | 6,000  
|Total loans
sold                                 |  |  |  |                | 131,232
|Principal
repayments and loan refinancings       |  |  |  |                | 99,509 
|Deferred loan
fees decrease (increase)           |  |  |  |                | (9     
|Allowance for
loans decrease (increase)          |  |  |  |                | (225   
|Net loan
increase (decrease)                     |  |  |  |                | (2,973 
|Net loans
receivable at end of period (1)        |  |  |  | $              | 172,546

|(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 47.26% of the
banks loans as of June 30, 2009 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 of the loan. This retention of servicing enables the Bank
to increase fee income and maintain a relationship with the borrower. Servicing income was $628,000 for the year ended June 30, 2009. At June 30, 2009,
American Federal Savings Bank had $258.09 million in residential mortgage loans and $12.42 million in commercial real estate 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 residence, but are typically subject to a prior lien, which may or may not be held by the
Bank. At June 30, 2009, $28.68 million or 17.11% 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 made up
21.90% of the Banks total loan portfolio, or $36.71 million at June 30, 2009. 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 $174,000 and
is typically made with fixed rates of interest and 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 $1.46 million (net of $5.84 million sold
to the Montana Board of Investments) on June 30, 2009, and is secured by a detention facility.




Real Estate Construction Lending.




American Federal Savings Bank also lends funds for the
construction of one- to-four-family homes and commercial real estate. 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 $4.64 million or 2.77% of the Banks loan portfolio at June 30,
2009.




Consumer Loans.




As part of its strategy to invest in higher yielding
shorter term loans, American Federal Savings Bank emphasized growth of its consumer lending portfolio in recent years. 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, 2009, consumer loans totaled $10.84 million or 6.46% 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.




6


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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 $7.54 million, or 4.50% of the
Banks total loan portfolio at June 30, 2009. 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 4.50% of the total portfolio at June 30, 2009, 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
credit 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, 2009, our largest aggregation of loans to one borrower was approximately $7.31 million, consisting of one commercial real
estate loan secured by a detention facility. Eighty percent, or $5.85 million, of that loan is sold to the Montana Board of Investments, leaving the
net balance of $1.46 million, below the Banks federal legal lending limit to one borrower of approximately $4.14 million. At June 30, 2009, this
loan was current. The Bank maintains the servicing for this loan.




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 currently have the ability to accept online mortgage loan applications and provide pre-approvals through 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 (five) of
the board of directors is required for approval of any loan, or aggregation of loans to a single borrower, that exceeds $1,250,000.




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.




7


---



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, 2009, was approximately $12.44 million, $11.23 million 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, 2009, 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, 2009, we had $1.00 million ($990,000 net of specific reserves) of loans that were
non-performing and held on non-accrual status.




Delinquent Loans.




The following table provides information regarding the
Banks loans that are delinquent 30 to 89 days at June 30, 2009:


|                                  |  |  |  | Number |    | Amount |  | Percentageof TotalDelinquentLoans
|--------------------------------- |  |  |  | ------ | -- | ------ |  | ---------------------------------
|
|Loan
type:                        |  |  |  |        |    |        |  |                                  
|Residential
mortgage (1-4 family) |  |  |  |        | 5  |        |  | $                                
|Real estate
construction          |  |  |  |        | 1  |        |  |                                  
|Commercial
real estate and land   |  |  |  |        | 7  |        |  |                                  
|Home
equity                       |  |  |  |        | 4  |        |  |                                  
|Consumer                          |  |  |  |        | 24 |        |  |                                  
|Commercial                        |  |  |  |        | 2  |        |  |                                  
|Total                             |  |  |  |        | 43 |        |  |                                  



8


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Non-Performing Assets.




The following table sets forth information regarding
American Federal Savings Banks non-performing assets as of the dates indicated. As of June 30, 2009 the Bank had no loans considered to be a
troubled debt restructuring within the meaning of the Statement of Financial Accounting Standards No. 114.


|                                                                   |  |  |  | At June 30, |      
|------------------------------------------------------------------ |  |  |  | ----------- | -----
|
|
|Non-accrual
loans                                                  |  |  |  | $           | 1,002
|Accuring
loans delinquent 90 days or more                          |  |  |  |             | 251  
|Real estate
owned                                                  |  |  |  |             |     
|Total                                                              |  |  |  |             | 1,253
|Total
non-performing loans as a percentage of total loan portfolio |  |  |  |             | 0.75 
|Percentage of
total assets                                         |  |  |  |             | 0.43 



During the year ended June 30, 2009, the Bank had one
foreclosure resulting in a loss of $3,000. During the year ended June 30, 2009, a minimal amount of interest was recorded on loans previously accounted
for on a non-accrual basis.




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, |      
|-------------------------------------------- |  |  |  | ----------- | -----
|
|
|Residential
mortgage (1-4 family):           |  |  |  | $           |     
|Special
Mention                              |  |  |  |             |     
|Substandard                                  |  |  |  |             | 392  
|Doubtful                                     |  |  |  |             |     
|Loss                                         |  |  |  |             |     
|                                            
|Commercial
Real Estate and Land:             |  |  |  |             |      
|Special
Mention                              |  |  |  |             |     
|Substandard                                  |  |  |  |             | 488  
|Doubtful                                     |  |  |  |             |     
|Loss                                         |  |  |  |             |     
|                                            
|Home equity
loans:                           |  |  |  |             |      
|Special
Mention                              |  |  |  |             |     
|Substandard                                  |  |  |  |             | 131  
|Doubtful                                     |  |  |  |             |     
|Loss                                         |  |  |  |             |     
|                                            
|Consumer
loans:                              |  |  |  |             |      
|Special
Mention                              |  |  |  |             |     
|Substandard                                  |  |  |  |             | 40   
|Doubtful                                     |  |  |  |             |     
|Loss                                         |  |  |  |             | 12   
|                                            
|Commercial
loans:                            |  |  |  |             |      
|Special
Mention                              |  |  |  |             |     
|Substandard                                  |  |  |  |             | 551  
|Doubtful                                     |  |  |  |             |     
|Loss                                         |  |  |  |             |     
|                                            
|Real estate
owned/repossessed property:      |  |  |  |             |      
|Special
Mention                              |  |  |  |             |     
|Substandard                                  |  |  |  |             |     
|Doubtful                                     |  |  |  |             |     
|Loss                                         |  |  |  |             |     
|Total
classified loans and real estate owned |  |  |  | $           | 1,614



10


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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 volume and severity of delinquencies, local
and national economy, underwriting standards, and other factors. 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.




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, or adjustments to, estimated losses are
included in earnings in the period they are established. We had $525,000 in allowances for loan losses at June 30, 2009.




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 bank 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.




11


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







|                                                                            |  |  |  | For the Years Ended June 30, |      
|--------------------------------------------------------------------------- |  |  |  | ---------------------------- | -----
|
|
|Balance at
beginning of period                                              |  |  |  | $                            | 300  
|Loans
charged-off                                                           |  |  |  |                              | (47  
|Recoveries                                                                  |  |  |  |                              | 15   
|Loss                                                                        |  |  |  |                              | (32  
|Provision for
possible loan losses                                          |  |  |  |                              | 257  
|Balance at
end of period                                                    |  |  |  |                              | 525  
|Allowance for
loan losses to total loans                                    |  |  |  |                              | 0.31 
|Allowance for
loan losses to total non-performing loans                     |  |  |  |                              | 41.90
|Net
recoveries (charge-offs) to average loans outstanding during the period |  |  |  |                              | 0.02



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.


|                                  |  |  |  | 2009 |     | 2008 | 
|--------------------------------- |  |  |  | ---- | --- | ---- | 
|
|
|First mortgage loans:            
|Residential
mortgage (1-4 family) |  |  |  | $    | 190 |      | 
|Commercial
real estate            |  |  |  |      | 158 |      | 
|Real estate
construction          |  |  |  |      | 10  |      | 
|Total first
mortgage loans        |  |  |  |      | 358 |      | 
|Other loans:                     
|Home
equity                       |  |  |  |      | 67  |      | 
|Consumer                          |  |  |  |      | 68  |      | 
|Commercial                        |  |  |  |      | 32  |      | 
|Total other
loans                 |  |  |  |      | 167 |      | 
|Total                             |  |  |  | $    | 525 |      | 



12


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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 (including those accounted for under SFAS 159), held-to-maturity, and
trading classifications. However, Eagle does not hold any securities for purposes of trading. 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.




We do not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative financial instruments, except interest rate caps and 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 initially rated investment grade.




The Board, through its asset liability committee, has
charged the President and CEO 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 (including those accounted for under SFAS 159) or held-to-maturity to enhance total return on investments. At
June 30, 2009, our investment securities included 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 0.44% of Eagles total investment portfolio. Securities available-for-sale
totaled 96.91% of Eagles total investment portfolio, while securitiesSFAS 159 totaled 0.03%. The remaining percentage is comprised of
interest-bearing deposits in banks and stock in the Federal Home Loan Bank of Seattle (FHLB).




13


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


|                                              |  |  |  | At June 30, |       
|--------------------------------------------- |  |  |  | ----------- | ------
|
|
|
|Securities
available for sale, at fair value: |  |  |  |             |       
|U.S.
Government and agency obligations        |  |  |  | $           | 3,882 
|Corporate
obligations                         |  |  |  |             | 9,493 
|Municipal
obligations                         |  |  |  |             | 28,893
|Collateralized mortgage obligations           |  |  |  |             | 31,551
|Mortgage-backed securities                    |  |  |  |             | 8,444 
|Common
stock                                  |  |  |  |             |      
|Corporate
preferred stock                     |  |  |  |             |      
|Total
securities available for sale           |  |  |  |             | 82,263
|Securities held to maturity, at book value:  
|Mortgage-backed securities                    |  |  |  |             |      
|Municipal
obligations                         |  |  |  |             | 375   
|Total
securities held to maturity             |  |  |  |             | 375   
|Preferred
stockSFAS 159                      |  |  |  |             | 25    
|Total
securities                              |  |  |  |             | 82,663
|Interest-bearing deposits                     |  |  |  |             | 224   
|Federal Home
Loan Bank capital stock, at cost |  |  |  |             | 2,000 
|Total                                         |  |  |  | $           | 84,887



14


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The following table sets forth information regarding the
carrying values, weighted average yields and maturities of Eagles investment securities portfolio at June 30, 2009.


|                                       |  |  |  | At June 30, 2009 (Dollars in thousands) |      
|-------------------------------------- |  |  |  | --------------------------------------- | -----
|
|
|U.S.
Government and agency obligations |  |  |  | $                                       |     
|Corporate
obligations                  |  |  |  |                                         |     
|Municipal
obligations                  |  |  |  |                                         | 100  
|Collateralized mortgage obligations    |  |  |  |                                         | 251  
|Mortgage-backed securities             |  |  |  |                                         | 358  
|Total
securities available for sale    |  |  |  |                                         | 709  
|Securities
held to maturity:           |  |  |  |                                         |      
|Municipal
obligations                  |  |  |  |                                         | 110  
|Total
securities held to maturity      |  |  |  |                                         | 110  
|PreferredSFAS 159                     |  |  |  |                                         |     
|Total
securities                       |  |  |  |                                         | 819  
|Interest-bearing deposits and          |  |  |  |                                         |      
|Federal Funds
Sold                     |  |  |  |                                         | 3,841
|Federal Home
Loan Bank capital stock   |  |  |  |                                         |     
|Total                                  |  |  |  | $                                       | 819  



15


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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 financial 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. 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, 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 $124.12 million or
65.21% of the Banks deposits at June 30, 2009 ($101.00 million or 53.95% 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.




16


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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, |        
|------------------------------------- |  |  |  | ----------- | -------
|
|
|
|Noninterest
checking                  |  |  |  | $           | 15,002 
|Passbook
savings                      |  |  |  |             | 26,445 
|NOW
account/Interest bearing checking |  |  |  |             | 32,664 
|Money market
accounts                 |  |  |  |             | 26,886 
|Total                                 |  |  |  |             | 100,997
|Certificates of deposit accounts:    
|IRA
certificates                      |  |  |  |             | 23,121 
|Brokered
certificates                 |  |  |  |             |       
|Other
certificates                    |  |  |  |             | 63,081 
|Total
certificates of deposit         |  |  |  |             | 86,202 
|Total
deposits                        |  |  |  | $           | 187,199



The following table sets forth the amounts and maturities
of our certificates of deposit as of June 30, 2009, for the maturity dates indicated:


|            |  |  |  | (Dollars in thousands) |       
|----------- |  |  |  | ---------------------- | ------
|
|under
1.01% |  |  |  | $                      | 2,678 
|1.01-2.00%  |  |  |  |                        | 24,882
|2.01-3.00%  |  |  |  |                        | 15,069
|3.01-4.00%  |  |  |  |                        | 26,460
|4.01-5.00%  |  |  |  |                        | 2,685 
|5.01-6.00%  |  |  |  |                        | 343   
|6.01-7.00%  |  |  |  |                        |      
|Total       |  |  |  | $                      | 72,117



17


---



The following table shows the amount of certificates of
deposit of more than $100,000 by time remaining until maturity as of June 30, 2009:


|                    |  |  |  | (Dollars in thousands)
|------------------- |  |  |  | ----------------------
|3 months or
less    |  |  |  | $                     
|Over 3 to 6
months  |  |  |  |                       
|Over 6 to 12
months |  |  |  |                       
|Over 12
months      |  |  |  |                       
|Total               |  |  |  | $                     



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


|                                                    |  |  |  | Year Ended June 30, |        
|--------------------------------------------------- |  |  |  | ------------------- | -------
|
|
|Opening
balance                                     |  |  |  | $                   | 178,851
|Deposits(Withdrawals), Net                          |  |  |  |                     | 5,265  
|Interest
credited                                   |  |  |  |                     | 3,083  
|Ending
balance                                      |  |  |  | $                   | 187,199
|Net
increase                                        |  |  |  | $                   | 8,348  
|Percent
increase                                    |  |  |  |                     | 4.67   
|Weighted
average cost of deposits during the period |  |  |  |                     | 1.86   
|Weighted
average cost of deposits at end of period  |  |  |  |                     | 1.38   



Our depositors are primarily residents of the state of
Montana.




