| | September 17, 2007 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, 2007.

As you have learned from
extensive coverage in local and national media there are significant challenges
facing the banking industry in the current environment. These challenges include
an environment of higher interest rates and narrowing spreads and the increases
for many banks in the amount of troubled loans. I am pleased to report that the
Company has performed well notwithstanding these developments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

With respect to interest
rates, we were able to experience only a slight decline in net income for the
fiscal year ended June 30, 2007. Net interest income, our main component of core
earnings, decreased slightly. This was offset by higher noninterest income.
Higher noninterest income was primarily due to an increase in net gain on sale
of loans. Per share earnings remained stable at $1.66 due to our continuing
stock repurchase program.

Last years plan was
to manage our growth in assets and our capital ratios. Growth in assets slowed
to 8.15%, with loans receivable increasing by 12.27%. Asset growth coupled with
our stock repurchase program lowered our core capital ratio from 9.97% to 9.85%.
Deposit growth was 3.04%, up from last year, but was assisted by a brokered CD
issuance during the year. As was the case last year, the funding side of our
business continues to be our greatest challenge. 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 managing growth in assets by funding growth in the loan portfolio
with maturities and repayments from our investment portfolio. In the current
relatively flat interest rate environment, funding this growth with expensive
liabilities negatively impacts our net interest income.

Our Company has also
managed its asset quality well and has also benefited from generally favorable
economic conditions in the state. Montanas continuing strong economy,
including an unemployment rate of less than 3.00%, combined with our strong
focus on asset quality, have contributed to additional improvement in our
non-performing asset ratios. Our non-performing loans as a percentage of assets
decreased again, from an already very low 0.20% to 0.09%. Also, while there has
been much discussion in the national media of the problems in the mortgage
industry, primarily in the subprime mortgage area, we do not engage in subprime
lending and have no exposure on our balance sheet to this type of lending.

The new fiscal year which
started July 1, 2007 marks the first year we will be subject to the Section 404
provisions of the Sarbanes-Oxley Act. Our management team has worked with our
outside auditors, internal auditors and staff to ensure we are in compliance
with these provisions.

Last month we were pleased
to celebrate the 85th anniversary of our founding in 1922. We had many
activities and enjoyed sharing our success with our customers and communities.
This year we will also experience some changes in our Board of Directors and
senior management team. Our current Chairman of the Board, Bob Pennington, will
be retiring after 48 years of service to American Federal Savings Bank as both
an officer and director, and our current Vice Chairman, Chuck Jacoby, will also
be retiring. Their experience and wisdom will be greatly missed. CEO Larry
Dreyer will also retire next month after 34 years with the bank. He will remain
on the board of directors. I was elected President in July, and would like to
thank Larry and the board for placing their trust in me to lead the Company. I
would also like to congratulate Clint Morrison on his appointment to Chief
Financial Officer.

---

We continue to expand our
footprint in the communities we serve. We are pleased to announce that we are in
the process of purchasing a lot in the new Skyway Mall in Helena for a new full
service branch. Construction will begin as soon as plans are approved, with the
opening expected within a year from now. The Helena market continues to grow,
and this will allow us to participate in the growth at the north end of the
city. In Bozeman we expect to close on our land purchase by the end of this
month. We now expect to open in our new Oak Street location in Bozeman in the
spring of 2009.

This past year we completed
the transition to electronic presentment of our checks received for deposit.
This has allowed us to reduce operating costs in our branch operations as well
as obtain quicker availability of deposited items. We negotiated a new contract
with our ATM and debit card service provider which also will lower those
operating costs.

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

A Personal Note of Thanks

At our upcoming annual
meeting in October, two of our Directors will be retiring from the Board. Our
Chairman, Robert L. Pennington, will be stepping down after serving our bank for
48 years. Our Vice-Chairman, Charles G. Jacoby, has been a Director for 28
years. Both of these gentlemen were instrumental in the success of our community
bank. They leave with the knowledge that they will be greatly missed and that we
sincerely appreciate their leadership and dedication. We are grateful for the
opportunity to continue building on their accomplishments.

As I retire from management
in October, I will continue to serve on our Board with confidence that our new
President, Pete Johnson, will lead us to continued success in the years ahead.

Very Sincerely,
Larry A. Dreyer
CEO

---



UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549








FORM
10-KSB



|(Mark one)                           
|-------------------------------------
|ý                                    
|                                     
|o                                    
|                                     
|Commission
      file number: 0-29687



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



|United
          States                                                        |  | 81-0531318                                  
|------------------------------------------------------------------------------ |  | --------------------------------------------
|(State
          or other jurisdiction of incorporation
      or organization) |  | (I.R.S.
        Employer Identification No.)
|                                                                               |  |                                             
|1400 Prospect
    Avenue, Helena, MT                                           |  | 59601                                       
|(Address
    of principal executive offices)                                   |  | (Zip Code)                                  
|                                                                               |  |                                             
|Issuer’s
         telephone number:                                            |  | (406)
      442-3080                        
|                                                                               |  | www.americanfederalsavingsbank.com          
|                                                                               |  |                                             
|Securities
      to be registered under Section 12(b) of the Act:              |  |                                             
|Title
      of class                                                           |  | Name
      of exchange on which registered  
|None                                                                           |  | N/A                                         
|                                                                               |  |                                             
|Securities
      to be registered under Section 12(g) of the Act:              |  |                                             
|Common
      stock, par value $0.01 per share                                 
|(Title
      of class)                                                        
|                                                                               |  |                                             



Check
    whether the issuer is not required to file reports pursuant to Section 13
    or 15(d) of the Exchange
Act.o

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



|ý  Yes |  | o  No
|------ |  | -----



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

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

Issuer's
    revenues for its most recent fiscal
year are $14,912,000



The aggregate market value of the common stock held
  by non-affiliates, computed by reference to the closing price as of August
  29, 2007, was $9,151,415.

As of August 29, 2007, there were 1,083,107 shares of common stock issued and
  outstanding.





**DOCUMENTS
    INCORPORATED BY REFERENCE**

1. Portions of the proxy
  statements for the annual meeting of stockholders for the fiscal years ended
  June 30,  2007 and June 30, 2007 and the Registration Statement on Form SB-2
filed on December 20, 1999 are incorporated by reference in Part III hereof.

**Transitional
    Small Business Disclosure
Format (Check one):**

Yes o
    
    No ý


TABLE OF CONTENTS

ItemNo.
     
     
     
     
     
     Page No.Part I1
     
     
     
     Description of Business
     
     
     12
     
     
     
     Description of Property
     
     
     223
     
     
     
     Legal Proceedings
     
     
     234
     
     
     
     Submission of Matters to a Vote of Security Holders
     
     
     23Part II5
     
     
     
     Market for Common Equity, Related Stockholder Matters and Small Business Issuers Purchases of Equity Securities
     
     
     235C
     
     
     
     Small Business Issuer Purchases of Equity Securities
     
     
     246
     
     
     
     Managements Discussion and Analysis or Plan of Operation
     
     
     247
     
     
     
     Financial Statements
     
     
     318A
     
     
     
     Controls and Procedures
     
     
     318B
     
     
     
     Other Information
     
     
     31Part III9
     
     
     
     Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
     
     
     3210
     
     
     
     Executive Compensation
     
     
     3211
     
     
     
     Security Ownership of Certain Beneficial Owners, and Management and Related Stockholder Matters
     
     
     3212
     
     
     
     Certain Relationships and Related Transactions
     
     
     3213
     
     
     
     Exhibits
     
     
     3214
     
     
     
     Principal Accountant Fees and Services
     
     
     32PART I

ITEM 1.    DESCRIPTION OF BUSINESS.

General

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

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

Business Strategy

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

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

Market Area

From our headquarters in
Helena, Montana, we operate four 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 Bozeman (opened 1980),
Butte (opened 1979) and Townsend (opened 1979), Montana.

Montana is one of the
largest states in terms of land mass but ranks as one of the least populated
states. As of the 2000 census it had a population of 902,000. Helena, where we
are headquartered, is the county seat of Lewis and Clark County, which has a
population of approximately 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 recent growth in part due to the growth of the University
as well as the increased tourism for resort areas in and near Bozeman.
Agriculture, however, remains an important part of Bozemans economy.
Bozeman has also become an attractive location for retirees, primarily from the
West Coast, owing to its many winter and summer recreational opportunities and
the presence of the University. Residential construction in Bozeman has
increased more rapidly than such construction in Helena and the other cities in
which we operate.

Butte, Montana is
approximately 64 miles southwest of Helena. Butte and the surrounding Silver-Bow
County have a population of approximately 32,800. Buttes population has
declined as a result of the decline in the energy and telecommunications
industries, which had afforded many higher paying jobs to residents of Butte and
Silver-Bow County.

Townsend is the smallest
community in which we operate. It has a population of about 2,000. Many of its
residents commute to other Montana locations for work. Other employment in
Townsend is primarily in agriculture and services. Townsend is approximately 32
miles southeast of Helena.
Competition We face strong competition
in our primary market area for the attraction of retail deposits and the
origination of loans. Historically, Montana was a unit banking state. This means
that the ability of Montana state banks to create branches was either prohibited
or significantly restricted. As a result of unit banking, Montana has a
significant number of independent financial institutions serving a single
community in a single location. While the states population is
approximately 945,000 people, there are approximately 63 credit unions in
Montana as well as two federally chartered thrift institutions, and 80
commercial banks as of June 30, 2007. Our most direct competition for depositors
has historically come from locally owned and out-of-state commercial banks,
thrift institutions and credit unions operating in our primary market area. The
number of such competitor locations has increased significantly in recent years.
Our competition for loans also comes from banks, thrifts and credit unions in
addition to mortgage bankers and brokers. Our principal market areas can be
characterized as markets with moderately increasing incomes, low unemployment,
increasing wealth (particularly in the growing resort areas such as Bozeman),
and moderate population growth. Lending Activities General. American Federal Savings
Bank primarily originates one- to four-family residential real estate loans and,
to a lesser extent, commercial real estate loans, real estate construction
loans, home equity loans, consumer loans and commercial loans. Commercial real
estate loans include loans on multi-family dwellings, loans on nonresidential
property and loans on developed and undeveloped land. Home equity loans include
loans secured by the borrowers primary residence. Typically, the property
securing such loans is subject to a prior lien. Consumer loans consist of loans
secured by collateral other than real estate, such as automobiles, recreational
vehicles and boats. Personal loans and lines of credit are made on deposits held
by the Bank and on an unsecured basis. Commercial loans consist of business
loans and lines of credit on a secured and unsecured basis. 2  Loan Portfolio Composition. The following table
analyzes the composition of the Banks loan portfolio by loan category at
the dates indicated. At June 30,2007
     
     2006(Dollars in thousands)Amount
     
     Percent ofTotal
     
     Amount
     
     Percent ofTotalFirst
mortgage loans:Residential
mortgage (14 family)(1)
     
     
     
     $
     81,958
     
     
     
     51.68
     %
     
     $
     75,913
     
     
     
     53.71
     %Commercial
real estate
     
     
     
     
     25,621
     
     
     
     16.16
     %
     
     
     18,648
     
     
     
     13.20
     %Real estate
construction
     
     
     
     
     8,253
     
     
     
     5.20
     %
     
     
     6,901
     
     
     
     4.88
     %Total first
mortgage loans
     
     
     
     
     115,832
     
     
     
     73.04
     %
     
     
     101,462
     
     
     
     71.79
     %Other loans:Home
equity
     
     
     
     
     24,956
     
     
     
     15.74
     %
     
     
     20,191
     
     
     
     14.29
     %Consumer
     
     
     
     
     11,438
     
     
     
     7.21
     %
     
     
     11,820
     
     
     
     8.36
     %Commercial
     
     
     
     
     6,366
     
     
     
     4.01
     %
     
     
     7,861
     
     
     
     5.56
     %Total other
loans
     
     
     
     
     42,760
     
     
     
     26.96
     %
     
     
     39,872
     
     
     
     28.21
     %Total
loans
     
     
     
     
     158,592
     
     
     
     100.00
     %
     
     
     141,334
     
     
     
     100.00
     %Less:Deferred loan
fees:
     
     
     
     
     (66
     )
     
     
     
     
     
     
     (59
     )Allowance for
loan losses
     
     
     
     
     518
     
     
     
     
     
     
     
     535Total loans,
net
     
     
     
     $
     158,140
     
     
     
     
     
     
     $
     140,858   
 (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 $533,000 and $547,000 for the years ended June 30, 2007 and 2006,
respectively. Other loan related fee income for contract collections, late
charges, credit life commissions and credit card fees were $83,000 and $88,000
for the years ended June 30, 2007 and 2006, respectively. Loan Maturity Schedule. The following table sets
forth the estimated maturity of the loan portfolio of the Bank at June 30, 2007.
Scheduled principal repayments of loans do not necessarily reflect the actual
life of such assets. The average life of a loan is typically substantially less
than its contractual terms because of prepayments. In addition, due on sale
clauses on loans generally give American Federal Savings Bank the right to
declare loans immediately due and payable in the event, among other things, that
the borrower sells the real property, subject to the mortgage, and the loan is
not paid off. All mortgage loans are shown to be maturing based on the date of
the last payment required by the loan agreement, except as noted. 3  Loans having no stated
maturity, those without a scheduled payment, demand loans and matured loans, are
shown as due within six months. Within 6Months
     
     6 to 12Months
     
     More than1 year to2 years
     
     More than2 years to5 years
     
     Over 5years
     
     Total(In thousands)Residential
mortgage (14 family)(1)
     
     
     
     $
     
     
     
     $
     362
     
     
     $
     161
     
     
     $
     2,581
     
     
     $
     80,012
     
     
     $
     83,116Commercial
real estate and land
     
     
     
     
     216
     
     
     
     3,387
     
     
     
     2,762
     
     
     
     6,349
     
     
     
     11,412
     
     
     
     24,126Real estate
construction
     
     
     
     
     284
     
     
     
     7,788
     
     
     
     1,676
     
     
     
     
     
     
     
     
     
     
     
     9,748Home
equity
     
     
     
     
     494
     
     
     
     1,812
     
     
     
     976
     
     
     
     10,593
     
     
     
     11,081
     
     
     
     24,956Consumer
     
     
     
     
     312
     
     
     
     2,443
     
     
     
     784
     
     
     
     4,949
     
     
     
     2,950
     
     
     
     11,438Commercial
     
     
     
     
     676
     
     
     
     1,767
     
     
     
     222
     
     
     
     1,102
     
     
     
     2,599
     
     
     
     6,366Total Loans
(1)
     
     
     
     $
     1,982
     
     
     $
     17,559
     
     
     $
     6,581
     
     
     $
     25,574
     
     
     $
     108,054
     
     
     $
     159,750   
 (1)
     
     Includes loans held for sale. The following table sets
forth the dollar amount of all loans, at June 30, 2007, due after June 30, 2008,
which have fixed interest rates and which have floating or adjustable interest
rates: Fixed
     
     Adjustable
     
     Total(Dollars in thousands)Residential
mortgage (14 family)
     
     
     
     $
     68,514
     
     
     $
     14,240
     
     
     $
     82,754Commercial
real estate
     
     
     
     
     17,506
     
     
     
     3,017
     
     
     
     20,523Real estate
construction
     
     
     
     
     1,676
     
     
     
     
     
     
     
     1,676Home
equity
     
     
     
     
     20,453
     
     
     
     2,197
     
     
     
     22,650Consumer
     
     
     
     
     8,242
     
     
     
     441
     
     
     
     8,683Commercial
     
     
     
     
     2,711
     
     
     
     1,212
     
     
     
     3,923Total (1)
     
     
     
     $
     119,102
     
     
     $
     21,107
     
     
     $
     140,209Percent of
total
     
     
     
     
     84.95
     %
     
     
     15.05
     %
     
     
     100.00
     %   
 (1)
     
     Due after June 30, 2008. 4  The following table sets
forth information with respect to our loan originations, purchases and sales
activity for the periods indicated. Ended June 30,2007
     
     2006(In thousands)Net loans
receivable (1) at beginning of period:
     
     
     
     $
     141,776
     
     
     $
     108,987Loans
originated:Residential
mortgage (14 family)
     
     
     
     
     64,622
     
     
     
     63,311Commercial
real estate
     
     
     
     
     10,763
     
     
     
     9,266Real estate
construction
     
     
     
     
     18,043
     
     
     
     13,745Home
equity
     
     
     
     
     16,780
     
     
     
     14,409Consumer
     
     
     
     
     5,899
     
     
     
     7,904Commercial
loans
     
     
     
     
     2,777
     
     
     
     6,390Total loans
originated
     
     
     
     
     118,884
     
     
     
     115,025Loans
sold:Whole
loans
     
     
     
     
     42,840
     
     
     
     29,735Total loans
sold
     
     
     
     
     42,840
     
     
     
     29,735Principal
repayments and loan refinancings
     
     
     
     
     58,515
     
     
     
     52,621Deferred loan
fees decrease (increase)
     
     
     
     
     (7
     )
     
     
     27Allowance for
loans decrease (increase)
     
     
     
     
     17
     
     
     
     93Net loan
increase (decrease)
     
     
     
     
     17,539
     
     
     
     32,789Net loans
receivable (1) at end of period
     
     
     
