**Osage**

**Bancshares, Inc.**

 

 

 

 

 

 

 

 

 

 

**2007ANNUALREPORT**

 

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**OSAGE            BANCSHARES, INC.**

**2007            ANNUAL REPORT**

 

 

**TABLE OF CONTENTS**

|   | Page |
|--------|------|

 

| Letter to                            Shareholders | 1 |
|---------------------------------------------------|---|

 

| Corporate                            Profile | 2 |
|----------------------------------------------|---|

 

| Stock Market                            Information | 2 |
|-----------------------------------------------------|---|

 

| Selected Consolidated                            Financial Data | 3 |
|-----------------------------------------------------------------|---|

 

| Selected Quarterly                            Financial Data | 4 |
|--------------------------------------------------------------|---|

 

| Management’s Discussion and                            Analysis

of Financial Condition                            and Results of Operations  |  

5 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|

 

| Report of Independent                            Registered Public Accounting Firm |  F-1 |
|------------------------------------------------------------------------------------|-----------|

 

| Consolidated Financial                            Statements |  F-2 |
|--------------------------------------------------------------|-----------|

 

| Notes to Consolidated                            Financial Statements |  F-8 |
|-----------------------------------------------------------------------|-----------|

 

| Corporate                            Information |          Inside                            Back Cover |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------|

 

 

bank more

 

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**Osage Bancshares, Inc.**

**239 E. Main Street**

**Pawhuska, OK 74056**

 

To Our            Shareholders and Customers:

 

It’s been an exciting year for Osage Federal! We had another            record year in earnings, posting net income of $940,000 for the year ended June 30,            2007, compared to $626,000 for the year ended June 30, 2006. This is a 50.2% increase,            most of which is from our net interest income.

 

We            finished the fiscal year with assets of $123 million, a $10 million, or 9.3% increase            over last year. Net loans were up $11 million over the last year, with strong growth in            one- to four-family and commercial real estate lending. Our deposits were $73 million            at June 30, 2007, an increase of $8 million over the prior year. This growth was in            certificates of deposit, which provide a good source of funding for our lending            activities.

 

We            completed our reorganization on January 17, 2007, eliminating Osage Federal MHC, and            issuing stock in a new holding company, Osage Bancshares, Inc. Our former public            shareholders of Osage Federal Financial, Inc. received 1.5739 shares of Bancshares            stock for their shares, and we issued an additional 2,513,880 shares at $10 per share,            including 201,828 shares purchased by our employee ownership plan. This reorganization            provides us additional capital to continue expanding into the future.

 

We            continue our history of paying quarterly dividends, including an $.08 dividend paid            August 14, 2007 to shareholders of record July 31, 2007.

 

During early 2007, we implemented a new website, osagefed.com, and began            offering free internet banking with free bill pay to follow. We already have 464            customers using internet banking,

 

During this fiscal year, we totally revamped our advertising, focusing            on the theme “bank more”. We are doing billboard, newspaper, cable TV,            direct mail and radio advertising using this tagline with our customers as the focal            point. The campaign has had a positive impact in our marketplace.

 

There has been a lot in the news lately regarding predatory lending, and            we want to assure you, our shareholders, that Osage Federal does not do this type of            lending, nor do we do other risky types of lending that could put our            shareholders’ investments at risk. We are a conservative lender, and that is            reflected in our low nonperforming asset and classified loan numbers.

 

There’s a lot to be excited about in the future, and we’re            glad you’re a part of it with us. Please continue to recommend Osage Federal to            your friends, family, and acquaintances. We appreciate the business!

 

Sincerely,

 

/s/ Mark S.            White

 

Mark            S. White

President & CEO

bank more

 

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**CORPORATEPROFILE**

 

Osage Bancshares, Inc. (the “Company”) is the holding            company for Osage Federal Bank (the “Bank”), a federal savings bank serving            Osage and Washington Counties, Oklahoma from its main office in Pawhuska and branch            office in Bartlesville. The Company is the successor to Osage Federal Financial, Inc.,            the former mid-tier holding company for the Bank, which ceased to exist when the            Bank’s former mutual holding company converted to stock form. As part of the            transaction, each outstanding publicly held share of common stock of Osage Federal            Financial, Inc. was converted into 1.5739 shares of common stock of the Company. The            Company also sold a total of 2,513,880 shares to the public at $10 per share, including            201,828 shares purchased by the Company’s employee stock ownership plan with            funds borrowed from the Company.

             

The            Bank was originally chartered by the State of Oklahoma in 1918 as the National Building            and Loan Association and converted to a federally-chartered savings and loan            association in 1935. Osage Federal Bank’s deposits are insured to applicable            limits by the Federal Deposit Insurance Corporation (“FDIC”) and it is a            member of the Federal Home Loan Bank of Topeka ("FHLB").

 

Our            executive offices are located at 239 East Main Street, Pawhuska, Oklahoma 74056 and our            main telephone number is (918) 287-2919. The Bank maintains a website atwww.osagefed.com.

 

**STOCK MARKET INFORMATION**

 

The            Company’s common stock commenced trading on The Nasdaq Global MarketSM            under the symbol “OSBK” on January 23, 2007. The following table reflects            high and low sale prices as reported on The Nasdaq Global MarketSM for the            Company since January 23, 2007 and high and low bid prices for Osage Federal Financial,            Inc. as reported on the OTC Bulletin Board prior thereto. The OTC Bulletin Board            quotations reflect inter-dealer prices, without retail mark-up, markdown or commission            and may not represent actual transactions. The table also shows the amount of dividends            declared per share for each quarter. Data for periods prior to January 23, 2007 has            been restated to reflect the exchange ratio in the second-step conversion. The            Company’s ability to pay dividends to stockholders is largely dependent upon the            dividends it receives from the Bank which is subject to certain regulatory restrictions            on the payment of dividends.

 

|  

**Quarter Ended** |   | **High** |   |   | **Low** |   |   | **Dividends Declared** |   |
|---------------------------|--------|----------|--------|--------|---------|--------|--------|------------------------|--------|
|                      |   |     |   |   |    |   |   |                   |   |   |   |   |
| June 30, 2007             |   | $        | 9.55   |   |    | $      | 8.15   |                   |   | $ | 0.07 |   |
| March 31, 2007            |   |     | 10.00  |   |    |   | 9.29   |                   |   |   | 0.06 |   |
| December 31, 2006         |   |     | 12.39  |   |    |   | 11.47  |                   |   |   | 0.095 |   |
| September 30, 2006        |   |     | 13.82  |   |    |   | 12.07  |                   |   |   | 0.095 |   |
|                      |   |     |   |   |    |   |   |                   |   |   |   |   |
| June 30, 2006             |   | $        | 13.50  |   |    | $      | 9.21   |                   |   | $ | 0.095 |   |
| March 31, 2006            |   |     | 9.53   |   |    |   | 8.36   |                   |   |   | 0.718 |   |
| December 31, 2005         |   |     | 9.24   |   |    |   | 8.61   |                   |   |   | 0.076 |   |
| September 30, 2005        |   |     | 9.02   |   |    |   | 8.26   |                   |   |   | 0.070 |   |

 

At            June 30, 2007, there were 3,603,590 shares of the Company’s common stock            outstanding and approximately 338 stockholders of record.            This number does not reflect the number of persons or entities who held stock in            nominee or street name through various brokerage firms.

 

2

 

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**SELECTED CONSOLIDATED FINANCIAL            DATA**

 

|                                                                           |   | **At or For the Year Ended June 30,**                  |     |
|--------------------------------------------------------------------------------|--------|--------------------------------------------------------|----------|
|                                                                           |   | **2007**                                               |     | **2006** |   | **2005** |   |
|                                                                           |   | **(Dollars in thousands,**

**except per share data)** |     |
| **Balance Sheet Data:**                                                        |   |                                                   |     |   |   |   |   |   |   |   |
| Assets                                                                         |   | $                                                      | 122,684  |   | $ | 112,237 |   | $ | 98,693 |   |
| Loans receivable, net                                                          |   |                                                   | 88,721   |   |   | 77,927 |   |   | 65,356 |   |
| Securities                                                                     |   |                                                   | 22,874   |   |   | 26,056 |   |   | 26,191 |   |
| Cash and cash equivalents                                                      |   |                                                   | 4,970    |   |   | 2,455 |   |   | 2,224 |   |
| Deposits                                                                       |   |                                                   | 72,704   |   |   | 64,310 |   |   | 62,084 |   |
| FHLB advances and other borrowings                                             |   |                                                   | 13,000   |   |   | 33,350 |   |   | 21,650 |   |
| Stockholders’ equity                                                     |   |                                                   | 35,198   |   |   | 13,128 |   |   | 13,584 |   |
| **Summary of Operations:**                                                     |   |                                                   |     |   |   |   |   |   |   |   |
| Interest income                                                                |   | $                                                      | 7,006    |   | $ | 5,821 |   | $ | 4,816 |   |
| Interest expense                                                               |   |                                                   | 3,336    |   |   | 2,814 |   |   | 2,028 |   |
| Net interest income                                                            |   |                                                   | 3,670    |   |   | 3,007 |   |   | 2,788 |   |
| Provision for loan losses                                                      |   |                                                   | 10       |   |   | 27 |   |   | — |   |
| Net interest income after provision for loan                            losses |   |                                                   | 3,660    |   |   | 2,980 |   |   | 2,788 |   |
| Noninterest income                                                             |   |                                                   | 666      |   |   | 659 |   |   | 647 |   |
| Noninterest expense                                                            |   |                                                   | 2,863    |   |   | 2,668 |   |   | 2,522 |   |
| Income before income taxes                                                     |   |                                                   | 1,463    |   |   | 971 |   |   | 913 |   |
| Provision for income taxes                                                     |   |                                                   | 523      |   |   | 345 |   |   | 308 |   |
| Net income                                                                     |   | $                                                      | 940      |   | $ | 626 |   | $ | 605 |   |
| **Per Share Data (1):**                                                        |   |                                                   |     |   |   |   |   |   |   |   |
| Earnings per share:                                                            |   |                                                   |     |   |   |   |   |   |   |   |
| Basic                                                                          |   | $                                                      | 0.28     |   | $ | 0.19 |   | $ | 0.17 |   |
| Diluted                                                                        |   |                                                   | 0.28     |   |   | 0.19 |   |   | 0.17 |   |
| Dividends per share(2)                                                         |   |                                                   | 0.43     |   |   | 1.51 |   |   | 0.275 |   |
| **Performance Ratios:**                                                        |   |                                                   |     |   |   |   |   |   |   |   |
| Return on average assets                                                       |   |                                                   | 0.79     | % |   | 0.60 | % |   | 0.66 | % |
| Return on average equity                                                       |   |                                                   | 3.92     |   |   | 4.63 |   |   | 4.37 |   |
| Interest rate spread                                                           |   |                                                   | 2.34     |   |   | 2.46 |   |   | 2.72 |   |
| Net interest margin                                                            |   |                                                   | 3.19     |   |   | 2.96 |   |   | 3.16 |   |
| Average interest-earning assets to averageInterest-bearing liabilities         |   |                                                   | 129.17   | % |   | 118.05 | % |   | 119.10 | % |
| Efficiency ratio                                                               |   |                                                   | 66.04    |   |   | 72.78 |   |   | 73.44 |   |
| Dividend payout ratio(2)                                                       |   |                                                   | 71.86    |   |   | 157.08 |   |   | 30.68 |   |
| **Asset Quality Ratios:**                                                      |   |                                                   |     |   |   |   |   |   |   |   |
| Non-performing loans to total loans, net                                       |   |                                                   | 0.02     | % |   | 0.01 | % |   | 0.13 | % |
| Non-performing assets to total assets                                          |   |                                                   | 0.05     |   |   | 0.05 |   |   | 0.12 |   |
| Net charge-offs to average loans outstanding                                   |   |                                                   | 0.01     |   |   | 0.03 |   |   | 0.03 |   |
| Allowance for loan losses to total loans                                       |   |                                                   | 0.45     |   |   | 0.51 |   |   | 0.59 |   |
| Allowance for loan losses to non-performing                            loans   |   |                                                   | 2,985.40 |   |   | 3,563.35 |   |   | 454.53 |   |
| **Capital Ratios:**                                                            |   |                                                   |     |   |   |   |   |   |   |   |
| Average equity to average assets                                               |   |                                                   | 20.10    | % |   | 12.85 | % |   | 15.08 | % |
| Equity to assets at period end                                                 |   |                                                   | 28.69    |   |   | 11.70 |   |   | 13.76 |   |
|                                                                                |        |                                                        |          |  |  |  |  |  |  |  |

            ___________
| (1) |  | Per share data for periods prior                    to January 17, 2007 has been adjusted for the exchange ratio in the second-step                    conversion of Osage Federal MHC. |  |
|-----|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|
| (2) |  | For periods prior to January 17, 2007 based on                    dividends paid per public share of Osage Federal Financial, Inc.                                                      |  |

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**SELECTED QUARTERLY FINANCIAL DATA**

 