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 and other borrowings from PNC Financial Services, Inc. (PNC) to
supplement our supply of lendable funds and to meet deposit withdrawal requirements.




During the fiscal year ended June 30, 2006, 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.




18


---



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


|                                                 |  |  |  | Ended June 30, |       
|------------------------------------------------ |  |  |  | -------------- | ------
|
|
|Advances and other borrowings:                  
|Average
balance                                  |  |  |  | $              | 67,772
|Maximum
balance at any month-end                 |  |  |  |                | 73,789
|Balance at
period end                            |  |  |  |                | 67,056
|                                                
|Weighted
average interest rate during the period |  |  |  |                | 3.90  
|Weighted
average interest rate at period end     |  |  |  |                | 4.02  



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, 2009, we had 79 full-time employees and 7
part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees to be
good.




19


---



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). The FDIC insurance has been temporarily raised to $250,000 until January 1, 2014. Insurance on deposits may be terminated by the FDIC it if
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, 2009 are set forth below.


|                  |  |  |  | Actual |        | For CapitalAdequacy Purposes | 
|----------------- |  |  |  | ------ | ------ | ---------------------------- | 
|
|
|Tangible          |  |  |  | $      | 27,079 |                              | 
|Leverage          |  |  |  | $      | 27,079 |                              | 
|Tier 1
risk-based |  |  |  | $      | 27,079 |                              | 
|Total
risk-based  |  |  |  | $      | 27,592 |                              | 



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.




20


---



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, 2009, 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.




21


---



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. The Bank maintains a primary credit facility at the Federal Reserves discount
window. It had a $0 balance as of June 30, 2009 and is secured by an agency bond.




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 its remaining applicable excess reserve as of June 30,
2009.




22


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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.




23


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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 six 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s 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, 2009 (in thousands) |       | Square Footage
|----------------------- |  |  |  | ----------------------------------- |  | ----------------------------------------------------- |  | ------------------------------------- | ----- | --------------
|Helena Main
Office      |  |  |  | 1400
Prospect Ave.Helena, MT 59601  |  | 1997                                                  |  | $                                     | 3,913 |               
|Helena
DowntownDrive-up |  |  |  | 28
Neill Ave. Helena, MT 59601      |  | 1987                                                  |  | $                                     | 354   |               
|Helena Skyway
Branch    |  |  |  | 2090
Cromwell DixonHelena, MT 59602 |  | 2009                                                  |  | $                                     | 2,466 |               
|Butte
Office            |  |  |  | 3401
Harrison Ave.Butte, MT 59701   |  | 1979                                                  |  | $                                     | 513   |               
|Bozeman
Office          |  |  |  | 606
North SeventhBozeman, MT 59715  |  | 1980                                                  |  | $                                     | 471   |               
|Bozeman
Branch          |  |  |  | 1455
Oak StBozeman, MT 59715        |  | Under
Construction(Expected to open Mid-October 2009) |  | $                                     | 5,823 |               
|Townsend
Office         |  |  |  | 416
BroadwayTownsend, MT 59644      |  | 1979                                                  |  | $                                     | 221   |               



As of June 30, 2009, the net book value of land, buildings,
furniture, and equipment owned by American Federal, less accumulated depreciation, totaled $13.76 million.




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,
2009.




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, 2009.




24


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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, 2009, there were 1,075,312 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 60.3%) of the outstanding common
stock.




The high bid and asked prices noted below for the four
quarters of fiscal 2008 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 Bid
|------------------- |  |  |  | -------- | ----- | -------
|Fourth
quarter 2009 |  |  |  | $        | 28.00 |        
|Third quarter
2009  |  |  |  | $        | 23.00 |        
|Second
quarter 2009 |  |  |  | $        | 26.00 |        
|First quarter
2009  |  |  |  | $        | 28.00 |        
|Fourth
quarter 2008 |  |  |  | $        | 29.50 |        
|Third quarter
2008  |  |  |  | $        | 30.80 |        
|Second
quarter 2008 |  |  |  | $        | 32.75 |        
|First quarter
2008  |  |  |  | $        | 33.00 |        



The closing price of the common stock on June 30, 2009, was
$28.00. The company had paid four quarterly dividends during the year, all in the amount of $.255 per share. Eagle Financial MHC waived receipt of its
dividends during the year.




25


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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 Programs
|---------- |  |  |  | ------------------------------------- | ---- | -------------------------------- |  | ------------------------------------------------------------------------------------ | --- | ----------------------------------------------------------------------------------
|April
2009 |  |  |  |                                       | None |                                  |  |                                                                                      | N/A |                                                                                   
|May
2009   |  |  |  |                                       | None |                                  |  |                                                                                      | N/A |                                                                                   
|June
2009  |  |  |  |                                       | None |                                  |  |                                                                                      | N/A |                                                                                   
|Total      |  |  |  |                                       | None |                                  |  |                                                                                      | N/A |                                                                                   

|* |  | The Company publicly announced a stock repurchase program on
January 17, 2008. 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 August 31, 2009, 5,315 shares had been purchased.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 7. 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,
intend, 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, 2009, 35.74% of its total loans were residential mortgage loans with fixed rates and 11.52% were residential mortgage
loans with adjustable rates. Total first lien mortgage loans at June 30, 2009, were $120.57 million or 71.93% of the total loan portfolio. Other loan
products include home equity loans, consumer and commercial loans. These loans totaled $47.05 million or 28.07% 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.




26


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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, |        
|------------------------------------------------------------- |  |  |  | ------------------------------------ | -------
|
|
|
|Assets:                                                      
|Interest-earning assets:                                      |  |  |  |                                      |        
|FHLB
stock                                                    |  |  |  | $                                    | 1,891  
|Loans
receivable, net                                         |  |  |  |                                      | 177,354
|Investment
securities                                         |  |  |  |                                      | 79,432 
|Interest-bearing deposits with banks                          |  |  |  |                                      | 3,271  
|Total
interest-earning assets                                 |  |  |  |                                      | 261,948
|Noninterest-earning assets                                    |  |  |  |                                      | 23,642 
|Total
assets                                                  |  |  |  | $                                    | 285,590
|Liabilities and Equity:                                      
|Interest-bearing liabilities:                                
|Deposit
accounts:                                             |  |  |  |                                      |        
|Money
market                                                  |  |  |  | $                                    | 26,344 
|Passbooks                                                     |  |  |  |                                      | 24,069 
|Checking                                                      |  |  |  |                                      | 32,994 
|Certificates
of deposit                                       |  |  |  |                                      | 86,666 
|Advances from
FHLB & subordinated debt                        |  |  |  |                                      | 72,927 
|Total
interest-bearing liabilities                            |  |  |  |                                      | 243,000
|Non-interest
checking                                         |  |  |  |                                      | 14,502 
|Other
noninterest-bearing liabilities                         |  |  |  |                                      | 2,117  
|Total
liabilities                                             |  |  |  |                                      | 259,619
|Total
equity                                                  |  |  |  |                                      | 25,971 
|Total
liabilities and equity                                  |  |  |  | $                                    | 285,590
|Net interest
income/interest rate spread(1)                   |  |  |  |                                      |        
|Net interest
margin(2)                                        |  |  |  |                                      |        
|Total
interest-earning assets to interest-bearing liabilities |  |  |  |                                      |        

|(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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------



27


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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) |      
|-------------------------------------------- |  |  |  | ------------------------------------------------ | -----
|
|
|
|Interest earning assets:                    
|Loans
receivable, net                        |  |  |  | $                                                | 783  
|Investment
securities                        |  |  |  |                                                  | 538  
|Interest-bearing deposits with banks         |  |  |  |                                                  | 67   
|Other earning
assets                         |  |  |  |                                                  |     
|Total
interest earning assets                |  |  |  |                                                  | 1,388
|Interest-bearing liabilities:               
|Passbook,
money market and checking accounts |  |  |  |                                                  | 96   
|Certificates
of deposit                      |  |  |  |                                                  | (94  
|Borrowings                                   |  |  |  |                                                  | 1,116
|Total
interest-bearing liabilities           |  |  |  |                                                  | 1,118
|Change in net
interest income                |  |  |  | $                                                | 270  



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 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 also 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 residential 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 servicing 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.




28


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Recently, 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. Management believes that the Bank will need to continue to focus on increasing net interest
margin, 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 biggest
challenge to the strategy is funding the growth of the Banks balance sheet in an efficient manner. Deposit growth will be difficult due to fierce
competition and wholesale funding (which is usually more expensive than retail deposits) will likely be needed to supplement deposit
growth.




The level and movement of interest rates impacts the
Banks earnings as well. For the 2009 fiscal year the yield curve continued to steepen as the Federal Open Market Committee (FOMC)
reduced the fed funds rate by a total of 175 basis points during the fiscal year, however long-term rates remained relatively
unchanged.




FINANCIAL CONDITION




Introduction.




Total assets increased $9.80 million, or 3.50%, to $289.71
million at June 30, 2009, compared to $279.91 million at June 30, 2008. Total liabilities increased by $7.64 million, or 3.01%, to $261.92 million at
June 30, 2009, from $254.27 million at June 30, 2008. The loan portfolio decreased $952,000 during the year. Total deposits increased $8.35 million.
Noninterest checking increased $385,000 or 2.63%, to $15.00 million at June 30, 2009, and money market accounts increased $1.61 million, or 6.37%.
Interest bearing checking and certificates of deposits increased $1.94 million, or 7.68%, and $1.87 million, or 2.22%, respectively. Much of the asset
growth was funded by these increased deposits.




Balance Sheet Details.




Loans receivable decreased $952,000, or 0.57% to $167.20
million from $168.15 million. Significant refinancing activity contributed to the lower loan balances. $131.23 million in loans were sold during fiscal
year 2009, an increase of $79.16 million from fiscal year 2008s amount of $52.07 million. Origination activity on all loan categories with the
exception of real estate construction loans and home equity loans increased in the current fiscal year. Commercial real estate and land loans increased
$8.51 million during the year, and residential mortgage loans decreased $7.52 million. The available-for-sale (AFS) investment portfolio increased
$3.85 million, or 4.90%, to $82.26 million at June 30, 2009 from $78.42 million at June 30, 2008. The investment category with the largest increase was
municipal obligations, which increased $6.70 million.




Total deposits increased $8.35 million. Of that amount,
certificates of deposit increased $1.87 million, to $86.20 million at June 30, 2009 from $84.33 million at June 30, 2008. The Bank had no brokered
deposits as of June 30, 2009. Interest-earning checking accounts increased $1.94 million while noninterest checking increased $385,000. Money market
accounts increased $1.61 million and savings accounts increased $2.54 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 and other borrowings decreased to $67.06
million at year-end 2009 from $68.22 million at year-end 2008, a decrease of $1.17 million.




Total shareholders equity was $27.79 million at June
30, 2009, an increase of $2.16 million. This increase was the result of net income for the year and a decrease in accumulated other comprehensive loss
of $240,000 (mainly due to a decrease in net unrealized loss on securities available-for-sale), partially offset by the purchase of treasury stock and
dividends paid during the year.




Comparison of Operating Results for the Years Ending June 30,
2009 and 2008




Net Income.




Eagles net income was $2.388 million and $2.110
million for the years ended June 30, 2009 and 2008, respectively. This increase of $278,000, or 13.18%, was the result of an increase in net interest
income of $1.797 million and an increase in net noninterest income of $775,000, offset by increases in noninterest expense of $1.50 million and the
provision for loan losses of $257,000. Eagles tax provision was $362,000 higher in 2009. Basic earnings per share for the year ended June 30,
2009 were $2.23, compared to $1.97 for the year ended June 30, 2008. Diluted earnings per share were $1.96 and $1.74 for 2009 and 2008,
respectively.




29


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Net Interest Income.




Net interest income increased to $9.233 million for the
year ended June 30, 2009, from $7.436 million for the previous year. This increase of $1.797 million, or 24.17%, was the result of an increase in
interest income of $1.250 million and a decrease in interest expense of $547,000. As shown in the Rate/Volume Analysis, this increase is
mainly attributable a larger average balance of loans and investments and lower rates on deposits.




Interest and Dividend Income.




Total interest and dividend income was $15.348 million for
the year ended June 30, 2009, compared to $14.089 million for the year ended June 30, 2008, an increase of $1.250 million, or 8.87%. Interest and fees
on loans increased to $11.411 million for 2009 from $10.905 million for 2008. This increase of $506,000, or 4.64%, was due primarily to the increase in
the average balances on loans receivable for the year ended June 30, 2009. The average interest rate earned on loans receivable decreased by 16 basis
points, to 6.43% from 6.59%. Average balances for loans receivable, net, for the year ended June 30, 2009 were $177.35 million, compared to $165.47
million for the previous year. This represents an increase of $11.88 million, or 7.18%. Interest and dividends on investment securities
available-for-sale (AFS) increased to $3.893 million for the year ended June 30, 2009 from $3.071 million for the year ended June 30, 2008, an increase
of $822,000, or 26.77%. This increase was the result of higher average interest rates on the AFS portfolio during the year, along with a higher average
balance. Interest earned from deposits at other banks decreased slightly for the year ended June 30, 2009 due to much lower rates. Interest and
dividends on investments held-to-maturity (HTM) also experienced a slight decline.




Interest Expense.