     $
     159,315
     
     
     $
     141,776   
 (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 51.68% of the banks loans as of June 30, 2007 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 $533,000 for the year ended
June 30, 2007. At June 30, 2007, American Federal Savings Bank had $187.27
million in residential mortgage loans sold with servicing retained. American
Federal Savings Bank does not ordinarily purchase home mortgage loans from other
financial institutions. Property appraisals on real
estate securing the Banks single-family residential loans are made by
state certified and licensed independent appraisers who are approved annually by
the board of directors. Appraisals are performed in accordance with applicable
regulations and policies. American Federal Savings Bank generally obtains title
insurance policies on all first mortgage real estate loans originated. On
occasion, refinancings of mortgage loans are approved using title reports
instead of title insurance. Title reports are also allowed on home equity loans.
Borrowers generally remit funds with each monthly payment of principal and
interest, to a loan escrow account from which American Federal Savings Bank
makes disbursements for such items as real estate taxes and hazard and mortgage
insurance premiums as they become due. Home Equity Loans. American Federal Savings
Bank also originates home equity loans. These loans are secured by the
borrowers primary residence, but are typically subject to a prior lien,
which may or may not be held by the Bank. At June 30, 2007, $24.96 million or
15.74% 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 16.16% of the Banks total loan portfolio, or $25.62
million at June 30, 2007. 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 $1,522,000 on June 30, 2007, and was secured by a residential
subdivision. 6  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 $8.25 million or 5.20% of the Banks loan portfolio at
June 30, 2007. 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, 2007, consumer loans totaled $11.44 million or 7.21%
of the Banks total loan portfolio. These loans consist primarily of auto
loans, RV loans, boat loans, personal loans and credit lines and deposit account
loans. Consumer loans are originated in the Banks market area and
generally have maturities of up to 7 years. For loans secured by savings
accounts, American Federal Savings Bank will lend up to 90% of the account
balance on single payment loans and up to 100% for monthly payment loans. Consumer loans have a
shorter term and generally provide higher interest rates than residential loans.
Consumer loans can be helpful in improving the spread between average loan yield
and cost of funds and at the same time improve the matching of the maturities of
rate sensitive assets and liabilities. Increasing its consumer loans has been a
major part of the Banks strategy of operating more like a commercial bank
than a traditional savings bank. The underwriting standards
employed by American Federal Savings Bank for consumer loans include a
determination of the applicants credit history and an assessment of the
applicants ability to meet existing obligations and payments on the
proposed loan. The stability of the applicants monthly income may be
determined by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount. Commercial Loans. Commercial loans amounted
to $6.37 million, or 4.01% of the Banks total loan portfolio at June 30,
2007. 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
4.01% of the total portfolio at June 30, 2007, American Federal Savings Bank
intends to increase such lending by focusing on market segments which it has not
previously emphasized, such as business loans to doctors, lawyers, architects
and other professionals as well as to small businesses within its market area.
Our management believes that this strategy provides opportunities for growth,
without significant additional cost outlays for staff and infrastructure. Commercial loans of this
nature usually involve greater risk than 1-4 family residential mortgage loans.
The collateral we receive is typically related directly to the performance of
the borrowers business which means that repayment of commercial loans is
dependent on the successful operations and income stream of the borrowers
business. Such risks can be significantly affected by economic conditions. In
addition, commercial lending generally requires substantially greater oversight
efforts compared to residential real estate lending. Loans to One Borrower. Under federal law, savings
institutions have, subject to certain exemptions, lending limits to one borrower
in an amount equal to the greater of $500,000 or 15% of the institutions
unimpaired capital and surplus. As of June 30, 2007, our largest aggregation of
loans to one borrower was approximately $1,522,000, consisting of one commercial
real estate loan secured by a residential subdivision. This was well below our
federal legal lending limit to one borrower of approximately $3.87 million at
such date. At June 30, 2007, this loan was current. 7  Loan Solicitation and Processing. Our customary sources of
mortgage loan applications include repeat customers, walk-ins, and referrals
from home builders and real estate brokers. We also advertise in local
newspapers and on local radio and television. We 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 (four) 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. 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, 2007, was approximately $5.82 million, all of which
was for residential mortgage loans. Non-performing Loans and Problem Assets Collection Procedures Generally, our collection
procedures provide that when a loan is 15 or more days delinquent, the borrower
is notified with a past due notice. If the loan becomes 30 days delinquent, the
borrower is sent a written delinquent notice requiring payment. If the
delinquency continues, subsequent efforts are made to contact the delinquent
borrower, including face to face meetings and counseling to resolve the
delinquency. All collection actions are undertaken with the objective of
compliance with the Fair Debt Collection Act. For mortgage loans and home
equity loans, if the borrower is unable to cure the delinquency or reach a
payment agreement, we will institute foreclosure actions. If a foreclosure
action is taken and the loan is not reinstated, paid in full or refinanced, the
property is sold at judicial sale at which we may be the buyer if there are no
adequate offers to satisfy the debt. Any property acquired as the result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold or otherwise disposed of. When real estate owned
is acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its fair market value less estimated selling costs. The initial
recording of any loss is charged to the allowance for loan losses. As of June
30, 2007, 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, 2007, we
had $21,000 of loans that were non-performing and held on non-accrual status. 8  Delinquent Loans. The following table
provides information regarding the Banks loans that are delinquent 30 to
89 days at June 30, 2007: Number
     
     Amount
     
     Percentage of Total Delinquent Loans(Dollars in thousands)Loan Type:Mortgage
(14 family)
     
     
     
     
     6
     
     
     $
     426
     
     
     
     43.08
     %Real estate
construction
     
     
     
     
     
     
     
     
     
     
     
     
     0.00
     %Commercial
real estate
     
     
     
     
     3
     
     
     
     130
     
     
     
     13.14
     %Home
equity
     
     
     
     
     4
     
     
     
     130
     
     
     
     13.14
     %Consumer
     
     
     
     
     17
     
     
     
     115
     
     
     
     11.63
     %Commercial
     
     
     
     
     4
     
     
     
     188
     
     
     
     19.01
     %Total
     
     
     
     
     34
     
     
     $
     989
     
     
     
     100.00
     % Non-Performing Assets. The following table sets
forth information regarding American Federal Savings Banks non-performing
assets as of the dates indicated. The Bank does not have any troubled debt
restructurings within the meaning of the Statement of Financial Accounting
Standards No. 114. At June 30,2007
     
     2006(Dollars in thousands)Non-accrual
loans
     
     
     
     $
     21
     
     
     $
     345Accruing
loans delinquent 90 days or more
     
     
     
     
     191
     
     
     
     114Real estate
owned
     
     
     
     
     
     
     
     
     Total
     
     
     
     $
     212
     
     
     $
     459Total
non-performing loans as a percentage of total loan portfolio
     
     
     
     
     0.13
     %
     
     
     0.33
     %Percentage of
total assets
     
     
     
     
     0.09
     %
     
     
     0.20
     %  The decrease in non-accrual
loans during the year ended June 30, 2007, was attributable primarily to a
commercial real estate property being sold during bankruptcy. During the year
ended June 30, 2007, the Bank had one foreclosure resulting in a gain of $1,500. During the year ended June
30, 2007, approximately $83,000 of interest was recorded on loans previously
accounted for on a non-accrual basis. The above mentioned commercial real estate
loan was on non-accrual basis in fiscal year 2006 and paid off in the current
fiscal year. This amount was included in the Banks interest income for the
period. Classified Assets. Management, in compliance
with regulatory guidelines, conducts an internal loan review program, whereby
loans are placed or classified in categories depending upon the level of risk of
nonpayment or loss. These categories are special mention, substandard, doubtful
or loss. When a loan is classified as substandard or doubtful, management is
required to establish an allowance for loan losses in an amount that is deemed
prudent. When management classifies a loan as a loss asset, a reserve equal to
100% of the loan balance is required to be established or the loan is required
to be charged-off. The allowance for loan losses is composed of an allowance for
both inherent risk associated with lending activities and specific problem
assets. 9  Managements
evaluation of the classification of assets and the adequacy of the allowance for
loan losses is reviewed by the Board on a regular basis and by the regulatory
agencies as part of their examination process. In addition, each loan that
exceeds $500,000 and each group of loans that exceeds $500,000 is monitored more
closely. The following table reflects our classified assets. At June 30,2007
     
     2006(In thousands)Residential
mortgages(14
family):Special
mention
     
     
     
     $
     
     
     
     $
     Substandard
     
     
     
     
     128
     
     
     
     291Doubtful
     
     
     
     
     
     
     
     
     Loss
     
     
     
     
     
     
     
     
     Commercial
Real Estate and Land:Special
mention
     
     
     
     
     
     
     
     
     Substandard
     
     
     
     
     
     
     
     
     Doubtful
     
     
     
     
     
     
     
     
     Loss
     
     
     
     
     
     
     
     
     Home equity
loans:Special
mention
     
     
     
     
     
     
     
     
     Substandard
     
     
     
     
     9
     
     
     
     34Doubtful
     
     
     
     
     
     
     
     
     Loss
     
     
     
     
     31
     
     
     
     31Consumer
loans:Special
mention
     
     
     
     
     
     
     
     
     Substandard
     
     
     
     
     21
     
     
     
     14Doubtful
     
     
     
     
     
     
     
     
     Loss
     
     
     
     
     4
     
     
     
     1Commercial
loans:Special
mention
     
     
     
     
     191
     
     
     
     Substandard
     
     
     
     
     7
     
     
     
     318Doubtful
     
     
     
     
     
     
     
     
     11Loss
     
     
     
     
     
     
     
     
     Real estate
owned/repossessed propertySpecial
mention
     
     
     
     
     
     
     
     
     Substandard
     
     
     
     
     
     
     
     
     Doubtful
     
     
     
     
     
     
     
     
     Loss
     
     
     
     
     
     
     
     
     Total
classified loans and real estate owned
     
     
     
     $
     391
     
     
     $
     700  Allowance for Loan Losses and Real Estate Owned. The Bank segregates its
loan portfolio for loan losses into the following broad categories: residential
mortgages (1-4 family), commercial real estate, real estate construction,
commercial loans, home equity loans and consumer loans. The Bank provides for a
general allowance for losses inherent in the portfolio by the above categories,
which consists of two components. General loss percentages are calculated based
on historical analyses and other factors such as peer group and national
comparisons (used primarily when recent loss history is inadequate). A
supplemental portion of the allowance is calculated for inherent losses which
probably exist as of the evaluation date even though they might not have been
identified by the more objective processes used. This is due to the risk of
error and/or inherent imprecision in the process. 10  This portion of the
allowance is particularly subjective and requires judgments based on qualitative
factors which do not lend themselves to exact mathematical calculations such as:
trends in delinquencies and non-accruals; trends in volume; terms and portfolio
mix; new credit products; changes in lending policies and procedures; and
changes in the outlook for the local, regional and national economy. At least quarterly, the
management of the Bank evaluates the need to establish reserves against losses
on loans and other assets based on estimated losses on specific loans and on any
real estate owned when a finding is made that a loss is estimable and probable.
Such evaluation includes a review of all loans for which full collectibility may
not be reasonably assured and considers; among other matters; the estimated
market value of the underlying collateral of problem loans; prior loss
experience; economic conditions; and overall portfolio quality. Provisions for losses are
charged against earnings in the period they are established. We had $518,000 in
allowances for loan losses at June 30, 2007. While we believe we have
established our existing allowance for loan losses in accordance with generally
accepted accounting principles, there can be no assurance that regulators, in
reviewing our loan portfolio, will not request that we significantly increase
our allowance for loan losses, or that general economic conditions, a
deteriorating real estate market, or other factors will not cause us to
significantly increase our allowance for loan losses, therefore negatively
affecting our financial condition and earnings. In making loans, we
recognize that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a secured loan,
the quality of the security for the loan. It is our policy to review
our loan portfolio, in accordance with regulatory classification procedures, on
at least a quarterly basis. The following table sets
forth information with respect to our allowance for loan losses at the dates
indicated: For the Years EndedJune 30,2007
     
     2006(Dollars in thousands)Balance at
beginning of period
     
     
     
     $
     535
     
     
     $
     573Loans
charged-off
     
     
     
     
     (29
     )
     
     
     (48
     )Recoveries
     
     
     
     
     12
     
     
     
     25Net loans
charged-off
     
     
     
     
     (17
     )
     
     
     (23
     )Provision for
possible loan losses
     
     
     
     
     
     
     
     
     Transfer to
repossessed property reserve
     
     
     
     
     
     
     
     
     (15
     )Balance at
end of period
     
     
     
     $
     518
     
     
     $
     535Allowance for
loan losses to total loans
     
     
     
     
     0.33
     %
     
     
     0.38
     %Allowance for
loan losses to total non- performing loans
     
     
     
     
     244.34
     %
     
     
     141.91
     %Net
recoveries (charge-offs) to average loans outstanding during the period
     
     
     
     
     (0.01
     )%
     
     
     (0.02
     )%  11  The following table
presents our allocation of the allowance for loan losses by loan category and
the percentage of loans in each category to total loans at the periods
indicated. 2007
     
     2006(Dollars in thousands)Amount
     
     Percentageof Allowanceto TotalAllowance
     
     Loans inEach Categoryto TotalLoans
     
     Amount
     
     Percentageof Allowanceto TotalAllowance
     
     Loans inEach Categoryto TotalLoansFirst
Mortgage Loans:Residential
mortgage (14 family)
     
     
     
     $
     189
     
     
     
     36.49
     %
     
     
     51.68
     %
     
     $
     60
     
     
     
     11.21
     %
     
     
     53.71
     %Commercial
real estate
     
     
     
     
     27
     
     
     
     5.21
     %
     
     
     16.16
     %
     
     
     8
     
     
     
     1.50
     %
     
     
     13.20
     %Real estate
construction
     
     
     
     
     13
     
     
     
     2.51
     %
     
     
     5.20
     %
     
     
     3
     
     
     
     0.56
     %
     
     
     4.88
     %Total
mortgage loans
     
     
     
     
     229
     
     
     
     44.21
     %
     
     
     73.04
     %
     
     
     71
     
     
     
     13.27
     %
     
     
     71.79
     %Other
loans:Home
equity
     
     
     
     
     48
     
     
     
     9.27
     %
     
     
     15.74
     %
     
     
     37
     
     
     
     6.92
     %
     
     
     14.29
     %Consumer
     
     
     
     
     141
     
     
     
     27.22
     %
     
     
     7.21
     %
     
     
     245
     
     
     
     45.79
     %
     
     
     8.36
     %Commercial
     
     
     
     
     100
     
     
     
     19.30
     %
     
     
     4.01
     %
     
     
     182
     
     
     
     34.02
     %
     
     
     5.56
     %Total other
loans
     
     
     
     
     289
     
     
     
     55.79
     %
     
     
     26.96
     %
     
     
     464
     
     
     
     86.73
     %
     
     
     28.21
     %Total
     
     
     
     $
     518
     
     
     
     100.00
     %
     
     
     100.00
     %
     
     $
     535
     
     
     
     100.00
     %
     
     
     100.00
     %  Investment Activities General Federally chartered savings
banks such as American Federal Savings Bank have the authority to invest in
various types of investment securities, including United States Treasury
obligations, securities of various Federal agencies (including securities
collateralized by mortgages), certificates of deposits of insured banks and
savings institutions, municipal securities, corporate debt securities and loans
to other banking institutions. Eagle maintains liquid
assets that may be invested in specified short-term securities and other
investments. Liquidity levels may be increased or decreased depending on the
yields on investment alternatives. They may also be increased based on
managements judgment as to the attractiveness of the yields then available
in relation to other opportunities. Liquidity levels can also change based on
managements expectation of future yield levels, as well as
managements projections as to the short-term demand for funds to be used
in the Banks loan origination and other activities. Eagle maintains an
investment securities portfolio and a mortgage-backed securities portfolio as
part of its investment portfolio. Investment Policies. The investment policy of
Eagle, which is established by the board of directors, is designed to foster
earnings and liquidity within prudent interest rate risk guidelines, while
complementing American Federals lending activities. The policy provides
for available-for-sale, held-to-maturity and trading classifications. However,
Eagle does not hold any securities for purposes of trading. The policy permits
investments in high credit quality instruments with diversified cash flows while
permitting us to maximize total return within the guidelines set forth in our
interest rate risk and liquidity management policies. Permitted investments
include but are not limited to U.S. government obligations, government agency or
government-sponsored agency obligations, state, county and municipal
obligations, and mortgage-backed securities. Collateralized mortgage
obligations, investment grade corporate debt securities, and commercial paper
are also included. We also invest in Federal Home Loan Bank overnight deposits
and federal funds, but these instruments are not considered part of the
investment portfolio. Our investment policy also
includes several specific guidelines and restrictions to insure adherence with
safe and sound activities. The policy prohibits investments in high-risk
mortgage derivative products (as defined within the policy) without prior
approval from the board of directors. Management must demonstrate the business
advantage of such investments. 12  We do not participate in
hedging programs, interest rate swaps, or other activities involving the use of
off-balance sheet derivative financial instruments, except 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 rated investment grade. The Board, through its
asset liability committee, has charged the President to implement the investment
policy. All transactions are reported to the board of directors monthly, as well
as the current composition of the portfolio, including market values and
unrealized gains and losses. Investment Securities. We maintain a portfolio of
investment securities, classified as either available-for-sale or
held-to-maturity to enhance total return on investments. At June 30, 2007, 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 1.37% of Eagles total investment portfolio.
Securities available-for-sale totaled 96.15% of Eagles total investment
portfolio. The remaining percentage is comprised of interest-bearing deposits in
banks and stock in the Federal Home Loan Bank (FHLB). During the past year,
total investment balances have remained relatively stable. Much of the cash
generated by payments on mortgage-backed securities and maturities of agency
obligations has been reinvested in municipal securities. The following table sets
forth the carrying value of Eagles investment and mortgage-backed
securities portfolio at the dates indicated. At June 30,2007
     