 

|                                                                           |   |                                         |      |               |   |              |   |               |      |   |   |      |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------------|-----------|--------------------|--------|-------------------|--------|--------------------|-----------|--------|--------|-----------|--------|
|                                                                           |   | **First                            Quarter** |      | **Second Quarter** |   | **Third Quarter** |   | **Fourth Quarter** |      |
| **Year Ended June 30, 2007**                                                   |   |                                         |      |               |   |              |   |               |      |   |   |      |   |
|                                                                           |   |                                         |      |               |   |              |   |               |      |   |   |      |   |
| Interest income                                                                |   | $                                            | 1,661,940 |               | $      | 1,702,787         |   | $                  | 1,798,234 |   | $      | 1,843,296 |   |
| Interest expense                                                               |   |                                         | 892,556   |               |   | 905,587           |   |               | 780,899   |   |   | 757,129   |   |
| Net interest income                                                            |   |                                         | 769,384   |               |   | 797,200           |   |               | 1,017,335 |   |   | 1,086,167 |   |
| Provision for loan losses                                                      |   |                                         | —   |               |   | 10,000            |   |               | —   |   |   | —   |   |
| Net interest income after provision for loan                            losses |   |                                         | 769,384   |               |   | 787,200           |   |               | 1,017,335 |   |   | 1,086,167 |   |
| Noninterest income                                                             |   |                                         | 170,971   |               |   | 159,721           |   |               | 164,030   |   |   | 170,978   |   |
| Noninterest expense                                                            |   |                                         | 679,568   |               |   | 676,762           |   |               | 721,086   |   |   | 785,818   |   |
| Income before income taxes                                                     |   |                                         | 260,787   |               |   | 270,159           |   |               | 460,279   |   |   | 471,327   |   |
| Income taxes                                                                   |   |                                         | 93,246    |               |   | 89,645            |   |               | 168,134   |   |   | 171,571   |   |
| Net income                                                                     |   | $                                            | 167,541   |               | $      | 180,514           |   | $                  | 292,145   |   | $      | 299,756   |   |
| Basic and diluted earnings per share                                           |   | $                                            | 0.05      |               | $      | 0.05              |   | $                  | 0.09      |   | $      | 0.09      |   |
|                                                                           |   |                                         |      |               |   |              |   |               |      |   |   |      |   |
|                                                                           |   | **First                            Quarter** |      | **Second Quarter** |   | **Third Quarter** |   | **Fourth Quarter** |      |
| **Year Ended June 30, 2006**                                                   |   |                                         |      |               |   |              |   |               |      |   |   |      |   |
|                                                                           |   |                                         |      |               |   |              |   |               |      |   |   |      |   |
| Interest income                                                                |   | $                                            | 1,367,340 |               | $      | 1,432,534         |   | $                  | 1,447,498 |   | $      | 1,574,199 |   |
| Interest expense                                                               |   |                                         | 617,337   |               |   | 673,099           |   |               | 711,708   |   |   | 811,944   |   |
| Net interest income                                                            |   |                                         | 750,003   |               |   | 759,435           |   |               | 735,790   |   |   | 762,255   |   |
| Provision for loan losses                                                      |   |                                         | —   |               |   | 12,000            |   |               | —   |   |   | 15,000    |   |
| Net interest income after provision for loan                            losses |   |                                         | 750,003   |               |   | 747,435           |   |               | 735,790   |   |   | 747,255   |   |
| Noninterest income                                                             |   |                                         | 176,176   |               |   | 165,859           |   |               | 155,531   |   |   | 161,158   |   |
| Noninterest expense                                                            |   |                                         | 663,350   |               |   | 666,732           |   |               | 692,208   |   |   | 645,805   |   |
| Income before income taxes                                                     |   |                                         | 262,829   |               |   | 246,562           |   |               | 199,113   |   |   | 262,608   |   |
| Income taxes                                                                   |   |                                         | 96,910    |               |   | 84,494            |   |               | 70,299    |   |   | 92,952    |   |
| Net income                                                                     |   | $                                            | 165,919   |               | $      | 162,068           |   | $                  | 128,814   |   | $      | 169,656   |   |
| Basic and diluted earnings per share                                           |   | $                                            | 0.05      |               | $      | 0.05              |   | $                  | 0.04      |   | $      | 0.05      |   |

             

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF            FINANCIAL**

**CONDITION AND RESULTS OF            OPERATIONS**

 

The            following discussion of the consolidated financial condition and results of operations            of the Company should be read in conjunction with the accompanying Consolidated            Financial Statements.

 

**Forward Looking Statements**

 

The            Private Securities Litigation Reform Act of 1995 contains safe harbor provisions            regarding forward-looking statements. When used in this discussion, the words            “believes”, “anticipates”, “contemplates”,            “expects”, and similar expressions are intended to identify forward-looking            statements. Such statements are subject to certain risks and uncertainties which could            cause actual results to differ materially from those projected. Those risks and            uncertainties include changes in interest rates, risks associated with the ability to            control costs, expenses, and general economic conditions. We undertake no obligation to            publicly release the results of any revisions to those forward-looking statements which            may be made to reflect events or circumstances after the date hereof or to reflect the            occurrence of unanticipated events.

 

**General**

 

Our            results of operations depend primarily on our net interest income, which is the            difference between the interest we earn on our interest-earning assets and the interest            we pay on interest-bearing liabilities. Net interest income is a function of the            relative average balances of our loans and investment securities versus deposits and            borrowed funds outstanding in any one period and the yields earned on those loans and            investments and the cost of those deposits and borrowed funds. Our interest-earning            assets consist primarily of residential and non-residential mortgage loans, commercial            loans, consumer loans, residential mortgage-related securities and federal funds sold.            Interest-bearing liabilities consist primarily of retail deposits and borrowings from            the FHLB. Our results of operations also depend on our provision for loan losses,            non-interest income, non-interest expense and effective tax rate. Non-interest income            includes service fees and charges. Non-interest expense includes salaries and employee            benefits, occupancy expenses and other general and administrative expenses.

 

Our            results of operations may also be affected significantly by changes in market interest            rates, economic and competitive conditions in our market area, and changes in            applicable laws, regulations or governmental policies. Furthermore, because our lending            activity is concentrated in loans secured by real estate located in Oklahoma, downturns            in the regional economy encompassing Oklahoma could have a negative impact on our            earnings.

 

**Overview**

 

On            January 17, 2007, the Company completed its initial public offering in which it sold            2,513,880 shares of its common stock for $10 per share including 201,828 shares            purchased by the Company’s employee stock ownership plan with funds borrowed from            the Company. Net proceeds from the offering were approximately $21.5 million, after            giving effect for the employee stock ownership plan loan. The offering was conducted in            connection with the stock conversion of Osage Federal MHC, the former mutual holding            company for Osage Federal Bank. As part of the transactions, each share of Osage            Federal’s former mid-tier holding company, Osage Federal Financial, Inc. was            converted to 1.5739 shares of the Company’s common stock and

 

5

 

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the            Company succeeded to the business of Osage Federal Financial, Inc. All per share data            for periods prior to January 17, 2007 has been restated to reflect this exchange ratio,            unless otherwise stated.

 

With            the capital raised in its offering, the Company has been able to grow its            interest-earning assets and improve its net interest margin. Loans receivable, net            increased 13.9% from June 30, 2006 to June 30, 2007. During this period, we have also            decreased the percentage of our assets invested in securities and other liquid            investments that generally yield less than mortgage loans. Securities decreased from            23.2% of assets at June 30, 2006 to 18.6% of assets at June 30, 2007. The proceeds            from the 2004 offering of Osage Federal Financial, Inc. were originally invested in            high-quality collateralized mortgage obligations which have been reduced through normal            paydowns, while the proceeds from the 2007 reorganization have been used primarily to            pay off high-rate, short-term FHLB advances and to fund new loan growth. We have            continued our certificate of deposit program called “You Pick ‘Em,”            which allows a depositor to choose a certificate term of 6 to 15 months, and receive            the same rate no matter which term is chosen. This allows us to retain and attract            customers, but does not lock us into paying high rates for long periods of time. In the            current rate environment, our strategy has been to attract shorter-term deposits,            paying less than like-term Federal Home Loan Bank advances. We also offer higher rates,            slightly below like-term FHLB advances, for higher-balance certificates with terms of            9, 11, 13, 18, 25, 30, 37, 49, and 61 months. Our strategy is to retain and attract            customers who are rate-sensitive, without driving up rates on all of our standard            certificate of deposit products. As of June 30, 2007, we have approximately 23% of our            certificates in these odd-termed categories, and 15% in the “You Pick            ‘Em” program. Certificates of deposit increased $10.8 million from June 30,            2006 to June 30, 2007. We continued to use long-term advances from the FHLB to            stabilize our funding costs. Although our interest rate spread continued to narrow, our            net interest margin improved from 2.96% for fiscal year 2006 to 3.19% for the fiscal            year ended June 30, 2007, and net interest income grew to $3.7 million, an increase of            $663,000, or 22.0% over the same period last year. We hold most of our fixed-rate loans            in our portfolio, but have recently begun selling our 30 year fixed rate conforming            loans into the secondary market to decrease interest rate risk.

 

**Business Strategy**

 

Our            business strategy has been to operate as a well-capitalized independent financial            institution dedicated to providing quality service at competitive prices and            emphasizing local control and decision-making. Generally, we have sought to implement            this strategy by maintaining a substantial part of our assets in loans secured by one-            to four-family residential real estate located in our market area. To the extent that            new deposits have exceeded loan originations, we have invested these deposits primarily            in mortgage-backed securities. Because of our significant loan portfolio growth again            this fiscal year, we have not purchased any mortgage-backed securities that we intend            to hold to maturity. We intend to continue to emphasize a variety of deposit and loan            products, with the latter consisting primarily of one- to four-family mortgages, and            multi-family and commercial real estate mortgage loans. We also intend to continue to            sell to Freddie Mac, a U.S. government-sponsored enterprise in the business of            purchasing residential mortgages from thrifts and other seller-servicers, most of our            conforming 30 year one- to four-family residential loans.

 

During the past three years, short-term interest rates have increased            334 basis points, while 30-year Treasury rates have actually*decreased*18 basis points. This caused the            “yield curve” to become inverted;*i.e.*, short-term rates have actually been            higher than long-term rates. Although longer term rates have recently risen, the yield            curve remains fairly flat, with only a 63

 

6

 

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basis point positive spread between the 30-year and the one month            Treasury rates at June 30, 2007. As a comparison, the average difference between            30-year and one month Treasury rates for the period of June 30, 1995 to June 30, 2005            was 211 basis points. From June 30, 2005 to June 30, 2007, this difference was 35 basis            points. This unfavorable interest rate scenario has compressed our net interest margin,            because we are typically attracting shorter-term certificates of deposit to invest in            longer-term loans. More than offsetting this compression has been the positive impact            of the injection of capital during our reorganization. A drop in short-term rates would            positively affect our net interest margin. To counter any rise in long-term rates, we            continue to emphasize the origination of shorter term fixed-rate loans and            adjustable-rate loans for the loan portfolio consistent with our asset/liability            management policies.

 

In            our local market, the oil business, the Wal-Mart distribution center, and casino            gambling have all contributed to economic growth. Several area businesses have had            expansions and have hired significant numbers of employees. Although we are not            generally a direct beneficiary of this hiring, we have generated substantial business            from related commercial growth in the area. The marketplace, especially in            Bartlesville, has and will be impacted by the large number of “spec” homes            (those built that are not pre-sold). There are a large number of spec homes currently            available in Bartlesville that have been completed for several months to over a year.            We do a limited amount of this type of lending to reputable builders, generally in the            under $300,000 price range. At June 30, 2007, only one of our spec home loans had been            completed and held for over a year, and it was sold in July 2007.

 

For            the past several years, we have emphasized the origination of shorter-term and            adjustable-rate loans for our portfolio, including commercial real estate, consumer,            commercial, construction and home equity loans, in order to improve the yield and            interest sensitivity of earning assets. We have employed a variety of strategies to            control funding costs including seeking lower cost non-certificate accounts, using            shorter-duration certificate accounts and laddering the maturities of our FHLB            advances.

 

During fiscal year 2007, we implemented free internet banking, (bill pay            will be added soon), and completed our website at osagefed.com. As of August 2007, 464            of our existing and new customers have enrolled in internet banking. These products are            new tools that will help us attract and maintain customers.

 

During fiscal year 2005, we began a wholesale strategy in which we used            short-term FHLB borrowings to acquire a diversified portfolio of high-quality fixed-            and variable-rate mortgage-related securities over the next several years. Our            objective was to build an interest sensitive portfolio that will enhance earnings in            all rate environments. Because of the inverted yield curve, our short-term borrowing            costs exceeded the yields from these securities. When we raised capital in our            reorganization, we used part of the proceeds to pay off these short-term borrowings. We            are no longer participating in the wholesale strategy, but continue to hold the            securities. Because they are at adjustable rates, many have repriced upwards this last            fiscal year.

 

**Management of Interest Rate Risk and Market Risk**

 

***Qualitative Analysis.***Because the            majority of our assets and liabilities are sensitive to changes in interest rates, a            significant form of market risk for us is interest rate risk, or changes in interest            rates. We are vulnerable to an increase in interest rates to the extent that            interest-bearing liabilities mature or reprice more rapidly than interest-earning            assets. Our assets include long-term (primarily 15-year), fixed-rate loans and            investments, while our primary source of funds is

 

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deposits with substantially shorter maturities. Although having            interest-bearing liabilities that reprice more frequently than interest-earning assets            is generally beneficial to net interest income during a period of declining interest            rates, this type of an asset/liability mismatch is generally detrimental during periods            of rising interest rates.

 

The            Board of Directors has established an Asset/Liability Committee that consists of            President and CEO Mark S. White, Executive Vice President and Chief Lending Officer            Richard Trolinger, Senior Vice President Martha Hayes, Vice President, Chief Financial            Officer and Treasurer Sue Allen Smith, Assistant Vice President Glenna Leik, and New            Accounts Manager Evelyn Laird. The committee meets on a monthly basis to review current            investments; average lives, durations and repricing frequencies of loans and            securities; loan and deposit pricing and production volumes and alternative funding            sources; interest rate risk analysis; liquidity and borrowing needs; and a variety of            other asset and liability management topics. A synopsis of each meeting is reported to            the full Board monthly.

 

To            reduce the effect of interest rate changes on net interest income, we have adopted            various strategies intended to enable us to improve the matching of interest-earning            asset maturities to interest-bearing liability maturities. The main elements of these            strategies include seeking to:

 

|   | (1) | originate loans with adjustable-rate features or                            fixed-rate loans with short maturities, such as commercial real estate,                            consumer, commercial, , construction, and home equity loans; |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | use odd-termed, shorter-duration certificates which                            allow us to retain customers but protect us from long-term, high-rate                            deposits; |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | attract more core deposits (i.e., transaction and                            savings accounts) which tend to be less interest rate sensitive;                            and |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | continue our practice of “laddering” FHLB                            advances. |
|--------|-----|--------------------------------------------------------------------------------------------|

 

***Quantitative Analysis.***Exposure to            interest rate risk is actively monitored by management. Osage Federal Bank’s            objective is to maintain a consistent level of profitability within acceptable risk            tolerances across a broad range of potential interest rate environments. We use the            Office of Thrift Supervision Net Portfolio Value (“NPV”) Model and other            models to monitor our exposure to interest rate risk which calculates changes in net            portfolio value. These results are reported to the Board of Directors quarterly.            Reports generated from assumptions provided and modified by management are reviewed by            the Asset/Liability Management Committee and reported to the Board of Directors            quarterly. The Interest Rate Sensitivity of Net Portfolio Value Report shows the degree            to which balance sheet line items and the net portfolio value are potentially affected            by a 50 to 300 basis point (1/100th of a percentage point) upward and a 50 to 200 basis            point downward shift (shock) in the Treasury yield curve.

 

The            following table presents Osage Federal Bank’s NPV as of June 30, 2007. The NPV            was calculated by the Office of Thrift Supervision, based on information provided by            Osage Federal Bank. At June 30, 2007, Osage Federal Bank was in compliance with the            interest rate risk limits established by the board of directors.