Total interest expense decreased to $6.115 million for the
year ended June 30, 2009 from $6.662 million for the year ended June 30, 2008, a decrease of $547,000, or 8.2%. Interest on deposits decreased to
$3.161 million for the year ended June 30, 2009 from $4.387 million for the year ended June 30, 2008. This decrease of $1.226 million, or 27.95%, was
due primarily to a decrease on average rates paid. The average cost of deposits decreased 81 basis points, to 1.86% in 2009 from 2.67% in 2008.
Certificates of deposit were the only category to show a decrease in average balances in 2009. An increase in the average balance of borrowings was
partially offset by a decrease in the average rate paid and resulted in an increase in interest paid on borrowings to $2.954 million for the year ended
June 30, 2009 from $2.266 million for the year ended June 30, 2008. The average balance of borrowings increased to $72.927 million for the year ended
June 30, 2009, compared to $48.867 million for the year ended June 30, 2008 and resulted principally from an increase in FHLB borrowings. The average
rate paid on borrowings decreased to 4.05% in 2009 from 4.64% in 2008.




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, 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. A
provision to increase the allowance for loan loss by $257,000 was made for the year ended June 30, 2009 while an adjustment of $175,000 was made to
reduce the allowance for loan loss for the year ended June 30, 2008. Total classified assets increased to $1.614 million at June 30, 2009 from $106,000
at June 30, 2008. Total non-performing loans as a percentage of the total loan portfolio is 0.75% at June 30, 2009, up from 0.02% at June 30, 2008. As
of June 30, 2009, American Federal Savings Bank had no real estate owned.




Noninterest Income.




Total noninterest income increased to $2.999 million for
the year ended June 30, 2009, from $2.224 million for the year ended June 30, 2008, an increase of $775,000 or 34.85%. This increase was primarily due
to an increase in gain on sale of loans of $1.415 million offset by recognized losses of $785,000 on Freddie Mac and Fannie Mae preferred stock that is
accounted for under Statement of Financial Accounting Standard (SFAS) No. 159 Fair Value Option for Financial Assets and Financial
Liabilities. The preferred stock of Freddie Mac and Fannie Mae currently held by the company constitutes $25,000 or .009 percent of total assets
as of June 30, 2009.Net gain on sale of loans increased due to significant refinance activity that occurred particularly in the third and fourth
quarters of the fiscal year. Service charges on deposit accounts increased $34,000 to $745,000 for the year ending June 30, 2009 from $711,000 for the
year ending June 30, 2008. This was primarily due to an increase in overdraft protection fees. Other noninterest income increased $43,000 to $652,000,
primarily due to increased fee income on electronic payments and higher fee income on loan products. The single largest item in other noninterest
income is earnings from bank owned life insurance of $264,000.




30


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Noninterest Expense.




Noninterest expense increased by $1.50 million or 21.23% to
$8.563 million for the year ended June 30, 2009 from $7.063 million for the year ended June 30, 2008. This increase was primarily due to increases in
salaries and benefits of $446,000, federal deposit insurance premiums of $287,000, amortization of mortgage servicing rights of $285,000, and
advertising expense of $101,000. The increase in salaries and benefits was due to normal pay raises and incentive pay related to mortgage originations.
Federal deposit insurance increased due to the special assessment applied to institutions in June 2009 and other premium increases assessed effective
January 2009. The amortization of mortgage servicing rights increased due to the increase in loan prepayments that resulted from the significant
increase in refinance activity, and advertising expenses were higher due to increased promotion of deposit products.Other categories of noninterest
expense showed modest changes.




Income Tax Expense.




Eagles income tax expense was $1.024 million for the
year ended June 30, 2009, compared to $662,000 for the year ended June 30, 2008. The effective tax rate for the year ended June 30, 2009 was 30.0% as
opposed to 23.9% for the year ended June 30, 2008.




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 9.29%
and 9.25% for the months ended June 30, 2009 and 2008, respectively.




The Banks primary sources of funds are deposits,
repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the Federal Home Loan Bank
of Seattle and other borrowings. 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 (used by) the Companys operating
activities, which is primarily comprised of cash transactions affecting net income was $5.730 million for the year ended June 30, 2009 and $(2.997)
million for the year ended June 30, 2008. The change was primarily a result of an increase in the amount of loans held for sale in
2009.




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
$10.218 million for the year ended June 30, 2009, and $28.934 million for the year ended June 30, 2008. The decrease in cash used was primarily due to
less investment purchases in available-for-sale securities in 2009 compared to 2008.




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 and other borrowings, totaled
$6.726 million for the year ended June 30, 2009, and $32.952 million for the year ended June 30, 2008. This decrease in cash provided was primarily due
to the decrease in FHLB borrowings in 2009.




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.




At March 31, 2009 (the most recent report available), the
Banks measure of sensitivity to interest rate movements, as measured by the OTS, decreased slightly from the previous quarter. The market value
of the Banks capital position has increased 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, 2009, the Banks regulatory capital was
in excess of all applicable regulatory requirements and the Bank is deemed well capitalized pursuant to FDIC rules. At June 30, 2009, the
Banks tangible, core, and risk-based capital ratios amounted to 9.53%, 9.53%, and 13.66%, respectively, compared to regulatory requirements of
1.5%, 3.0%, and 8.0%, respectively.




31


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IMPACT OF INFLATION AND CHANGING PRICES




Our financial statements and the accompanying notes, which
are found in Item 8, 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 September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements.
SFAS 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell an asset or transfer a
liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for
the asset or liability. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years for financial assets and liabilities such as derivatives measured at fair value under
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, investments in securities under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, etc. SFAS 157 has been deferred until fiscal years beginning after November 15, 2008 for nonfinancial
assets and liabilities such as asset retirement obligations measured at fair value at initial recognition under SFAS 143, Accounting for Asset
Retirement Obligations, long-lived asset groups measured at fair value under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, liabilities for exit or disposal activities measured at fair value under SFAS No. 146, Accounting for Costs Associated With Exit or
Disposal Activities, etc. The Company adopted the provisions of this new accounting principle as it relates to financial assets and financial
liabilities and such effects have been included in Note 18. The Company adopted SFAS No. 157 on July 1, 2007 in conjunction with its adoption of SFAS
No. 159.




On February 15, 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, which allows an entity the irrevocable option to elect fair value for the initial
and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these
financial assets and liabilities would be recognized in earnings when they occur. SFAS No. 159 further establishes certain additional disclosure
requirements. The Company adopted SFAS No. 159 on July 1, 2007.




In December 2007, the FASB issued SFAS No. 141(R),
Business Combinationsa replacement of FASB No. 141 (SFAS 141(R)). SFAS 141(R) requires (a) a company to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at fair value as of the acquisition date; and (b) an acquirer in preacquisition
periods to expense all acquisition-related costs, among various other modifications to SFAS No. 141. SFAS 141(R) requires that any adjustments to an
acquired entitys deferred tax asset and liability balance that occur after the measurement period be recorded as a component of income tax
expense. This accounting treatment is required for business combinations consummated before the effective date of SFAS No. 141(R) (non-prospective),
otherwise SFAS 141(R) must be applied prospectively. The presentation and disclosure requirements must be applied retrospectively to provide
comparability in the financial statements. Early adoption is prohibited.SFAS 141(R) is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The impact of this standard is dependent upon the level of future acquisitions.




In March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires companies to provide
qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of gains and losses on
derivative contracts, and details of credit-risk-related contingent features in their hedged positions. The statement also requires companies to
disclose more information about the location and amounts of derivative instruments in financial statements; how derivatives and related hedges are
accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities; and how the hedges affect the entitys
financial position, financial performance and cash flows. SFAS 161 is effective for periods beginning after November 15, 2008. The Company will comply
with the disclosure provisions of SFAS 161 to the extent it has entered into derivative transactions in the year of adoption.




On November 14, 2008, the Securities and Exchange
Commission (SEC) issued its long-anticipated proposed International Financial Reporting Standards (IFRS) roadmap outlining milestones that, if
achieved, could lead to mandatory transition to IFRS for U.S. domestic registrants starting in 2014. IFRS is a comprehensive series of accounting
standards published by the International Accounting Standards Board (IASB). Under the proposed roadmap, the Company could be required through its
parent company to prepare financial statements in accordance with IFRS, and the SEC will make a




32


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determination in 2011 regarding the mandatory adoption
of IFRS for U.S. domestic registrants. Management is currently assessing the impact that this potential change would have on the Companys
consolidated financial statements, and will continue to monitor the development of the potential implementation of IFRS.




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 SFAS No. 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.




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 8. FINANCIAL STATEMENTS.




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




ITEM 9A. CONTROLS AND PROCEDURES




Disclosure Controls and Procedures




We conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended, as of June 30, 2009, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commissions rules and forms,
including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, management has concluded that as of June
30, 2009, our disclosure controls and procedures were effective.




33


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Management Annual Report on Internal Control over Financial
Reporting




Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management
conducted an assessment of the effectiveness of our internal control over financial reporting. This assessment was based upon the criteria for
effective internal control over financial reporting established in Internal ControlIntegrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission.




The Companys internal control over financial
reporting involves a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes the
controls themselves, as well as monitoring of the controls and internal auditing practices and actions to correct deficiencies identified. Because of
its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.




Management assessed the effectiveness of the Companys
internal control over financial reporting as of June 30, 2009. Based on this assessment, management concluded that, as of June 30, 2009, the
Companys internal control over financial reporting was effective.




Changes in Internal Control over Financial
Reporting




There were no changes in the Companys internal
control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Act Rules 13a-15 or
15d-15 that occurred during the quarter ended June 30, 2009 that affected, or were reasonably likely to affect, the Companys internal control
over financial reporting.




ITEM 9B. OTHER INFORMATION




None.




34


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PART III




Item 10. Directors, Executive Officers And Corporate
Governance




Except as provided below, the information required by this
Item 10 is hereby incorporated by reference to our definitive proxy statement to be filed within 120 days after the close of our fiscal
year.




Executive Officers of the Registrant




The following is a list of the names and ages of our
executive officers, all positions and offices held by each person and each persons principal occupations or employment during the past five
years. There are no family relationships between any executive officers and directors.


|Peter J. Johnson, President
& Chief Executive Officer |  | Age 51
|----------------------------------------------------- |  | ------



Mr. Johnson has served as President of the Bank and Eagle
since July 2007 and CEO since November 2007. Prior to being named President, he had served as the Companys Executive Vice President and Chief
Financial Officer. He joined the Bank in 1981. He currently serves on the Montana Independent Bankers Association board of directors. He is a past
chairman of both the Helena Area Chamber of Commerce and the Diocese of Helena Finance Council. He is also a member of the Rotary Club of Helena, and
serves on the board of trustees of St. Peters Hospital.


|Clinton J. Morrison, Senior
Vice President & Chief Financial Officer |  | Age 39
|-------------------------------------------------------------------- |  | ------



Mr. Morrison has served as the Chief Financial Officer of
the Bank and Eagle since July 2007. Prior to being named the Chief Financial Officer, he had served as the Companys treasurer and compliance
officer. He joined the Bank in 2001. Mr. Morrison maintains a certified public accountants license in the State of Montana. He currently is a member of
the Montana Society of CPAs and the American Institute of CPAs. Mr. Morrison currently is a member of the Helena Downtown Kiwanis Club and previously
served terms as President and Treasurer of that organization.


|Michael C. Mundt, Senior
Vice President & Chief Lending Officer |  | Age 55
|--------------------------------------------------------------- |  | ------



Mr. Mundt has served as the Chief Lending Officer of the
Bank since April of 1994. Prior to being named the Chief Lending Officer, he served as Vice President of Consumer and Commercial Lending. He joined the
bank in 1988. He currently serves on the Montana Bankers Associations board of directors, and also currently serves as the President of the
Montana Business Assistance Connection, a local economic development non-profit organization.


|Robert M. Evans, Senior Vice
President & Chief Information Officer |  | Age 61
|------------------------------------------------------------------ |  | ------



Mr. Evans has served as the Chief Information Officer of
the Bank since January 2008. Prior to being named Chief Information Officer, he served as the Banks Vice President of Information Services. Mr.
Evans also serves as the Banks Security Officer. He joined the Bank in 1986.


|Rachel R. Amdahl, Senior
Vice President/Operations |  | Age 40
|-------------------------------------------------- |  | ------



Mrs. Amdahl has served as Senior Vice President/Operations
of the Bank since February 2006. Prior to being named the Senior Vice President/Operations, she served as Vice President/Operations since 2000. She
joined the Bank in 1987. She currently serves on the Lewis and Clark County United Way board of directors. She also is a member of the Womens
Leadership Network.




Item 11. Executive Compensation




The information required by this Item 11 is hereby
incorporated by reference to our definitive proxy statement to be filed within 120 days after the close of our fiscal year.




Item 12. Security Ownership Of Certain Beneficial Owners And
Management And Related Stockholder Matters




The information required by this Item 12 is hereby
incorporated by reference to our definitive proxy statement to be filed within 120 days after the close of our fiscal year.




Item 13. Certain Relationships And Related Transactions, And
Director Independence




The information required by this Item 13 is hereby
incorporated by reference to our definitive proxy statement to be filed within 120 days after the close of our fiscal year.




Item 14. Principal Accounting Fees And
Services




The information required by this Item 14 is hereby
incorporated by reference to our definitive proxy statement to be filed within 120 days after the close of our fiscal year.