     2006(Dollars in thousands)Book Value
     
     Percentage of Total
     
     Book Value
     
     Percentage of TotalSecurities
available for sale, at fair value:U.S.
Government and agency obligations
     
     
     
     $
     3,643
     
     
     
     5.41
     %
     
     $
     7,296
     
     
     
     10.96
     %Corporate
obligations
     
     
     
     
     13,623
     
     
     
     20.22
     
     
     
     15,617
     
     
     
     23.46Municipal
obligations
     
     
     
     
     20,728
     
     
     
     30.77
     
     
     
     17,143
     
     
     
     25.76Collateralized mortgage obligations
     
     
     
     
     17,075
     
     
     
     25.35
     
     
     
     15,817
     
     
     
     23.76Mortgage-backed securities
     
     
     
     
     7,872
     
     
     
     11.68
     
     
     
     6,747
     
     
     
     10.14Common
Stock
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     Corporate
preferred stock
     
     
     
     
     1,833
     
     
     
     2.72
     
     
     
     1,578
     
     
     
     2.37Total
securities available-for-sale
     
     
     
     
     64,774
     
     
     
     96.15
     
     
     
     64,198
     
     
     
     96.45Securities
held to maturity, at book value:Mortgage-backed securities
     
     
     
     
     95
     
     
     
     0.14
     
     
     
     190
     
     
     
     0.29Municipal
obligations
     
     
     
     
     826
     
     
     
     1.23
     
     
     
     828
     
     
     
     1.24Total
securities held-to-maturity
     
     
     
     
     921
     
     
     
     1.37
     
     
     
     1,018
     
     
     
     1.53Total
securities
     
     
     
     
     65,695
     
     
     
     97.51
     
     
     
     65,216
     
     
     
     97.98Interest-bearing deposits
     
     
     
     
     360
     
     
     
     0.53
     
     
     
     27
     
     
     
     0.04Federal Home
Loan Bank capital stock, at cost
     
     
     
     
     1,315
     
     
     
     1.95
     
     
     
     1,315
     
     
     
     1.98Total
     
     
     
     $
     67,370
     
     
     
     100.00
     %
     
     $
     66,558
     
     
     
     100.00
     %  13  The following table sets
forth information regarding the carrying values, weighted average yields and
maturities of Eagles investment and mortgage-backed securities portfolio
at June 30, 2007. At June 30, 2007One Year or Less
     
     One to Five Years
     
     More than Five Years
     
     Total Investment SecuritiesCarrying Value
     
     Annualized Weighted Average Yield
     
     Carrying Value
     
     Annualized Weighted Average Yield
     
     Carrying Value
     
     Annualized Weighted Average Yield
     
     CarryingValue
     
     ApproximateMarketValue
     
     AnnualizedWeightedAverageYield(Dollars in thousands)Securities
available for sale:U.S.
Government and agency obligations
     
     
     
     $
     844
     
     
     
     3.77
     
     
     $
     1,949
     
     
     
     3.72
     %
     
     $
     849
     
     
     
     4.62
     %
     
     $
     3,642
     
     
     $
     3,642
     
     
     
     3.94
     %Corporate
obligations
     
     
     
     
     6,024
     
     
     
     3.47
     
     
     
     6,661
     
     
     
     4.65
     
     
     
     938
     
     
     
     5.65
     
     
     
     13,623
     
     
     
     13,623
     
     
     
     4.20Municipal
obligations
     
     
     
     
     
     
     
     
     
     
     
     
     491
     
     
     
     4.49
     
     
     
     20,237
     
     
     
     5.92
     
     
     
     20,728
     
     
     
     20,728
     
     
     
     5.89Collateralized
mortgage obligations
     
     
     
     
     
     
     
     
     
     
     
     
     1,133
     
     
     
     3.84
     
     
     
     15,943
     
     
     
     4.73
     
     
     
     17,076
     
     
     
     17,076
     
     
     
     4.67Mortgage-backed securities
     
     
     
     
     249
     
     
     
     2.28
     
     
     
     1,951
     
     
     
     3.95
     
     
     
     5,672
     
     
     
     5.44
     
     
     
     7,872
     
     
     
     7,872
     
     
     
     4.97Corporate
preferred stock
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     1,833
     
     
     
     5.91
     
     
     
     1,833
     
     
     
     1,833
     
     
     
     5.91Common stock
(dividend yield)
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     Total
securities available for sale
     
     
     
     
     7,117
     
     
     
     3.46
     
     
     
     12,185
     
     
     
     4.31
     
     
     
     45,472
     
     
     
     5.41
     

     
     
     64,774
     

     
     
     64,774
     

     
     
     4.99Securities held
to maturity:Mortgage-backed securities
     
     
     
     
     
     
     
     
     
     
     
     
     95
     
     
     
     5.76
     
     
     
     
     
     
     
     
     
     
     
     95
     
     
     
     95
     
     
     
     5.76Municipal
obligations
     
     
     
     
     150
     
     
     
     4.37
     
     
     
     412
     
     
     
     5.78
     
     
     
     264
     
     
     
     6.50
     

     
     
     826
     

     
     
     835
     

     
     
     5.75Total securities
held to maturity
     
     
     
     
     150
     
     
     
     4.37
     
     
     
     507
     
     
     
     5.78
     
     
     
     264
     
     
     
     6.50
     

     
     
     921
     

     
     
     930
     

     
     
     5.75Total
securities
     
     
     
     
     7,267
     
     
     
     3.48
     
     
     
     12,692
     
     
     
     4.37
     
     
     
     45,736
     
     
     
     5.42
     

     
     
     65,695
     

     
     
     65,704
     

     
     
     5.00Interest-bearing
deposits
     
     
     
     
     360
     
     
     
     5.21
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

     
     
     360
     

     
     
     360
     

     
     
     5.21Federal Home
Loan Bank capital stock
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     1,315
     
     
     
     0.60
     

     
     
     1,315
     

     
     
     1,315
     

     
     
     0.60Total
     
     
     
     $
     7,627
     
     
     
     3.56
     %
     
     $
     12,692
     
     
     
     4.37
     %
     
     $
     47,051
     
     
     
     5.28
     %

     
     $
     67,370
     

     
     $
     67,379
     

     
     
     4.92
     %  14  SOURCES OF FUNDS General. Deposits are the major
source of our funds for lending and other investment purposes. Borrowings
(principally from the Federal Home Loan Bank of Seattle) are also used to
compensate for reductions in the availability of funds from other sources. In
addition to deposits and borrowings, we derive funds from loan and
mortgage-backed securities principal repayments, and proceeds from the maturity,
call and sale of mortgage-backed securities and investment securities and from
the sale of loans. Loan and mortgage-backed securities payments are a relatively
stable source of funds, while loan prepayments and deposit inflows are
significantly influenced by general interest rates and 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, passbook and statement savings accounts,
money market accounts and IRA accounts. Based on our historical experience, we
include IRA accounts funded by certificates of deposit as core deposits because
they exhibit the principal features of core deposits in that they are stable and
generally are not rate sensitive. Core deposits amounted to $111.99 million or
54.32% of the Banks deposits at June 30, 2007 ($90.46 million or 50.35% 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. During this past fiscal year, the Bank issued $4.41 million in
callable brokered certificates of deposit. They are callable at the Banks
option which provides the Bank the ability to lower its cost on these accounts
if interest rates decline. 15  The following table sets
forth American Federals distribution of deposit accounts at the dates
indicated and the weighted average interest rate on each category of deposit
represented: At June 30,2007
     
     2006(Dollars in thousands)Amount
     
     Percent of Total
     
     Weighted Average Rate
     
     Amount
     
     Percent of Total
     
     Weighted Average RateNoninterest
checking
     
     
     
     $
     13,694
     
     
     
     7.62
     %
     
     
     0.00
     %
     
     $
     12,575
     
     
     
     7.21
     %
     
     
     0.00
     %Passbook
savings
     
     
     
     
     22,521
     
     
     
     12.54
     %
     
     
     0.65
     %
     
     
     24,438
     
     
     
     14.02
     %
     
     
     0.65
     %NOW
account/Interest bearing checking
     
     
     
     
     30,953
     
     
     
     17.23
     %
     
     
     0.21
     %
     
     
     29,571
     
     
     
     16.96
     %
     
     
     0.13
     %Money market
accounts
     
     
     
     
     23,292
     
     
     
     12.96
     %
     
     
     2.12
     %
     
     
     29,129
     
     
     
     16.71
     %
     
     
     1.93
     %Total
     
     
     
     
     90,460
     
     
     
     50.35
     %
     
     
     0.78
     %
     
     
     95,713
     
     
     
     54.90
     %
     
     
     0.79
     %Certificates
of deposit accounts:IRA
certificates
     
     
     
     
     21,534
     
     
     
     11.99
     %
     
     
     3.97
     %
     
     
     22,977
     
     
     
     13.18
     %
     
     
     3.40
     %Brokered
certificates
     
     
     
     
     4,411
     
     
     
     2.46
     %
     
     
     5.30
     %
     
     
     
     
     
     
     0.00
     %
     
     
     0.00
     %Other
certificates
     
     
     
     
     63,242
     
     
     
     35.20
     %
     
     
     4.66
     %
     
     
     55,652
     
     
     
     31.92
     %
     
     
     3.67
     %Total
certificates of deposit
     
     
     
     
     89,187
     
     
     
     49.65
     %
     
     
     4.53
     %
     
     
     78,629
     
     
     
     45.10
     %
     
     
     3.59
     %Total
deposits
     
     
     
     $
     179,647
     
     
     
     100.00
     %
     
     
     2.64
     %
     
     $
     174,342
     
     
     
     100.00
     %
     
     
     2.05
     %  The following table shows
the amount of certificates of deposit of more than $100,000 by time remaining
until maturity as of June 30, 2007: (In thousands)June 30, 2008
     
     June 30, 2009
     
     June 30, 2010
     
     After June 30, 2010
     
     Total1.012.00%
     
     
     
     $
     
     
     
     $
     
     
     
     $
     
     
     
     $
     
     
     
     $
     2.013.00%
     
     
     
     
     518
     
     
     
     56
     
     
     
     
     
     
     
     
     
     
     
     5743.014.00%
     
     
     
     
     25,293
     
     
     
     7,418
     
     
     
     353
     
     
     
     42
     
     
     
     33,1064.015.00%
     
     
     
     
     34,348
     
     
     
     1,434
     
     
     
     577
     
     
     
     314
     
     
     
     36,6735.016.00%
     
     
     
     
     14,206
     
     
     
     4,591
     
     
     
     
     
     
     
     37
     
     
     
     18,8346.017.00%
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     Total
     
     
     
     $
     74,365
     
     
     $
     13,499
     
     
     $
     930
     
     
     $
     393
     
     
     $
     89,187    The following table shows the
amount of certificates of deposit of more than $100,000 by time remaining until maturity as of June 30, 2007:
 (In thousands)3 months or
less
     
     
     
     $
     5,712Over 3 to 6
months
     
     
     
     
     4,210Over 6 to 12
months
     
     
     
     
     5,978Over 12
months
     
     
     
     
     1,986Total
     
     
     
     $
     17,886  16  The following table sets
forth the net changes in deposit accounts for the periods indicated:

Year Ended June 30,2007
     
     2006(Dollars in thousands)Opening
balance
     
     
     
     $
     174,342
     
     
     $
     172,496Deposits(Withdrawals), Net
     
     
     
     
     1,279
     
     
     
     (1,110
     )Interest
credited
     
     
     
     
     4,026
     
     
     
     2,956Ending
balance
     
     
     
     $
     179,647
     
     
     $
     174,342Net
increase
     
     
     
     $
     5,305
     
     
     $
     1,846Percent
increase
     
     
     
     
     3.04
     %
     
     
     1.07
     %Weighted
average cost of deposits during the period
     
     
     
     
     2.37
     %
     
     
     1.87
     %Weighted
average cost of deposits at end of period
     
     
     
     
     2.64
     %
     
     
     2.05
     %
 Our depositors are
primarily residents of the state of Montana. We issued $4.41 million in brokered
deposits during this fiscal year.

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

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

Year Ended June 30,2007
     
     2006(Dollars in thousands)Advances and
other borrowings:Average
balance
     
     
     
     $
     29,071
     
     
     $
     12,665Maximum
balance at any month-end
     
     
     
     
     36,695
     
     
     
     22,602Balance at
period end
     
     
     
     
     33,800
     
     
     
     22,371Weighted
average interest rate during the period
     
     
     
     
     5.04
     %
     
     
     4.31
     %Weighted
average interest rate at period end
     
     
     
     
     4.90
     %
     
     
     4.96
     %
 17

Subsidiary Activity


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

As of June 30, 2007, we had
72 full-time employees and 8 part-time employees. The employees are not
represented by a collective bargaining unit. We believe our relationship with
our employees to be good.

18

REGULATION

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

Regulation of American Federal Savings Bank
General.

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

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

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

Insurance of Deposit Accounts.

The deposit accounts held
by American Federal Savings Bank are insured by the Deposit Insurance Fund of
the FDIC to a maximum of $100,000 as permitted by law (qualifying retirement
funds are insured up to $250,000). Insurance on deposits may be terminated by
the FDIC 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, 2007 are set forth below.

Actual
     
     For Capital Adequacy PurposesAmount
     
     Ratio
     
     Amount
     
     Ratio(Dollars in thousands)Tangible
     
     
     
     $
     25,314
     
     
     
     10.48
     
     
     $
     3,623
     
     
     
     1.50Leverage
     
     
     
     $
     25,314
     
     
     
     10.48
     
     
     $
     7,246
     
     
     
     3.00Tier 1
risk-based
     
     
     
     $
     25,314
     
     
     
     14.50
     
     
     $
     6,984
     
     
     
     4.00Total
risk-based
     
     
     
     $
     25,797
     
     
     
     14.78
     
     
     $
     13,967
     
     
     
     8.00
 Tangible capital is defined
as core capital less all intangible assets, less nonqualifying mortgage
servicing rights and investments. Core capital is defined as common
stockholders equity, noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, nonwithdrawable
accounts and pledged deposits of mutual savings associations and qualifying
supervisory goodwill, less nonqualifying intangible assets, mortgage servicing
rights and investments.

19

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

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

Dividend and Other Capital Distribution Limitations.

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

Office of Thrift
Supervision regulations impose limitations on all capital distributions by
savings institutions, such as cash dividends, payment to repurchase or otherwise
acquire its shares, payments to stockholders of another institution in a
cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institutions
capital level. An institution that exceeds all capital requirements before and
after a proposed capital distribution and has not been advised by the Office of
Thrift Supervision that it is in need of more than the normal supervision has
the greatest amount of flexibility for determining dividends. Such institutions
can, after prior notice but without the approval of the Office of Thrift
Supervision, make capital distributions during a calendar year. These
distributions can be equal to the greater of 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
excess capital divided by its fully phased-in capital requirements at the
beginning of the calendar year. At the institutions discretion, dividends
can also be 75% of its net income over the most recent four-quarter period. Any
additional capital distributions require prior regulatory notice. As of June 30,
2007, American Federal Savings Bank had this level of flexibility with respect
to dividends.

Qualified Thrift Lender Test.

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


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

Liquidity Requirements.

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

20

Federal Home Loan Bank System.

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

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

Federal Reserve System.

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

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

Regulation of Eagle Bancorp
General.
Eagle Bancorp, as a federal
stock corporation in a mutual holding company structure, is deemed a federal
mutual holding company within the meaning of Section 10(o) of the Home Owners
Loan act (HOLA). Eagle is registered and files reports with the
Office of Thrift Supervision and is subject to regulation and examination by the
Office of Thrift Supervision. In addition, the Office of Thrift Supervision has
enforcement authority over Eagle and any nonsavings institution subsidiary of
Eagle. The Office of Thrift Supervision can restrict or prohibit activities that
it determines to be a serious risk to us. This regulation is intended primarily
for the protection of our depositors and not for the benefit of stockholders of
Eagle.
Federal Taxation
Savings institutions are
subject to the Internal Revenue Code of 1986, as amended, in the same general
manner as other corporations. Prior to changes to the Internal Revenue Code in
1996, thrift institutions enjoyed a tax advantage over banks with respect to
determining additions to its bad debt reserves.

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

The revisions to the
Internal Revenue Code in 1996 also provided that all thrift institutions must
generally recapture any applicable excess reserves into their
taxable income, over a six year period beginning in 1996; however, such
recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institutions applicable
excess reserves equals the excess of the balance of its bad debt reserves as of
the close of its taxable year beginning before January 1, 1996, over the balance
of such reserves as of the close of its last taxable year beginning before
January 1, 1988. These are known as pre-1988 reserves. American Federal Savings
Bank had recaptured all of its remaining applicable excess reserve as of
June 30, 2007.

21

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

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

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

State Taxation

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

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

ITEM 2.    DESCRIPTION OF PROPERTY.

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

Location
     
     
     
     Address
     
     Opened
     
     Value at June 30, 2007 (in thousands)
     
     Square FootageHelena
MainOffice
     
     
     
     1400
Prospect Ave.Helena, MT 59601
     
     
     1997
     
     
     $
     4,232
     
     
     
     32,304Helena
DowntownDrive-up
     
     
     
     28
Neill Ave.Helena, MT 59601
     
     
     1987
     
     
     $
     373
     
     
     
     1,391Butte
Office
     
     
     
     3401
Harrison Ave.Butte, MT 59701
     
     
     1979
     
     
     $
     535
     
     
     
     3,890Bozeman
Office
     
     
     
     606
North SeventhBozeman, MT 59715
     
     
     1980
     
     
     $
     600
     
     
     
     5,886Townsend
Office
     
     
     
     416
BroadwayTownsend, MT 59644
     
     
     1979
     
     
     $
     65
     
     
     
     1,973
 As of June 30, 2007, the
net book value of land, buildings, furniture, and equipment owned by American
Federal, less accumulated depreciation, totaled $5.81 million. Eagle has an
earnest money deposit for the purchase of land in Bozeman for potential branch
relocation and has spent approximately $67,000 on architect fees for preliminary
building plans.