 

8

 

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|                        |   |                       |   |         |                                                         |    |         |   |                          |   |                   |   |   |   |    |   |   |
|-----------------------------|--------|----------------------------|--------|--------------|--------------------------------------------------------------|---------|--------------|--------|-------------------------------|--------|------------------------|--------|--------|--------|---------|--------|--------|
|                        |   | **Net Portfolio Value**    |   |         | **Net Portfolio Value**

**as % of Present Value of Assets** |
| **Change in**

**Rate (1)** |   | **$ Amount**               |   | **$ Change** |                                                         |    | **% Change** |   | **Net Portfolio Value Ratio** |   | **Basis Point Change** |
|                        |   | **(Dollars in thousands)** |   |         |                                                         |    |         |   |                          |   |                   |   |
|                        |   |                       |   |         |                                                         |    |         |   |                          |   |                   |   |   |   |    |   |   |
| +300  bp               |   | $                          | 20,314 |         | $                                                            | (6,951  | )            |   | (25                           | )%     |                   | 17.27  | %      |   | (430    | )      | bp     |
| +200  bp               |   |                       | 22,754 |         |                                                         | (4,511  | )            |   | (17                           | )%     |                   | 18.86  |   |   | (271    | )      | bp     |
| +100  bp               |   |                       | 25,135 |         |                                                         | (2,130  | )            |   | (8                            | )%     |                   | 20.33  |   |   | (124    | )      | bp     |
| +  50  bp         |   |                       | 26,261 |         |                                                         | (1,004  | )            |   | (4                            | )%     |                   | 21.00  |   |   | (57     | )      | bp     |
| 0 bp                        |   |                       | 27,265 |         |                                                         | — |         |   | —                       |   |                   | 21.57  |   |   | — |   | bp     |
| -50 bp                      |   |                       | 28,170 |         |                                                         | 905     |         |   | 3                             | %      |                   | 22.07  |   |   | 50      |   | bp     |
| -100 bp                     |   |                       | 28,922 |         |                                                         | 1,657   |         |   | 6                             | %      |                   | 22.47  |   |   | 89      |   | bp     |
| -200 bp                     |   |                       | 29,710 |         |                                                         | 2,445   |         |   | 9                             | %      |                   | 22.80  |   |   | 123     |   | bp     |
|                        |   |                       |   |         |                                                         |    |         |   |                          |   |                   |   |   |   |    |   |   |
|                             |        |                            |        |              |                                                              |         |              |        |                               |        |                        |        |        |        |         |        |        |  |  |  |  |  |  |

 

__________

|   | (1) | The –300 bp scenario is not reported due to the                            low prevailing interest rate environment. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------|

             

The            above analysis indicates that the net portfolio value of Osage Federal Bank would be            more adversely affected by a 100 basis point increase in market rates than by a 100            basis point decrease in market rates. The report also indicates that throughout the            rate scenarios analyzed, Osage Federal Bank’s net portfolio value would remain in            excess of 8% of the present value of its assets which is within the guidelines adopted            by our board of directors. To reduce our future interest-rate risk, we have originated            more floating rate loans. We have also sold some loans in the secondary market if we            anticipated that they would have long lives. To reduce our future interest-rate risk,            we began offering deposit products which have short odd terms, which will revert to a            standard term at maturity, generally at much lower rates. We have maintained a ladder            of maturing FHLB advances extending in excess of six years.

 

Future interest rates and their effect on NPV or net interest income are            not predictable. Computations of prospective effects of hypothetical interest rate            changes are based on numerous assumptions, including relative levels of market interest            rates, prepayments, and deposit run-offs, and should not be relied upon as indicative            of actual results. There are inherent shortcomings in this type of computation.            Although individual assets and liabilities may have similar maturities or periods of            repricing, they may react at different times and in different degrees to changes in            market interest rates. The interest rates on some adjustable-rate assets and            liabilities may fluctuate in advance of changes in market interest rates, while rates            on other adjustable-rate assets and liabilities may lag behind changes in market            interest rates depending on the index used to set rates. Assets, such as            adjustable-rate mortgages, generally have features that restrict changes in interest            rates on a short-term basis and over the life of the asset. In the event of a change in            interest rates, prepayments and early withdrawal levels could deviate significantly            from those assumed in making calculations set forth above. Additionally, an increased            credit risk may result as the ability of many borrowers to service their debts may            decrease in the event of an interest rate increase.

 

9

 

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**Critical Accounting Policies, Judgments and Estimates**

 

The            accounting and reporting policies of the Company conform with the accounting principles            generally accepted in the United States of America and general practices within the            financial services industry. This requires management to make estimates and assumptions            that affect the amounts reported in the financial statements and the accompanying            notes. Actual results could differ from those estimates. These policies are critical            because they are highly dependent upon subjective or complex judgments, assumptions and            estimates.

 

Management bases its estimates and judgments on historical experience            and on various other factors that are believed to be reasonable under the            circumstances, the results of which form the basis for making judgments about the            carrying values of assets and liabilities that are not readily apparent from other            sources. There can be no assurance that actual results will not differ from those            estimates. If actual results are different than management’s judgments and            estimates, our financial results could change, and such change could be material to            us.

 

***Allowance for Loan Losses.***We            consider that the determination of the allowance for loan losses involves a higher            degree of judgment and complexity than other significant accounting policies. The            balance in the allowance for loan losses is determined based on management’s            review and evaluation of the loan portfolio in relation to past loss experience, peer            group comparisons, the size and composition of the portfolio, current economic events            and conditions, and other pertinent factors, including management’s assumptions            as to future delinquencies, recoveries and losses. All of these factors may be            susceptible to significant change. To the extent actual outcomes differ from            management’s estimates, additional provisions for loan losses may be required            that would adversely impact earnings in future periods.

 

Credit losses are an inherent part of our business and, although we            believe the methodologies for determining the allowance for loan losses and the current            level of the allowance are adequate, it is possible that there may be unidentified            losses in the portfolio that may become evident only at a future date. Additional            provisions for such losses, if necessary, would negatively impact earnings.

 

For            purposes of our allowance for loan loss methodology, we categorize our loans into one            of nine categories: residential fixed-rate mortgages, adjustable-rate loans (including            residential and nonresidential loans), second mortgages, commercial business,            commercial real estate, construction, automobile, mobile home, and other consumer            loans. The indicated loss factors resulting from this analysis are applied to determine            a level for each of the nine categories of loans. In addition, we individually assign            loss factors to all loans that have been identified as having loss attributes, as            indicated by deterioration in the financial condition of the borrower or a decline in            underlying collateral values.

 

***Intangible Assets.***Intangible assets            such as mortgage servicing rights are subject to periodic impairment tests and            amortization of the asset through a charge to expense. To the extent the outcome of the            impairment tests differ from the carrying value, additional charges to expense could be            required to reduce the carrying value to fair value, which would adversely impact            earnings in future periods. For purposes of measuring impairment, mortgage servicing            rights are stratified based on the predominant risk characteristics of the underlying            loans. The predominant characteristics currently used for stratification are            contractual maturity and interest rate.

 

10

 

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**Comparison of Financial Condition at June 30, 2007 and June 30,            2006**

 

Our            total assets increased by $10.5 million to $122.7 million at June 30, 2007 from $112.2            million at June 30, 2006 primarily due to the $21.5 million in equity raised in our            reorganization. Loans receivable, net increased to $88.7 million at June 30, 2007 from            $77.9 million at June 30, 2006. One- to four-family mortgages increased $7.3 million,            or 13.2%, to $62.0 million at June 30, 2007 from $54.7 million at June 30, 2006.            Nonresidential real estate loans increased $4.8 million, or 66.2% to $12.0 million at            June 30, 2007 from $7.2 million at June 30, 2006. We have funded loans for some medical            and dental buildings this year, as well as some duplexes and residential development            loans. Construction loans decreased $1.9 million, or 39.7%, to $2.8 million at June 30,            2007 from $4.7 million at June 30, 2006. In 2006, we had funded construction of a            dental building, and when it converted to permanent financing, we sold half of the            loan. There were no loans held for sale at June 30, 2007, and $156,000 loans held for            sale at June 30, 2006. We held most of the fixed-rate, one- to four-family loans that            we originate in our portfolio.

 

Cash            and cash equivalents (consisting primarily of federal funds sold and our balances in            our correspondent bank account) increased by $2.5 million, or 102.4%, to $5.0 million            at June 30, 2007 from $2.5 million at June 30, 2006. This higher balance reflects part            of the reorganization proceeds, which is invested in federal funds sold. Our            correspondent bank determines our daily funds availability, and they either sell or            purchase federal funds on our behalf. These are overnight investments (federal funds            sold) or overnight borrowings (federal funds purchased). At June 30, 2007 we had            federal funds sold of $2.8 million. These funds are placed at various institutions to            minimize credit risk. Securities decreased to $22.9 million at June 30, 2007 from $26.1            million at June 30, 2006. This decrease was due to normal paydowns in the            held-to-maturity and available-for-sale portfolios, which consist of mortgage-backed            securities, private placement pass-through securities, and collateralized mortgage            obligations. Because of the current and near-term anticipated rate environment, we have            stopped the wholesale strategy that we began in 2005.

 

Our            total liabilities decreased $11.8 million due to a decrease in FHLB borrowings to $13.0            million at June 30, 2007 from $33.4 million at June 30, 2006. We used part of the            proceeds from the reorganization to pay off our short-term borrowings. Some of these            borrowings were for the wholesale securities strategy begun in 2005. Total deposits            increased to $72.7 million at June 30, 2007 from $64.3 million at June 30, 2006, an            $8.4 million, or 13.1% increase. Certificates of deposit increased to $51.5            million from $40.7 million at June 30, 2006. We have been promoting our odd-termed            certificates and “You Pick ‘Em” specials, and have accumulated $19.6            million of deposits in these categories. There has been some change in the mix of our            checking and money market deposits. All categories of nonmaturity deposits have            decreased from the prior year. Noninterest bearing accounts, which are included in            checking accounts, have decreased $629,000 to $4.2 million at June 30, 2007, compared            to $4.8 million at June 30, 2006. Our high-yield, high balance NOW accounts had            balances of $1.0 million as of June 30, 2007, a decrease of $446,000 from June 30,            2006. Money market accounts have decreased $921,000 between the same periods, and            passbook savings accounts have decreased $497,000. We have seen some of these            nonmaturity deposits transferred to our higher-yielding certificates, and we have lost            some of these funds to financial institutions with much more aggressive money market            rates. Recently, we advertised a substantially higher rate on our high-yield, high            balance NOW rate in order to retain and attract balances. We believe that with more            widespread use of internet banking, we can significantly impact all of these            nonmaturity balances.

 

11

 

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Stockholders’ equity increased $22.1 million to $35.2 million at            June 30, 2007 from $13.1 million at June 30, 2006, due to the proceeds from our            reorganization in January 2007. Equity also benefited from earnings of $940,000, while            net dividends decreased equity by $658,000.

 

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

 

***General.***Net income for the year            ended June 30, 2007 was $940,000 ($.28 per diluted share), a $314,000 increase compared            to net income of $626,000 ($0.19 per diluted share) for fiscal 2006. The increase in            net income resulted mainly from an increase in net interest income.

 

***Interest Income.***Total interest            income increased by $1.2 million, or 20.4%, to $7.0 million for the year ended June 30,            2007 from $5.8 million for the year ended June 30, 2006 primarily due to a $13.5            million increase in average earning assets and a 36 basis point increase in yield on            those assets. The average balance of total interest-earning assets increased to $115.2            million for 2007 from $101.7 million for 2006. The increase in average earning assets            was attributable to an $11.5 million, or 16.2% increase in the average volume of loans,            and a $2.0 million, or 6.5% increase in the average balance of securities and deposits            with other financial institutions. The increase in this category of earning assets was            driven by growth in federal funds sold and the available-for-sale mutual fund,            partially offset by decreases in both available-for-sale and held to maturity            investment securities. We anticipate that these investment securities balances will            continue to decrease as paydowns are received, since we have no immediate plans to            purchase other securities. The average yield on the loan portfolio has increased 17            basis points to 6.66% between the periods, and the average yield on securities and            deposits with other financial institutions has increased 66 basis points to 4.63%            between the periods. Many of our securities and variable-rate loans have repriced            upwards during the year.

 

***Interest Expense.***Total interest            expense increased by $522,000, or 18.6%, to $3.3 million for the year ended June 30,            2007 compared to $2.8 million for the year ended June 30, 2006. Our average            interest-bearing liabilities, including most deposits and FHLB advances, increased $3.0            million to $89.2 million for the year ended June 30, 2007, compared to $86.2 million            for the same period in 2006. Of those averages, advances are down $7.0 million and            certificates of deposit are up $11.8 million. Our money market account average balances            decreased $1.1 million between the two periods, and interest-bearing checking balances            decreased $1.0 million The cost of our total interest-bearing liabilities has increased            47 basis points from the prior period, from 3.27% to 3.74%. This was due to a            combination of two factors: use of short-term advances in a rising short-term interest            rate environment during the first half of the year; and the transfer of funds from            checking or money market accounts into higher-yielding certificates.

 

***Net Interest Income.***Net interest            income increased by $663,000, or 22.0%, to $3.7 million for the year ended June 30,            2007 from $3.0 million for fiscal 2006. The net interest rate spread decreased to 2.34%            for 2007 from 2.46% for 2006, while the net interest margin increased to 3.19% from            2.96%. The decrease in the spread resulted from the higher cost of short-term            borrowings in the first half of the year and a change in the mix of deposits into            higher-cost certificates. The increase in the margin resulted from the equity received            during the reorganization. This equity is, in effect, a free source of funds. Since            this equity was used primarily to pay off short-term borrowings, it did not            substantially grow our average earning assets. The margin is influenced positively by a            high mix of low-cost or free funding sources, and negatively by the amount of earning            assets.

 

***Provision for Loan Losses.***Provision            for loan losses for the year ended June 30, 2007 was $10,000 and $27,000 for the year            ended June 30, 2006. There were $7,000 of net charge-offs in

 

12

 

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2007            compared to $21,000 of net charge-offs in 2006. Based on our stratification of the loan            portfolios using historical loss factors and other data, management believes that the            recorded allowance would cover both known and inherent losses in the portfolio that            were both probable and estimable. Although nonaccrual loans remained low at $13,000 at            June 30, 2007 compared to $11,000 at June 30, 2006, the allowance for loan losses was            increased as a result of higher loan balances in several major categories. There can be            no assurance, however, that the allowance for loan losses will be sufficient to cover            actual losses.