35


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PART IV




Item 15. 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,
2009 and June 30, 2008 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                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |  |  |  | *        |  | 3.1                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |  |  |  | *        |  | 3.2                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |  |  |  | *        |  | 4                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |  |  |  | *        |  | 10.1                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  | **       |  | 10.2                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  | ***      |  | 10.3                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  |          |  | 11                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |  |  |  | ****     |  | 14                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |  |  |  |          |  | 21.1                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  |          |  | 23.1                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  |          |  | 31.1                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  |          |  | 31.2                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  |          |  | 32.1                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |  |  |          |  | 99                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  |  |  | *        |  | 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 Form 8-K filed with the SEC on November 6, 2006.                                                                                                                                                                                                                                                                                                                                                            
|   |  |  |  | ****     |  | Incorporated by
reference to the Form 10-KSB filed with the SEC on September 16, 2004.                                                                                                                                                                                                                                                                                                                                                       
|  



36


---





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/ Peter J. JohnsonPeter J. Johnson President & 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/ Peter J.
JohnsonPeter J. Johnson       |  |  |  | President &
Chief Executive Officer Director (Principal Executive Officer)                                       |  | 9/21/2009
|                                          
|/s/ Clinton J.
MorrisonClinton J. Morrison |  |  |  | Senior Vice
President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | 9/21/2009
|                                          
|/s/ Larry A.
DreyerLarry A. Dreyer         |  |  |  | Chairman                                                                                                         |  | 9/21/2009
|                                          
|/s/ Don O.
CampbellDon O. Campbell         |  |  |  | Vice
Chairman                                                                                                    |  | 9/21/2009
|                                          
|/s/ Rick F.
HaysRick F. Hays               |  |  |  | Director                                                                                                         |  | 9/21/2009
|                                          
|/s/ Lynn E.
DickeyLynn E. Dickey           |  |  |  | Director                                                                                                         |  | 9/21/2009
|                                          
|/s/ James A.
MaierleJames A. Maierle       |  |  |  | Director                                                                                                         |  | 9/21/2009
|                                          
|/s/ Thomas J.
McCarvelThomas J. McCarvel   |  |  |  | Director                                                                                                         |  | 9/21/2009



37


---



Exhibit 99  Consolidated Statements of Financial
Condition




38


---





AND SUBSIDIARY




CONSOLIDATED FINANCIAL STATEMENTS and REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM June 30, 2009 and 2008


---



EAGLE BANCORP AND SUBSIDIARY




Contents


|                                                           |  |  |  | Page
|---------------------------------------------------------- |  |  |  | ----
|Report of
Independent Registered Public Accounting Firm    |  |  |  |     
|Financial
Statements                                       |  |  |  |     
|Consolidated
Statements of Financial Condition             |  |  |  |     
|Consolidated
Statements of Income                          |  |  |  |     
|Consolidated
Statements of Changes in Stockholders Equity |  |  |  |     
|Consolidated
Statements of Cash Flows                      |  |  |  |     
|Notes to
Consolidated Financial Statements                 |  |  |  |     

---







Report of Independent Registered Public Accounting
Firm




To the Board of Directors and Stockholders of Eagle
Bancorp and Subsidiary




We have audited the accompanying consolidated statements of
financial condition of Eagle Bancorp and Subsidiary as of June 30, 2009 and 2008 and the related consolidated statements of income,
stockholders equity and cash flows for years 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 audits.




We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits 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 audits provide a reasonable basis for our
opinion.




In our opinion, the 2009 and 2008 financial statements
referred to above present fairly, in all material respects, the financial position of Eagle Bancorp and Subsidiary as of June 30, 2009 and 2008,
and the results of its operations and its cash flows for years then ended in conformity with accounting principles generally accepted in the United
States of America.









Abilene, Texas August 7, 2009




-1-


---



EAGLE BANCORP AND SUBSIDIARY Consolidated Statements
of Financial Condition June 30, 2009 and 2008(Dollars in Thousands, Except for Per Share Data)


|Assets                                                                                                                                                         |  |  |  | 2009 |         | 2008
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ------- | ----
|Cash and due
from banks                                                                                                                                        |  |  |  | $    | 2,487   |     
|Interest
bearing deposits in banks                                                                                                                             |  |  |  |      | 224     |     
|Federal funds
sold                                                                                                                                             |  |  |  |      | 3,617   |     
|Cash and cash
equivalents                                                                                                                                      |  |  |  |      | 6,328   |     
|                                                                                                                                                              
|Securities
available-for-sale                                                                                                                                  |  |  |  |      | 82,263  |     
|Securities
held-to-maturity (fair value approximates $384 in 2009 and $708 in 2008)                                                                            |  |  |  |      | 375     |     
|Preferred
stockSFAS 159                                                                                                                                       |  |  |  |      | 25      |     
|FHLB stock
restricted, at cost                                                                                                                                 |  |  |  |      | 2,000   |     
|Investment in
Eagle Bancorp Statutory Trust I                                                                                                                  |  |  |  |      | 155     |     
|Mortgage
loans held for sale                                                                                                                                   |  |  |  |      | 5,349   |     
|Loans
receivable, net of deferred loan fees and allowance for loan losses of $525 in 2009 and $300 in 2008                                                     |  |  |  |      | 167,197 |     
|Accrued
interest and dividend receivable                                                                                                                       |  |  |  |      | 1,399   |     
|Mortgage
servicing rights, net                                                                                                                                 |  |  |  |      | 2,208   |     
|Premises and
equipment, net                                                                                                                                    |  |  |  |      | 13,761  |     
|Cash
surrender value of life insurance                                                                                                                         |  |  |  |      | 6,496   |     
|Other
assets                                                                                                                                                   |  |  |  |      | 2,153   |     
|                                                                                                                                                               |  |  |  | $    | 289,709 |     
|                                                                                                                                                              
|Liabilities and Shareholders Equity                                                                                                                          
|Noninterest
bearing                                                                                                                                            |  |  |  | $    | 15,002  |     
|Interest
bearing                                                                                                                                               |  |  |  |      | 172,197 |     
|Total
deposits                                                                                                                                                 |  |  |  |      | 187,199 |     
|                                                                                                                                                              
|Accrued
expenses and other liabilities                                                                                                                         |  |  |  |      | 2,507   |     
|Federal funds
purchased                                                                                                                                        |  |  |  |      |        |     
|FHLB advances
and other borrowings                                                                                                                             |  |  |  |      | 67,056  |     
|Subordinated
debentures                                                                                                                                        |  |  |  |      | 5,155   |     
|Total
liabilities                                                                                                                                              |  |  |  |      | 261,917 |     
|                                                                                                                                                              
|Shareholders equity                                                                                                                                          
|Preferred
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; 1,075,312 and 1,076,072 shares outstanding in 2009 and 2008,
respectively |  |  |  |      | 12      |     
|Capital
surplus                                                                                                                                                |  |  |  |      | 4,564   |     
|Unallocated
common stock held by ESOP                                                                                                                          |  |  |  |      | (18     | )   
|Treasury
stock, at cost                                                                                                                                        |  |  |  |      | (5,034  | )   
|Retained
earnings                                                                                                                                              |  |  |  |      | 28,850  |     
|Net
accumulated other comprehensive loss                                                                                                                       |  |  |  |      | (582    | )   
|Total
shareholders equity                                                                                                                                     |  |  |  |      | 27,792  |     
|                                                                                                                                                               |  |  |  | $    | 289,709 |     



The accompanying notes are an integral partof these
consolidated financial statements.




-2-


---








EAGLE BANCORP AND SUBSIDIARY Consolidated Statements
of Income Years Ended June 30, 2009 and 2008(Dollars in Thousands, Except for Per Share Data)


|                                                            |  |  |  | 2009 |        | 2008
|----------------------------------------------------------- |  |  |  | ---- | ------ | ----
|Interest and dividend income                               
|Loans,
including fees                                       |  |  |  | $    | 11,411 |     
|Securities
available-for-sale                               |  |  |  |      | 3,893  |     
|Securities
held- to-maturity                                |  |  |  |      | 20     |     
|Trust
preferred securities                                  |  |  |  |      | 9      |     
|Federal Home
Loan Bank stock dividends                      |  |  |  |      |       |     
|Deposits with
banks                                         |  |  |  |      | 15     |     
|Total
interest income                                       |  |  |  |      | 15,348 |     
|                                                           
|Interest expense                                           
|Deposits                                                    |  |  |  |      | 3,161  |     
|FHLB advances
and other borrowings                          |  |  |  |      | 2,645  |     
|Subordinated
debentures                                     |  |  |  |      | 309    |     
|Total
interest expense                                      |  |  |  |      | 6,115  |     
|                                                           
|Net
interest income                                         |  |  |  |      | 9,233  |     
|Provision
(credit) for loan losses                          |  |  |  |      | 257    |     
|Net
interest income after provision for loan losses         |  |  |  |      | 8,976  |     
|                                                           
|Noninterest income                                         
|Service
charges on deposit accounts                         |  |  |  |      | 745    |     
|Net gain on
sale of loans                                   |  |  |  |      | 2,216  |     
|Mortgage loan
service fees                                  |  |  |  |      | 628    |     
|Net realized
gain on sales of available for sale securities |  |  |  |      | 54     |     
|Net loss on
preferred stock  SFAS 159                      |  |  |  |      | (1,296 | )   
|Other
income                                                |  |  |  |      | 652    |     
|Total
noninterest income                                    |  |  |  |      | 2,999  |     
|                                                           
|Noninterest expenses                                       
|Salaries and
employee benefits                              |  |  |  |      | 4,411  |     
|Occupancy and
equipment expense                             |  |  |  |      | 900    |     
|Data
processing                                             |  |  |  |      | 370    |     
|Advertising                                                 |  |  |  |      | 394    |     
|Amortization
of mortgage servicing rights                   |  |  |  |      | 598    |     
|Federal
insurance premiums                                  |  |  |  |      | 307    |     
|Postage                                                     |  |  |  |      | 151    |     
|Legal,
accounting, and examination fees                     |  |  |  |      | 231    |     
|Consulting
fees                                             |  |  |  |      | 114    |     
|ATM
processing                                              |  |  |  |      | 62     |     
|Other
expense                                               |  |  |  |      | 1,025  |     
|Total
noninterest expenses                                  |  |  |  |      | 8,563  |     
|Income
before income taxes                                  |  |  |  |      | 3,412  |     
|Income tax
expense                                          |  |  |  |      | 1,024  |     
|                                                           
|Net
income                                                  |  |  |  | $    | 2,388  |     
|Basic
earnings per share                                    |  |  |  | $    | 2.23   |     
|Diluted
earnings per share                                  |  |  |  | $    | 1.96   |     



The accompanying notes are an integral partof these
consolidated financial statements.




-3-


---



EAGLE BANCORP AND SUBSIDIARY Consolidated Statements
of Changes in Stockholders Equity Years Ended June 30, 2009 and 2008(Dollars in Thousands, Except for Per Share
Data)







|                                                                                                 |  |  |  | Preferred Stock |   | Common Stock
|------------------------------------------------------------------------------------------------ |  |  |  | --------------- | - | ------------
|Balance at
July 1, 2007                                                                          |  |  |  | $               |  |             
|Net
income                                                                                       |  |  |  |                 |   |             
|Change in net
unrealized depreciation on available for sale securities and cash flow hedges, net |  |  |  |                 |   |             
|Total
comprehensive income                                                                       |  |  |  |                 |   |             
|SFAS 159
Adjustment                                                                              |  |  |  |                 |   |             
|Dividends
paid ($.96 per share)                                                                  |  |  |  |                 |   |             
|Treasury
stock purchased (1,250 shares @ $33.00;                                                 |  |  |  |                 |   |             
|3,285 shares
@ $32.75; 1,000 shares @ $27.25;                                                    |  |  |  |                 |   |             
|750 shares @
$28.25; 2,000 shares @ $28.25;                                                      |  |  |  |                 |   |             
|ESOP shares
allocated or committed to be released for allocation (4,600) shares                  |  |  |  |                 |   |             
|Balance at
June 30, 2008                                                                         |  |  |  |                 |  |             
|Net
income                                                                                       |  |  |  |                 |   |             
|Change in net
unrealized depreciation on available for sale securities and cash flow hedges, net |  |  |  |                 |   |             
|Total
comprehensive income                                                                       |  |  |  |                 |   |             
|Dividends
paid ($1.02 per share)                                                                 |  |  |  |                 |   |             
|Treasury
stock purchased (760 shares @ $27.00)                                                   |  |  |  |                 |   |             
|EITF No. 06-4
& 06-10                                                                            |  |  |  |                 |   |             
|ESOP shares
allocated or committed to be released for allocation (4,600) shares                  |  |  |  |                 |   |             
|Balance at
June 30, 2009                                                                         |  |  |  | $               |  |             



The accompanying notes are an integral partof these
consolidated financial statements.




-4-


---
















|Additional Paid-In |  |  |  | Unallocated ESOP Shares |     | Treasury Stock |  | Retained Earnings |        | Accumulated Other Comprehensive Loss |  | Total
|------------------ |  |  |  | ----------------------- | --- | -------------- |  | ----------------- | ------ | ------------------------------------ |  | -----
|$ 4,387            |  |  |  | $                       | (92 | )              |  | $                 | (4,759 | )                                    |  | $    
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   | (254   | )                                    |  |      
|100                |  |  |  |                         | 37  |                |  |                   |        |                                      |  |      
|4,487              |  |  |  |                         | (55 | )              |  |                   | (5,013 | )                                    |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|                   |  |  |  |                         |     |                |  |                   | (21    | )                                    |  |      
|                   |  |  |  |                         |     |                |  |                   |        |                                      |  |      
|77                 |  |  |  |                         | 37  |                |  |                   |        |                                      |  |      
|$ 4,564            |  |  |  | $                       | (18 | )              |  | $                 | (5,034 | )                                    |  | $    



The accompanying notes are an integral partof these
consolidated financial statements.