22

ITEM 3.    LEGAL PROCEEDINGS.
American Federal, from time
to time, is a party to routine litigation, which arises in the normal course of
business, such as claims to enforce liens, condemnation proceedings on
properties in which American Federal Savings Bank holds security interests,
claims involving the making and servicing of real property loans, and other
issues incident to the business of American Federal. There were no lawsuits
pending or known to be contemplated against Eagle or American Federal at June
30, 2007.

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, 2007.

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, 2007, there were 1,084,357 shares of common stock
outstanding, held by approximately 600 shareholders of record. Eagle Financial
MHC, Eagles mutual holding company, held 648,493 shares (or 59.8%) of the
outstanding common stock.

The high bid and asked
prices noted below for the four quarters of fiscal 2006 and the four quarters of
the current fiscal year were obtained from the OTC Bulletin Board. The
quotations reflect interdealer prices without retail markup,

High Bid
     
     Low BidFourth
quarter 2007
     
     
     
     $
     34.00
     
     
     $
     31.43Third quarter
2007
     
     
     
     $
     34.50
     
     
     $
     31.50Second
quarter 2007
     
     
     
     $
     34.00
     
     
     $
     31.30First quarter
2007
     
     
     
     $
     34.00
     
     
     $
     31.25Fourth
quarter 2006
     
     
     
     $
     33.00
     
     
     $
     30.30Third quarter
2006
     
     
     
     $
     34.50
     
     
     $
     31.50Second
quarter 2006
     
     
     
     $
     36.00
     
     
     $
     32.15First quarter
2006
     
     
     
     $
     35.00
     
     
     $
     30.00
 The closing price of the
common stock on June 30, 2007, was $32.70. The company had paid four quarterly
dividends during the year, all in the amount of $0.22per share. Eagle Financial
MHC waived receipt of its dividends during the year.

23

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

Period
     
     
     
     (a)TotalNumber ofSharesPurchased*
     
     (b)AveragePrice PaidPer Share
     
     (c)Total Number ofShares Purchasedas Part
ofPubliclyAnnounced Plansor Programs
     
     (d)Maximum Numberof Shares thatMay Yet
BePurchasedUnder the Plansor ProgramsApril
2007
     
     
     
     
     None
     
     
     
     N/A
     
     
     
     N/A
     
     
     
     N/AMay
2007
     
     
     
     
     1,000
     
     
     $
     33.00
     
     
     
     1,000
     
     
     
     4,535June
2007
     
     
     
     
     None
     
     
     
     N/A
     
     
     
     N/A
     
     
     
     N/ATotal
     
     
     
     
     1,000
     
     
     $
     33.00
     
     
     
     1,000
     
     
     
     N/A
 *The Company publicly
announced a stock repurchase program on July 21, 2006. 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
27, 2007, 25,465 shares had been purchased.

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

Note Regarding Forward-Looking Statements

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

General

Eagle Bancorps
subsidiary, American Federal Savings Bank, operates as a community savings bank.
It raises money by offering FDIC-insured deposit products and lending this
money, primarily for the purpose of home financing. As of June 30, 2007, 43.11%
of its total loans were residential mortgage loans with fixed rates and 8.91%
were residential mortgage loans with adjustable rates. Total first lien mortgage
loans at June 30, 2007, were $115.83 million or 73.04% of the total loan
portfolio. Other loan products include home equity loans, consumer and
commercial loans. These loans totaled $42.76 million or 26.96% of the total loan
portfolio.

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

24


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

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

For the twelve months ended June 30,2007
     
     2006(Dollars in thousands)AverageDailyBalance
     
     InterestandDividends
     
     Yield/Rate
     
     AverageDailyBalance
     
     InterestandDividends
     
     Yield/RateAssets:Interest-earning assets:FHLB
stock
     
     
     
     $
     1,315
     
     
     $
     7
     
     
     
     0.53
     %
     
     $
     1,315
     
     
     $
     
     
     
     
     0.00
     %Loans
receivable, net
     
     
     
     
     149,818
     
     
     
     9,731
     
     
     
     6.50
     
     
     
     124,282
     
     
     
     7,799
     
     
     
     6.28Investment
securities
     
     
     
     
     66,723
     
     
     
     2,854
     
     
     
     4.28
     
     
     
     69,700
     
     
     
     2,641
     
     
     
     3.79Interest-bearing deposits with banks
     
     
     
     
     922
     
     
     
     50
     
     
     
     5.42
     
     
     
     1,473
     
     
     
     59
     
     
     
     4.01Total
interest-earning assets
     
     
     
     
     218,778
     
     
     
     12,642
     
     
     
     5.78
     
     
     
     196,770
     
     
     
     10,499
     
     
     
     5.34Noninterest-earning assets
     
     
     
     
     18,351
     
     
     
     
     
     
     
     
     
     
     
     18,274Total
assets
     
     
     
     $
     237,129
     
     
     
     
     
     
     
     
     
     
     $
     215,044Liabilities
and Equity:Interest-bearing liabilities:Deposit
accounts:Money
market
     
     
     
     $
     25,648
     
     
     $
     525
     
     
     
     2.05
     
     
     $
     29,388
     
     
     $
     492
     
     
     
     1.67Passbooks
     
     
     
     
     23,139
     
     
     
     152
     
     
     
     0.66
     
     
     
     24,994
     
     
     
     164
     
     
     
     0.66Checking
     
     
     
     
     30,789
     
     
     
     63
     
     
     
     0.20
     
     
     
     31,024
     
     
     
     55
     
     
     
     0.18Certificates
of deposit
     
     
     
     
     83,753
     
     
     
     3,451
     
     
     
     4.12
     
     
     
     75,842
     
     
     
     2,300
     
     
     
     3.03Advances from
FHLB & subordinated debt
     
     
     
     
     34,226
     
     
     
     1,766
     
     
     
     5.16
     
     
     
     16,573
     
     
     
     774
     
     
     
     4.67Total
interest-bearing liabilities
     
     
     
     
     197,555
     
     
     
     5,957
     
     
     
     3.02
     
     
     
     177,821
     
     
     
     3,785
     
     
     
     2.13Non-interest
checking
     
     
     
     
     13,382
     
     
     
     
     
     
     
     
     
     
     
     12,612Other
noninterest-bearing liabilities
     
     
     
     
     2,189
     
     
     
     
     
     
     
     
     
     
     
     1,956Total
liabilities
     
     
     
     
     213,126
     
     
     
     
     
     
     
     
     
     
     
     192,389Total
equity
     
     
     
     
     24,003
     
     
     
     
     
     
     
     
     
     
     
     22,655Total
liabilities and equity
     
     
     
     $
     237,129
     
     
     
     
     
     
     
     
     
     
     $
     215,044Net interest
income/interest rate spread(1)
     
     
     
     
     
     
     
     $
     6,685
     
     
     
     2.76
     %
     
     
     
     
     
     $
     6,714
     
     
     
     3.21
     %Net interest
margin(2)
     
     
     
     
     
     
     
     
     
     
     
     
     3.06
     %
     
     
     
     
     
     
     
     
     
     
     3.41
     %Total
interest-earning assets to int-bearing liabilities
     
     
     
     
     
     
     
     
     
     
     
     
     110.74
     %
     
     
     
     
     
     
     
     
     
     
     110.66
     %
 
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on
interest-bearing liabilities.
(2) Net interest margin represents income before the provision for loan losses divided by average interest-earning assets.

25

Rate/Volume
Analysis

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

For the Years Ended June 30,Increase (Decrease)(In thousands)2007 vs 2006
     
     2006 vs 2005Volume
     
     Due toRate
     
     Net
     
     Volume
     
     Due toRate
     
     NetInterest
earning assets:Loans
receivable, net
     
     
     
     $
     1,603
     
     
     $
     329
     
     
     $
     1,932
     
     
     $
     1,645
     
     
     $
     37
     
     
     $
     1,682Investment
securities
     
     
     
     
     (113
     )
     
     
     326
     
     
     
     213
     
     
     
     (462
     )
     
     
     231
     
     
     
     (231
     )Interest-bearing deposits with banks
     
     
     
     
     (22
     )
     
     
     13
     
     
     
     (9
     )
     
     
     (9
     )
     
     
     34
     
     
     
     25Other earning
assets
     
     
     
     
     
     
     
     
     7
     
     
     
     7
     
     
     
     
     
     
     
     (20
     )
     
     
     (20
     )Total
interest earning assets
     
     
     
     
     1,468
     
     
     
     675
     
     
     
     2,143
     
     
     
     1,174
     
     
     
     282
     
     
     
     1,456Interest-bearing liabilities:Passbook,
money market and checking accounts
     
     
     
     
     (49
     )
     
     
     78
     
     
     
     29
     
     
     
     1
     
     
     
     195
     
     
     
     196Certificates
of deposit
     
     
     
     
     239
     
     
     
     912
     
     
     
     1,151
     
     
     
     8
     
     
     
     412
     
     
     
     420Borrowings
     
     
     
     
     824
     
     
     
     168
     
     
     
     992
     
     
     
     379
     
     
     
     227
     
     
     
     606Total
interest-bearing liabilities
     
     
     
     
     1,014
     
     
     
     1,158
     
     
     
     2,172
     
     
     
     388
     
     
     
     834
     
     
     
     1,222Change in net
interest income
     
     
     
     $
     454
     
     
     $
     (483
     )
     
     $
     (29
     )
     
     $
     786
     
     
     $
     (552
     )
     
     $
     234
 Interest Rate Risk Analysis

In addition to the
asset/liability committee, the board of directors reviews our asset and
liability policies. The board of directors reviews interest rate risk and
interest rate trends quarterly, as well as liquidity and capital ratio
requirements. Management administers the policies and determinations of the
board of directors with respect to our asset and liability goals and strategies.
Our asset and liability policy and strategies are expected to continue as
described so long as competitive and regulatory conditions in the financial
institution industry and market interest rates continue as they have in recent
years.

Overview

The Companys primary
activity is its ownership of its wholly owned subsidiary, American Federal
Savings Bank (the Bank). The Bank is a federally chartered savings
bank, engaging in typical banking activities: acquiring deposits from local
markets and investing in loans and investment securities. The Banks
primary component of earnings is its net interest margin (also called spread or
margin), the difference between interest income and interest expense. The net
interest margin is managed by management (through the pricing of its products
and by the types of products offered and kept in portfolio), and is affected by
moves in interest rates. Noninterest income in the form of fee income and gain
on sale of loans adds to the Banks income.

The Bank has a strong
mortgage lending focus, with the majority of its loans in single-family
residential mortgages. This has led to successfully marketing home equity loans
to its customers, as well as a wide range of shorter term consumer loans for
various personal needs (automobiles, recreational vehicles, etc.). In recent
years the Bank has focused on adding commercial loans to its portfolio, both
real estate and non-real estate. The purpose of this diversification is to
mitigate the Banks dependence on the 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 serviced portfolio, which provides a
steady source of fee income. The gain on sale of loans also provides significant
fee income in periods of high mortgage loan origination volumes. Fee income is
also supplemented with fees generated from the Banks deposit accounts. The
Bank has a high percentage of non-maturity deposits, such as checking accounts
and savings accounts, which allows management flexibility in managing its
spread. Non-maturity deposits do not automatically reprice as interest rates
rise, as do certificates of deposit.

26

For the past two years,
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 2007 fiscal
year the yield curve continued to be flat, i.e. short-term interest rates were
approximately at the same level as long-term interest rates. This can have a
negative impact on the Banks net interest margin as its deposits are
typically priced relative to short-term rates, while the majority of its loan
products are priced relative to long-term rates. The Bank has been able to
partially offset this effect by reinvesting investment proceeds in the loan
portfolio, because as noted earlier, loans typically earn higher rates of return
than investments. Additionally, many of the Banks investments which mature
in the coming year are at low (below current market) interest rates, affording
an opportunity to reinvest the proceeds at the current higher rates and
increasing interest income in the coming quarters. Much of the Banks
certificate of deposit portfolio has already repriced to current levels, leading
to a slower increase in interest expense on deposits in the next fiscal year.

Financial Condition

Introduction.

Total assets increased
$18.51 million, or 8.18%, to $244.69 million at June 30, 2007, compared to
$226.18 million at June 30, 2006. Total liabilities increased by $16.97 million,
or 8.33%, to $220.60 million at June 30, 2007, from $203.63 million at June 30,
2006. The loan portfolio grew $17 million during the year, approximately
one-half of the previous years growth, due to an increase in loan sales.
The rate of deposit growth was up from the previous years pace, with
certificates of deposit showing the largest increase, due in part to the
issuance of $4.41 million in brokered deposits. Much of the asset growth was
funded by increased borrowings.

Balance Sheet Details.

Loans receivable increased $17.28 million, or 12.27% to $158.14 million from $140.86 million.  Increased
originations in most loan
categories contributed to the higher loan balances, and consequently all
categories except consumer and commercial loans showed an increase in balances
compared to last year. Commercial real estate and land loans increased $6.97
million during the year, and residential mortgage loans increased $6.05 million.
The available-for-sale (AFS) investment portfolio increased $576,000, or 0.90%,
to $64.77 million at June 30, 2007 from $64.20 million at June 30, 2006. The
investment category with the largest increase was municipal securities, which
increased $3.59 million.

Total deposits increased
$5.31 million. Certificates of deposit increased $12.00 million, to $67.65
million at June 30, 2007 from $55.65 million at June 30, 2006. This amount
includes the $4.41 million of brokered certificates of deposit issued during the
year. Interest-earning checking accounts increased $1.38 million while
noninterest checking increased $1.12 million. Money market accounts decreased
$5.84 million and savings accounts decreased $1.92 million. A significant
portion of the funds which left money market and savings accounts moved to
certificates of deposit. 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 increased
to $33.80 million at year-end 2007 from $22.37 million at year-end 2006, an
increase of $11.43 million. This increase was needed to help fund loan growth.

Total shareholders
equity was $24.09 million at June 30, 2007, an increase of $1.54 million. This
increase was the result of net income for the year and a decrease in accumulated
other comprehensive loss of $239,000 (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.

27

Comparison of Operating Results for the Years Ending June 30, 2007 and 2006

Net Income.

Eagles net income was
$1.778 million and $1.785 million for the years ended June 30, 2007 and 2006
respectively. This decrease of $7,000, or 0.40%, was the result of an increase
in noninterest expense of $149,000 and a decrease in net interest income of
$29,000, offset by an increase in noninterest income of $96,000. Eagles
tax provision was $75,000 lower in 2007. Basic earnings per share for the year
ended June 30, 2007 were $1.66, compared to $1.66 for the year ended June 30,
2006. Diluted earnings per share were $1.47 and $1.48 for 2007 and 2006,
respectively.

Net Interest Income.

Net interest income
decreased to $6.685 million for the year ended June 30, 2007, from $6.714
million for the previous year. This decrease of $29,000, or 0.43%, was the
result of an increase in interest expense of $2.174 million, partially offset by
an increase in interest and dividend income of $2.145 million.

Interest and Dividend Income.

Total interest and dividend
income was $12.651 million for the year ended June 30, 2007, compared to $10.506
million for the year ended June 30, 2006, an increase of $2.145 million, or
20.42%. Interest and fees on loans increased to $9.731 million for 2007 from
$7.799 million for 2006. This increase of $1.932 million, or 24.77%, was due
primarily to the increase in the average balances on loans receivable for the
year ended June 30, 2007. The average interest rate earned on loans receivable
increased by 22 basis points, to 6.50% from 6.28%. Average balances for loans
receivable, net, for the year ended June 30, 2007 were $149.82 million, compared
to $124.28 million for the previous year. This represents an increase of $25.54
million, or 20.55% and reflects managements plan to grow the loan
portfolio. Interest and dividends on investment securities available-for-sale
(AFS) increased to $2.811 million for the year ended June 30, 2007 from $2.589
million for the year ended June 30, 2006, an increase of $222,000, or 8.57%.
This increase was the result of higher average interest rates on the AFS
portfolio during the year, as the average balances declined. Interest earned
from deposits at other banks decreased slightly for the year ended June 30, 2007
due to lower average balances. Interest and dividends on investments
held-to-maturity (HTM) also experienced a slight decline.

Interest Expense.

Total interest expense
increased to $5.966 million for the year ended June 30, 2007 from $3.792 million
for the year ended June 30, 2006, an increase of $2.174 million, or 57.33%.
Interest on deposits increased to $4.191 million for the year ended June 30,
2007 from $3.011 million for the year ended June 30, 2006. This increase of
$1.180 million, or 39.19%, was due primarily to an increase on average rates
paid, while average balances increased slightly on deposit accounts. The average
cost of deposits increased 50 basis points, to 2.37% in 2007 from 1.87% in 2006.
Certificates of deposit were the only category to show an increase in average
balances in 2007. An increase in the average balance of borrowings as well as an
increase in the average rate paid resulted in an increase in interest paid on
borrowings to $1.775 million for the year ended June 30, 2007 from $781,000 for
the year ended June 30, 2006. The average balance of borrowings increased to
$34.226 million for the year ended June 30, 2007, compared to $16.573 million
for the year ended June 30, 2006. The average rate paid on borrowings increased
to 5.16% in 2007 from 4.67% in 2006.