 

***Noninterest Income.***Noninterest            income increased to $666,000 for the year ended June 30, 2007 from $659,000 for the            year ended June 30, 2006. Mortgage loan servicing fees and fees from debit cards and            ATM usage included in other income increased $17,000 each, while gains on sales of            loans decreased to $12,000 for 2007, down $27,000 from $39,000 for 2006 due to lower            volumes sold. We anticipate that these gains from the sale of mortgages will remain at            lower levels because refinancing activity has slowed, and because we have made a            strategic decision to retain our shorter-term originated mortgages. By retaining            mortgages, we have increased our net interest income. Service charges on deposit            accounts decreased $15,000 from the prior year, which is a function of both lower            balances of transaction accounts, and reductions in overdraft fees from            customers.

 

***Noninterest Expense.***Noninterest            expense was $2.9 million for the year ended June 30, 2007, increasing $195,000 from            $2.7 million for the year ended June 30, 2006. Salaries and benefits increased $98,000,            or 6.0%, for several reasons. Base salaries increased $36,000, reflecting normal            raises. The additional employee stock ownership plan expenses as a result of the            reorganization increased compensation by $49,000, and employee insurance costs            increased $28,000. Dividends on unearned restricted stock, which are accounted for as            compensation expense, decreased $37,000 between the years. The 2006 expense includes            the special $1.00 ($.635, restated for the exchange ratio in the reorganization)            dividend paid in January 2006 to public shareholders of Osage Federal Financial, Inc.            Occupancy expense decreased $3,000, primarily due to lower furniture and equipment            depreciation, partially offset by higher equipment and building maintenance costs.            Other operating expenses increased $99,000 for the period. Advertising increased            $19,000 due to the new advertising campaign, and data processing expenses rose $19,000,            reflecting the addition of internet banking and other services. Expenses for operation            of the ATM and debit card network increased $13,000 over the prior year. As noted            previously, income from these activities has also increased significantly. During 2007,            we made a $10,000 provision on a foreclosed asset property that is in a flood plain,            after the severe flooding that occurred in our market during June 2007. Also, in 2006,            we reversed a $10,000 expense for an anticipated fraud loss that did not            occur

             

Management expects noninterest expenses to increase following the            reorganization as a result of the establishment of additional stock benefit plans and            increased costs related to the employee stock ownership plan, as well as increased            costs associated with being a listed company including annual Nasdaq fees and            additional Sarbanes-Oxley compliance. In addition, we anticipate an increase in            occupancy expense due to the current remodeling of our Bartlesville branch.

 

***Provision for Income Taxes.***The            provision for income taxes increased $178,000, or 51.6%, reflecting an increase in            pretax income. The effective tax rates were 36% for both the fiscal years ended June            30, 2007 and 2006.

 

13

 

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

 

***General.***Net income for the year            ended June 30, 2006 was $626,000 ($0.29 per diluted share), a $21,000 increase compared            to net income of $605,000 ($0.17 per diluted share) for fiscal 2005. The increase in            net income resulted mainly from an increase in net interest income.

 

***Interest Income.***Total interest            income increased by $1.0 million, or 20.9%, to $5.8 million for the year ended June 30,            2006 from $4.8 million for the year ended June 30, 2005 primarily due to a $13.4            million increase in average earning assets and a 26 basis point increase in yield. The            average balance of total interest-earning assets increased to $101.7 million for 2006            from $88.3 million for 2005. The increase in average earning assets was            attributable to a $10.0 million, or 16.6% increase in the average volume of loans, and            a $3.4 million, or 12.4% increase in the average balance of securities and deposits            with other financial institutions. The increase in the category of earning assets was            driven by growth in the available-for-sale portfolio. Average balances for            available-for-sale securities were $17.9 million for the year ended June 30, 2006, a            $6.2 million increase from the prior-year average balance. The average yield on the            loan portfolio has increased 5 basis points to 6.49% between the periods, and the            average yield on securities and deposits with other financial institutions has            increased 69 basis points to 3.97% between the periods. Because of a short-term rising            rate environment, many of our securities and variable-rate loans repriced during the            year.

 

***Interest Expense.***Total interest            expense increased by $786,000, or 38.7%, to $2.8 million for the year ended June 30,            2006 compared to $2.0 million in the year ended June 30, 2005. Our average            interest-bearing liabilities, including most deposits and Federal Home Loan Bank            advances, increased $12.1 million to $86.2 million for the year ended June 30, 2006,            compared to $74.1 million in the same period in 2005. Of those averages, advances were            up $13.8 million and certificates of deposit were up $1.5 million. Our money market            account average balances declined $3.3 million between the two periods. The cost of our            total interest-bearing liabilities increased 53 basis points from the prior period,            from 2.74% to 3.27%. This was due to a combination of two factors: use of short-term            advances in a rising short-term interest rate environment; and the transfer of funds            from checking or money market accounts into higher-yielding odd-termed            certificates.

 

***Net Interest Income.***Net interest            income increased by $219,000, or 7.9%, to $3.0 million for the year ended June 30, 2006            from $2.8 million for fiscal 2005. The net interest rate spread decreased to 2.46% for            2006 from 2.72% for 2005, while the net interest margin decreased to 2.96% from 3.16%.            The decreases in spread and margin resulted from the higher cost of short-term            borrowings and a change in the mix of deposits into higher-cost            certificates.

 

***Provision for Loan Losses. ***Provision for loan losses for the year ended June 30, 2006 was $27,000,            and there was no provision for the year ended June 30, 2005. There were $21,000 of net            charge-offs in 2006 compared to $15,000 of net charge-offs in 2005. Although nonaccrual            and past due loans declined to $11,000 at June 30, 2006 from $87,000 at June 30, 2005,            the allowance for loan losses was increased as a result of higher loan balances in            almost every category.

 

***Noninterest Income.***Noninterest            income increased to $659,000 for the year ended June 30, 2006 from $647,000 for the            year ended June 30, 2005. Service charges increased by $30,000, because of service            charge fee increases that were implemented April 15, 2005. Gains on the sale of            mortgages decreased to $39,000 for 2006 from $67,000 for 2005. Other income

 

14

 

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increased $8,000 mainly due to interchange income from increased            customer usage of debit and ATM cards.

 

***Noninterest Expense.***Noninterest            expense was $2.7 million for the year ended June 30, 2006, increasing $145,000 from            $2.5 million for the year ended June 30, 2005. Salaries and benefits increased            $150,000, or 10.2%, for several reasons. Base salaries increased $45,000, reflecting            normal raises. The addition of the stock option plan and restricted plan increased            expenses by $102,000. Dividends on unearned restricted stock, which are accounted for            as compensation expense, accounted for $45,000. The expense includes the special $1.00            dividend paid in January 2006. We recorded a full year expense for these plans in 2006,            which accounted for the remaining $57,000 difference. These plans were approved by            stockholders on November 17, 2004. Our employee stock ownership plan expense increased            $7,000 from the prior year. Occupancy expense decreased $7,000, primarily due to lower            furniture and equipment depreciation, reflecting accelerated writeoffs of computer            equipment earlier in the year ended June 30, 2005. Other operating expenses increased            $3,000 for the period. Our audit and filing fees decreased $10,000 from the prior            fiscal year. During 2005, we had significant expenses related to approval of the            restricted stock and option plans. Data processing expenses rose $13,000, due to            recognition of a full year of costs for our telephone banking system. In fiscal year            2004, we had anticipated a $10,000 loss as a result of a customer’s fraudulent            activity. Since we were not required to pay the claim, we recognized a $10,000 benefit            in the 2006 fiscal year. Expenses for operation of the ATM and debit card network            increased $10,000 over the prior year. As noted above, income from these activities had            also increased significantly. Losses from overdrawn checking accounts increased $9,000            over the prior year. Most of this was from insufficient funds fees that we had charged            our customers. Advertising increased $9,000 over the prior year, reflecting continuing            targeted ads for certificate products.

 

***Provision for Income Taxes.***The            provision for income taxes increased $37,000, or 12.0%, reflecting an increase in            pretax income. The effective tax rates were 36% and 34% for the fiscal years ended June            30, 2006 and 2005, respectively.

 

15

 

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***Average Balance Sheet.***The following            tables set forth certain information relating to our interest-earning assets and            interest-bearing liabilities at and for the periods indicated. The average yields and            costs are derived by dividing income or expense by the average balance of assets or            liabilities, respectively, for the periods presented. Average balances are daily            averages. An estimate based on month-end balances is used for noninterest-bearing            deposits. Management does not believe that the use of month-end balances instead of            daily average balances for noninterest-bearing deposits has caused any material            differences in the information presented.

 

|                                                                                                                                    | **Year Ended June 30,**    |
|-----------------------------------------------------------------------------------------------------------------------------------------|----------------------------|
|                                                                                                                                    | **2007**                   |   | **2006** |   | **2005** |
|                                                                                                                                    | **Average Balance**        |   | **Interest** |   | **Average Yield/****Cost** |   | **Average Balance** |   | **Interest** |   | **Average Yield/****Cost** |   | **Average Balance** |   | **Interest** |   | **Average Yield/**** Cost** |
|                                                                                                                                    | **(Dollars in Thousands)** |   |
| Interest-earning assets:                                                                                                                |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable, net (1)                                                                                                               | $                          | 82,237 |   | $ | 5,478 |   | 6.66 | % |   | $ | 70,744 |   | $ | 4,590 |   | 6.49 | % |   | $ | 60,698 |   | $ | 3,911 |   | 6.44 | % |
| Securities(2)                                                                                                                           |                       | 32,981 |   |   | 1,528 |   | 4.63 |   |   |   | 30,974 |   |   | 1,231 |   | 3.97 |   |   |   | 27,565 |   |   | 905 |   | 3.28 |   |
| Total interest-earning assets                                                                                                           |                       | 115,218 |   |   | 7,006 |   | 6.08 |   |   |   | 101,718 |   |   | 5,821 |   | 5.72 |   |   |   | 88,263 |   |   | 4,816 |   | 5.46 |   |
| Non-interest-earning assets                                                                                                             |                       | 4,011 |   |   |   |   |   |   |   |   | 3,539 |   |   |   |   |   |   |   |   | 3,518 |   |   |   |   |   |   |
| Total assets                                                                                                                            | $                          | 119,229 |   |   |   |   |   |   |   | $ | 105,257 |   |   |   |   |   |   |   | $ | 91,781 |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                                                                           |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand and NOW accounts                                                                                                                 | $                          | 8,311 |   |   | 67 |   | 0.81 |   |   | $ | 9,317 |   |   | 92 |   | 0.99 |   |   | $ | 9,072 |   |   | 79 |   | 0.87 |   |
| Money market savings                                                                                                                    |                       | 5,910 |   |   | 93 |   | 1.57 |   |   |   | 7,035 |   |   | 98 |   | 1.39 |   |   |   | 10,376 |   |   | 147 |   | 1.42 |   |
| Savings                                                                                                                                 |                       | 4,436 |   |   | 34 |   | 0.77 |   |   |   | 4,096 |   |   | 32 |   | 0.78 |   |   |   | 4,243 |   |   | 33 |   | 0.77 |   |
| Certificates of deposit                                                                                                                 |                       | 49,113 |   |   | 2,100 |   | 4.28 |   |   |   | 37,323 |   |   | 1,300 |   | 3.48 |   |   |   | 35,835 |   |   | 1,105 |   | 3.08 |   |
| FHLB advances                                                                                                                           |                       | 21,430 |   |   | 1,042 |   | 4.86 |   |   |   | 28,397 |   |   | 1,292 |   | 4.55 |   |   |   | 14,583 |   |   | 664 |   | 4.56 |   |
| Total interest-bearing liabilities                                                                                                      |                       | 89,200 |   |   | 3,336 |   | 3.74 |   |   |   | 86,168 |   |   | 2,814 |   | 3.27 |   |   |   | 74,109 |   |   | 2,028 |   | 2.77 |   |
| Non-interest-bearing liabilities                                                                                                        |                       | 6,062 |   |   |   |   |   |   |   |   | 5,563 |   |   |   |   |   |   |   |   | 3,828 |   |   |   |   |   |   |
| Total liabilities                                                                                                                       |                       | 95,262 |   |   |   |   |   |   |   |   | 91,731 |   |   |   |   |   |   |   |   | 77,937 |   |   |   |   |   |   |
| Stockholder’s equity (3)                                                                                                          |                       | 23,967 |   |   |   |   |   |   |   |   | 13,526 |   |   |   |   |   |   |   |   | 13,844 |   |   |   |   |   |   |
| Total liabilities and stockholder’s                            equity                                                             | $                          | 119,229 |   |   |   |   |   |   |   | $ | 105,257 |   |   |   |   |   |   |   | $ | 91,781 |   |   |   |   |   |   |
|                                                                                                                                    |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                                                                                     |                       |   |   | $ | 3,670 |   |   |   |   |   |   |   | $ | 3,007 |   |   |   |   |   |   |   | $ | 2,788 |   |   |   |
| Net interest rate spread(4)                                                                                                             |                       |   |   |   |   |   | 2.34 | % |   |   |   |   |   |   |   | 2.45 | % |   |   |   |   |   |   |   | 2.72 | % |
| Net interest margin(5)                                                                                                                  |                       |   |   |   |   |   | 3.19 | % |   |   |   |   |   |   |   | 2.96 | % |   |   |   |   |   |   |   | 3.16 | % |
| Ratio of average interest-earning                            assets to average interest-                            bearing liabilities |                            |  |  |  |  |  | 129.17 | % |  |  |  |  |  |  |  | 118.05 | % |  |  |  |  |  |  |  | 119.10 | % |
|                                                                                                                                         |                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

_________
| (1) |  | Non-accruing loans have been included in loans                    receivable, net, and the effect of such inclusion was not material. Loans held                    for salehave been included in loans receivable, net. |  |
|-----|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|
| (2) |  | Includes securities, interest-bearing deposits,                    and FHLB stock.                                                                                                                                       |  |
| (3) |  | Includes equity received from contributions made                    to the ESOP.                                                                                                                                         |  |
| (4) |  | Interest rate spread represents the difference                    between the average yield on interest-earning assets and the average cost of                    interest-bearing liabilities.                          |  |
| (5) |  | Net interest margin represents net interest                    income as a percentage of average interest-earning assets.                                                                                                |  |

 

16

 

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***Rate/Volume Analysis***. The following            table reflects the sensitivity of our interest income and interest expense to changes            in volume and in prevailing interest rates during the periods indicated. Each category            reflects the: (1) changes in volume (changes in volume multiplied by old rate); (2)            changes in rate (changes in rate multiplied by old volume); and (3) net change. The net            change attributable to the combined impact of volume and rate has been allocated            proportionally to the absolute dollar amounts of change in each.