-5-


---



EAGLE BANCORP AND SUBSIDIARY




Consolidated Statements of Cash Flows Years Ended June 30, 2009 and 2008(Dollars in Thousands, Except for Per Share
Data)


|                                                                                           |  |  |  | 2009 |         | 2008
|------------------------------------------------------------------------------------------ |  |  |  | ---- | ------- | ----
|Cash flows from operating activities                                                      
|Net
income                                                                                 |  |  |  | $    | 2,388   |     
|Adjustments
to reconcile net income to net cash provided by (used in) operating activities |  |  |  |      |         |     
|Provision for
mortgage servicing rights valuation losses                                   |  |  |  |      |        |     
|Provision(credit) for loan losses                                                          |  |  |  |      | 257     |     
|Depreciation                                                                               |  |  |  |      | 482     |     
|Net
amortization of securities premium & discounts                                         |  |  |  |      | 163     |     
|Amortization
of capitalized mortgage servicing rights                                      |  |  |  |      | 598     |     
|Net gain on
sale of loans                                                                  |  |  |  |      | (2,216  | )   
|Net realized
(gain) loss on sales of available-for-sale securities                         |  |  |  |      | (54     | )   
|Net
recognized loss on preferred stockSFAS 159                                            |  |  |  |      | 1,296   |     
|Net loss on
sale of OREO                                                                   |  |  |  |      | 2       |     
|Net loss on
sale of fixed assets                                                           |  |  |  |      |        |     
|Appreciation
in cash surrender value of life insurance, net                                |  |  |  |      | (211    | )   
|Net change
in                                                                              |  |  |  |      |         |     
|Loans held
for sale                                                                        |  |  |  |      | 4,257   |     
|Accrued
interest receivable                                                                |  |  |  |      | 27      |     
|Other
assets                                                                               |  |  |  |      | (1,603  | )   
|Accrued
expenses and other liabilities                                                     |  |  |  |      | 344     |     
|Net cash
provided by (used in) operating activities                                        |  |  |  |      | 5,730   |     
|Cash flows from investing activities                                                      
|Activity in
available for sale securities                                                  |  |  |  |      |         |     
|Sales                                                                                      |  |  |  |      | 5,298   |     
|Maturities,
prepayments and calls                                                          |  |  |  |      | 11,182  |     
|Purchases                                                                                  |  |  |  |      | (20,114 | )   
|Activity in held to maturity securities                                                   
|Maturities,
prepayments and calls                                                          |  |  |  |      | 322     |     
|FHLB stock
purchased                                                                       |  |  |  |      | (285    | )   
|Loan
originations and principal collections, net                                           |  |  |  |      | (471    | )   
|Purchase of
bank owned life insurance                                                      |  |  |  |      |        |     
|Proceeds from
sale of OREO                                                                 |  |  |  |      | 13      |     
|Proceeds from
sale of equipment                                                            |  |  |  |      |        |     
|Additions to
premises and equipment                                                        |  |  |  |      | (6,163  | )   
|Net cash used
in investing activities                                                      |  |  |  |      | (10,218 | )   
|Cash flows from financing activities                                                      
|Net increase
(decrease) in deposits                                                        |  |  |  |      | 8,348   |     
|Net change in
federal funds purchased                                                      |  |  |  |      | (3,000  | )   
|Net change in
advances from the FHLB and other borrowings                                  |  |  |  |      | 1,834   |     
|Purchase of
treasury stock, at cost                                                        |  |  |  |      | (21     | )   
|Dividends
paid                                                                             |  |  |  |      | (435    | )   
|Net cash
provided by financing activities                                                  |  |  |  |      | 6,726   |     
|Net change
in cash and cash equivalents                                                    |  |  |  |      | 2,238   |     
|Cash and cash
equivalents at beginning of year                                             |  |  |  |      | 4,090   |     
|Cash and
cash equivalents at end of year                                                   |  |  |  | $    | 6,328   |     



The accompanying notes are an integral partof these
consolidated financial statements.




-6-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008







|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, valuation of deferred tax assets and mortgage servicing rights management obtains
independent appraisals and valuations.




Significant Group Concentrations
of Credit Risk




Most of the Companys
business activity is with customers located within the south-central Montana area. Note 3 discusses the types of securities that the Company invests
in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or
customer.




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, 2009 and June 30, 2008, 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.




-7-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------



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, interest bearing deposits in banks, and federal funds sold all of which mature within ninety
days.




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 $50,000 as of June 30, 2009 and
2008.




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, 2009 and 2008.




Securities  SFAS 159
 Beginning fiscal year, July 1, 2007 the Company elected to account for its preferred stock under SFAS No. 159, which allows an entity the
irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these assets are recognized in earning when incurred. On July 1, 2007 a charge to
retained earnings for $118,000 was recorded in accordance with the implementation of SFAS No. 159 to record the unrealized loss (net of taxes) on
preferred stock at that date.




-8-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------



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 Bank redeemed no FHLB shares during the years ended June 30, 2009 and 2008.




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. Past due status is based on the contractual terms of the loan. 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 is
established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.




-9-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------








The allowance for loan losses is
evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.




The allowance consists of
specific, general and unallocated components. For such loans that are classified as impaired, an allowance is established when the discounted cash
flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect managements estimate of probable losses. The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the
portfolio.




A loan is considered impaired
when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of
delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows
discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.




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, unless such loans are subject of a restructuring agreement.




Mortgage Servicing
Rights




Servicing assets are recognized
as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized
at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based
on relative fair value. Fair value is based on a market price valuation model that calculates the present value of estimated future net servicing
income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to
service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and
losses.




-10-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------



Mortgage Servicing Rights 
continued




Servicing assets are evaluated
for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches
based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an
individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Bank later determines that all or a
portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Capitalized
servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future
net servicing income of the underlying financial assets.




Servicing fee income is recorded
for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when
earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.




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, 2009 and 2008 there were no adjustments to fair value that were outside the normal appreciation in cash surrender
value.




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.




-11-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------



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 148,260 shares in 2009 and 147,500 shares in 2008.




Advertising
Costs




The Company expenses advertising
costs as they are incurred. Advertising costs were approximately $394,000 and $293,000 for the years ended June 30, 2009 and 2008,
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.




-12-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------



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, 2009 and 2008, 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 September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell
an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most
advantageous market for the asset or liability. The changes to current practice resulting from the application of this statement relate to the
definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years for financial assets and liabilities such as derivatives
measured at fair value under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, investments in securities under SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, etc. SFAS 157 has been deferred until fiscal years beginning after November
15, 2008 for nonfinancial assets and liabilities such as asset retirement obligations measured at fair value at initial recognition under SFAS 143,
Accounting for Asset Retirement Obligations, long-lived asset groups measured at fair value under SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, liabilities for exit or disposal activities measured at fair value under SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities, etc. The Company adopted the provisions of this new accounting principle as it relates to financial
assets and financial liabilities and such effects have been included in Note 18. The Company adopted SFAS No. 157 on July 1, 2007 in conjunction with
its adoption of SFAS No. 159.




On February 15, 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which allows an entity the irrevocable option to
elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent
changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS No. 159 further establishes
certain additional disclosure requirements. The Company adopted SFAS No. 159 on July 1, 2007.




-13-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------



Recent Accounting Pronouncements
 continued




In December 2007, the FASB
issued SFAS No. 141(R), Business Combinationsa replacement of FASB No. 141 (SFAS 141(R)). SFAS 141(R) requires (a) a company to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at fair value as of the acquisition date; and (b) an
acquirer in preacquisition periods to expense all acquisition-related costs, among various other modifications to SFAS No. 141. SFAS 141(R) requires
that any adjustments to an acquired entitys deferred tax asset and liability balance that occur after the measurement period be recorded as a
component of income tax expense. This accounting treatment is required for business combinations consummated before the effective date of SFAS No.
141(R) (non-prospective), otherwise SFAS 141(R) must be applied prospectively. The presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial statements. Early adoption is prohibited.SFAS 141(R) is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008. The impact of this standard is dependent upon the level of future
acquisitions.




In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161
requires companies to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value
of gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. The statement also
requires companies to disclose more information about the location and amounts of derivative instruments in financial statements; how derivatives and
related hedges are accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities; and how the hedges affect the
entitys financial position, financial performance and cash flows. SFAS 161 is effective for periods beginning after November 15, 2008. The
Company will comply with the disclosure provisions of SFAS 161 to the extent it has entered into derivative transactions in the year of
adoption.




On November 14, 2008, the
Securities and Exchange Commission (SEC) issued its long-anticipated proposed International Financial Reporting Standards (IFRS) roadmap outlining
milestones that, if achieved, could lead to mandatory transition to IFRS for U.S. domestic registrants starting in 2014. IFRS is a comprehensive series
of accounting standards published by the International Accounting Standards Board (IASB). Under the proposed roadmap, the Company could be required
through its parent company to prepare financial statements in accordance with IFRS, and the SEC will make a determination in 2011 regarding the
mandatory adoption of IFRS for U.S. domestic registrants. Management is currently assessing the impact that this potential change would have on the
Companys consolidated financial statements, and will continue to monitor the development of the potential implementation of
IFRS.




-14-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 1: |  | Summary of Significant Accounting Policies 
continued
|------- |  | ------------------------------------------------------



Reclassifications




Certain 2008 amounts have been
reclassified to conform to the 2009 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:


2009
     
     2008(In
Thousands)Weighted
average shares outstanding during the year on which basic earnings per share is calculated
     
     
     
     
     1,071
     
     
     
     1,071Add: weighted
average of stock held in treasury
     
     
     
     
     148
     
     
     
     143Average
outstanding shares on which diluted earnings per share is calculated
     
     
     
     
     1,219
     
     
     
     1,214Net income
applicable to common stockholders
     
     
     
     $
     2,338
     
     
     $
     2,110Basic
earnings per share
     
     
     
     $
     2.23
     
     
     $
     1.97Diluted
earnings per share
     
     
     
     $
     1.96
     
     
     $
     1.74


|NOTE 3: |  | Securities
|------- |  | ----------








The Companys investment
policy requires that the Company purchase only high-grade investment securities. Most 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:




-15-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


NOTE 3:
     
     Securities  continued  June 30, 2009(Dollars in Thousands)Available for Sale
     
     
     
     AmortizedCost
     
     GrossUnrealizedGains
     
     GrossUnrealizedLosses
     
     Estimated Market ValueU.S.
Government and agency
     
     
     
     $
     3,893
     
     
     $
     14
     
     
     $
     (25
     )
     
     $
     3,882Municipal
obligations
     
     
     
     
     29,747
     
     
     
     202
     
     
     
     (1,056
     )
     
     
     28,893Corporate
obligations
     
     
     
     
     9,963
     
     
     
     149
     
     
     
     (619
     )
     
     
     9,493Mortgage-backed securites
     
     
     
     
     8,287
     
     
     
     162
     
     
     
     (5
     )
     
     
     8,444CMOs
     
     
     
     
     31,274
     
     
     
     663
     
     
     
     (386
     )
     
     
     31,551Total
securities available for sale
     
     
     
     $
     83,164
     
     
     $
     1,190
     
     
     $
     (2,091
     )
     
     $
     82,263Held to MaturityMunicipal
obligations
     
     
     
     $
     375
     
     
     $
     9
     
     
     $
     
     
     
     $
     384Total
securities held to maturity
     
     
     
     $
     375
     
     
     $
     9
     
     
     $
     
     
     
     $
     384Securities SFAS 159Preferred
stock
     
     
     
     $
     2,000
     
     
     $
     
     
     
     $
     (1,975
     )
     
     $
     25$
     2,000
     
     
     $
     
     
     
     $
     (1,975
     )
     
     $
     25


June 30, 2008(Dollars in Thousands)Available for Sale
     
     
     
     AmortizedCost
     
     GrossUnrealizedGains
     
     GrossUnrealized Losses
     
     Estimated Market ValueU.S.
Government and agency
     
     
     
     $
     2,242
     
     
     $
     6
     
     
     $
     (16
     )
     
     $
     2,232Municipal
obligations
     
     
     
     
     22,790
     
     
     
     60
     
     
     
     (660
     )
     
     
     22,190Corporate
obligations
     
     
     
     
     12,811
     
     
     
     53
     
     
     
     (142
     )
     
     
     12,722Mortgage-backed securites
     
     
     
     
     13,135
     
     
     
     8
     
     
     
     (127
     )
     
     
     13,016CMOs
     
     
     
     
     28,580
     
     
     
     36
     
     
     
     (392
     )
     
     
     28,224Common
stock
     
     
     
     
     82
     
     
     
     
     
     
     
     (49
     )
     
     
     33Total
securities available for sale
     
     
     
     $
     79,640
     
     
     $
     163
     
     
     $
     (1,386
     )
     
     $
     78,417Held to
MaturityMunicipal
obligations
     
     
     
     $
     675
     
     
     $
     11
     
     
     $
     
     
     
     $
     686Mortgage-backed securites
     
     
     
     
     22
     
     
     
     
     
     
     
     
     
     
     
     22Total
securities held to maturity
     
     
     
     $
     697
     
     
     $
     11
     
     
     $
     
     
     
     $
     708Securities SFAS 159Preferred
stock
     
     
     
     $
     2,000
     
     
     $
     
     
     
     $
     (679
     )
     
     $
     1,321$
     2,000
     
     
     $
     
     
     
     $
     (679
     )
     
     $
     1,321




-16-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 3: |  | Securities  continued
|------- |  | ----------------------








Beginning July 1, 2007 the
Company elected to account for its FHLMC and FNMA preferred stock under SFAS No. 159 Fair Value Option for Financial Assets and Financial Liabilities,
which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and
liabilities on a contract-by-contract basis. Subsequent changes in fair value of these assets are recognized in earnings when incurred. Management
elected to invoke the option to carry its preferred stock at fair value to more accurately reflect the estimated realizability of the preferred stock
at each financial reporting date. The market value of preferred stock was $25,000 and $1,321,000 at June 30, 2009 and 2008, respectively, resulting in
a loss in value of $1,296,000 and $511,000 for the years ending June 30, 2009 and 2008, respectively, and is included in noninterest
income.




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 $113,000 and $87,000 for the years ended June 30, 2009 and 2008, respectively. Gross realized losses on securities
available-for-sale were $59, and $15,000 for the years ended June 30, 2009 and 2008, respectively.