Provision for Loan Losses.
Provisions for loan losses
are charged to earnings to maintain the total allowance for loan losses at a
level considered adequate by American Federal Savings Bank to provide for
probable loan losses based on prior loss experience, volume and type of lending
conducted by American Federal, available peer group information, and past due
loans in portfolio. The Banks policies require the review of assets on a
quarterly basis. The Bank classifies loans as well as other assets if warranted.
While management believes it uses the best information available to make a
determination with respect to the allowance for loan losses, it recognizes that
future adjustments may be necessary. No provision was made for loan losses for
either year ended June 30, 2007 or June 30, 2006. This is a reflection of the
continued strong asset quality of American Federals loan portfolio, as
non-performing loan ratios continue to be low. Total classified assets decreased
to $391,000 at June 30, 2007 from $700,000 at June 30, 2006. Total
non-performing loans as a percentage of the total loan portfolio is 0.13%. As of
June 30, 2007, American Federal Savings Bank had no real estate owned.

28

Noninterest Income.

Total noninterest income
increased to $2.261 million for the year ended June 30, 2007, from $2.165
million for the year ended June 30, 2006, an increase of $96,000 or 4.43%. This
increase was primarily due to increases in net gain on sale of loans and other
noninterest income. Net gain on sale of loans increased $151,000 to $643,000,
due to managements decision to sell a higher percentage of mortgage
originations. Other noninterest income increased $45,000 to $593,000, primarily
due to increased fee income on electronic payments and higher fee income on loan
products.

Noninterest Expense.
Noninterest expense
increased by $149,000 or 2.30% to $6.614 million for the year ended June 30,
2007 from $6.465 million for the year ended June 30, 2006. This increase was
primarily due to increases in salaries and benefits of $98,000, legal and
accounting fees of $50,000 and marketing expense of $46,000. The increase in
salaries and benefits was due to normal pay raises. Legal and accounting fees
were higher due to the outsourcing of the Banks internal audit function
and higher legal expenses at the holding company level. Marketing expenses were
higher due to increased promotion of deposit products. These increases were
partially offset by a decrease in the amortization of mortgage servicing fees of
$50,000. This decrease was due to decreased prepayment activity on mortgage
loans. Other categories of noninterest expense showed modest changes.
Income Tax Expense.
Eagles income tax
expense was $554,000 for the year ended June 30, 2007, compared to $629,000 for
the year ended June 30, 2006. The effective tax rate for the year ended June 30,
2007 was 23.76% as opposed to 26.06% for the year ended June 30, 2006.

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 9.93% and 16.27% for the months ended June 30, 2007 and 2006,
respectively. The liquidity ratio declined due to an increase in the loan
portfolio (funded by other borrowings) while the investment portfolio and
deposits showed smaller increases.

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 the
Companys operating activities, which is primarily comprised of cash
transactions affecting net income was $2.89 million for the year ended June 30,
2007 and $4.90 million for the year ended June 30, 2006. The change was
primarily a result of a decrease in the amount of loans held for sale in 2006.

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 $18.80 million for the year ended June
30, 2007, and $25.57 million for the year ended June 30, 2006. The decrease in
cash used was primarily due to slower growth of the loan portfolio in 2007
compared to 2006.

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 $16.11 million for the year ended June 30, 2007, and $18.57
million for the year ended June 30, 2006. This decrease in cash provided was
primarily due to the issuance of trust preferred securities in 2006.

Liquidity may be adversely
affected by unexpected deposit outflows, higher interest rates paid by
competitors, and similar matters. Management monitors projected liquidity needs
and determines the level desirable based in part on our commitments to make
loans and managements assessment of our ability to generate funds.

29

At March 31, 2007 (the most
recent report available), the Banks measure of sensitivity to interest
rate movements, as measured by the OTS, increased slightly from the previous
quarter. The market value of the Banks capital position has decreased
slightly from the previous year. The Bank is well within the guidelines set
forth by the Board of Directors for interest rate sensitivity.

As of June 30, 2007, the
Banks regulatory capital was in excess of all applicable regulatory
requirements. At June 30, 2007, the Banks tangible, core, and risk-based
capital ratios amounted to 10.5%, 10.5%, and 14.8%, respectively, compared to
regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively.

Impact of Inflation and Changing Prices

Our financial statements
and the accompanying notes, which are found in Item 7, have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Interest rates have a greater impact on our
performance than do the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.

Recent Accounting Pronouncements

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

On September 28, 2006, the
Company issued trust-preferred securities through a wholly-owned subsidiary
trust, further described in Note 9 of the audited financial statements. Under
the provisions of FIN 46R, the Company accounts for its investment in the trust
as an asset and its junior subordinated debentures as a liability. Additionally,
the Company reports the dividends paid and received on the securities in the
statement of income as interest income and expense. In February 2006, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 155,
Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS
Statements No. 133 and 140. SFAS No. 155 improves financial reporting by
eliminating the exemption from applying SFAS No. 133 to interests in securitized
financial assets so that similar instruments are accounted for similarly
regardless of the form of the instruments.

This statement also
improves financial reporting by allowing a preparer to elect fair value
measurement at acquisition, at issuance, or when a previously recognized
financial instrument is subject to a remeasurement (new basis) event, on an
instrument-by-instrument basis, in cases in which a derivative would otherwise
have to be bifurcated. SFAS No. 155 is effective for all financial instruments
acquired, issued, or subject to a remeasurement (new basis) event occurring
after the beginning of the Companys first fiscal year that begins after
September 15, 2006. The Company does not anticipate that the adoption of this
new accounting principle will have a material effect on its financial position,
results of operations or cash flows.

On March 17, 2006, the FASB
issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment
of SFAS No. 140, which permits, but does not require, an entity to account for
one or more classes of servicing rights (i.e., mortgage servicing rights, or
MSRs) at fair value, with the changes in fair value recorded in the Consolidated
Statement of Income. Management is currently evaluating the impact and timing of
the adoption of SFAS 156 on the Companys financial condition, results of
operations and cash flows.

30

In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 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 No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company
does not anticipate that the adoption of this new accounting principle will have
a material effect on its financial position, results of operations or cash
flows.

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. SFAS No. 159 is effective for the Companys
financial statements for the year beginning on July 1, 2008, with earlier
adoption permitted. Management is currently evaluating the impact and timing of
the adoption of SFAS 159 on the Companys financial condition, results of
operations and cash flows.

In June 2006, the FASB
issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes. FIN 48 provides detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in
an enterprises financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 requires an entity to recognize the
financial statement impact of a tax position when it is more likely than not
that the position will be sustained upon examination. If the tax position meets
the more-likely-than-not recognition threshold, the tax effect is recognized at
the largest amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement. Any difference between the tax position taken
in the tax return and the tax position recognized in the financial statements
using the criteria above results in the recognition of a liability in the
financial statements for the unrecognized benefit. Similarly, if a tax position
fails to meet the more-likely-than-not recognition threshold, the benefit taken
in tax return will also result in the recognition of a liability in the
financial statements for the full amount of the unrecognized benefit.

FIN 48 will be effective
for fiscal years beginning after December 15, 2006 (including the first interim
period for calendar year companies) and the provisions of FIN 48 will be applied
to all tax positions under SFAS No. 109 upon initial adoption. The cumulative
effect of applying the provisions of this interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year. The
Company does not anticipate that the adoption of this new accounting principle
will have a material effect on its financial position, results of operations or
cash flows.

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.

31

Deferred Tax Assets.

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

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

ITEM 7.    FINANCIAL STATEMENTS.
Eagle Bancorps
audited financial statements, notes thereto, and auditors reports are
found immediately following Part III of this report.

ITEM 8A.    CONTROLS AND PROCEDURES
Based on their evaluation,
the registrants Chief Executive Officer, Larry A. Dreyer, President, Peter
J. Johnson and Chief Financial Officer, Clinton J. Morrison, have concluded the
registrants disclosure controls and procedures are effective as of June
30, 2007 to ensure that information required to be disclosed in the reports that
the registrant files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. During the
last fiscal quarter, there have been no changes in the registrants
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the registrants internal control
over financial reporting.
ITEM 8B.    OTHER INFORMATION
None.
32

PART III

The information required by
Items 9, 10, 11, 12 and 14 of this part is presented in the proxy statement
issued by the Board of Directors in connection with the annual meeting of
stockholders to be held October 18, 2007, which is hereby incorporated by
reference into this annual report.

Item 13.          Exhibits.


A.
     
     (1) The following documents are filed as part of this report:
The audited Consolidated Statements of Financial Condition of Eagle Bancorp and subsidiary as of June 30, 2007 and June 30, 2006 and the related
Consolidated Statements of Income, Consolidated Statements of Changes in Stockholder Equity and Consolidated Statements of Cash Flows for the years
then ended, together with the related notes and independent auditors reports.(2)
     
     Schedules omitted as they are not applicable.B. Exhibits



*
     
     2.1
     
     Amended and Restated Plan of Mutual Holding Company Reorganization and Stock Issuance*
     
     3.1
     
     Charter of Eagle Bancorp*
     
     3.2
     
     Bylaws of Eagle Bancorp*
     
     4
     
     Form
of Stock Certificate of Eagle Bancorp*
     
     10.1
     
     Employee Stock Ownership Plan and Trust*
     
     10.2
     
     Employment Contract of Larry A. Dreyer**
     
     10.3
     
     Stock Plan***
     
     10.4
     
     Employment Contract of Peter J. Johnson11
     
     Computation of per share earnings (incorporated by reference to Note 3 to Notes To Consolidated Statements of Financial Condition dated June
30, 2007)****
     
     14
     
     Code
of Ethics21.1
     
     Subsidiaries of Registrant (incorporated by reference to Part I, Subsidiary Activity)23.1
     
     Consent of Davis, Kinard & Co., P.C.31.1
     
     Certification by Larry A. Dreyer, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
     
     Certification by Clinton J. Morrison, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
     
     Certification by Larry A. Dreyer, Chief Executive Officer and Clinton J. Morrison, Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*
     
     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.
33

This Page Intentionally Left Blank

 
AND SUBSIDIARY
                                                   CONSOLIDATED FINANCIAL STATEMENTS 
                                                                  and 
                                        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                                                        June 30, 2007 and 2006EAGLE BANCORP AND SUBSIDIARYContents

PageReport of
Independent Registered Public Accounting Firm
     
     
     
     
     1Financial
StatementsConsolidated
Statements of Financial Condition
     
     
     
     
     2Consolidated
Statements of Income
     
     
     
     
     3Consolidated
Statements of Changes in Stockholders Equity
     
     
     
     
     4Consolidated
Statements of Cash Flows
     
     
     
     
     6Notes to
Consolidated Financial Statements
     
     
     
     
     7
 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, 2007, and 2006 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 2007
and 2006 financial statements referred to above present fairly, in all material
respects, the financial position of Eagle Bancorp and Subsidiary as of June 30,
2007 and 2006, 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.

DAVIS, KINARD & CO., P.C.Abilene, Texas July 24, 2007-1-


EAGLE BANCORP AND SUBSIDIARY
                                 Consolidated Statements of Financial Condition June 30, 2007 and 2006(Dollars in Thousands, Except for Per Share Data)


2007
     
     2006AssetsCash and due
from banks
     
     
     
     $
     2,709
     
     
     $
     2,844Interest
bearing deposits in banks
     
     
     
     
     360
     
     
     
     27Cash and cash
equivalents
     
     
     
     
     3,069
     
     
     
     2,871Securities
available for sale
     
     
     
     
     64,774
     
     
     
     64,198Securities
held to maturity (fair value approximates $930 in 2007 and $1,030 in 2006)
     
     
     
     
     921
     
     
     
     1,018FHLB stock
restricted, at cost
     
     
     
     
     1,315
     
     
     
     1,315Investment in
Eagle Bancorp Statutory Trust I
     
     
     
     
     155
     
     
     
     155Mortgage
loans held for sale
     
     
     
     
     1,175
     
     
     
     918Loans
receivable, net of deferred loan fees and allowance for loan losses of $518 in 2007 and $535 in 2006
     
     
     
     
     158,140
     
     
     
     140,858Accrued
interest and dividend receivable
     
     
     
     
     1,333
     
     
     
     1,211Mortgage
servicing rights, net
     
     
     
     
     1,628
     
     
     
     1,722Premises and
equipment, net
     
     
     
     
     5,806
     
     
     
     5,962Cash
surrender value of life insurance
     
     
     
     
     5,764
     
     
     
     5,230Other
assets
     
     
     
     
     606
     
     
     
     720$
     244,686
     
     
     $
     226,178Liabilities and Shareholders EquityNoninterest
bearing
     
     
     
     $
     13,694
     
     
     $
     12,575Interest
bearing
     
     
     
     
     165,953
     
     
     
     161,767Total
deposits
     
     
     
     
     179,647
     
     
     
     174,342Accrued
expenses and other liabilities
     
     
     
     
     1,996
     
     
     
     1,765Federal funds
purchased
     
     
     
     
     3,800
     
     
     
     FHLB advances
and other borrowings
     
     
     
     
     30,000
     
     
     
     22,371Subordinated
debentures
     
     
     
     
     5,155
     
     
     
     5,155Total
liabilities
     
     
     
     
     220,598
     
     
     
     203,633Shareholders equityPreferred
stock, no par value; 1,000,000 shares authorized, no shares issued or outstanding
     
     
     
     
     
     
     
     
     Common stock,
$0.01 par value; 9,000,000 shares authorized, 1,223,572 shares issued; 1,084,357 and1,091,722
shares outstanding in 2007 and 2006, respectively
     
     
     
     
     12
     
     
     
     12Capital
surplus
     
     
     
     
     4,387
     
     
     
     4,274Unallocated
common stock held by ESOP
     
     
     
     
     (92
     )
     
     
     (129
     )Treasury
stock, at cost
     
     
     
     
     (4,759
     )
     
     
     (4,521
     )Retained
earnings
     
     
     
     
     25,448
     
     
     
     24,056Net
accumulated other comprehensive loss
     
     
     
     
     (908
     )
     
     
     (1,147
     )Total
shareholders equity
     
     
     
     
     24,088
     
     
     
     22,545$
     244,686
     
     
     $
     226,178
 The accompanying notes are an
integral part of these consolidated financial statements.


-2-

EAGLE BANCORP AND SUBSIDIARY
                                 Consolidated Statements of Income Years Ended June 30, 2007 and 2006(Dollars in Thousands, Except for Per Share Data)

2007
     
     2006Interest
and dividend incomeLoans,
including fees
     
     
     
     $
     9,731
     
     
     $
     7,799Available for
sale securities
     
     
     
     
     2,811
     
     
     
     2,589Held to
maturity securities
     
     
     
     
     43
     
     
     
     52Trust
preferred securities
     
     
     
     
     9
     
     
     
     7Federal Home
Loan Bank stock dividends
     
     
     
     
     7
     
     
     
     Deposits with
banks
     
     
     
     
     50
     
     
     
     59Total
interest income
     
     
     
     
     12,651
     
     
     
     10,506Interest
expenseDeposits
     
     
     
     
     4,191
     
     
     
     3,011FHLB advances
and other borrowings
     
     
     
     
     1,466
     
     
     
     546Subordinated
debentures
     
     
     
     
     309
     
     
     
     235Total
interest expense
     
     
     
     
     5,966
     
     
     
     3,792Net
interest income
     
     
     
     
     6,685
     
     
     
     6,714Provision for
loan losses
     
     
     
     
     
     
     
     
     Net
interest income after provision for loan losses
     
     
     
     
     6,685
     
     
     
     6,714Noninterest incomeService
charges on deposit accounts
     
     
     
     
     496
     
     
     
     532Net gain on
sale of loans
     
     
     
     
     643
     
     
     
     492Mortgage loan
service fees
     
     
     
     
     533
     
     
     
     593Net realized
loss on sales of available for sale securities
     
     
     
     
     (4
     )
     
     
     Other
income
     
     
     
     
     593
     
     
     
     548Total
noninterest income
     
     
     
     
     2,261
     
     
     
     2,165Noninterest expensesSalaries and
employee benefits
     
     
     
     
     3,617
     
     
     
     3,519Occupancy and
equipment expense
     
     
     
     
     824
     
     
     
     848Data
processing
     
     
     
     
     286
     
     
     
     274Advertising
     
     
     
     
     247
     
     
     
     201Amortization
of mortgage servicing rights
     
     
     
     
     305
     
     
     
     355Federal
insurance premiums
     
     
     
     
     21
     
     
     
     23Postage
     
     
     
     
     86
     
     
     
     86Legal,
accounting, and examination fees
     
     
     
     
     232
     
     
     
     182Consulting
fees
     
     
     
     
     79
     
     
     
     58ATM
processing
     
     
     
     
     49
     
     
     
     51Other
expense
     
     
     
     
     868
     
     
     
     868Total
noninterest expenses
     
     
     
     
     6,614
     
     
     
     6,465Income
before income taxes
     
     
     
     
     2,332
     
     
     
     2,414Income tax
expense
     
     
     
     
     554
     
     
     
     629Net
income
     
     
     
     $
     1,778
     
     
     $
     1,785Basic
earnings per share
     
     
     
     $
     1.66
     
     
     $
     1.66Diluted
earnings per share
     
     
     
     $
     1.47
     
     
     $
     1.48
 The accompanying notes are an
integral part of these consolidated financial statements.