 

 

|                                     |   | **Year Ended June 30,**             |   |     | **Year Ended June 30,**             |      |
|------------------------------------------|--------|-------------------------------------|--------|----------|-------------------------------------|-----------|
|                                     |   | **2007 vs. 2006**                   |   |     | **2006 vs. 2005**                   |      |
|                                     |   | **Increase (Decrease)**

**Due to** |   |     | **Increase (Decrease)**

**Due to** |      |
|                                     |   | **Volume**                          |   | **Rate** |                                | **Total** |   |   | **Volume** |   | **Rate** |   | **Total** |   |
|                                     |   | **(In thousands)**                  |   |
| Interest and dividend income:            |   |                                |   |     |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                         |   | $                                   | 763    |     | $                                   | 125       |   | $ | 888 |   |   | $ | 652 |   | $ | 27 |   | $ | 679 |   |
| Securities                               |   |                                | 84     |     |                                | 213       |   |   | 297 |   |   |   | 120 |   |   | 206 |   |   | 326 |   |
| Total interest-earning assets            |   |                                | 847    |     |                                | 338       |   |   | 1,185 |   |   |   | 772 |   |   | 233 |   |   | 1,005 |   |
|                                     |   |                                |   |     |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                        |   |                                |   |     |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand and NOW Deposits                  |   | $                                   | (9     | )        | $                                   | (16       | ) | $ | (25 | ) |   | $ | 2 |   | $ | 11 |   | $ | 13 |   |
| Money market savings                     |   |                                | (17    | )        |                                | 12        |   |   | (5 | ) |   |   | (47 | ) |   | (2 | ) |   | (49 | ) |
| Savings accounts                         |   |                                | 3      |     |                                | (1        | ) |   | 2 |   |   |   | (1 | ) |   | — |   |   | (1 | ) |
| Certificates of deposit                  |   |                                | 465    |     |                                | 335       |   |   | 800 |   |   |   | 47 |   |   | 148 |   |   | 195 |   |
| Advances from FHLB and

other borrowings |   |                                | (334   | )        |                                | 84        |   |   | (250 | ) |   |   | 629 |   |   | (1 | ) |   | 628 |   |
| Total interest-bearingliabilities        |   |                                | 108    |     |                                | 414       |   |   | 522 |   |   |   | 630 |   |   | 156 |   |   | 786 |   |
| Change in net interest income            |   | $                                   | 739    |     | $                                   | (76       | ) | $ | 663 |   |   | $ | 142 |   | $ | 77 |   | $ | 219 |   |
|                                     |   |                                |   |     |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

**Liquidity and Commitments**

 

We            are required to maintain sufficient liquidity to ensure a safe and sound operation.            Liquidity may increase or decrease depending upon the availability of funds and            comparative yields on investments in relation to the return on loans. Historically, we            have maintained liquid assets above levels believed to be adequate to meet the            requirements of normal operations, including potential deposit outflows. Cash flow            projections are regularly reviewed and updated to assure that adequate liquidity is            maintained

 

Our            liquidity, represented by cash and cash equivalents, is a product of our operating,            investing and financing activities. Our primary sources of funds are deposits,            scheduled payments, prepayments and maturities of outstanding loans and mortgage-backed            securities, maturities of investment securities and other short-term investments and            funds provided from operations. While scheduled payments from the amortization of loans            and mortgage-backed securities and maturing investment securities and short-term            investments are relatively predictable sources of funds, deposit flows and loan            prepayments are greatly influenced by general interest rates, economic conditions and            competition. In addition, we invest excess funds in short-term interest-earning assets,            which provide liquidity to meet lending requirements. We also generate cash

 

17

 

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through borrowings. We utilize FHLB advances to leverage our capital            base and provide a portion of the funding needed to manage the interest rate risk            presented by our core business of attracting and retaining retail deposits to fund            mortgage and consumer loans.

 

Liquidity management is both a daily and long-term function of business            management. Excess liquidity is generally invested in short-term investments such as            overnight deposits and federal funds sold, mutual funds, and collateralized mortgage            obligations. On a longer term basis, we maintain a strategy of investing in various            loan products. We use our sources of funds primarily to meet our ongoing commitments,            to pay maturing certificates of deposit and savings withdrawals, to fund loan            commitments and to maintain our portfolio of mortgage-backed securities and investment            securities. At June 30, 2007, the total approved loan origination commitments            outstanding amounted to $2.8 million, and we had $587,000 of unfunded commitments on            lines of credit. At the same date, construction loans in process were            $1.5 million. Certificates of deposit scheduled to mature in one year or less at            June 30, 2007, totaled $39.2 million. Management’s policy is to maintain deposit            rates at levels that are competitive with other local financial institutions. Based on            the competitive rates and on historical experience, management believes that a            significant portion of maturing deposits will remain with Osage Federal Bank. In            addition, at June 30, 2007, our total collateralized borrowing limit was $53.3 million            of which we had $13.0 million outstanding, giving us the ability at June 30, 2007 to            borrow an additional $40.3 million from the FHLB as a funding source to meet            commitments and for liquidity purposes. We had no commitments to sell loans at June 30,            2007.

 

The            following table presents our fixed and determinable contractual obligations and            commitments by payment date as of June 30, 2007.

 

|                                                             |   | **Total**                             |   | **Less** **Than**                             **1** **Year**   |   | **1-3** **Years** |   | **4-5****Years**       |    | **After****5** **Years** |   |
|------------------------------------------------------------------|--------|---------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|---------|-------------------------------|--------|
|                                                             |   | **(In thousands)**                    |   |
| Federal Home Loan Bank borrowings                                |   | $                                     | 13,000 |                                                                                    | $      | 2,000                  |   | $                      | 3,000   |                          | $      | 4,000 |   | $ | 4,000 |   |   |
| Certificates of deposit                                          |   |                                  | 51,508 |                                                                                    |   | 39,171                 |   |                   | 8,746   |                          |   | 3,591 |   |   | — |   |   |
| Total                                                            |   | $                                     | 64,508 |                                                                                    | $      | 41,171                 |   | $                      | 11,746  |                          | $      | 7,591 |   | $ | 4,000 |   |   |
|                                                             |   |                                  |   |                                                                                    |   |                   |   |                   |    |                          |   |   |   |   |   |   |   |
|                                                             |   |                                  |   |                                                                                    |   |                   |   |                   |    |                          |   |
|                                                             |   | **Total**

**Amounts**

**Committed** |   | **Less** **Than**                             **1** **Year**   |   | **1-3** **Years** |   | **4-5** **Years** |    | **After****5** **Years** |   |
|                                                             |   | **(In thousands)**                    |   |
| Construction loans in process (1)                                |   | $                                     | 1,474  |                                                                                    | $      | 138                    |   | $                      | 441     |                          | $      | — |   | $ | 895 |   |
| Other commitments to extend                            credit(2) |   |                                  | 2,820  |                                                                                    |   | 2,820                  |   |                   | — |                          |   | — |   |   | — |   |
| Unfunded lines of credit                                         |   |                                  | 587    |                                                                                    |   | 174                    |   |                   | 393     |                          |   | 20 |   |   | — |   |
| Total                                                            |   | $                                     | 4,881  |                                                                                    | $      | 3,132                  |   | $                      | 834     |                          | $      | 20 |   | $ | 895 |   |
|                                                                  |        |                                       |        |                                                                                         |        |                        |        |                        |         |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 _____________

| (1)

(2) | Includes construction loans which will convert to                            permanent loans.

Represents amounts committed to customers. |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------|

**Off-Balance Sheet Arrangements**

 

We            are parties to financial instruments with off-balance sheet risk in the normal course            of business. These financial instruments primarily include loan commitments and lines            of credit, including commercial lines. We use these financial instruments to meet the            financing needs of our customers. Outstanding loan commitments and lines of credit at            June 30, 2007 were $2.8 million and $587,000, respectively. These financial            instruments involve, to varying degrees,

 

18

 

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elements of credit, interest rate, and liquidity risk. These do not            represent unusual risk and management does not anticipate any accounting losses, which            would have a material effect on us.

 

**Capital**

 

Consistent with our goals to operate a sound and profitable financial            organization, the Company actively seeks to maintain the Bank as a “well            capitalized” institution in accordance with regulatory standards. Total equity of            Osage Bancshares, Inc. was $35.2 million at June 30, 2007, or 28.7% of total assets on            that date. As of June 30, 2007, the Bank exceeded all capital requirements of the            Office of Thrift Supervision. The Bank’s regulatory capital ratios at June 30,            2007 were as follows: core capital – 18.89%; Tier I risk-based capital –            36.50%; and total risk-based capital – 37.13%. The regulatory capital            requirements to be considered well capitalized are 5.0%, 6.0% and 10.0%,            respectively.

 

**Impact of Inflation**

 

The            financial statements included in this document have been prepared in accordance with            accounting principles generally accepted in the United States of America. These            principles require the measurement of financial position and operating results in terms            of historical dollars, without considering changes in the relative purchasing power of            money over time due to inflation.

 

Our            primary assets and liabilities are monetary in nature. As a result, interest rates have            a more significant impact on our performance than the effects of general levels of            inflation. Interest rates, however, do not necessarily move in the same direction or            with the same magnitude as the price of goods and services, since such prices are            affected by inflation. In a period of rapidly rising interest rates, the liquidity and            maturities structures of our assets and liabilities are critical to the maintenance of            acceptable performance levels.

 

The            principal effect of inflation on earnings, as distinct from levels of interest rates,            is in the area of noninterest expense. Such expense items as employee compensation,            employee benefits and occupancy and equipment costs may be subject to increases as a            result of inflation. An additional effect of inflation is the possible increase in the            dollar value of the collateral securing loans that we have made. We are unable to            determine the extent, if any, to which properties securing our loans have appreciated            in dollar value due to inflation.

 

**Recent Accounting Pronouncements**

 

In            February 2006, the FASB issued SFAS No. 155 (FAS 155),*Accounting for Certain Hybrid Financial Instruments: an amendment of            FASB Statements No.* *133 and            140*. FAS 155 permits fair value re-measurement for any hybrid            financial instrument that contains an embedded derivative that otherwise would require            bifurcation, clarifies which interest-only strips and principal-only strips are not            subject to the requirements of Statement 133, establishes a requirement to evaluate            interests in securitized financial assets to identify interests that are freestanding            derivatives or that are hybrid financial instruments that contain an embedded            derivative requiring bifurcation, clarifies that concentrations of credit risk in the            form of subordination are not embedded derivatives, and amends Statement 140 to            eliminate the prohibition on a qualifying special purpose entity from holding a            derivative financial instrument that pertains to a beneficial interest other than            another derivative financial instrument. FAS 155 is effective for all financial            instruments acquired or issued after the beginning of an entity’s            first

 

19

 

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fiscal year that begins after September 15, 2006. The adoption of this            statement will not have a material effect on the Company’s consolidated financial            statements.

In            March 2006, the FASB issued Statement of Financial Accounting Standards No. 156            (SFAS No.156),*Accounting for Servicing of Financial Assets,            an amendment of FASB Statement No.* *140, Accounting for Transfers and Servicing of Financial Assets and            Extinguishments of Liabilities*, which requires that all            separately recognized servicing assets and servicing liabilities be initially measured            at fair value, if practicable and permits the entities to elect either fair value            measurement with changes in fair value reflected in earnings or the amortization and            impairment requirements of Statement 140 for subsequent measurement. The subsequent            measurement of separately recognized servicing assets and servicing liabilities at fair            value eliminates the necessity for entities that manage the risks inherent in servicing            assets and servicing liabilities with derivatives to qualify for hedge accounting            treatment and eliminates the characterization of declines in fair value as impairments            or direct write-downs. Statement No. 156 is effective as of the beginning of an            entity’s first fiscal year that begins after September 15, 2006. Earlier            adoption is permitted as of the beginning of an entity’s fiscal year, provided            the entity has not yet issued financial statements, including interim financial            statements for any period of that fiscal year. The adoption of this statement will not            have a material effect on the Company’s consolidated financial            statements.

In            March 2006 and updated in September 2006, The Emerging Issues Task Force released Draft            Abstract No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit            Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This abstract deals            with whether the postretirement benefit associated with an endorsement split-dollar            arrangement is effectively settled in accordance with either Statement 106 or Opinion            12 upon entering into such arrangement. The EITF reached a consensus that employers            actually incur a liability for the death benefit associated with these types of            policies, even though the insurance company undertakes the legal obligation to provide            a benefit to individuals insured under these arrangements. The adoption of this            statement will not have a material effect on the Company’s consolidated financial            statements

In            September 2006, the Financial Accounting Standards Board (FASB) issued Statement No.            157,*Fair Value Measurements*. The            statement defines fair value, establishes a framework for measuring fair value in            generally accepted accounting principles, and expands disclosures about fair value            measurements. This statement applies to other accounting pronouncements that require or            permit fair value measurements, the Board having previously concluded in those            accounting pronouncements that fair value is the relevant measurement attribute. This            statement does not require any new fair value measurements and is effective for the            Company beginning July 1, 2008. Management has not completed its review of the new            guidance; however, the effect of the statement’s implementation is not expected            to be material to the Company’s financial statements or results of            operations.

In            February 2007, the FASB issued Statement No. 159,*The Fair            Value Option for Financial Assets and Financial Liabilities*.            This statement permits entities to choose to measure eligible items at fair value at            specified election dates. For items for which the fair value option has been elected,            unrealized gains and losses are to be reported in earnings at each subsequent reporting            date. The fair value option is irrevocable unless a new election date occurs, may be            applied instrument by instrument, with a few exceptions, and applies only to entire            instruments and not to portions of instruments. This statement provides an opportunity            to mitigate volatility in reported earnings caused by measuring related assets and            liabilities differently without having to apply complex hedge accounting. Statement No.            159 is effective for the Company beginning July 1, 2008. Management has not completed            its review of the new guidance; however, the

 

20

 

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effect of the statement’s implementation is not expected to be            material to the Company’s results of operations or financial position

In            May 2005, the Financial Accounting Standards Board (FASB) issued Statement on Financial            Accounting Standards (SFAS) No. 154,*Accounting Changes and            Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No.            3*. SFAS 154 changes the requirements for the accounting for,            and reporting of, a change in accounting principle. SFAS 154 requires that a voluntary            change in accounting principle be applied retrospectively with all prior period            financial statements presented using the accounting principle. SFAS 154 is effective            for accounting changes and corrections of errors in fiscal years beginning after            December 15, 2005. The Company adopted SFAS 154 effective July 1, 2006. Since there            have been no material accounting changes or errors for the year ended June 30, 2007,            the adoption did not have a material impact on the Company’s results of            operations or financial condition.

In            June 2006, the FASB issued FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, and Interpretation of            FASB Statement No. 109*(FIN 48). FIN 48 clarifies the            accounting for uncertainty in income taxes recognized in an enterprise’s            financial statements and prescribes a recognition threshold and measurement attribute            for financial statement recognition and measurement of a tax position taken or expected            to be taken in a tax return. This Interpretation also provides related guidance on            under recognition, classification, interest and penalties, accounting in interim            periods and disclosure. FIN 48 is effective for the Company beginning July 1, 2007. The            adoption of the interpretation is not expected to be material.