The amortized cost and estimated
fair value of securities at June 30, 2009 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, 2009Held to Maturity
     
     Available for Sale(Dollars in Thousands)
     
     
     
     Amortized Cost
     
     Estimated Market Value
     
     Amortized Cost
     
     Estimated Market ValueDue in one
year or less
     
     
     
     $
     110
     
     
     $
     110
     
     
     $
     110
     
     
     $
     110Due from one
to five years
     
     
     
     
     125
     
     
     
     131
     
     
     
     10,414
     
     
     
     10,187Due from five
to ten years
     
     
     
     
     140
     
     
     
     143
     
     
     
     7,643
     
     
     
     7,683Due after ten
years
     
     
     
     
     
     
     
     
     
     
     
     
     25,437
     
     
     
     24,289375
     
     
     
     384
     
     
     
     43,604
     
     
     
     42,269Mortgage-backed
     
     
     
     
     
     
     
     
     
     
     
     
     8,287
     
     
     
     8,444CMOs
     
     
     
     
     
     
     
     
     
     
     
     
     31,273
     
     
     
     31,550Total
     
     
     
     $
     375
     
     
     $
     384
     
     
     $
     83,164
     
     
     $
     82,263




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




-17-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 3: |  | Securities  continued
|------- |  | ----------------------








At June 30, 2009 and 2008,
securities with a carrying value of $36,651,000 and $33,880,000, respectively, were pledged to secure public deposits and for other purposes required
or permitted by law.




The following table discloses,
as of June 30, 2009 and 2008, 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:


Less than 12 months
     
     12 months or longerJune 30, 2009(Dollars in Thousands)
     
     
     
     Estimated Market Value
     
     Gross Unrealized Losses
     
     Estimated Market Value
     
     Gross Unrealized LossesU.S.
Government and agency
     
     
     
     $
     1,686
     
     
     $
     18
     
     
     $
     458
     
     
     $
     7Municipal
obligations
     
     
     
     
     11,529
     
     
     
     422
     
     
     
     5,732
     
     
     
     634Corporate
obligations
     
     
     
     
     1,193
     
     
     
     49
     
     
     
     1,961
     
     
     
     570Mortgage-backed & CMOs
     
     
     
     
     2,755
     
     
     
     196
     
     
     
     1,062
     
     
     
     195Total
     
     
     
     $
     17,163
     
     
     $
     685
     
     
     $
     9,213
     
     
     $
     1,406


June 30, 2008U.S.
Government and agency
     
     
     
     $
     964
     
     
     $
     16
     
     
     $
     
     
     
     $
     Municipal
obligations
     
     
     
     
     13,272
     
     
     
     460
     
     
     
     3,067
     
     
     
     200Corporate
obligations
     
     
     
     
     7,973
     
     
     
     218
     
     
     
     
     
     
     
     Mortgage-backed & CMOs
     
     
     
     
     32,191
     
     
     
     404
     
     
     
     1,991
     
     
     
     39Common
stock
     
     
     
     
     33
     
     
     
     49Total
     
     
     
     $
     54,433
     
     
     $
     1,147
     
     
     $
     5,058
     
     
     $
     239




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, 2009 and 2008. 97 and 140 securities are in an unrealized loss position as of June 30,
2009 and 2008, respectively.




Management evaluates securities
for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value.




-18-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 3: |  | Securities  continued
|------- |  | ----------------------








At June 30, 2009, 58 U.S.
Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 3.2% from the Companys
amortized cost basis. These unrealized losses are principally due to rising interest rates. In analyzing an issuers financial condition,
management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have
occurred, and industry analysts reports. As management has the ability to hold debt securities until maturity, or for the foreseeable future if
classified as available for sale, no declines are deemed to be other than temporary.




At June 30, 2009, 28 mortgage
backed and CMO securities have unrealized losses with aggregate depreciation of less than 1.0% from the Companys cost basis. These unrealized
losses are principally due to rising interest rates. No credit issues have been identified that cause management to believe the declines in market
value are other than temporary. In analyzing the issuers financial condition, management considers industry analysts reports, financial
performance and projected target prices of investment analysts within a one-year time frame. As management has the ability to hold debt securities
until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.




At June 30, 2009, 11 corporate
obligations have unrealized losses with aggregate depreciation of less than 7.0% from the Companys cost basis. These unrealized losses are
principally due to rising interest rates. No credit issues have been identified that cause management to believe the declines in market value are other
than temporary. In analyzing the issuers financial condition, management considers industry analysts reports, financial performance and
projected target prices of investment analysts within a one-year time frame. As management has the ability to hold debt securities until maturity, or
for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.




-19-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 4: |  | Loans
|------- |  | -----








A summary of the balances of
loans follows:







June 30,2009
     
     2008(Dollars
in Thousands)First
mortgage loans:Residential
mortgage (1-4 family)
     
     
     
     $
     79,216
     
     
     $
     86,751Commercial
real estate
     
     
     
     
     36,713
     
     
     
     28,197Real estate
construction
     
     
     
     
     4,642
     
     
     
     7,317Other loans:
Home equity
     
     
     
     
     28,676
     
     
     
     28,034Consumer
     
     
     
     
     10,835
     
     
     
     11,558Commercial
     
     
     
     
     7,541
     
     
     
     6,502Subtotal
     
     
     
     
     167,623
     
     
     
     168,359Less:
Allowance for loan losses
     
     
     
     
     (525
     )
     
     
     (300
     )Deferred loan
fees, net
     
     
     
     
     99
     
     
     
     90Total loans,
net
     
     
     
     $
     167,197
     
     
     $
     168,149




Loans net of related allowance
for loan losses on which the accrual of interest has been discontinued were $990,000 and $0 at June 30, 2009 and 2008, respectively. Interest income
not accrued on these loans and cash interest income was immaterial for the years ended June 30, 2009 and 2008. The allowance for loan losses on
nonaccrual loans as of June 30, 2009 and 2008 was $12,000 and $32,000, respectively. The Company expects to collect all amounts due on nonaccrual
loans, including interest accrued at contractual rates. There were $15,000 and $32,000 loans considered impaired at June 30, 2009 and 2008,
respectively. As of June 30, 2009 and 2008, the Company had $251,000 and $0, 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 30,2009
     
     2008(Dollars
in Thousands)Balance at
beginning of period
     
     
     
     $
     300
     
     
     $
     518Provision
(credit) for loan losses
     
     
     
     
     257
     
     
     
     (175
     )Loans charged
off
     
     
     
     
     (47
     )
     
     
     (54
     )Recoveries of
loans previously charged off
     
     
     
     
     15
     
     
     
     11Balance at
end of period
     
     
     
     $
     525
     
     
     $
     300




-20-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|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, and
their related parties, of the Company at June 30, 2009 and 2008, were $1,760,679 and $7,808,639, respectively. During the year ended June 30, 2009,
total principal additions amounted to $123,752 and total principal payments amounted to $6,123,665.One loan was to a company that is a related party of
a director, and accounts for $6,000,000 of the $6,123,665 principle payments noted previously. On July 9, 2008 $6,000,000 of this loan was sold to the
Montana Board of Investments under an existing commitment established February 28, 2007. Interest income from all these loans was $140,015 and $229,617
for the years ended June 30, 2009 and 2008, respectively.


|NOTE 5: |  | Mortgage Servicing Rights
|------- |  | -------------------------








The Company is servicing loans
for the benefit of others totaling approximately $270,508,000 and $204,654,000 at June 30, 2009 and 2008, 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 $2,668,000 and $2,219,000 at June 30,
2009 and 2008, respectively.




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







Years Ended June 30,2009
     
     2008(Dollars
in Thousands)Mortgage
servicing rightsBalance at
beginning of period
     
     
     
     $
     1,652
     
     
     $
     1,628Mortgage
servicing rights capitalized
     
     
     
     
     1,154
     
     
     
     337Amortization
of mortgage servicing rights
     
     
     
     
     (598
     )
     
     
     (313
     )Balance at
end of period
     
     
     
     
     2,208
     
     
     
     1,652Valuation
allowanceBalance at
beginning of period
     
     
     
     
     
     
     
     
     Provision
(credited) to operations
     
     
     
     
     
     
     
     
     Balance at
end of period
     
     
     
     
     
     
     
     
     Net mortgage
servicing rights
     
     
     
     $
     2,208
     
     
     $
     1,652




-21-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 5: |  | Mortgage Servicing Rights  continued
|------- |  | -------------------------------------








The fair values of these rights
were $2,389,000 and $2,078,000 at June 30, 2009 and June 30, 2008, respectively. The fair value of servicing rights was determined using discount rates
ranging from 9% to 20%, prepayment speeds ranging from 100% to 400%, depending on stratification of the specific right. The fair value was also
adjusted for the affect of potential past dues and foreclosures.


|NOTE 6: |  | Premises and Equipment
|------- |  | ----------------------








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







June 30,2009
     
     2008(Dollars
in Thousands)Land,
buildings, and improvements
     
     
     
     $
     16,380
     
     
     $
     10,571Furniture and
equipment
     
     
     
     
     3,757
     
     
     
     4,26120,137
     
     
     
     14,832Accumulated
depreciation
     
     
     
     
     (6,376
     )
     
     
     (6,752
     )$
     13,761
     
     
     $
     8,080




Depreciation expense totaled
$482,256 and $458,964 for the years ended June 30, 2009 and 2008, respectively.


|NOTE 7: |  | Deposits
|------- |  | --------








The composition of deposits are
summarized as follows:







June 30,2009
     
     2008(Dollars
in Thousands)Noninterest
checking
     
     
     
     $
     15,002
     
     
     $
     14,617Interest
bearing checking (0.33%, 0.38%)
     
     
     
     
     32,664
     
     
     
     30,720Passbook
savings (0.41%, 0.65%)
     
     
     
     
     26,445
     
     
     
     23,906Money market
accounts (.64%, 1.75%)
     
     
     
     
     26,886
     
     
     
     25,275Time
certificates of deposits(2009  .75%  5.35%, 2008  1.98%  5.35%)
     
     
     
     
     86,202
     
     
     
     84,333$
     187,199
     
     
     $
     178,851




The weighted average cost of
funds was 1.38% and 1.94% at June 30, 2009 and 2008, respectively.




-22-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 7: |  | Deposits  continued
|------- |  | --------------------








At June 30, 2009, the scheduled
maturities of time deposits are as follows:







(Dollars
in Thousands)Within one
year
     
     
     
     $
     72,102One to two
years
     
     
     
     
     10,067Two to three
years
     
     
     
     
     2,663Three to four
years
     
     
     
     
     913Thereafter
     
     
     
     
     457Total
     
     
     
     $
     86,202




Interest expense on deposits is
summarized as follows:







Years Ended June 30,2009
     
     2008(Dollars
in Thousands)Checking
     
     
     
     $
     114
     
     
     $
     71Passbook
savings
     
     
     
     
     131
     
     
     
     150Money market
accounts
     
     
     
     
     322
     
     
     
     420Time
certificates of deposits
     
     
     
     
     2,594
     
     
     
     3,746$
     3,161
     
     
     $
     4,387




As of May 20, 2009 FDIC
insurance covers deposits up to $250,000 through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per
deposit for all account categories except for IRAs and other certain retirement accounts which will remain at $250,000 per depositor. The Bank is a
participant in the FDICs Transactional Account Gaurantee Program, and as such noninterest bearing accounts are fully insured until June 30, 2010
when the program expires. At June 30, 2009 and 2008, the Company held $40,146,000 and $37,211,000, respectively, in non-retirement deposit accounts
that included balances in excess of $100,000 or more. At June 30, 2009 and 2008, the Company held $294,000 and $285,000, respectively, in qualified
retirement deposit accounts that included balances in excess of $250,000. After December 31, 20013 deposit amounts above $100,000, and $250,000 for
retirement accounts may not be insured by the FDIC, depending upon the underlying ownership of the account.




At June 30, 2009 and 2008, the
Company reclassified $148,000 and $44,000, respectively, in overdrawn deposits as loans.




Directors and senior
officers deposit accounts at June 30, 2009 and 2008, were $299,000 and $201,000, respectively.




-23-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 8: |  | Advances from the Federal Home Loan Bank and other
borrowings
|------- |  | -------------------------------------------------------------








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







June 30,2009
     
     2008(Dollars
in Thousands)Within one
year
     
     
     
     $
     10,667
     
     
     $
     9,167One to two
years
     
     
     
     
     8,389
     
     
     
     15,666Two to three
years
     
     
     
     
     18,000
     
     
     
     3,389Three to four
years
     
     
     
     
     16,000
     
     
     
     16,000Four to five
years
     
     
     
     
     9,000
     
     
     
     16,000Thereafter
     
     
     
     
     5,000
     
     
     
     5,000Total
     
     
     
     $
     67,056
     
     
     $
     65,222




Federal Home Loan
Advances




The advances are due at maturity,
with the exception of two advances, totaling, $10,000,000, that are callable at the FHLB of Seattles option. The advances are subject to
prepayment penalties. The interest rates on advances are fixed. 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. The carrying value of the securities collateralized for these
advances was $1,135,081 as of June 30, 2009. At June 30, 2009 and 2008, 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, 2009, was 30% of total Bank assets, or approximately $86.8 million. The balance of advances was $44,056,000 and $42,222,000 at June 30, 2009 and
2008, respectively.




Other
Borrowings




The Bank had $23,000,000 in
structured repurchase agreements with PNC Financial Service Group, Inc. (PNC) at June 30, 2009, and 2008. These agreements are
collateralized by corporate and municipal securities. The carrying value of these securities was $27,961,000 as of June 30, 2009. These agreements
include terms, under certain conditions, which allow PNC to exercise a call option.




Federal Funds
Purchased




The Bank has a $6,000,000 Federal
Funds line of credit with PNC. The balance was $0, and $3,000,000 as of June 30, 2009 and 2008, respectively.




The Bank established a $5,000,000
Federal Funds line of credit with Zions Bank during the fiscal year 2009. The balance was $0 as of June 30, 2009.