-3-

EAGLE BANCORP AND SUBSIDIARY
                     Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 2007 and 2006(Dollars in Thousands, Except for Per Share Data)


PreferredStock
     
     Common StockBalance at
July 1, 2005
     
     
     
     $
     
     
     
     $
     12Net incomeChange in net
unrealized depreciation on available for sale securities and cash flow hedges, netTotal
comprehensive incomeDividends
paid ($.80 per share)Restricted
stock plan shares allocated (4,600)Treasury
stock purchased (2,500 shares @ $31.75;1,200 shares
@ $32.20; 1,000 shares @ $32.50;1,400 shares
@ $34.45; 2,500 shares @ $34.25;1,300 shares
@ $32.50; 4,000 shares @ $33.25;1,350 shares
@ $33.10; 1,600 shares @ $31.00)ESOP shares
allocated or committed to be released for allocation (4,600) sharesBalance at
June 30, 2006
     
     
     
     
     
     
     
     
     12Net incomeChange in net
unrealized depreciation on available for sale securities and cash flow hedges, netTotal
comprehensive incomeDividends
paid ($.88 per share)Treasury
stock purchased (3,100 shares @ $31.90;1,056 shares
@ $32.00; 1,000 shares @ $32.60;1,200 shares
@ $33.00; 1,000 shares @ $33.00;ESOP shares
allocated or committed to be released for allocation (4,600) sharesBalance at
June 30, 2007
     
     
     
     $
     
     
     
     $
     12The accompanying notes are an
integral part of these consolidated financial statements.

-4-

AdditionalPaid-InCapital
     
     UnallocatedESOPShares
     
     TreasuryStock
     
     RetainedEarnings
     
     Accumulated Other Comprehensive Loss
     
     TotalBalance at
July 1, 2005
     
     
     
     $
     4,188
     
     
     $
     (165
     )
     
     $
     (4,048
     )
     
     $
     22,630
     
     
     $
     (352
     )
     
     $
     22,265Net income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     1,785
     
     
     
     
     
     
     
     1,785Change in net
unrealized depreciation on available for sale securities and cash flow hedges, net
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (795
     )
     
     
     (795
     )Total
comprehensive income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     990Dividends
paid ($.80 per share)
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (359
     )
     
     
     
     
     
     
     (359
     )Restricted
stock plan shares allocated (4,600)
     
     
     
     
     (27
     )
     
     
     
     
     
     
     80
     
     
     
     
     
     
     
     
     
     
     
     53Treasury
stock purchased (2,500 shares @ $31.75;1,200 shares
@ $32.20; 1,000 shares @ $32.50;1,400 shares
@ $34.45; 2,500 shares @ $34.25;1,300 shares
@ $32.50; 4,000 shares @ $33.25;1,350 shares
@ $33.10; 1,600 shares @ $31.00)
     
     
     
     
     
     
     
     
     
     
     
     
     (553
     )
     
     
     
     
     
     
     
     
     
     
     (553
     )ESOP shares
allocated or committed to be released for allocation (4,600) shares
     
     
     
     
     113
     
     
     
     36
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     149Balance at
June 30, 2006
     
     
     
     
     4,274
     
     
     
     (129
     )
     
     
     (4,521
     )
     
     
     24,056
     
     
     
     (1,147
     )
     
     
     22,545Net income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     1,778
     
     
     
     
     
     
     
     1,778Change in net
unrealized depreciation on available for sale securities and cash flow hedges, net
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     239
     
     
     
     239Total
comprehensive income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     2,017Dividends
paid ($.88 per share)
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (386
     )
     
     
     
     
     
     
     (386
     )Treasury
stock purchased (3,100 shares @ $31.90;1,056 shares
@ $32.00; 1,000 shares @ $32.60;1,200 shares
@ $33.00; 1,000 shares @ $33.00;
     
     
     
     
     
     
     
     
     
     
     
     
     (238
     )
     
     
     
     
     
     
     
     
     
     
     (238
     )ESOP shares
allocated or committed to be released for allocation (4,600) shares
     
     
     
     
     113
     
     
     
     37
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     150Balance at
June 30, 2007
     
     
     
     $
     4,387
     
     
     $
     (92
     )
     
     $
     (4,759
     )
     
     $
     25,448
     
     
     $
     (908
     )
     
     $
     24,088-5-

EAGLE BANCORP AND SUBSIDIARY
                               Consolidated Statements of Cash Flows Years Ended June 30, 2007 and 2006(Dollars in Thousands, Except for Per Share Data)


2007
     
     2006Cash flows
from operating activitiesNet
income
     
     
     
     $
     1,778
     
     
     $
     1,785Adjustments
to reconcile net income to net cash provided by operating activitiesProvision for
mortgage servicing rights valuation losses
     
     
     
     
     
     
     
     
     (46
     )Depreciation
     
     
     
     
     482
     
     
     
     509Net
amortization of securities
     
     
     
     
     503
     
     
     
     924Amortization
of capitalized mortgage servicing rights
     
     
     
     
     305
     
     
     
     355Loss on sale
of foreclosed assets
     
     
     
     
     
     
     
     
     6Net gain on
sale of loans
     
     
     
     
     (643
     )
     
     
     (492
     )Net realized
loss on sales of available for sale securities
     
     
     
     
     4
     
     
     
     Appreciation
in cash surrender value of life insurance, net
     
     
     
     
     (191
     )
     
     
     (181
     )Restricted
stock awards
     
     
     
     
     
     
     
     
     53Net change
inLoans held
for sale
     
     
     
     
     387
     
     
     
     1,711Accrued
interest receivable
     
     
     
     
     (119
     )
     
     
     (111
     )Other
assets
     
     
     
     
     210
     
     
     
     (192
     )Accrued
expenses and other liabilities
     
     
     
     
     169
     
     
     
     577Net cash
provided by operating activities
     
     
     
     
     2,885
     
     
     
     4,898Cash flows
from investing activitiesActivity in
available for sale securitiesSales
     
     
     
     
     5,122
     
     
     
     1,627Maturities,
prepayments and calls
     
     
     
     
     16,097
     
     
     
     15,845Purchases
     
     
     
     
     (21,936
     )
     
     
     (8,616
     )Activity in
held to maturity securitiesMaturities,
prepayments and calls
     
     
     
     
     111
     
     
     
     164Investment in
Eagle Bancorp Statutory Trust I
     
     
     
     
     
     
     
     
     (155
     )Loan
originations and principal collections, net
     
     
     
     
     (17,522
     )
     
     
     (34,273
     )Purchase of
bank owned life insurance
     
     
     
     
     (342
     )
     
     
     Proceeds from
sale of foreclosed assets
     
     
     
     
     
     
     
     
     69Additions to
premises and equipment
     
     
     
     
     (326
     )
     
     
     (229
     )Net cash used
in investing activities
     
     
     
     
     (18,796
     )
     
     
     (25,568
     )Cash flows
from financing activitiesNet increase
in deposits
     
     
     
     
     5,305
     
     
     
     1,848Net change in
federal funds purchased
     
     
     
     
     3,800
     
     
     
     Net change in
advances from the FHLB and other borrowings
     
     
     
     
     7,628
     
     
     
     12,484Purchase of
treasury stock, at cost
     
     
     
     
     (238
     )
     
     
     (553
     )Proceeds from
subordinated debentures
     
     
     
     
     
     
     
     
     5,155Dividends
paid
     
     
     
     
     (386
     )
     
     
     (359
     )Net cash
provided by financing activities
     
     
     
     
     16,109
     
     
     
     18,575Net change
in cash and cash equivalents
     
     
     
     
     198
     
     
     
     (2,095
     )Cash and cash
equivalents at beginning of year
     
     
     
     
     2,871
     
     
     
     4,966Cash and
cash equivalents at end of year
     
     
     
     $
     3,069
     
     
     $
     2,871
 The accompanying notes are an
integral part of these consolidated financial statements.

-6-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006NOTE 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, 2007 and
June 30, 2006, 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 SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

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, and interest-bearing deposits in
banks, 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 $391,000 and $488,000 as of
June 30, 2007 and 2006, respectively.

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, 2007 and 2006.

Federal Home Loan Bank Stock

The Companys
investment in Federal Home Loan Bank (FHLB) stock is a restricted
investment carried at cost ($100 per share par value), which approximates its
fair value. As a member of the FHLB system, the Company is required to maintain
a minimum level of investment in FHLB stock based on specific percentages of its
outstanding FHLB advances. The Company may request redemption at par value of
any stock in excess of the amount it is required to hold. Stock redemptions are
made at the discretion of the FHLB. The FHLB redeemed no shares during the years
ended June 30, 2007 and 2006.

-8-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 1: Summary of Significant Accounting Policies - continued


Mortgage Loans Held-for-Sale


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

Loans

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

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

The accrual of interest on
loans is discontinued at the time the loan is 90 days delinquent unless the
credit is well secured and in process of collection. Personal loans are
typically charged off no later than 180 days past due. 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 loans
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.

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.

-9-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 1: Summary of Significant Accounting Policies - continued

Allowance for Loan Losses - continued

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 SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

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, 2007 and 2006 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 SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 1: Summary of Significant Accounting Policies - continued
Income TaxesIncome 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 139,215 shares in 2007 and 131,850 shares
in 2006.

Advertising Costs

The Company expenses
advertising costs as they are incurred. Advertising costs were approximately
$247,000 and $201,000 for the years ended June 30, 2007 and 2006, 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 SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

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, 2007 and 2006, the Company was holding forward delivery commitments
that qualify as derivative financial instruments.

The carrying value of the
Companys financial instruments approximates fair value. The fair value of
the Companys financial instruments is generally determined by a third
partys valuation of the underlying asset.
Recent Accounting Pronouncements
In December 2003, the
Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities an
Interpretation of ARB No. 51 (FIN 46R). This Interpretation,
which replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support.

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

In February 2006, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 155,
Accounting for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140. SFAS No. 155 improves financial reporting by
eliminating the exemption from applying SFAS No. 133 to interests in securitized
financial assets so that similar instruments are accounted for similarly
regardless of the form of the instruments. This statement also improves
financial reporting by allowing a preparer to elect fair value measurement at
acquisition, at issuance, or when a previously recognized financial instrument
is subject to a remeasurement (new basis) event, on an instrument-by-instrument
basis, in cases in which a derivative would otherwise have to be bifurcated.
SFAS No. 155 is effective for all financial instruments acquired, issued, or
subject to a remeasurement (new basis) event occurring after the beginning of
the Companys first fiscal year that begins after September 15, 2006. The
Company does not anticipate that the adoption of this new accounting principle
will have a material effect on its financial position, results of operations or
cash flows.

-13-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 1: Summary of Significant Accounting Policies - continued

Recent Accounting Pronouncements - continued

On March 17, 2006, the FASB
issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment
of SFAS No. 140, which permits, but does not require, an entity to account for
one or more classes of servicing rights (i.e., mortgage servicing rights, or
MSRs) at fair value, with the changes in fair value recorded in the Consolidated
Statement of Income. Management is currently evaluating the impact and timing of
the adoption of SFAS 156 on the Companys financial condition, results of
operations and cash flows.

In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 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 No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company
does not anticipate that the adoption of this new accounting principle will have
a material effect on its financial position, results of operations or cash
flows.


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. SFAS No. 159
is effective for the Companys financial statements for the year beginning
on July 1, 2008, with earlier adoption permitted. Management is currently
evaluating the impact and timing of the adoption of SFAS 159 on the
Companys financial condition, results of operations and cash flows.

In June 2006, the FASB
issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes. FIN 48 provides detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in
an enterprises financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 requires an entity to recognize the
financial statement impact of a tax position when it is more likely than not
that the position will be sustained upon examination. If the tax position meets
the more-likely-than-not recognition threshold, the tax effect is recognized at
the largest amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement. Any difference between the tax position taken
in the tax return and the tax position recognized in the financial statements
using the criteria above results in the recognition of a liability in the
financial statements for the unrecognized benefit. Similarly, if a tax position
fails to meet the more-likely-than-not recognition threshold, the benefit taken
in tax return will also result in the recognition of a liability in the
financial statements for the full amount of the unrecognized benefit.

-14-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 1: Summary of Significant Accounting Policies - continued

Recent Accounting Pronouncements - continued

FIN 48 will be effective
for fiscal years beginning after December 15, 2006 (including the first interim
period for calendar year companies) and the provisions of FIN 48 will be applied
to all tax positions under SFAS No. 109 upon initial adoption. The cumulative
effect of applying the provisions of this interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year. The
Company does not anticipate that the adoption of this new accounting principle
will have a material effect on its financial position, results of operations or
cash flows.

Reclassifications

Certain 2006 amounts have
been reclassified to conform to the 2007 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:
2007
     
     2006(In
Thousands)Weighted
average shares outstanding during the year on which basic earnings per share is calculated
     
     
     
     
     1,073
     
     
     
     1,078Add: weighted
average of stock held in treasury
     
     
     
     
     137
     
     
     
     127Average
outstanding shares on which diluted earnings per share is calculated
     
     
     
     
     1,210
     
     
     
     1,205Net income
applicable to common stockholders
     
     
     
     $
     1,778
     
     
     $
     1,785Basic
earnings per share
     
     
     
     $
     1.66
     
     
     $
     1.66Diluted
earnings per share
     
     
     
     $
     1.47
     
     
     $
     1.48
 NOTE 3: Securities

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

-15-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 3: Securities  continued

June 30, 2007(Dollars in Thousands)Available for Sale
     
     
     
     AmortizedCost
     
     GrossUnrealizedGains
     
     GrossUnrealizedLosses
     
     EstimatedMarket ValueU.S.
Government and agency
     
     
     
     $
     3,690
     
     
     $
     5
     
     
     $
     (52
     )
     
     $
     3,643Municipal
obligations
     
     
     
     
     21,198
     
     
     
     58
     
     
     
     (528
     )
     
     
     20,728Corporate
obligations
     
     
     
     
     13,847
     
     
     
     
     
     
     
     (224
     )
     
     
     13,623Mortgage-backed securites
     
     
     
     
     8,107
     
     
     
     3
     
     
     
     (238
     )
     
     
     7,872CMOs
     
     
     
     
     17,408
     
     
     
     4
     
     
     
     (337
     )
     
     
     17,075Corporate
preferred stock
     
     
     
     
     2,000
     
     
     
     
     
     
     
     (167
     )
     
     
     1,833Total
securities available for sale
     
     
     
     $
     66,250
     
     
     $
     70
     
     
     $
     (1,546
     )
     
     $
     64,774Held to
MaturityMunicipal
obligations
     
     
     
     $
     826
     
     
     $
     9
     
     
     $
     
     
     
     $
     835Mortgage-backed securites
     
     
     
     
     95
     
     
     
     
     
     
     
     
     
     
     
     95Total
securities held to maturity
     
     
     
     $
     921
     
     
     $
     9
     
     
     $
     
     
     
     $
     930
 

June 30, 2006(Dollars in Thousands)Available for Sale
     
     
     
     AmortizedCost
     
     GrossUnrealizedGains
     
     GrossUnrealizedLosses
     
     EstimatedMarket ValueU.S.
Government and agency
     
     
     
     $
     7,448
     
     
     $
     6
     
     
     $
     (158
     )
     
     $
     7,296Municipal
obligations
     
     
     
     
     17,471
     
     
     
     67
     
     
     
     (395
     )
     
     
     17,143Corporate
obligations
     
     
     
     
     16,059
     
     
     
     
     
     
     
     (442
     )
     
     
     15,617Mortgage-backed securites
     
     
     
     
     6,949
     
     
     
     2
     
     
     
     (204
     )
     
     
     6,747CMOs
     
     
     
     
     16,330
     
     
     
     
     
     
     
     (513
     )
     
     
     15,817Corporate
preferred stock
     
     
     
     
     1,800
     
     
     
     
     
     
     
     (222
     )
     
     
     1,578Total
securities available for sale
     
     
     
     $
     66,057
     
     
     $
     75
     
     
     $
     (1,934
     )
     
     $
     64,198Held to
MaturityMunicipal
obligations
     
     
     
     $
     828
     
     
     $
     14
     
     
     $
     (2
     )
     
     $
     840Mortgage-backed securites
     
     
     
     
     190
     
     
     
     
     
     
     
     
     
     
     
     190Total
securities held to maturity
     
     
     
     $
     1,018
     
     
     $
     14
     
     
     $
     (2
     )
     
     $
     1,030
 -16-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 3: Securities - continued

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

Gross recognized gains on
securities available-for-sale were $27,996 and $9,286 for the years ended June
30, 2007 and 2006, respectively. Gross recognized losses on securities
available-for-sale were $32,332 and $9,893 for the years ended June 30, 2007 and
2006, respectively.

The amortized cost and
estimated fair value of securities at June 30, 2007 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, 2007Held to Maturity
     
     Available for Sale(Dollars in Thousands)
     
     
     
     AmortizedCost
     
     EstimatedMarketValue
     
     AmortizedCost
     
     Estimated Market ValueDue in one
year or less
     
     
     
     $
     150
     
     
     $
     150
     
     
     $
     6,953
     
     
     $
     6,868Due from one
to five years
     
     
     
     
     411
     
     
     
     414
     
     
     
     9,276
     
     
     
     9,101Due from five
to ten years
     
     
     
     
     265
     
     
     
     271
     
     
     
     3,483
     
     
     
     3,385Due after ten
years
     
     
     
     
     
     
     
     
     
     
     
     
     19,023
     
     
     
     18,640826
     
     
     
     835
     
     
     
     38,735
     
     
     
     37,994Mortgage-backed
     
     
     
     
     95
     
     
     
     95
     
     
     
     8,107
     
     
     
     7,872CMOs
     
     
     
     
     
     
     
     
     
     
     
     
     17,408
     
     
     
     17,075Corporate
preferred stock
     
     
     
     
     
     
     
     
     
     
     
     
     2,000
     
     
     
     1,833Total
     
     
     
     $
     921
     
     
     $
     930
     
     
     $
     66,250
     
     
     $
     64,774
 Maturities of securities do
not reflect repricing opportunities present in adjustable rate securities.