In            September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,*Considering the Effects of Prior Year Misstatements when Quantifying            Misstatements in Current Year Financial Statements*(SAB 108).            SAB 108 provides guidance on how prior year misstatements should be considered when            quantifying misstatements in current year financial statements for purposes of            assessing materiality. SAB 108 requires that a registrant assess the materiality of a            current period misstatement by determining how the current period’s balance sheet            would be affected in correcting a misstatement without considering the years in which            the misstatement originated and how the current period’s income statement is            misstated, including the reversing effect of prior year misstatements. SAB 108 is            effective for fiscal years ending after November 15, 2006. The cumulative effect of            applying SAB 108 may be recorded by adjusting current year beginning balances of the            affected assets and liabilities with a corresponding adjustment to the current year            beginning balance in retained earning if certain criteria are met. The adoption of this            bulletin did not have a material impact on the Company’s consolidated financial            statements.

 

 

21

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**Report of Independent Registered Public Accounting            Firm**

 

 

Audit            Committee, Board of Directors and Stockholders

Osage            Bancshares, Inc.

Pawhuska, Oklahoma

 

We            have audited the accompanying consolidated balance sheets of Osage Bancshares, Inc. as            of June 30, 2007 and 2006, and the related consolidated statements of income,            stockholders’ equity and cash flows for each of the three years in the period            ended June 30, 2007. 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            audit to obtain reasonable assurance about whether the financial statements are free of            material misstatement. An audit includes examining, on a test basis, evidence            supporting the amounts and disclosures in the financial statements. An audit also            includes assessing the accounting principles used and significant estimates made by            management, as well as evaluating the overall financial statement presentation. We            believe that our audits provide a reasonable basis for our opinion.

In our            opinion, the consolidated financial statements referred to above present fairly, in all            material respects, the financial position of Osage Bancshares, Inc. as of June 30, 2007            and 2006, and the results of its operations and its cash flows for each of the three            years in the period ended June 30, 2007, in conformity with accounting principles            generally accepted in the United States of America.

 

**BKD, LLP**

 

Joplin,            Missouri

September 20, 2007

 

F-1

 

----

 

 

 

****Osage Bancshares, Inc.****

**Consolidated Balance Sheets**

**Years Ended June 30, 2007, 2006 and 2005**

 

| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |        |     |   |        |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|-------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **2007** |        | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| Cash and due from                            banks                                                                                                                                                                                                                                                                                                                                                                                                                              |   | $        | 1,338,149   |     | $      | 1,374,110   |   |
| Interest bearing deposits with                            banks                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     | 823,671     |     |   | 58,906      |   |
| Federal funds sold                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |     | 2,808,000   |     |   | 1,022,000   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| Cash and cash                            equivalents                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     | 4,969,820   |     |   | 2,455,016   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| Available-for-sale                            securities                                                                                                                                                                                                                                                                                                                                                                                                                        |   |     | 15,911,147  |     |   | 17,835,601  |   |
| Held-to-maturity                            securities                                                                                                                                                                                                                                                                                                                                                                                                                          |   |     | 6,962,431   |     |   | 8,220,499   |   |
| Loans, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     | 88,721,198  |     |   | 77,927,235  |   |
| Loans held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |     | —     |     |   | 155,500     |   |
| Premises and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |     | 1,455,651   |     |   | 1,155,390   |   |
| Foreclosed assets held for                            sale                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     | 43,123      |     |   | 49,993      |   |
| Interest receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |     | 476,381     |     |   | 430,610     |   |
| Federal Home Loan Bank stock, at                            cost                                                                                                                                                                                                                                                                                                                                                                                                                |   |     | 1,808,300   |     |   | 1,711,000   |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |     | 25,591      |     |   | 47,792      |   |
| Bank owned life                            insurance                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     | 2,163,928   |     |   | 2,086,877   |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |     | 146,633     |     |   | 161,892     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $        | 122,684,203 |     | $      | 112,237,405 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| **Liabilities and Stockholders’                            Equity**                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |        |     |   |        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| **Liabilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     |        |     |   |        |   |
| Deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $        | 72,703,614  |     | $      | 64,309,734  |   |
| Federal Home Loan Bank                            advances                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     | 13,000,000  |     |   | 33,350,000  |   |
| Advances from borrowers held in                            escrow                                                                                                                                                                                                                                                                                                                                                                                                               |   |     | 761,165     |     |   | 785,813     |   |
| Accrued interest and other                            liabilities                                                                                                                                                                                                                                                                                                                                                                                                               |   |     | 680,133     |     |   | 500,279     |   |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |     | 87,144,912  |     |   | 98,945,826  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| **Commitments and                            Contingencies**                                                                                                                                                                                                                                                                                                                                                                                                                    |   |     | —     |     |   | —     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| **Equity Received from                            Contributions to the ESOP (42,640 shares****at June 30, 2007 and 21,117 shares at June 30,                            2006)**                                                                                                                                                                                                                                                                                                 |   |     | 341,229     |     |   | 163,470     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| **Stockholders’                            Equity**                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |        |     |   |        |   |
| Preferred stock,                            2007 — $.01 par value (5,000,000 shares                            authorized;none outstanding); 2006 — $.10 par value                            (5,000,000 shares                            authorized, none outstanding)                                                                                                                                                                                       |   |     | —     |     |   | —     |   |
| Common stock, 2007 —                            $0.01 par value, 20,000,000 sharesauthorized, 3,603,590 shares issued and outstanding, net                            of 288,000 allocated and unallocated ESOP shares;                            2006 —  $0.10par value, 20,000,000 shares authorized, 3,599,536                            sharesissued and outstanding, net of 86,172 allocated                            andunallocated ESOP shares |   |     | 33,156      |     |   | 223,226     |   |
| Additional paid-in                            capital                                                                                                                                                                                                                                                                                                                                                                                                                           |   |     | 27,255,732  |     |   | 5,290,160   |   |
| Retained earnings                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |     | 8,154,032   |     |   | 7,872,151   |   |
| Accumulated other comprehensive                            loss                                                                                                                                                                                                                                                                                                                                                                                                                 |   |     | (244,858    | )        |   | (257,428    | )      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| Total stockholders’                            equity                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     | 35,198,062  |     |   | 13,128,109  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |        |     |   |        |   |
| Total liabilities and                            stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                     |   | $        | 122,684,203 |     | $      | 112,237,405 |   |

 

*See Notes to Consolidated Financial Statements*

F-2

----

**Osage Bancshares, Inc.**

**Consolidated Statements of Income**

**Years Ended June 30, 2007, 2006 and 2005**

 

|                                                                           |   | **2007** |      | **2006** |   | **2005**  |   |
|--------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
| **Interest Income**                                                            |   |     |      |     |   |      |   |   |   |   |
| Loans                                                                          |   | $        | 5,477,688 |     | $      | 4,589,822 |   | $ | 3,911,604 |   |
| Available-for-sale                            securities                       |   |     | 830,886   |     |   | 720,171   |   |   | 332,936 |   |
| Held-to-maturity                            securities                         |   |     | 331,090   |     |   | 403,053   |   |   | 526,430 |   |
| Deposits with other financial                            institutions          |   |     | 269,040   |     |   | 32,033    |   |   | 12,433 |   |
| Other                                                                          |   |     | 97,553    |     |   | 76,492    |   |   | 32,877 |   |
| Total interest income                                                          |   |     | 7,006,257 |     |   | 5,821,571 |   |   | 4,816,280 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Interest                            Expense**                                |   |     |      |     |   |      |   |   |   |   |
| Deposits                                                                       |   |     | 2,293,825 |     |   | 1,522,070 |   |   | 1,363,805 |   |
| Advances from Federal Home Loan                            Bank                |   |     | 1,042,346 |     |   | 1,292,018 |   |   | 664,386 |   |
| Total interest expense                                                         |   |     | 3,336,171 |     |   | 2,814,088 |   |   | 2,028,191 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Net Interest                            Income**                             |   |     | 3,670,086 |     |   | 3,007,483 |   |   | 2,788,089 |   |
| Provision for loan                            losses                           |   |     | 10,000    |     |   | 27,000    |   |   | — |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| Net interest income after                            provision for loan losses |   |     | 3,660,086 |     |   | 2,980,483 |   |   | 2,788,089 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Noninterest                            Income**                              |   |     |      |     |   |      |   |   |   |   |
| Service charges on deposit                            accounts                 |   |     | 382,936   |     |   | 397,443   |   |   | 367,436 |   |
| Other service charges and                            fees                      |   |     | 70,225    |     |   | 64,797    |   |   | 60,953 |   |
| Gain on sale of mortgage                            loans                      |   |     | 11,710    |     |   | 38,878    |   |   | 67,192 |   |
| Net loan servicing                            fees                             |   |     | 48,469    |     |   | 31,422    |   |   | 32,810 |   |
| Other income                                                                   |   |     | 152,360   |     |   | 126,184   |   |   | 118,621 |   |
| Total noninterest                            income                            |   |     | 665,700   |     |   | 658,724   |   |   | 647,012 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Noninterest                            Expense**                             |   |     |      |     |   |      |   |   |   |   |
| Salaries and employee                            benefits                      |   |     | 1,728,502 |     |   | 1,630,019 |   |   | 1,479,600 |   |
| Net occupancy expense                                                          |   |     | 263,261   |     |   | 266,218   |   |   | 273,516 |   |
| Deposit insurance                            premium                           |   |     | 8,679     |     |   | 8,455     |   |   | 9,422 |   |
| Other operating                            expenses                            |   |     | 862,792   |     |   | 763,403   |   |   | 760,125 |   |
| Total noninterest                            expense                           |   |     | 2,863,234 |     |   | 2,668,095 |   |   | 2,522,663 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Income Before Income                            Taxes**                      |   |     | 1,462,552 |     |   | 971,112   |   |   | 912,438 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Provision for Income                            Taxes**                      |   |     | 522,596   |     |   | 344,655   |   |   | 307,884 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Net Income**                                                                 |   | $        | 939,956   |     | $      | 626,457   |   | $ | 604,554 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Basic Earnings Per                            Share**                        |   | $        | .28       |     | $      | .19       |   | $ | .17 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Diluted Earnings Per                            Share**                      |   | $        | .28       |     | $      | .19       |   | $ | .17 |   |
|                                                                           |   |     |      |     |   |      |   |   |   |   |
| **Cash Dividends Paid Per                            Share**                   |   | $        | .320      |     | $      | .959      |   | $ | .175 |   |

 

*See Notes to Consolidated Financial Statements*

F-3

----

**Osage Bancshares, Inc.**

**Consolidated Statements of Stockholders’            Equity**

**Years Ended June 30, 2007, 2006 and 2005**

 

|                                                                                                                    |   | **Common Stock** |      |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------|-----------|
|                                                                                                                    |   | **Shares**       |      | **Amount** |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| **Balance, July 1,                            2004**                                                                    |   |             | 2,226,562 |   | $ | 222,656 |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| Net income                                                                                                              |   |             | —   |   |   | — |   |
| Change in unrealized depreciation                            on available-for-sale securities, net of

taxes of $40,069 |   |             | —   |   |   | — |   |
| Total comprehensive                            income                                                                   |   |             |      |   |   |   |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| Allocation of ESOP                            shares                                                                    |   |             | 6,077     |   |   | — |   |
| Dividends paid                                                                                                          |   |             | —   |   |   | — |   |
| Purchase of shares for Restricted                            Stock Plan, net of amortization

(30,100 shares)           |   |             | —   |   |   | — |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| **Balance, June 30,                            2005**                                                                   |   |             | 2,232,639 |   |   | 222,656 |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| Net income                                                                                                              |   |             | —   |   |   | — |   |
| Change in unrealized depreciation                            on available-for-sale securities, net of

taxes of $69,696 |   |             | —   |   |   | — |   |
| Total comprehensive                            income                                                                   |   |             |      |   |   |   |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| Dividends paid                                                                                                          |   |             | —   |   |   | — |   |
| Proceeds from the exercise of                            stock options                                                  |   |             | 5,704     |   |   | 570 |   |
| Allocation of ESOP                            shares                                                                    |   |             | 7,340     |   |   | — |   |
| Tax benefits from                            employees’ stock option and Restricted Stock Plans                   |   |             | —   |   |   | — |   |
| Purchase of shares for Restricted                            Stock Plan, net of amortization

(15,526 shares)           |   |             | —   |   |   | — |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| **Balance, June 30,                            2006**                                                                   |   |             | 2,245,683 |   |   | 223,226 |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| Net income                                                                                                              |   |             | —   |   |   | — |   |
| Change in unrealized depreciation                            on available-for-sale securities, net of

taxes of $7,705  |   |             | —   |   |   | — |   |
| Total comprehensive                            income                                                                   |   |             | —   |   |   | — |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| Dividends paid                                                                                                          |   |             | —   |   |   | — |   |
| Net proceeds from sale of common                            stock, including par value change

from $0.10 to $0.01      |   |             | 1,095,282 |   |   | (190,106 | ) |
| Proceeds from the exercise of                            stock options                                                  |   |             | 3,590     |   |   | 36 |   |
| Allocation of ESOP                            shares                                                                    |   |             | 13,675    |   |   | — |   |
| Tax benefits from ESOP,                            employees’ stock option, and restricted stock

Plans           |   |             | —   |   |   | — |   |
| Amortization of restricted stock                            and stock option plans net of shares

Withheld              |   |             | —   |   |   | — |   |
|                                                                                                                    |   |             |      |   |   |   |   |
| **Balance June 30,                            2007**                                                                    |   |             | 3,358,230 |   | $ | 33,156 |   |

 

*See Notes to Consolidated Financial Statements*

F-4

----

**Osage Bancshares, Inc.**

**Consolidated Statements of Stockholders’ Equity            (Continued)**

**Years Ended June 30, 2007, 2006 and 2005**

 

|  

                             