-24-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 8: |  | Advances from the Federal Home Loan Bank and other borrowings
 continued
|------- |  | -------------------------------------------------------------------------



Federal Reserve Bank Discount
Window




For additional liquidity sources,
the Bank opened a credit facility at the Federal Reserve Banks Discount Window. The amount available to the Bank is limited by various collateral
requirements. The Bank has pledged one Agency security and one mortgage backed security at the Federal Reserve Bank that had a carrying value of
$6,151,000 as of June 30, 2009. The account had $0 balance as of June 30, 2009 and 2008.




For all borrowings outstanding
the weighted average interest rate for advances at June 30, 2009 and 2008 was 4.02% and 3.94% respectively. The weighted average amount outstanding was
$67,772,000 and $43,712,000 for the years ended June 30, 2009 and 2008, respectively.




The maximum amount outstanding at
any month-end was $73,789,000 and $68,222,222 during the years ended June 30, 2009 and 2008, respectively.


|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.




For the years ended June 30,
2009 and June 30, 2008, interest expense on the subordinated debentures was $309,000.




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.




-25-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 11: |  | Income Taxes
|-------- |  | ------------








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







Years Ended June 30,2009
     
     2008(Dollars
in Thousands)CurrentU.S.
federal
     
     
     
     $
     975
     
     
     $
     678Montana
     
     
     
     
     270
     
     
     
     1981,245
     
     
     
     876DeferredU.S.
federal
     
     
     
     
     (149
     )
     
     
     (165
     )Montana
     
     
     
     
     (72
     )
     
     
     (49
     )(221
     )
     
     
     (214
     )Total
     
     
     
     $
     1,024
     
     
     $
     662




The nature and components of
deferred tax assets and liabilities, which are a component of other assets in 2009 and 2008 in the accompanying statement of financial condition, are
as follows:







June 30,2009
     
     2008(Dollars
in Thousands)Deferred tax
assets:Deferred
compensation
     
     
     
     $
     272
     
     
     $
     267Loans
receivable
     
     
     
     
     34
     
     
     
     20Securities
available-for-sale & preferred stock SFAS 159
     
     
     
     
     862
     
     
     
     567Other
     
     
     
     
     16
     
     
     
     22Total
deferred tax assets
     
     
     
     
     1,184
     
     
     
     876Deferred tax
liabilities:Premises and
equipment
     
     
     
     
     210
     
     
     
     112Deferred loan
fees
     
     
     
     
     11
     
     
     
     23FHLB
stock
     
     
     
     
     389
     
     
     
     389Unrealized
gain on hedging
     
     
     
     
     20
     
     
     
     14Other
     
     
     
     
     
     
     
     
     11Total
deferred tax liabilities
     
     
     
     
     630
     
     
     
     549Net deferred
tax asset
     
     
     
     $
     554
     
     
     $
     327




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.




-26-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 11: |  | Income Taxes  continued
|-------- |  | ------------------------








A reconciliation of the
Companys effective income tax provision to the statutory federal income tax rate is as follows:







Years Ended June 30,2009
     
     2008(Dollars
in Thousands)Federal
income taxes at the statutory rate of 34%
     
     
     
     $
     1,160
     
     
     $
     942State income
taxes
     
     
     
     
     230
     
     
     
     150Nontaxable
income
     
     
     
     
     (451
     )
     
     
     (409
     )Other,
net
     
     
     
     
     85
     
     
     
     (21
     )Income tax
expense
     
     
     
     $
     1,024
     
     
     $
     662Effective tax
rate
     
     
     
     
     30.0
     %
     
     
     23.9
     %




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 $525,000 and $300,000 at June 30, 2009 and 2008, respectively, for which
federal income tax has not been provided.




-27-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|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 income is summarized as follows for the years ended June 30:







2009
     
     2008(Dollars
in Thousands)Net
unrealized holding loss arising during the year:Available for
sale securities, net of related income tax benefit of $112 and $48, respectively
     
     
     
     $
     263
     
     
     $
     112Forward
delivery commitments, net of related income tax expense of $6 and $8, respectively
     
     
     
     
     15
     
     
     
     20FAS 159
reclassification on July 1, 2007
     
     
     
     
     
     
     
     
     118Change in
effective tax rate (on beginning balance of other comprehensive loss of ($908) at July 1, 2007)
     
     
     
     
     
     
     
     
     (114
     )Reclassification adjustment for net realized gain included in net income, net of related income tax expense of $16 and $22,
respectively
     
     
     
     
     (38
     )
     
     
     (50
     )Other
comprehensive income
     
     
     
     $
     240
     
     
     $
     86




-28-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 13: |  | Supplemental Cash Flow Information
|-------- |  | ----------------------------------






Years Ended June 30,2009
     
     2008(Dollars
in Thousands)Supplemental
Cash Flow InformationCash paid
during the year for interest
     
     
     
     $
     6,127
     
     
     $
     6,565Cash paid
during the year for income taxes
     
     
     
     
     1,475
     
     
     
     919Non-Cash
Investing ActivitiesIncrease in
market value of securities available for sale
     
     
     
     $
     (321
     )
     
     $
     (88
     )Mortgage
servicing rights capitalized
     
     
     
     
     1,154
     
     
     
     338ESOP shares
released
     
     
     
     
     114
     
     
     
     137


|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, 2009 and 2008, 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 5, 2009) 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:




-29-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 14: |  | Regulatory Capital Requirements 
continued
|-------- |  | -------------------------------------------






(Dollars in Thousands)
     
     
     
     Actual
     
     Minimum Capital Requirement
     
     Minimum To Be Well Capitalized Under Prompt
Corrective Action ProvisionsJune 30, 2009:
     
     
     
     Amount
     
     Ratio
     
     Amount
     
     Ratio
     
     Amount
     
     RatioTotal
Risk-based Capital to Risk Weighted AssetsConsolidated
     
     
     
     $
     33,886
     
     
     
     16.61
     %
     
     $
     16,318
     
     
     
     8.00
     %
     
     $
     N/A
     
     
     
     N/A
     %Bank
     
     
     
     
     27,592
     
     
     
     13.66
     
     
     
     16,157
     
     
     
     8.00
     
     
     
     20,196
     
     
     
     10.00Tier I
Capital toRisk Weighted
AssetsConsolidated
     
     
     
     
     33,374
     
     
     
     16.36
     
     
     
     8,159
     
     
     
     4.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     27,079
     
     
     
     13.41
     
     
     
     8,078
     
     
     
     4.00
     
     
     
     12,118
     
     
     
     6.00Tier I
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     33,374
     
     
     
     11.50
     
     
     
     8,709
     
     
     
     3.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     27,079
     
     
     
     9.53
     
     
     
     8,522
     
     
     
     3.00
     
     
     
     14,203
     
     
     
     5.00Tangible
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     33,374
     
     
     
     11.50
     
     
     
     4,354
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     27,079
     
     
     
     9.53
     
     
     
     4,261
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/AJune 30,
2008:Total
Risk-based Capital to Risk Weighted AssetsConsolidated
     
     
     
     $
     31,875
     
     
     
     16.24
     %
     
     $
     15,702
     
     
     
     8.00
     %
     
     $
     N/A
     
     
     
     N/A
     %Bank
     
     
     
     
     26,192
     
     
     
     13.43
     
     
     
     15,599
     
     
     
     8.00
     
     
     
     19,498
     
     
     
     10.00Tier I
Capital toRisk Weighted
AssetsConsolidated
     
     
     
     
     31,611
     
     
     
     16.11
     
     
     
     7,851
     
     
     
     4.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,928
     
     
     
     13.30
     
     
     
     7,799
     
     
     
     4.00
     
     
     
     11,699
     
     
     
     6.00Tier I
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     31,611
     
     
     
     11.25
     
     
     
     8,433
     
     
     
     3.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,928
     
     
     
     9.40
     
     
     
     8,272
     
     
     
     3.00
     
     
     
     13,787
     
     
     
     5.00Tangible
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     31,611
     
     
     
     11.25
     
     
     
     4,216
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,928
     
     
     
     9.40
     
     
     
     4,136
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/A




-30-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|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 30,2009
     
     2008(Dollars
in Thousands)Capital
determined by generally accepted accounting principles
     
     
     
     $
     26,687
     
     
     $
     25,282Unrealized
loss on securities available-for-sale
     
     
     
     
     439
     
     
     
     678Unrealized
gain on forward delivery commitments
     
     
     
     
     (47
     )
     
     
     (32
     )Tier I (core)
capital
     
     
     
     
     27,079
     
     
     
     25,928General
allowance for loan losses
     
     
     
     
     513
     
     
     
     264Total risk
based capital
     
     
     
     $
     27,592
     
     
     $
     26,192




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 require OTS approval. The Bank has paid
dividends totaling $1,552,000 and $1,600,000 to the Company during the years ended June 30, 2009, and 2008, respectively. The Company had paid four
quarterly dividends of $.255 per share to its shareholders for the year ended June 30, 2009, and four quarterly dividends of $0.24 per share to its
shareholders for the year ended June 30, 2008.




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.


|NOTE 15: |  | 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 $54,000 during the year ended June 30, 2009 for
support services, and an additional $83,041 for computer hardware and software used by the Bank for its computer network. For the year ended June 30,
2008, expenditures were $35,000 for support services and $137,000 for computer hardware and software.




-31-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 15: |  | Related Party Transactions  continued
|-------- |  | --------------------------------------








In 2007, the Bank also made a
construction loan, in the normal course of lending, to this same affiliated entity for the construction of an office building. At the years ending June
30, 2009 and 2008, $0 and $6,011,000 ($1,570,000 net of participation sold) had been disbursed, respectively. In fiscal 2008 the construction was
completed and the loan was refinanced into $7,500,000 permanent financing. On July 9, 2008, 80 percent, or $6.0 million was sold to the Montana Board
of Investments. As of June 30, 2009 this loans principal balance was $7,301,000 ($722,000 net of participation sold). The Bank maintains the servicing
for this loan.


|NOTE 16: |  | 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
$182,000 and $159,000 for the years ended June 30, 2009 and 2008, 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, 2009 and 2008, the Companys match totaled
$47,000 and $43,000, 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, 2009 and 2008, the total expense was $102,000 and $105,000, respectively. The Company has
recorded a liability for the deferred compensation plan of $908,000 and $890,000 at June 30, 2009 and 2008, respectively, which is included in the
balance of accrued expenses and other liabilities.




Employee Stock Ownership
Plan




The Company has established an
ESOP for eligible employees who meet certain age and service requirements. At inception the ESOP borrowed $368,000 from Eagle Bancorp and used the
funds to purchase 46,006 shares of common stock, at $8 per share, 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.




-32-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 16: |  | Employee Benefits  continued
|-------- |  | -----------------------------



Employee Stock Ownership Plan
 continued




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 $107,000
and $128,000 were recognized in fiscal 2009 and 2008, respectively, for 4,600 shares committed to be released to participants during the years ended
June 30, 2009 and 2008 with respect to the plan years ending December 31, 2008 and 2007. The cost of the 2,306 ESOP shares ($18,000 at June 30, 2009)
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 $65,000 at that date.




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.




There were no stock options
granted under the Plan as of June 30, 2009.


|NOTE 17: |  | 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.




-33-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 17: |  | Financial Instruments and Off-Balance-Sheet Activities 
continued
|-------- |  | ------------------------------------------------------------------








The notional amounts of the
Companys commitments to extend credit at fixed and variable interest rates were approximately $12,440,000 and $8,374,000 at June 30, 2009 and
2008, respectively. Fixed rate commitments are extended at rates ranging from 4.50% to 8.0% and 4.50% to 6.75% at June 30, 2009 and 2008, respectively.
The Company has lines of credit representing credit risk of approximately $52,288,000 and $43,751,000 at June 30, 2009 and 2008, respectively, of which
approximately $26,838,000 and $21,026,000 had been drawn at June 30, 2009 and 2008, respectively. The Company has credit cards issued representing
credit risk of approximately $675,000 and $640,000 at June 30, 2009 and 2008, respectively, of which approximately $21,000 and $24,000 had been drawn
at June 30, 2009 and 2008, respectively. The Company has letters of credits issued representing credit risk of approximately $1,347,000 and $2,440,000
at June 30, 2009 and 2008, 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, 2009 and 2008,
the Company had entered into commitments to deliver approximately $5,344,000 and $7,425,000 respectively, in loans to various investors, all at fixed
interest rates ranging from 4.25% to 5.63% and 5.25% to 6.38%, at June 30, 2009 and 2008, respectively. The Company had approximately $68,000 and
$46,000 of gains deferred as a result of the forward delivery commitments entered into as of June 30, 2009 and 2008, 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, 2009.




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.




-34-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 18: |  | Fair Value Disclosures
|-------- |  | ----------------------








SFAS 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value
measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in
the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market
used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that
assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for
transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market
that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.




SFAS 157 requires the use of
valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and
other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses
valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is
based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be
consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.
Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on
market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entitys own assumptions about the
assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In
that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:


| |  | Level 1 Inputs  Unadjusted quoted prices in active markets
for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Level 2 Inputs  Inputs other than quoted prices included
in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default
rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



-35-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 18: |  | Fair Value Disclosures  continued
|-------- |  | ----------------------------------








A description of the valuation
methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.




In general, fair value is based
upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that
primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at
fair value. While management believes the Companys valuation methodologies are appropriate and consistent with other market participants, the use
of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date.




Available for Sale
Securities  Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 inputs. For these
securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus
prepayments speeds, credit information and the bonds terms and conditions, among other things.




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




Preferred Stock 
SFAS 159  Freddie Mac and Fannie Mae preferred stock are reported at fair value utilizing Level 1 and Level 2 inputs. For these
securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus
prepayments speeds, credit information and the bonds terms and conditions, among other things.




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




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.