At June 30, 2007 and 2006,
securities with a carrying value of $24,452,665 and $9,055,000, respectively,
were pledged to secure public deposits and for other purposes required or
permitted by law.

-17-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 3: Securities - continued
The following table
discloses, as of June 30, 2007 and 2006, the Companys investment
securities that have been in a continuous unrealized-loss position for less than
12 months and those that have been in a continuous unrealized loss position for
12 or more months:


June 30, 2007Less than 12 months
     
     12 months or longer(Dollars in Thousands)
     
     
     
     EstimatedMarketValue
     
     GrossUnrealizedLosses
     
     EstimatedMarketValue
     
     GrossUnrealizedLossesU.S.
Government and agency
     
     
     
     $
     
     
     
     $
     
     
     
     $
     2,820
     
     
     $
     52Municipal
obligations
     
     
     
     
     12,338
     
     
     
     369
     
     
     
     4,023
     
     
     
     159Corporate
obligations
     
     
     
     
     4,075
     
     
     
     75
     
     
     
     9,548
     
     
     
     149Mortgage-backed & CMOs
     
     
     
     
     6,617
     
     
     
     183
     
     
     
     15,292
     
     
     
     392Corporate
preferred stock
     
     
     
     
     380
     
     
     
     20
     
     
     
     1,453
     
     
     
     147Total
     
     
     
     $
     23,410
     
     
     $
     647
     
     
     $
     33,136
     
     
     $
     899June 30, 2006U.S.
Government and agency
     
     
     
     $
     1,319
     
     
     $
     12
     
     
     $
     4,755
     
     
     $
     146Municipal
obligations
     
     
     
     
     10,619
     
     
     
     305
     
     
     
     2,052
     
     
     
     92Corporate
obligations
     
     
     
     
     
     
     
     
     
     
     
     
     15,617
     
     
     
     441Mortgage-backed & CMOs
     
     
     
     
     3,826
     
     
     
     67
     
     
     
     18,433
     
     
     
     651Corporate
preferred stock
     
     
     
     
     
     
     
     
     
     
     
     
     1,578
     
     
     
     222Total
     
     
     
     $
     15,764
     
     
     $
     384
     
     
     $
     42,435
     
     
     $
     1,552
 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, 2007 and 2006. 168 and 180
securities are in an unrealized loss position as of June 30, 2007 and 2006,
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 SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 3: Securities - continued

At June 30, 2007, sixty
U.S. Government and agency securities and municipal obligations have unrealized
losses with aggregate depreciation of less than 3% 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, 2007,
eighty-eight mortgage backed and CMO securities have unrealized losses with
aggregate depreciation of 3% 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, 2007, sixteen
corporate obligations have unrealized losses with aggregate depreciation of 2%
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, 2007, four
corporate preferred stocks have unrealized losses with aggregate depreciation of
8% 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 these securities for the foreseeable future, no declines are deemed to
be other than temporary.

-19-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 4: Loans

A summary of the balances of loans follow:


June 30,2007
     
     2006(Dollars
in Thousands)First
mortgage loans:Residential
mortgage (14 family)
     
     
     
     $
     81,958
     
     
     $
     75,913Commercial
real estate
     
     
     
     
     25,621
     
     
     
     18,648Real estate
construction
     
     
     
     
     8,253
     
     
     
     6,901Other
loans:Home
equity
     
     
     
     
     24,956
     
     
     
     20,191Consumer
     
     
     
     
     11,438
     
     
     
     11,820Commercial
     
     
     
     
     6,366
     
     
     
     7,861Subtotal
     
     
     
     
     158,592
     
     
     
     141,334Less:
Allowance for loan losses
     
     
     
     
     (518
     )
     
     
     (535
     )Deferred loan
fees, net
     
     
     
     
     66
     
     
     
     59Total loans,
net
     
     
     
     $
     158,140
     
     
     $
     140,858
 Loans net of related
allowance for loan losses on which the accrual of interest has been discontinued
were $21,470 and $345,000 at June 30, 2007 and 2006, respectively. Interest
income not accrued on these loans and cash interest income was immaterial for
the years ended June 30, 2007 and 2006. The allowance for loan losses on
nonaccrual loans as of June 30, 2007 and 2006 was $35,509 and $31,488,
respectively. The Company expects to collect all amounts due on nonaccrual
loans, including interest accrued at contractual rates. Accordingly, there are
no loans considered impaired at June 30, 2007 and 2006. As of June 30, 2007 and
2006, the Company had $191,000 and $144,000, respectively, of loans past due
greater than ninety days that were still accruing interest.

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


June 30,2007
     
     2006(Dollars
in Thousands)Balance at
beginning of period
     
     
     
     $
     535
     
     
     $
     573Reclassification to repossessed property reserve
     
     
     
     
     
     
     
     
     (15
     )Provision for
loan losses
     
     
     
     
     
     
     
     
     Loans charged
off
     
     
     
     
     (29
     )
     
     
     (48
     )Recoveries of
loans previously charged off
     
     
     
     
     12
     
     
     
     25Balance at
end of period
     
     
     
     $
     518
     
     
     $
     535
 -20-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements
 June 30, 2007 and 2006

NOTE 4: Loans - continued

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

Loans receivable from
directors and senior officers of the Company at June 30, 2007 and 2006, were
$152,901and $135,172, respectively. During the year ended June 30, 2007, total
principal additions amounted to $51,433, and total principal payments amounted
to $69,162. Interest income from these loans was $8,905 and $11,136 for the
years ended June 30, 2007 and 2006, respectively.

NOTE 5: Mortgage Servicing Rights

The Company is servicing
loans for the benefit of others totaling approximately $194,624,000 and
$197,773,000 at June 30, 2007 and 2006, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, and foreclosure processing.

Custodial escrow balances
maintained in connection with the foregoing loan servicing, and included in
demand deposits, were approximately $1,946,000 and $1,518,000 at June 30, 2007
and 2006, respectively.

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


Years Ended June 30,2007
     
     2006(Dollars
in Thousands)Mortgage
servicing rightsBalance at
beginning of period
     
     
     
     $
     1,722
     
     
     $
     1,903Mortgage
servicing rights capitalized
     
     
     
     
     211
     
     
     
     174Amortization
of mortgage servicing rights
     
     
     
     
     (305
     )
     
     
     (355
     )Balance at
end of period
     
     
     
     
     1,628
     
     
     
     1,722Valuation
allowanceBalance at
beginning of period
     
     
     
     
     
     
     
     
     46Provision
(credited) to operations
     
     
     
     
     
     
     
     
     (46
     )Balance at
end of period
     
     
     
     
     
     
     
     
     Net mortgage
servicing rights
     
     
     
     $
     1,628
     
     
     $
     1,722
 The fair values of these
rights were $2,114,000 and $2,043,000 at June 30, 2007 and June 30, 2006,
respectively. The fair value of servicing rights was determined using discount
rates ranging from 10% to 18%, prepayment speeds ranging from 111% to 329%,
depending on stratification of the specific right. The fair value was also
adjusted for the affect of potential past dues and foreclosures.

-21-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 6: Premises and Equipment

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


June 30,2007
     
     2006(Dollars
in Thousands)Land,
buildings, and improvements
     
     
     
     $
     8,094
     
     
     $
     7,991Furniture and
equipment
     
     
     
     
     4,231
     
     
     
     4,04212,325
     
     
     
     12,033Accumulated
depreciation
     
     
     
     
     (6,519
     )
     
     
     (6,071
     )$
     5,806
     
     
     $
     5,962
 Depreciation expense
totaled $482,580 and $509,170 for the years ended June 30, 2007 and 2006,
respectively.

NOTE 7: Deposits
Deposits are summarized as follows:



June 30,2007
     
     2006(Dollars
in Thousands)Noninterest
checking
     
     
     
     $
     13,694
     
     
     $
     12,575Interest
bearing checking (0.21%, 0.20%)
     
     
     
     
     30,953
     
     
     
     29,571Passbook
savings (0.65%, 0.65%)
     
     
     
     
     22,521
     
     
     
     24,438Money market
accounts (2.12%, 1.93%)
     
     
     
     
     23,292
     
     
     
     29,129Time
certificates of deposits (20072.71%5.35%, 20062.13%5.07%)
     
     
     
     
     89,187
     
     
     
     78,629$
     179,647
     
     
     $
     174,342
 The weighted average cost
of funds was 2.64% and 2.05% at June 30, 2007 and 2006, respectively.

-22-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 7: Deposits - continued

At June 30, 2007, the
scheduled maturities of time deposits are as follows:




(Dollars
in Thousands)Within one
year
     
     
     
     $
     74,365One to two
years
     
     
     
     
     13,499Two to three
years
     
     
     
     
     930Three to four
years
     
     
     
     
     384Thereafter
     
     
     
     
     9Total
     
     
     
     $
     89,187
 Interest expense on
deposits is summarized as follows:


Years Ended June 30,2007
     
     2006(Dollars
in Thousands)Checking
     
     
     
     $
     64
     
     
     $
     55Passbook
savings
     
     
     
     
     151
     
     
     
     164Money market
accounts
     
     
     
     
     525
     
     
     
     492Time
certificates of deposits
     
     
     
     
     3,451
     
     
     
     2,300$
     4,191
     
     
     $
     3,011
 Effective April 1, 2006
FDIC insurance increased to $250,000 for qualified retirement accounts. For
nonqualified retirement accounts, the coverage remains at $100,000. At June 30,
2007 and 2006, the Company held $34,859,000 and $31,403,000, respectively, in
non-retirement deposit accounts that included balances in excess of $100,000 or
more. At June 30, 2007 and 2006, the Company held $275,000 and $276,000,
respectively, in qualified retirement deposit accounts that included balances in
excess of $250,000. 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, 2007 and 2006,
the Company reclassified $21,322 and $20,260, respectively, in overdrawn
deposits as loans.

Directors and senior
officers deposit accounts at June 30, 2007 and 2006, were $289,049 and
$543,063, respectively.

-23-

EAGLE BANCORP AND SUBSIDIARY

                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

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,


June 30,2007
     
     2006(Dollars
in Thousands)Within one
year
     
     
     
     $
     2,000
     
     
     $
     16,371One to two
years
     
     
     
     
     2,000
     
     
     
     2,000Two to three
years
     
     
     
     
     7,000
     
     
     
     2,000Three to four
years
     
     
     
     
     
     
     
     
     2,000Four to five
years
     
     
     
     
     19,000
     
     
     
     Thereafter
     
     
     
     
     
     
     
     
     Total
     
     
     
     $
     30,000
     
     
     $
     22,371
 Federal Home Loan Advances

The advances are due at
maturity, with the exception of a $5,000,000 advance that is callable at the
FHLB of Seattles option. This advance was called on August 1, 2007. The
advances are subject to prepayment penalties. The interest rates on advances are
fixed, with the exception of one advance which is adjustable (tied to the three
month LIBOR). 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 $5,281,282 as of June 30, 2007. At June
30, 2007 and 2006, 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,
2007, was 30% of total Bank assets, or approximately $72,091,000. The balance of
advances was $16,000,000 and $22,371,000 at June 30, 2007 and 2006,
respectively.

Other Borrowings

The Bank had $14,000,000 in
structured repurchase agreements with PNC Financial Service Group, Inc.
(PNC) at June 30, 2007. These agreements are collateralized by
corporate and municipal securities. The carrying value of these securities was
$17,214,907 as of June 30, 2007. These agreements include terms, under certain
conditions, which allow PNC to exercise a call option.

Federal Funds Purchased

During the year the Bank
obtained a $6,000,000 Federal Funds line of credit with PNC. The balance was
$3,800,000 at June 30, 2007.
For all borrowings the weighted average interest
rate for advances at June 30, 2007 and 2006 was 4.90% and 4.96% respectively.
The weighted average amount outstanding was $29,071,000 and $12,665,000 for the
years ended June 30, 2007 and 2006, respectively.
The maximum amount outstanding
at any month-end was $36,695,185 and $22,602,000 during the years ended June 30,
2007 and 2006, respectively.

-24-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
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, 2007 and June 30, 2006, interest expense on the subordinated debentures was
$309,000 and 235,000, respectively.

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

NOTE 10: Legal Contingencies
Various legal claims also
arise from time to time in the normal course of business which, in the opinion
of management, will have no material effect on the Companys financial
statements.

NOTE 11: Income Taxes

The components of the Companys income tax provision are as follows:
Years Ended June 30,2007
     
     2006(Dollars
in Thousands)CurrentU.S.
federal
     
     
     
     $
     492
     
     
     $
     531Montana
     
     
     
     
     154
     
     
     
     143646
     
     
     
     674DeferredU.S.
federal
     
     
     
     
     (76
     )
     
     
     (37
     )Montana
     
     
     
     
     (16
     )
     
     
     (8
     )(92
     )
     
     
     (45
     )Total
     
     
     
     $
     554
     
     
     $
     629
 -25-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 11: Income Taxes - continued

The nature and components
of deferred tax assets and liabilities, which are a component of other assets in
2007 and 2006 in the accompanying statement of financial condition, are as
follows:


June 30,2007
     
     2006(Dollars
in Thousands)Deferred tax
assets:Deferred
compensation
     
     
     
     $
     323
     
     
     $
     307Loans
receivable
     
     
     
     
     57
     
     
     
     56Securities
available for sale
     
     
     
     
     548
     
     
     
     702Other
     
     
     
     
     23
     
     
     
     18Total
deferred tax assets
     
     
     
     
     951
     
     
     
     1,083Deferred tax
liabilities:Premises and
equipment
     
     
     
     
     175
     
     
     
     227Deferred loan
fees
     
     
     
     
     12
     
     
     
     22FHLB
stock
     
     
     
     
     490
     
     
     
     490Unrealized
gain on hedging
     
     
     
     
     7
     
     
     
     6Other
     
     
     
     
     
     
     
     
     17Total
deferred tax liabilities
     
     
     
     
     684
     
     
     
     762Net deferred
tax asset
     
     
     
     $
     267
     
     
     $
     321
 The Company believes, based
upon the available evidence, that all deferred tax assets will be realized in
the normal course of operations. Accordingly, these assets have not been reduced
by a valuation allowance.

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


Years Ended June 30,2007
     
     2006(Dollars
in Thousands)Federal
income taxes at the statutory rate of 34%
     
     
     
     $
     793
     
     
     $
     821State income
taxes
     
     
     
     
     138
     
     
     
     135Nontaxable
income
     
     
     
     
     (333
     )
     
     
     (312
     )Other,
net
     
     
     
     
     (44
     )
     
     
     (15
     )Income tax
expense
     
     
     
     $
     554
     
     
     $
     629Effective tax
rate
     
     
     
     
     23.8
     %
     
     
     26.1
     %
 -26-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 11: Income Taxes - continued

Prior to January 1, 1987,
the Company was allowed a special bad debt deduction limited generally in the
current year to 32% (net of preference tax) of otherwise taxable income and
subject to certain limitations based on aggregate loans and savings account
balances at the end of the year. If the amounts that qualified as deductions for
federal income tax purposes are later used for purposes other than for bad debt
losses, they will be subject to federal income tax at the then current corporate
rate. Retained earnings include approximately $915,000 at June 30, 2007 and
2006, for which federal income tax has not been provided.
NOTE 12: Comprehensive Income
Comprehensive income
represents the sum of net income and items of other comprehensive
income that are reported directly in stockholders equity, such as
the change during the period in the after-tax net unrealized gain or loss on
securities available-for-sale.