**Additional Paid-**

**in Capital** |       | **Retained**

**Earnings** |   | **Accumulated**

**Other**

**Comprehensive**

**Loss** |   | **Total** |     |
|----------------------------------------------------------------------------------|------------|----------------------------|--------|---------------------------------------------------------|--------|-----------|----------|
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
| $                                                                                | 5,646,912  |                       | $      | 7,810,673                                               |   | $         | (78,347  | ) | $ | 13,601,894 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | 604,554                                                 |   |      | —  |   |   | 604,554 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | —                                                 |   |      | (65,367  | ) |   | (65,367 | ) |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   | 539,187 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | —                                                 |   |      | —  |   |   | — |   |
|                                                                             | —    |                       |   | (185,500                                                | )      |      | —  |   |   | (185,500 | ) |
|                                                                             | (371,723   | )                          |   | —                                                 |   |      | —  |   |   | (371,723 | ) |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | 5,275,189  |                       |   | 8,229,727                                               |   |      | (143,714 | ) |   | 13,583,858 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | 626,457                                                 |   |      | —  |   |   | 626,457 |   |
|                                                                             | —    |                       |   | —                                                 |   |      | (113,714 | ) |   | (113,714 | ) |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   | 512,743 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | (984,033                                                | )      |      | —  |   |   | (984,033 | ) |
|                                                                             | 128,593    |                       |   | —                                                 |   |      | —  |   |   | 129,163 |   |
|                                                                             | —    |                       |   | —                                                 |   |      | —  |   |   | — |   |
|                                                                             | 10,368     |                       |   | —                                                 |   |      | —  |   |   | 10,368 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | (123,990   | )                          |   | —                                                 |   |      | —  |   |   | (123,990 | ) |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | 5,290,160  |                       |   | 7,872,151                                               |   |      | (257,428 | ) |   | 13,128,109 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | 939,956                                                 |   |      | —  |   |   | 939,956 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | —                                                 |   |      | 12,570   |   |   | 12,570 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   | 952,526 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | —    |                       |   | (658,075                                                | )      |      | —  |   |   | (658,075 | ) |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | 21,772,620 |                       |   | —                                                 |   |      | —  |   |   | 21,582,514 |   |
|                                                                             | 27,571     |                       |   | —                                                 |   |      | —  |   |   | 27,607 |   |
|                                                                             | —    |                       |   | —                                                 |   |      | —  |   |   | — |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | 34,672     |                       |   | —                                                 |   |      | —  |   |   | 34,672 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
|                                                                             | 130,709    |                       |   | —                                                 |   |      | —  |   |   | 130,709 |   |
|                                                                             |       |                       |   |                                                    |   |      |     |   |   |   |   |
| $                                                                                | 27,255,732 |                       | $      | 8,154,032                                               |   | $         | (244,858 | ) | $ | 35,198,062 |   |

 

*See Notes to Consolidated Financial Statements*

F-5

----

**Osage Bancshares, Inc.**

**Consolidated Statements of Cash Flows**

**Years Ended June 30, 2007, 2006 and 2005**

 

|                                                                                                    |   | **2007** |        | **2006** |   | **2005**    |   |
|---------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|-------------|--------|
| **Operating                            Activities**                                                     |   |     |        |     |   |        |   |   |   |   |
| Net income                                                                                              |   | $        | 939,956     |     | $      | 626,457     |   | $ | 604,554 |   |
| Items not requiring (providing)                            cash                                         |   |     |        |     |   |        |   |   |   |   |
| Depreciation                                                                                            |   |     | 93,095      |     |   | 100,296     |   |   | 121,261 |   |
| Provision for loan and foreclosed                            asset losses                               |   |     | 20,000      |     |   | 27,000      |   |   | — |   |
| Amortization of securities                            and originated mortgageservicing rights           |   |     | 80,260      |     |   | 115,234     |   |   | 106,747 |   |
| Restricted stock plan and option                            expense                                     |   |     | 137,351     |     |   | 137,351     |   |   | 57,963 |   |
| Deferred income taxes                                                                                   |   |     | 14,496      |     |   | (69,890     | )      |   | 13,360 |   |
| Gain on sale of mortgage                            loans                                               |   |     | (11,710     | )        |   | (38,878     | )      |   | (67,192 | ) |
| (Gain) loss on sale of foreclosed                            assets held for sale                       |   |     | (11,085     | )        |   | (19,357     | )      |   | 1,589 |   |
| Dividends on available-for-sale                            mutual funds                                 |   |     | (631,262    | )        |   | (485,005    | )      |   | (326,490 | ) |
| Stock dividends on Federal Home                            Loan Bank stock                              |   |     | (97,300     | )        |   | (76,100     | )      |   | (32,500 | ) |
| Loss on disposal of premises and                            equipment                                   |   |     | 2,166       |     |   | —     |   |   | 24 |   |
| Increase in cash surrender                            value of bank owned lifeinsurance                 |   |     | (77,051     | )        |   | (75,105     | )      |   | (77,727 | ) |
| Originations of loans held                            for delivery againstcommitments                   |   |     | (1,342,090  | )        |   | (4,926,870  | )      |   | (5,998,317 | ) |
| Proceeds from nonrecourse                            sale of loans held fordelivery against commitments |   |     | 1,502,166   |     |   | 4,790,250   |   |   | 6,037,154 |   |
| Allocation of Employee Stock                            Ownership Plan shares                           |   |     | 177,759     |     |   | 94,073      |   |   | 69,397 |   |
| Tax benefits of employee                            plans                                               |   |     | 34,671      |     |   | —     |   |   | — |   |
| Changes in                                                                                              |   |     |        |     |   |        |   |   |   |   |
| Interest receivable                                                                                     |   |     | (45,771     | )        |   | (76,094     | )      |   | (34,808 | ) |
| Other assets                                                                                            |   |     | (29,264     | )        |   | (9,994      | )      |   | 16,166 |   |
| Accrued interest and other                            liabilities                                       |   |     | 179,854     |     |   | 63,018      |   |   | 314,836 |   |
|                                                                                                    |   |     |        |     |   |        |   |   |   |   |
| Net cash provided by operating                            activities                                    |   |     | 936,241     |     |   | 176,386     |   |   | 806,017 |   |
|                                                                                                    |   |     |        |     |   |        |   |   |   |   |
| **Investing                            Activities**                                                     |   |     |        |     |   |        |   |   |   |   |
| Net change in loans                                                                                     |   |     | (10,898,414 | )        |   | (12,713,778 | )      |   | (9,935,859 | ) |
| Purchase of held-to-maturity                            securities                                      |   |     | —     |     |   | —     |   |   | (610,645 | ) |
| Purchases of premises and                            equipment                                          |   |     | (395,522    | )        |   | (21,278     | )      |   | (36,836 | ) |
| Purchase of Federal Home Loan                            Bank stock                                     |   |     | —     |     |   | (552,400    | )      |   | (365,000 | ) |
| Proceeds from sale of foreclosed                            assets                                      |   |     | 102,406     |     |   | 116,787     |   |   | 42,141 |   |
| Purchases of available-for-sale                            securities                                   |   |     | —     |     |   | (5,937,220  | )      |   | (3,135,039 | ) |
| Proceeds from maturities and                            paydowns of held-to-maturity securities         |   |     | 1,259,653   |     |   | 3,154,741   |   |   | 4,914,660 |   |
| Proceeds from maturities and                            paydowns of available-for-sale securities       |   |     | 2,545,803   |     |   | 3,178,912   |   |   | 33,776 |   |
|                                                                                                    |   |     |        |     |   |        |   |   |   |   |
| Net cash used in investing                            activities                                        |   |     | (7,386,074  | )        |   | (12,774,236 | )      |   | (9,092,802 | ) |

 

*See Notes to Consolidated Financial Statements*

 

|   | F-6 |
|--------|-----|

----

**Osage Bancshares, Inc.**

**Consolidated Statements of Cash Flows            (Continued)**

**Years Ended June 30, 2007, 2006 and 2005**

 

|                                                                                                                 |   | **2007** |        | **2006** |   | **2005**   |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|------------|--------|
| **Financing                            Activities**                                                                  |   |     |        |     |   |       |   |   |   |   |
| Net decrease in demand, money                            market, NOW                            and savings deposits |   | $        | (2,387,771  | )        | $      | (2,320,300 | )      | $ | (628,487 | ) |
| Net increase in certificates of                            deposit                                                   |   |     | 10,781,651  |     |   | 4,546,237  |   |   | 1,045,650 |   |
| Net increase (decrease) in                            Federal Home Loan Bank short-term borrowings                   |   |     | (20,850,000 | )        |   | 12,200,000 |   |   | 7,050,000 |   |
| Proceeds from Federal Home Loan                            Bank advances                                             |   |     | 2,000,000   |     |   | 3,000,000  |   |   | 5,000,000 |   |
| Repayments of Federal Home Loan                            Bank advances                                             |   |     | (1,500,000  | )        |   | (3,500,000 | )      |   | (3,000,000 | ) |
| Net increase (decrease) in                            advances from borrowers held in escrow                         |   |     | (24,648     | )        |   | 30,886     |   |   | 65,862 |   |
| Net proceeds from sale of common                            stock                                                    |   |     | 21,495,520  |     |   | —    |   |   | — |   |
| Payment of dividends (net of                            restricted stock dividends)                                  |   |     | (658,075    | )        |   | (984,033   | )      |   | (185,500 | ) |
| Shares purchased and withheld for                            restricted stock plans                                  |   |     | (6,643      | )        |   | (223,356   | )      |   | (429,686 | ) |
| Proceeds from exercise of stock                            options                                                   |   |     | 27,607      |     |   | 79,387     |   |   | — |   |
| Cash injection from Osage Federal                            MHC                                                     |   |     | 86,996      |     |   | —    |   |   | — |   |
| Net cash provided by financing                            activities                                                 |   |     | 8,964,637   |     |   | 12,828,821 |   |   | 8,917,839 |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| **Increase in Cash and Cash                            Equivalents**                                                 |   |     | 2,514,804   |     |   | 230,971    |   |   | 631,054 |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| **Cash and Cash Equivalents,                            Beginning of Year**                                          |   |     | 2,455,016   |     |   | 2,224,045  |   |   | 1,592,991 |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| **Cash and Cash Equivalents, End                            of Year**                                                |   | $        | 4,969,820   |     | $      | 2,455,016  |   | $ | 2,224,045 |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| **Supplemental Cash Flows                            Information**                                                   |   |     |        |     |   |       |   |   |   |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| Real estate and other assets                            acquired in settlement of loans                              |   | $        | 102,851     |     | $      | 125,831    |   | $ | 82,952 |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| Interest paid                                                                                                        |   | $        | 3,318,660   |     | $      | 2,817,880  |   | $ | 2,031,539 |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| Income taxes paid                                                                                                    |   | $        | 451,983     |     | $      | 398,764    |   | $ | 151,780 |   |
|                                                                                                                 |   |     |        |     |   |       |   |   |   |   |
| Mutual fund dividends                            reinvested                                                          |   | $        | 631,262     |     | $      | 485,005    |   | $ | 326,490 |   |

 

*See Notes to Consolidated Financial Statements*

F-7

----

**Osage Bancshares,            Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

 

| **Note 1:** | **Nature of Operations and Summary of Significant Accounting                            Policies** |
|-------------|----------------------------------------------------------------------------------------------------|

***Nature of Operations***

Osage Bancshares, Inc. (the Company) is a thrift holding            company whose principal activity is the ownership and management of Osage            Federal Bank (the Bank). The Bank is primarily engaged in providing a full range            of banking and financial services to individual and corporate customers in north            central Oklahoma. The Bank is subject to competition from other financial institutions.            The Bank is subject to the regulation of certain federal and state agencies and            undergoes periodic examinations by those regulatory authorities.

***Reorganization***

On January 17, 2007, Osage Federal MHC (the MHC) completed            its reorganization into stock form and the Company succeeded to the business of the            MHC‘s former federal mid-tier holding company subsidiary, Osage Federal            Financial, Inc., which ceased to exist. Each outstanding share of common stock of Osage            Federal Financial, Inc. was converted into 1.5739 shares of common stock of the            Company.  As part of the transaction, the Company sold a total of 2,513,880 shares            to the public at $10 per share, including 201,828 shares purchased by the            Company’s employee stock ownership plan with funds borrowed from the Company. The            Company, which is a state-chartered corporation, owns 100% of the Bank.

Offering costs were deferred and deducted from the            proceeds of the shares sold in the stock offering. If the offering had not been            completed, all costs would have been charged to expense. At June 30, 2007,            approximately $1,625,000 in such costs had been incurred.

At June 30, 2007, the consolidated financial statements of            the Company included those of the Bank. All intercompany items have been eliminated.            Prior to consummation of the reorganization, the Company had no assets or liabilities.            For periods prior to January 17, 2007, the Company’s financial statements consist            of those of Osage Federal Financial, Inc.  Earnings per share calculations and            other references to stock, such as Note 11, have been restated as if the reorganization            occurred at the beginning of the accounting periods presented.

***Principles of Consolidation***

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

***Use of Estimates***

The preparation of financial statements in conformity with            accounting principles generally accepted in the United States of America requires            management to make estimates and assumptions that affect the reported amounts of assets            and liabilities and disclosure of contingent assets and liabilities at the date of the            financial statements and the reported amounts of revenues and expenses during the            reporting period. Actual results could differ from those estimates.

 

 

F-8

----

 

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

Material estimates that are particularly            susceptible to significant change relate to the determination of the allowance for loan            losses and the valuation of assets acquired in connection with foreclosures or in            satisfaction of loans. In connection with the determination of the allowance for loan            losses and the valuation of foreclosed assets held for sale, management obtains            independent appraisals for significant properties.

***Cash Equivalents***

The Company considers all liquid investments with            original maturities of three months or less to be cash equivalents.

***Securities***

Available-for-sale securities, which include any            security for which the Company has no immediate plan to sell but which may be sold in            the future, are carried at fair value. Unrealized gains and losses are recorded, net of            related income tax effects, in stockholders’ equity.

Held-to-maturity securities, which include any            security for which the Company has the positive intent and ability to hold until            maturity, are carried at historical cost adjusted for amortization of premiums and            accretion of discounts.

Amortization of premiums and accretion of            discounts are recorded as interest income from securities. Realized gains and losses            are recorded as net security gains (losses). Gains and losses on sales of securities            are determined on the specific-identification method.

***Mortgage Loans Held for Sale***

Mortgage loans originated and intended for sale            in the secondary market are carried at the lower of cost or fair value in the            aggregate. Net unrealized losses, if any, are recognized through a valuation allowance            by charges to income.

***Loans***

Loans that management has the intent and ability            to hold until maturity or pay-offs are reported at their outstanding principal adjusted            for any charge-offs, the allowance for loan losses and any deferred fees or costs on            originated loans. Interest income is reported on the interest method and includes            amortization of net deferred loan fees and costs over the loan term. Generally, loans            are placed on non-accrual status at ninety days past due and interest is considered a            loss, unless the loan is well-secured and in the process of collection.

***Allowance for Loan Losses***

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

 

F-9

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

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 revision as more information becomes available.

A loan is considered impaired when, based on            current information and events, it is probable that the Bank 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 of the circumstances surrounding the loan and the            borrower, including the length of the 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.