The following table summarizes
financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2009 and 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):




-36-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 18: |  | Fair Value Disclosures  continued
|-------- |  | ----------------------------------






June 30, 2009Level 1 Inputs
     
     Level 2 Inputs
     
     Level 3 Inputs
     
     Total Fair ValueAvailable for
sale securities
     
     
     
     $
     
     
     
     $
     82,263
     
     
     $
     
     
     
     $
     82,263Preferred
stock  SFAS 159
     
     
     
     
     
     
     
     
     25
     
     
     
     
     
     
     
     25Loans
held-for-sale
     
     
     
     
     
     
     
     
     5,349
     
     
     
     
     
     
     
     5,349


June 30, 2008Level 1Inputs
     
     Level 2Inputs
     
     Level 3Inputs
     
     Total Fair ValueAvailable for
sale securities
     
     
     
     $
     
     
     
     $
     78,417
     
     
     $
     
     
     
     $
     78,417Preferred
stockSFAS 159
     
     
     
     
     
     
     
     
     1,321
     
     
     
     
     
     
     
     1,321Loans
held-for-sale
     
     
     
     
     
     
     
     
     7,370
     
     
     
     
     
     
     
     7,370









Certain financial assets and
financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis
but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table summarizes
financial assets and financial liabilities measured at fair value on a nonrecurring basis as of June 30, 2009 and 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):







June 30, 2009Level 1Inputs
     
     Level 2Inputs
     
     Level 3Inputs
     
     Total Fair ValueImpaired
loans
     
     
     
     $
     
     
     
     $
     3
     
     
     $
     
     
     
     $
     3Mortgage
servicing rights
     
     
     
     
     
     
     
     
     2,389
     
     
     
     
     
     
     
     2,389







June 30, 2008Level 1Inputs
     
     Level 2Inputs
     
     Level 3Inputs
     
     Total Fair ValueImpaired
loans
     
     
     
     $
     
     
     
     $
     
     
     
     $
     
     
     
     $
     Mortgage
servicing rights
     
     
     
     
     
     
     
     
     1,652
     
     
     
     
     
     
     
     1,652




During the year ended June 30,
2009, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible
loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $15,000 were reduced by specific valuation
allowance allocations totaling $12,000 to a total reported fair value of $3,000 based on collateral valuations utilizing Level 2 valuation
inputs.




As of June 30, 2009, mortgage
servicing rights were remeasured and reported at fair value through a valuation allowance based upon the fair value of the calculated servicing rights.
Servicing rights with a carrying value of $2,208,000 were reduced by the valuation allowance totaling $0 to a total reported fair value of $2,208,000
based on collateral valuations utilizing Level 2 valuation inputs.




-37-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 18: |  | Fair Value Disclosures  continued
|-------- |  | ----------------------------------








Certain non-financial assets and
non-financial liabilities measured at fair value on a recurring and non-recurring basis include goodwill, other intangible assets and other
non-financial long-lived assets. As stated above, SFAS 157 will be applicable to these fair value measurements that began on January 1,
2009.




Those financial instruments not
subject to the initial implementation of SFAS 157 are required under SFAS 107 to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. Below is a table
that summarizes the fair market values of all financial instruments of the Company at June 30, 2009, followed by methods and assumptions that were used
by the Company in estimating the fair value of the classes of financial instruments not covered by SFAS 157.




The estimated fair value amounts
of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.







June 30,2009
     
     2008(Dollars in Thousands)
     
     
     
     Carrying Amount
     
     Estimated Fair Value
     
     Carrying Amount
     
     Estimated Fair ValueFinancial
Assets:Cash and cash
equivalents
     
     
     
     $
     6,328
     
     
     $
     6,328
     
     
     $
     4,090
     
     
     $
     4,090Securities
held-to-maturity
     
     
     
     
     375
     
     
     
     384
     
     
     
     697
     
     
     
     708FHLB
stock
     
     
     
     
     2,000
     
     
     
     2,000
     
     
     
     1,715
     
     
     
     1,715Loans
receivable, net
     
     
     
     
     167,197
     
     
     
     172,408
     
     
     
     168,149
     
     
     
     169,027Cash value of
life insurance
     
     
     
     
     6,496
     
     
     
     6,496
     
     
     
     6,285
     
     
     
     6,285Financial
Liabilities:Deposits
     
     
     
     
     100,997
     
     
     
     100,997
     
     
     
     94,518
     
     
     
     94,518Time
certificates of deposit
     
     
     
     
     86,202
     
     
     
     88,284
     
     
     
     84,333
     
     
     
     85,241Advances from
the FHLB & other borrowings
     
     
     
     
     67,056
     
     
     
     70,524
     
     
     
     65,222
     
     
     
     66,575Subordinated
debentures
     
     
     
     
     5,155
     
     
     
     3,899
     
     
     
     5,155
     
     
     
     4,833




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




-38-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 18: |  | Fair Value Disclosurescontinued
|-------- |  | --------------------------------








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.




Stock in the FHLB
The fair value of stock in the FHLB approximates redemption value.




Loans receivable 
Fair values are estimated by stratifying the loan portfolio into groups of loans with similar financial characteristics. Loans are segregated by type
such as real estate, commercial, and consumer, with each category further segmented into fixed and adjustable rate interest terms.




For mortgage loans, the Company
uses the secondary market rates in effect for loans that have similar characteristics. The fair value of other fixed rate loans is calculated by
discounting scheduled cash flows through the anticipated maturities adjusted for prepayment estimates. Adjustable interest rate loans are assumed to
approximate fair value because they generally reprice within the short term.




Fair values are adjusted for
credit risk based on assessment of risk identified with specific loans, and risk adjustments on the remaining portfolio based on credit loss
experience.




Assumptions regarding credit
risk are judgmentally determined using specific borrower information, internal credit quality analysis, and historical information on segmented loan
categories for non-specific borrowers.




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, 2009 & 2008, respectively if the borrowings repriced according to their stated
terms.


|NOTE 19: |  | Condensed Parent Company Financial Statements
|-------- |  | ---------------------------------------------








Set forth below is the condensed
statements of financial condition as of June 30, 2009 and 2008, of Eagle Bancorp together with the related condensed statements of income and cash
flows for the years ended June 30, 2009 and 2008.




-39-


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EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 19: |  | Condensed Parent Company Financial Statements 
continued
|-------- |  | ---------------------------------------------------------



Condensed Statements of Financial Condition(Dollars in Thousands)







2009
     
     2008AssetsCash and cash
equivalents
     
     
     
     $
     318
     
     
     $
     237Securities
available for sale
     
     
     
     
     5,491
     
     
     
     4,666Preferred
stock  SFAS 159
     
     
     
     
     25
     
     
     
     141Investment in
Eagle Bancorp Statutory Trust I
     
     
     
     
     155
     
     
     
     155Investment in
American Federal Savings Bank
     
     
     
     
     26,688
     
     
     
     25,282Other
assets
     
     
     
     
     282
     
     
     
     321Total
assets
     
     
     
     $
     32,959
     
     
     $
     30,802Liabilities and stockholders equityAccounts
payable and accrued expenses
     
     
     
     
     13
     
     
     
     13Long-term
subordinated debt
     
     
     
     
     5,155
     
     
     
     5,155Stockholders Equity
     
     
     
     
     27,791
     
     
     
     25,634Total
liabilities and stockholders equity
     
     
     
     $
     32,959
     
     
     $
     30,802




Condensed Statements of Income(Dollars in
Thousands)







2009
     
     2008Interest
income
     
     
     
     $
     146
     
     
     $
     166Interest
expense
     
     
     
     
     (310
     )
     
     
     (310
     )Noninterest
expense
     
     
     
     
     (114
     )
     
     
     (117
     )Loss before
income taxes
     
     
     
     
     (278
     )
     
     
     (261
     )Income tax
benefit
     
     
     
     
     (83
     )
     
     
     (144
     )Loss before
equity in undistributed earnings of American Federal Savings Bank
     
     
     
     
     (195
     )
     
     
     (117
     )Equity in
undistributed earnings of American Federal Savings Bank
     
     
     
     
     2,583
     
     
     
     2,227Net
income
     
     
     
     $
     2,388
     
     
     $
     2,110




-40-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 19: |  | Condensed Parent Company Financial Statements 
continued
|-------- |  | ---------------------------------------------------------



Condensed Statements of Cash Flow(Dollars in
Thousands)


2009
     
     2008Cash flows
from operating activitiesNet
income
     
     
     
     $
     2,388
     
     
     $
     2,110Adjustments
to reconcile net income to net cash used in operating activities:Equity in
undistributed earnings of American Federal Savings Bank
     
     
     
     
     (2,583
     )
     
     
     (2,227
     )Other
adjustments, net
     
     
     
     
     94
     
     
     
     6Net cash used
in operating activities
     
     
     
     
     (101
     )
     
     
     (111
     )Cash flows
from investing activitiesCash
contribution from American Federal Savings Bank
     
     
     
     
     1,302
     
     
     
     1,600Activity in
available for sale securitiesSales
     
     
     
     
     89
     
     
     
     Maturities,
prepayments and calls
     
     
     
     
     279
     
     
     
     89Purchases
     
     
     
     
     (1,152
     )
     
     
     (908
     )Net cash
provided by investing activities
     
     
     
     
     518
     
     
     
     781Cash flows
from financing activitiesESOP payments
and dividends
     
     
     
     
     120
     
     
     
     146Payments to
purchase treasury stock
     
     
     
     
     (21
     )
     
     
     (254
     )Dividends
paid
     
     
     
     
     (435
     )
     
     
     (415
     )Net cash used
in financing activities
     
     
     
     
     (336
     )
     
     
     (523
     )Net change in
cash and cash equivalents
     
     
     
     
     81
     
     
     
     147Cash and cash
equivalents at beginning of period
     
     
     
     
     237
     
     
     
     90Cash and
cash equivalents at end of period
     
     
     
     $
     318
     
     
     $
     237




-41-


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EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 20: |  | Quarterly Results of Operations (Unaudited)
|-------- |  | -------------------------------------------








The following is a condensed
summary of quarterly results of operations for the years ended June 30, 2009 and 2008:







Year ended June 30, 2009First Quarter
     
     Second Quarter
     
     Third Quarter
     
     Fourth Quarter(Dollars
in Thousands, except per share data)Interest and
dividend income
     
     
     
     $
     3,816
     
     
     $
     3,943
     
     
     $
     3,822
     
     
     $
     3,760Interest
expense
     
     
     
     
     1,580
     
     
     
     1,575
     
     
     
     1,512
     
     
     
     1,441Net interest
income
     
     
     
     
     2,236
     
     
     
     2,368
     
     
     
     2,310
     
     
     
     2,319Loan loss
provision
     
     
     
     
     
     
     
     
     34
     
     
     
     72
     
     
     
     151Net interest
income after loan loss provision
     
     
     
     
     2,236
     
     
     
     2,334
     
     
     
     2,238
     
     
     
     2,168Non interest
income
     
     
     
     
     (504
     )
     
     
     444
     
     
     
     1,526
     
     
     
     1,533Non interest
expense
     
     
     
     
     1,849
     
     
     
     2,056
     
     
     
     2,251
     
     
     
     2,407Income before
income tax expense
     
     
     
     
     (117
     )
     
     
     722
     
     
     
     1,513
     
     
     
     1,294Income tax
expense
     
     
     
     
     (17
     )
     
     
     198
     
     
     
     454
     
     
     
     389Net
income
     
     
     
     $
     (100
     )
     
     $
     524
     
     
     $
     1,059
     
     
     $
     905Comprehensive
income (loss)
     
     
     
     $
     (1,134
     )
     
     $
     308
     
     
     $
     374
     
     
     $
     692Basic
earnings per common share
     
     
     
     $
     0.09
     
     
     $
     0.49
     
     
     $
     0.99
     
     
     $
     0.84Diluted
earnings per common share
     
     
     
     $
     0.08
     
     
     $
     0.43
     
     
     $
     0.87
     
     
     $
     0.74


Year ended June 30, 2008Interest and
dividend income
     
     
     
     $
     3,408
     
     
     $
     3,494
     
     
     $
     3,474
     
     
     $
     3,713Interest
expense
     
     
     
     
     1,699
     
     
     
     1,717
     
     
     
     1,639
     
     
     
     1,598Net interest
income
     
     
     
     
     1,709
     
     
     
     1,777
     
     
     
     1,835
     
     
     
     2,115Loan loss
provision
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (175
     )Net interest
income after loan loss provision
     
     
     
     
     1,709
     
     
     
     1,777
     
     
     
     1,835
     
     
     
     2,290Non interest
income
     
     
     
     
     584
     
     
     
     269
     
     
     
     619
     
     
     
     752Non interest
expense
     
     
     
     
     1,668
     
     
     
     1,787
     
     
     
     1,761
     
     
     
     1,847Income before
income tax expense
     
     
     
     
     625
     
     
     
     259
     
     
     
     693
     
     
     
     1,195Income tax
expense
     
     
     
     
     161
     
     
     
     40
     
     
     
     155
     
     
     
     306Net
income
     
     
     
     $
     464
     
     
     $
     219
     
     
     $
     538
     
     
     $
     889Comprehensive
loss
     
     
     
     $
     556
     
     
     $
     215
     
     
     $
     236
     
     
     $
     (921
     )Basic
earnings per common share
     
     
     
     $
     0.43
     
     
     $
     0.20
     
     
     $
     0.50
     
     
     $
     0.83Diluted
earnings per common share
     
     
     
     $
     0.38
     
     
     $
     0.18
     
     
     $
     0.44
     
     
     $
     0.73




-42-


---



EAGLE BANCORP AND SUBSIDIARYNotes to Consolidated
Financial StatementsJune 30, 2009 and 2008


|NOTE 21: |  | Subsequent Events
|-------- |  | -----------------








The Board announced on July 16,
2009 the declaration of a cash dividend of $0.26 per share for the fourth quarter. It is payable August 28, 2009 to shareholders of record at the close
of business August 7, 2009. 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.




-43-


---