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


2007
     
     2006(Dollars
in Thousands)Net
unrealized holding gain or loss arising during the year:Available for
sale securities, net of related income tax (benefit) expense of $144 and $(480), respectively
     
     
     
     $
     239
     
     
     $
     (788
     )Forward
delivery commitments, net of related income tax (benefit) expense of $(1) and $(5), respectively
     
     
     
     
     2
     
     
     
     (7
     )Reclassification adjustment for net realized gain included in net income, net of related income tax expense (benefit) of $(2) and $0,
respectively
     
     
     
     
     (2
     )
     
     
     Other
comprehensive (loss) income
     
     
     
     $
     239
     
     
     $
     (795
     )
 -27-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 13: Supplemental Cash Flow Information


Years Ended June 30,2007
     
     2006(Dollars
in Thousands)Supplemental
Cash Flow InformationCash paid
during the year for interest
     
     
     
     $
     6,018
     
     
     $
     3,948Cash paid
during the year for income taxes
     
     
     
     
     531
     
     
     
     640Non-Cash
Investing ActivitiesDecrease
(increase) in market value of securities available for sale
     
     
     
     $
     (382
     )
     
     $
     1,265Mortgage
servicing rights capitalized
     
     
     
     
     211
     
     
     
     174ESOP shares
released
     
     
     
     
     149
     
     
     
     150
 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, 2007 and 2006, 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 June
4, 2007) 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:

-28-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 14: Regulatory Capital Requirements - continued



(Dollars in Thousands)
     
     
     
     Actual
     
     MinimumCapitalRequirement
     
     Minimum To Be Well Capitalized Under Prompt
Corrective Action ProvisionsAmount
     
     Ratio
     
     Amount
     
     Ratio
     
     Amount
     
     RatioJune 30,
2007:Total
Risk-based Capital to Risk Weighted AssetsConsolidated
     
     
     
     $
     30,382
     
     
     
     17.30
     %
     
     $
     14,048
     
     
     
     8.00
     %
     
     $
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,797
     
     
     
     14.78
     
     
     
     13,967
     
     
     
     8.00
     
     
     
     17,459
     
     
     
     10.00Tier I
Capital toRisk Weighted
AssetsConsolidated
     
     
     
     
     29,899
     
     
     
     17.03
     
     
     
     7,024
     
     
     
     4.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,314
     
     
     
     14.50
     
     
     
     6,984
     
     
     
     4.00
     
     
     
     21,691
     
     
     
     6.00Tier I
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     29,899
     
     
     
     12.15
     
     
     
     7,375
     
     
     
     3.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,314
     
     
     
     10.48
     
     
     
     7,246
     
     
     
     3.00
     
     
     
     12,076
     
     
     
     5.00Tangible
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     29,899
     
     
     
     12.15
     
     
     
     3,687
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,314
     
     
     
     10.48
     
     
     
     3,623
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/AJune 30,
2006:Total
Risk-based Capital to Risk Weighted AssetsConsolidated
     
     
     
     
     29,212
     
     
     
     17.93
     
     
     
     13,035
     
     
     
     8.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,590
     
     
     
     15.79
     
     
     
     12,961
     
     
     
     8.00
     
     
     
     16,202
     
     
     
     10.00Tier I
Capital toRisk Weighted
AssetsConsolidated
     
     
     
     
     28,554
     
     
     
     17.52
     
     
     
     6,518
     
     
     
     4.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,087
     
     
     
     15.48
     
     
     
     6,481
     
     
     
     4.00
     
     
     
     9,721
     
     
     
     6.00Tier I
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     28,554
     
     
     
     12.52
     
     
     
     6,481
     
     
     
     3.00
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,087
     
     
     
     11.16
     
     
     
     6,742
     
     
     
     3.00
     
     
     
     11,237
     
     
     
     5.00Tangible
Capital toAdjusted
Total AssetsConsolidated
     
     
     
     
     28,554
     
     
     
     12.52
     
     
     
     3,420
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/ABank
     
     
     
     
     25,087
     
     
     
     11.16
     
     
     
     3,371
     
     
     
     1.50
     
     
     
     N/A
     
     
     
     N/A
 -29-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
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 30,2007
     
     2006(Dollars
in Thousands)Capital
determined by generally accepted accounting principles
     
     
     
     $
     24,595
     
     
     $
     24,144Unrealized
loss on securities available-for-sale
     
     
     
     
     826
     
     
     
     1,091Unrealized
loss on equity securities
     
     
     
     
     (96
     )
     
     
     (138
     )Unrealized
gain on forward delivery commitments
     
     
     
     
     (11
     )
     
     
     (10
     )Tier I (core)
capital
     
     
     
     
     25,314
     
     
     
     25,087General
allowance for loan losses
     
     
     
     
     483
     
     
     
     503Total risk
based capital
     
     
     
     $
     25,797
     
     
     $
     25,590
 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
$1,716,904 and $1,433,000 to the Company during the years ended June 30, 2007,
and 2006, respectively. The Company had paid four quarterly dividends of $0.22
per share to its shareholders for the year ended June 30, 2007, and four
quarterly dividends of $0.20 per share to its shareholders for the year ended
June 30, 2006.
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 $21,885 during the year ended June 30,
2007 for support services, and an additional $94,056 for computer hardware and
software used by the Bank for its computer network. For the year ended June 30,
2006, expenditures were $33,500 for support services and $20,454 for computer
hardware and software.

During the current fiscal
year 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 June
30, 2007 $1,489,097 had been disbursed.

-30-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
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 $148,730 and $145,230 for
the years ended June 30, 2007 and 2006, 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, 2007 and 2006, the Companys match totaled $38,439 and $39,484,
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, 2007 and 2006, the total
expense was $93,646 and $92,159, respectively. The Company has recorded a
liability for the deferred compensation plan of $858,433 and $813,050 at June
30, 2007 and 2006, 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 $368,048 from Eagle Bancorp and used the funds to
purchase 46,006 shares of common stock in the offering. The Bank makes periodic
contributions to the ESOP sufficient to satisfy the debt service requirements of
the loan that has a ten-year term and bears interest at 8%. The ESOP uses these
contributions, and any dividends received by the ESOP on unallocated shares, to
make principal and interest payments on the loan.

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

Total ESOP expenses of
$134,713 and $134,832 were recognized in fiscal 2007 and 2006, respectively, for
4,600 shares committed to be released to participants during the years ended
June 30, 2007 and 2006 with respect to the plan years ending December 31, 2006
and 2005. The cost of the 11,506 ESOP shares ($92,048 at June 30, 2007) 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 $376,250 at that date.

-31-

EAGLE BANCORP AND SUBSIDIARY


                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 16: Employee Benefits - continued

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

During fiscal 2007 and
2006, 0 and 4,600 shares vested, respectively and were removed from treasury
stock resulting in compensation expense of $0 and $26,450, respectively.

There were no stock options
granted under the Plan as of June 30, 2007.

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.

The notional amount of the
Companys commitments to extend credit at fixed and variable interest rates
were approximately $5,823,000 and $3,326,000 at June 30, 2007 and 2006,
respectively. Fixed rate commitments are extended at rates ranging from 4.75% to
8.25% and 5.00% to 7.90% at June 30, 2007 and 2006, respectively. The Company
has lines of credit representing credit risk of approximately $36,092,000 and
$29,793,000 at June 30, 2007 and 2006, respectively, of which approximately
$18,047,000 and $14,263,000 had been drawn at June 30, 2007 and 2006,
respectively. The Company has credit cards issued representing credit risk of
approximately $624,000 and $596,000 at June 30, 2007 and 2006, respectively, of
which approximately $23,000 and $21,000 had been drawn at June 30, 2007 and
2006, respectively. The Company has letters of credits issued representing
credit risk of approximately $1,532,000 and $1,226,000 at June 30, 2007 and
2006, respectively.

-32-

EAGLE BANCORP AND SUBSIDIARY


                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 17: Financial Instruments and Off-Balance-Sheet Activities- continued

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, 2007 and
2006, the Company had entered into commitments to deliver approximately
$1,201,000 and $918,000 respectively, in loans to various investors, all at
fixed interest rates ranging from 2.75% to 6.50% and 5.00% to 6.50%, at June 30,
2007 and 2006, respectively. The Company had approximately $18,000 and $15,000
of gains deferred as a result of the forward delivery commitments entered into
as of June 30, 2007 and 2006, 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, 2007.

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.

NOTE 18: Fair Value of Financial Instruments

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

-33-

EAGLE BANCORP AND SUBSIDIARY

Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 18: Fair Value of Financial Instruments - continued


June 30,2007
     
     2006CarryingAmount
     
     EstimatedFairValue
     
     CarryingAmount
     
     EstimatedFairValue(Dollars
in Thousands)Financial
Assets:Cash and cash
equivalents
     
     
     
     $
     3,069
     
     
     $
     3,069
     
     
     $
     2,871
     
     
     $
     2,871Securities
available-for-sale
     
     
     
     
     64,774
     
     
     
     64,774
     
     
     
     64,198
     
     
     
     64,198Securities
held-to-maturity
     
     
     
     
     921
     
     
     
     930
     
     
     
     1,018
     
     
     
     1,030FHLB
stock
     
     
     
     
     1,315
     
     
     
     1,315
     
     
     
     1,315
     
     
     
     1,315Mortgage
loans held-for-sale
     
     
     
     
     1,175
     
     
     
     1,175
     
     
     
     918
     
     
     
     918Loans
receivable, net
     
     
     
     
     158,140
     
     
     
     157,883
     
     
     
     140,858
     
     
     
     139,720Mortgage
servicing rights
     
     
     
     
     1,628
     
     
     
     2,114
     
     
     
     1,722
     
     
     
     2,043Cash value of
life insurance
     
     
     
     
     5,764
     
     
     
     5,764
     
     
     
     5,230
     
     
     
     5,230Financial
Liabilities:Deposits
     
     
     
     
     90,460
     
     
     
     90,460
     
     
     
     95,713
     
     
     
     95,713Time
certificates of deposit
     
     
     
     
     89,187
     
     
     
     88,144
     
     
     
     78,629
     
     
     
     77,125Advances from
the FHLB
     
     
     
     
     30,000
     
     
     
     29,717
     
     
     
     22,371
     
     
     
     22,216Subordinated
debentures
     
     
     
     
     5,155
     
     
     
     5,007
     
     
     
     5,155
     
     
     
     4,451
 The following methods and
assumptions were used by the Company in estimating the fair value of the
following classes of financial instruments.

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

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

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

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

-34-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 18: Fair Value of Financial Instruments - continued
Fair values are adjusted
for credit risk based on assessment of risk identified with specific loans, and
risk adjustments on the remaining portfolio based on credit loss experience.

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

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

Cash surrender value of
life insurance  The carrying amount for cash surrender value of life
insurance approximates fair value as policies are recorded at redemption value.

Deposits and time
certificates of deposit  The fair value of deposits with no stated
maturity, such as checking, passbook, and money market, is equal to the amount
payable on demand. The fair value of time certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar maturities.

Advances
from the FHLB & Subordinated Debentures  The fair value of the
Companys advances and debentures are estimated using discounted cash flow
analysis based on the interest rate that would be effective June 30, 2007, 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, 2007 and 2006, of
Eagle Bancorp together with the related condensed statements of income and cash
flows for the years ended June 30, 2007 and 2006.

-35-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006

NOTE 19: Condensed Parent Company Financial Statements - continued




Condensed
Statements of Financial Condition(Dollars in Thousands)




2007
     
     2006AssetsCash and cash
equivalents
     
     
     
     $
     90
     
     
     $
     315Securities
available for sale
     
     
     
     
     4,108
     
     
     
     2,778Investment in
Eagle Bancorp Statutory Trust I
     
     
     
     
     155
     
     
     
     155Investment in
American Federal Savings Bank
     
     
     
     
     24,596
     
     
     
     24,145Other
assets
     
     
     
     
     307
     
     
     
     320Total
assets
     
     
     
     $
     29,256
     
     
     $
     27,713Liabilities and stockholders equityAccounts
payable and accrued expenses
     
     
     
     
     13
     
     
     
     13Long-term
subordinated debt
     
     
     
     
     5,155
     
     
     
     5,155Stockholders Equity
     
     
     
     
     24,088
     
     
     
     22,545Total
liabilities and stockholders equity
     
     
     
     $
     29,256
     
     
     $
     27,713
 Condensed
Statements of Income (Dollars in Thousands)

2007
     
     2006Interest
income
     
     
     
     $
     162
     
     
     $
     88Interest
expense
     
     
     
     
     (311
     )
     
     
     (257
     )Noninterest
expense
     
     
     
     
     (123
     )
     
     
     (114
     )Loss before
income taxes
     
     
     
     
     (272
     )
     
     
     (283
     )Income tax
benefit
     
     
     
     
     (149
     )
     
     
     (135
     )Loss before
equity in undistributed earnings of American Federal Savings Bank
     
     
     
     
     (123
     )
     
     
     (148
     )Equity in
undistributed earnings of American Federal Savings Bank
     
     
     
     
     1,901
     
     
     
     1,933Net
income
     
     
     
     $
     1,778
     
     
     $
     1,785
 -36-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 19: Condensed Parent Company Financial Statements - continued


Condensed
Statements of Cash Flow(Dollars in Thousands)

2007
     
     2006Cash flows
from operating activitiesNet
income
     
     
     
     $
     1,778
     
     
     $
     1,785Adjustments
to reconcile net income to net cash used in operating activities:Equity in
undistributed earnings of American Federal Savings Bank
     
     
     
     
     (1,901
     )
     
     
     (1,933
     )Restricted
stock awards
     
     
     
     
     
     
     
     
     53Other
adjustments, net
     
     
     
     
     10
     
     
     
     (158
     )Net cash used
in operating activities
     
     
     
     
     (113
     )
     
     
     (253
     )Cash flows
from investing activitiesCash
contribution from American Federal Savings Bank
     
     
     
     
     1,717
     
     
     
     1,433Activity in
available for sale securitiesSales
     
     
     
     
     
     
     
     
     Maturities,
prepayments and calls
     
     
     
     
     30
     
     
     
     34Purchases
     
     
     
     
     (1,382
     )
     
     
     (2,795
     )Investment in
Eagle Bancorp Statutory Trust I
     
     
     
     
     
     
     
     
     (155
     )Net cash
provided by (used in) investing activities
     
     
     
     
     365
     
     
     
     (1,483
     )Cash flows
from financing activitiesESOP payments
and dividends
     
     
     
     
     146
     
     
     
     152Payments to
purchase treasury stock
     
     
     
     
     (238
     )
     
     
     (554
     )Net changes
in notes payable advances
     
     
     
     
     
     
     
     
     (2,500
     )Proceeds from
subordinated debentures
     
     
     
     
     
     
     
     
     5,155Dividends
paid
     
     
     
     
     (386
     )
     
     
     (359
     )Net cash
(used in) provided by financing activities
     
     
     
     
     (478
     )
     
     
     1,894Net change in
cash and cash equivalents
     
     
     
     
     (226
     )
     
     
     158Cash and cash
equivalents at beginning of period
     
     
     
     
     316
     
     
     
     157Cash and
cash equivalents at end of period
     
     
     
     $
     90
     
     
     $
     315
 -37-

EAGLE BANCORP AND SUBSIDIARY
                                   Notes to Consolidated Financial Statements June 30, 2007 and 2006
NOTE 20: Quarterly Results of Operations (Unaudited)

The following is a
condensed summary of quarterly results of operations for the years ended June
30, 2007 and 2006:


Year ended June 30, 2007FirstQuarter
     
     SecondQuarter
     
     ThirdQuarter
     
     Fourth Quarter(Dollars
in Thousands, except per share data)Interest and
dividend income
     
     
     
     $
     2,994
     
     
     $
     3,102
     
     
     $
     3,260
     
     
     $
     3,288Interest
expense
     
     
     
     
     1,340
     
     
     
     1,472
     
     
     
     1,532
     
     
     
     1,615Net interest
income
     
     
     
     
     1,654
     
     
     
     1,630
     
     
     
     1,728
     
     
     
     1,673Non interest
income
     
     
     
     
     537
     
     
     
     592
     
     
     
     544
     
     
     
     588Non interest
expense
     
     
     
     
     1,616
     
     
     
     1,661
     
     
     
     1,660
     
     
     
     1,677Income before
income tax expense
     
     
     
     
     575
     
     
     
     561
     
     
     
     612
     
     
     
     584Income tax
expense
     
     
     
     
     153
     
     
     
     100
     
     
     
     159
     
     
     
     142Net
income
     
     
     
     $
     422
     
     
     $
     461
     
     
     $
     453
     
     
     $
     442Comprehensive
income (loss)
     
     
     
     $
     670
     
     
     $
     55
     
     
     $
     156
     
     
     $
     (642
     )Basic
earnings per common share
     
     
     
     $
     0.39
     
     
     $
     0.43
     
     
     $
     0.42
     
     
     $
     0.41Diluted
earnings per common share
     
     
     
     $
     0.35
     
     
     $
     0.38
     
     
     $
     0.37
     
     
     $
     0.37Year ended June 30, 2006Interest and
dividend income
     
     
     
     $
     2,438
     
     
     $
     2,586
     
     
     $
     2,661
     
     
     $
     2,814Interest
expense
     
     
     
     
     768
     
     
     
     896
     
     
     
     981
     
     
     
     1,140Net interest
income
     
     
     
     
     1,670
     
     
     
     1,690
     
     
     
     1,680
     
     
     
     1,674Non interest
income
     
     
     
     
     643
     
     
     
     517
     
     
     
     474
     
     
     
     531Non interest
expense
     
     
     
     
     1,592
     
     
     
     1,637
     
     
     
     1,634
     
     
     
     1,602Income before
income tax expense
     
     
     
     
     721
     
     
     
     570
     
     
     
     520
     
     
     
     603Income tax
expense
     
     
     
     
     222
     
     
     
     125
     
     
     
     117
     
     
     
     165Net
income
     
     
     
     $
     499
     
     
     $
     445
     
     
     $
     403
     
     
     $
     438Comprehensive
loss
     
     
     
     $
     (183
     )
     
     $
     (226
     )
     
     $
     (33
     )
     
     $
     (353
     )Basic
earnings per common share
     
     
     
     $
     0.46
     
     
     $
     0.41
     
     
     $
     0.37
     
     
     $
     0.41Diluted
earnings per common share
     
     
     
     $
     0.41
     
     
     $
     0.37
     
     
     $
     0.33
     
     
     $
     0.36
 NOTE 21: Subsequent Events

The Board announced on July
19, 2007 the declaration of a cash dividend of $0.24 per share for the fourth
quarter. It is payable August 24, 2007 to shareholders of record at the close of
business August 3, 2007. 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.

-38-

SIGNATURES

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




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

Signatures
     
     
     
     Title
     
     Date/s/ Larry A. DreyerLarry A. Dreyer
     
     
     
     Chief Executive
Officer Director (Principal Executive Officer)
     
     9/14/07/s/ Peter J. JohnsonPeter J. Johnson
     
     
     
     President
     
     9/14/07/s/ Clinton J. MorrisonClinton J. Morrison
     
     
     
     Senior Vice
President and Chief Financial Officer
     
     9/14/07/s/ Robert L. PenningtonRobert L. Pennington
     
     
     
     Chairman
     
     9/14/07/s/ Charles G. JacobyCharles G. Jacoby
     
     
     
     Vice
Chairman
     
     9/14/07/s/ Don O. CampbellDon O. Campbell
     
     
     
     Director
     
     9/14/07/s/ Lynn E. DickeyLynn E. Dickey
     
     
     
     Director
     
     9/14/07/s/ James A. MaierleJames A. Maierle
     
     
     
     Director
     
     9/14/07/s/ Thomas J. McCarvelThomas J. McCarvel
     
     
     
     Director
     
     9/14/07
 -39-

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