***Premises and Equipment***

Depreciable assets are stated at cost less            accumulated depreciation. Depreciation is charged to expense using the straight-line            method over the estimated useful lives of the assets. Building and improvements,            furniture, fixtures, and equipment, and automobiles are depreciated using the            straight-line method over the estimated useful lives of the assets, which are as            follows:

             

|   |   | Buildings and                            improvements         |   | 5-40 years |   |
|--------|--------|---------------------------------------------------------------|--------|------------|--------|
|   |   | Furniture, fixtures, and                            equipment |   | 3-10 years |   |
|   |   | Automobiles                                                   |   | 5 years    |   |

             

***Federal Home Loan Bank Stock***

Federal Home Loan Bank stock is a required            investment for members of the Federal Home Loan Bank system. The required investment in            the common stock is based on a predetermined formula. At June 30, 2007, the Bank            held 18,083 shares with a cost of $1,808,300 and at June 30, 2006, the Bank held            17,110 shares of stock with a cost of $1,711,000.

***Foreclosed Assets Held for Sale***

Assets acquired through, or in lieu of, loan            foreclosure are held for sale and are initially recorded at fair value at the date of            foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are            periodically performed by management and the assets are carried at the lower of            carrying amount or fair value less cost to sell. Revenue and expenses from operations            and changes in the valuation allowance are included in net expenses from foreclosed            assets.

 

F-10

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

***Mortgage Servicing Rights***

Mortgage servicing rights on originated loans            that have been sold are capitalized by allocating the total cost of the mortgage loans            between the mortgage servicing rights and the loans based on their relative fair            values. Capitalized servicing rights are amortized in proportion to and over the period            of estimated servicing revenues. Impairment of mortgage-servicing rights is assessed            based on the fair value of those rights. Fair values are estimated using discounted            cash flows based on a current market interest rate. For purposes of measuring            impairment, the rights are stratified based on the predominant risk characteristics of            the underlying loans. The predominant characteristics currently used for stratification            are type of loan, contractual maturity and interest rate. The amount of impairment            recognized is the amount by which the capitalized mortgage servicing rights for a            stratum exceed their fair value.

***Income Taxes***

Deferred tax assets and liabilities are            recognized for the tax effect of differences between the financial statement and tax            bases of assets and liabilities. A valuation allowance is established to reduce            deferred tax assets if it is more likely than not that a deferred tax asset will not be            realized.

***Earnings Per Share***

Basic earnings per share is computed based on the            weighted average number of shares outstanding during the period. Diluted earnings per            share is computed using the weighted average common shares and all potentially dilutive            common shares outstanding during the period. Shares held by the ESOP are deducted from            the shares outstanding until committed to be released. All earnings per share            calculations have been restated as if the reorganization had occurred at the beginning            of the periods presented in the financial statements.

***Restriction on Cash and Due From Banks***

The Bank is required to maintain reserve funds in            cash by the Federal Reserve Bank. The reserves required at June 30, 2007 and 2006            were $103,000 and $106,000, respectively.

***Reclassifications***

Certain reclassifications have been made to the            2006 financial statements to conform to the 2007 financial statement presentation.            These reclassifications had no effect on net earnings.

 

F-11

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

| **Note 2:** | **Securities** |
|-------------|----------------|

The amortized cost and approximate fair values of            securities are as follows:

***Available-for-Sale Securities*** 

 

|                                                                                         |   | **June** **30, 2007** |       |
|----------------------------------------------------------------------------------------------|--------|----------------------------|------------|
|                                                                                         |   | **Amortized**

**Cost**    |       | **Gross**

**Unrealized**

**Gains** |   | **Gross**

**Unrealized**

**Losses** |   | **Approximate**

**Fair**

**Value** |   |
| Mutual fund consisting primarily                            of mortgage securities           |   | $                          | 13,059,170 |   | $ | — |   | $ | (369,290 | ) | $ | 12,689,880 |   |
| Mortgage-backed securities and                            collateralized mortgage securities |   |                       | 3,246,907  |   |   | 3,635 |   |   | (29,275 | ) |   | 3,221,267 |   |
|                                                                                         |   |                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                         |   | $                          | 16,306,077 |   | $ | 3,635 |   | $ | (398,565 | ) | $ | 15,911,147 |   |

 

 

|                                                                                         |   | **June** **30, 2006** |       |
|----------------------------------------------------------------------------------------------|--------|----------------------------|------------|
|                                                                                         |   | **Amortized**

**Cost**    |       | **Gross**

**Unrealized**

**Gains** |   | **Gross**

**Unrealized**

**Losses** |   | **Approximate**

**Fair**

**Value** |   |
| Mutual fund consisting primarily                            of mortgage securities           |   | $                          | 12,427,908 |   | $ | — |   | $ | (341,549 | ) | $ | 12,086,359 |   |
| Mortgage-backed securities and                            collateralized mortgage securities |   |                       | 5,822,898  |   |   | 2,889 |   |   | (76,545 | ) |   | 5,749,242 |   |
|                                                                                         |   |                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                         |   | $                          | 18,250,806 |   | $ | 2,889 |   | $ | (418,094 | ) | $ | 17,835,601 |   |

             

***Held-to-Maturity Securities***

 

|                                                                                          |   | **June** **30, 2007** |      |
|-----------------------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                                          |   | **Amortized**

**Cost**    |      | **Gross Unrealized Gains** |   | **Gross**

**Unrealized**

**Losses** |   | **Approximate**

**Fair**

**Value** |   |
| Mortgage-backed securities and                            collateralized mortgage obligations |   | $                          | 6,962,431 |   | $ | 2,657 |   | $ | (374,999 | ) | $ | 6,590,089 |   |
|                                                                                               |        |                            |           |  |  |  |  |  |  |  |  |  |  |

 

 

|                                                                                          |   | **June** **30, 2006** |      |
|-----------------------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                                          |   | **Amortized**

**Cost**    |      | **Gross**

**Unrealized**

**Gains** |   | **Gross**

**Unrealized**

**Losses** |   | **Approximate Fair                            Value** |   |
| Mortgage-backed securities and                            collateralized mortgage obligations |   | $                          | 8,220,499 |   | $ | 1,727 |   | $ | (469,048 | ) | $ | 7,753,178 |   |
|                                                                                               |        |                            |           |  |  |  |  |  |  |  |  |  |  |

             

The mortgage-backed securities and collateralized            mortgage obligations are not due on a single maturity date. All of these securities are            backed by either Freddie Mac, Fannie Mae or Ginnie Mae, or are private placement            securities rated at least AA.

 

F-12

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

The amortized cost of securities and overnight            funds pledged as collateral to secure public deposits and for other purposes amounted            to approximately $7,069,000 and $8,253,000 at June 30, 2007 and 2006,            respectively. The approximate fair value of pledged securities and overnight funds            amounted to approximately $6,759,000 and $7,836,000 at June 30, 2007 and 2006,            respectively.

Included in held-to-maturity securities at            June 30, 2007 and 2006, are certain collateralized mortgage obligations with an            amortized cost of $3,594,100 and $3,962,300, respectively, and a fair value of            $3,360,400 and $3,693,200, respectively, whose fair values may be more volatile as            yields earned are affected by the speed at which mortgages in an underlying trust are            paid prior to their scheduled maturities.

The Bank had no sales of available-for-sale or            held-to-maturity securities during the years ended June 30, 2007 and            2006.

Fair values of certain investments in            mortgage-backed and mutual fund securities are reported above at an amount less than            their historical cost. Total fair value of these investments at June 30, 2007 and            2006 was $21,709,631 and $24,909,652, which is approximately 96.5% and 95.6%,            respectively of the Bank’s available-for-sale and held-to-maturity investment            portfolio. These declines primarily resulted from the inverted rate curve in the            market.

Based on evaluation of available evidence,            including recent changes in market interest rates, credit rating information and            information obtained from regulatory filings, management believes the declines in fair            value for these securities are temporary.

Should the impairment of any of these securities            become other than temporary, the cost basis of the investment will be reduced and the            resulting loss recognized in net income in the period the other-than-temporary            impairment is identified.

The following table shows the Company’s            gross unrealized losses and fair value, aggregated by investment category and length of            time that individual securities have been in a continuous unrealized loss position at            June 30, 2007 and 2006.

             

|                                                                               |   | **June** **30, 2007** |    |
|------------------------------------------------------------------------------------|--------|----------------------------|---------|
|                                                                               |   | **Less than 12 Months**    |    | **12 Months or More** |   | **Total** |   |
| **Description of**

**Securities**                                                 |   | **Fair Value**             |    | **Unrealized**

**Losses** |   | **Fair Value** |   | **Unrealized**

**Losses** |   | **Fair Value** |   | **Unrealized**

**Losses** |   |
|                                                                               |   |                       |    |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed                            securities                              |   | $                          | 58,154  |   | $ | (652 | ) | $ | 8,961,597 |   | $ | (403,622 | ) | $ | 9,019,751 |   | $ | (404,274 | ) |
| Mutual fund consisting primarily                            of mortgage securities |   |                       | — |   |   | — |   |   | 12,689,880 |   |   | (369,290 | ) |   | 12,689,880 |   |   | (369,290 | ) |
|                                                                               |   |                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total temporarily impaired                            securities                   |   | $                          | 58,154  |   | $ | (652 | ) | $ | 21,651,477 |   | $ | (772,912 | ) | $ | 21,709,631 |   | $ | (773,564 | ) |

 

 

 

F-13

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

 

|                                                                               |   | **June** **30, 2007** |      |
|------------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                               |   | **Less than 12 Months**    |      | **12 Months or More** |   | **Total** |   |
| **Description of**

**Securities**                                                 |   | **Fair Value**             |      | **Unrealized**

**Losses** |   | **Fair Value** |   | **Unrealized**

**Losses** |   | **Fair Value** |   | **Unrealized**

**Losses** |   |
|                                                                               |   |                       |      |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed                            securities                              |   | $                          | 3,795,306 |   | $ | (53,546 | ) | $ | 9,027,987 |   | $ | (492,047 | ) | $ | 12,823,293 |   | $ | (545,593 | ) |
| Mutual fund consisting primarily                            of mortgage securities |   |                       | —   |   |   | — |   |   | 12,086,359 |   |   | (341,549 | ) |   | 12,086,359 |   |   | (341,549 | ) |
| Total temporarily impaired                            securities                   |   | $                          | 3,795,306 |   | $ | (53,546 | ) | $ | 21,114,346 |   | $ | (833,596 | ) | $ | 24,909,652 |   | $ | (887,142 | ) |

             

| **Note 3:** | **Loans and Allowance for Loan Losses** |
|-------------|-----------------------------------------|

Categories of loans include:

             

|                                                                       |   | **2007** |       | **2006** |   |
|----------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| First mortgage loans (principally                            conventional) |   |     |       |     |   |   |   |
| Principal balances                                                         |   |     |       |     |   |   |   |
| Secured by one-to four-family                            residences        |   | $        | 61,986,343 |     | $      | 54,742,425 |   |
| Secured by other                            properties                     |   |     | 11,957,074 |     |   | 7,195,324 |   |
| Construction loans                                                         |   |     | 2,817,627  |     |   | 4,675,090 |   |
|                                                                       |   |     | 76,761,044 |     |   | 66,612,839 |   |
| Less                                                                       |   |     |       |     |   |   |   |
| Undisbursed portion of                            construction loans       |   |     | 1,473,797  |     |   | 2,008,215 |   |
| Net deferred loan origination                            fees              |   |     | 84,944     |     |   | 46,053 |   |
|                                                                       |   |     | 1,558,741  |     |   | 2,054,268 |   |
| Total first mortgage                            loans                      |   |     | 75,202,303 |     |   | 64,558,571 |   |
| Consumer and other                            loans                        |   |     |       |     |   |   |   |
| Principal balances                                                         |   |     |       |     |   |   |   |
| Automobile                                                                 |   |     | 5,184,249  |     |   | 5,357,171 |   |
| Savings                                                                    |   |     | 812,561    |     |   | 732,160 |   |
| Second mortgage                                                            |   |     | 4,419,505  |     |   | 4,097,542 |   |
| Manufactured home                                                          |   |     | 273,616    |     |   | 287,738 |   |
| Commercial                                                                 |   |     | 1,740,125  |     |   | 1,755,437 |   |
| Other                                                                      |   |     | 1,491,241  |     |   | 1,538,317 |   |
| Total consumer and other                            loans                  |   |     | 13,921,297 |     |   | 13,768,365 |   |
| Total loans                                                                |   |     | 89,123,600 |     |   | 78,326,936 |   |
| Less allowance for loan                            losses                  |   |     | 402,402    |     |   | 399,701 |   |
|                                                                       |   | $        | 88,721,198 |     | $      | 77,927,235 |   |

 

 

F-14

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

Activity in the allowance for loan losses was as            follows:

             

|                                                                                                                                                                                                                      |   | **2007** |    | **2006** |   | **2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                                                                                                                                                                                      |   |     |    |     |   |     |   |
| Balance, beginning of                            year                                                                                                                                                                     |   | $        | 399,701 |     | $      | 393,475  |   | $ | 408,726 |   |
| Provision charged to                            expense                                                                                                                                                                   |   |     | 10,000  |     |   | 27,000   |   |   | — |   |
| Losses of $17,099, $21,074, and                            $15,752 charged off, net of                            recoveries of $9,800 for 2007, $300 for 2006 and $501 for                            2005, respectively |   |     | (7,299  | )        |   | (20,774  | )      |   | (15,251 | ) |
|                                                                                                                                                                                                                      |   |     |    |     |   |     |   |   |   |   |
| Balance, end of year                                                                                                                                                                                                      |   | $        | 402,402 |     | $      | 399,701  |   | $ | 393,475 |   |

             

Impaired loans totaled approximately $101,300 and            $124,100 at June 30, 2007 and 2006, respectively. An allowance for loan losses of            $2,000 relates to impaired loans at June 30, 2007 and 2006,            respectively.

Interest of approximately $6,000, $6,000 and            $12,000 was recognized in the years ended June 30, 2007, 2006 and 2005,            respectively, on average impaired loans of approximately $113,000, $159,000 and            $143,000 for 2007, 2006 and 2005, respectively. Interest of approximately $5,000,            $5,100 and $9,000 was recognized in the years ended June 30, 2007, 2006 and 2005,            respectively, on impaired loans on a cash basis during 2007, 2006 and 2005.

Non-accrual loans at June 30, 2007 and 2006            were $13,479 and $11,217, respectively. There were no loans past due greater than 90            days and still accruing interest at June 30, 2007 or 2006.

| **Note 4:** | **Loan Servicing** |
|-------------|--------------------|

Mortgage loans serviced for others are not            included in the accompanying consolidated balance sheets. The unpaid principal balances            of mortgage loans serviced for others totaled $38,694,308 and $41,615,338, at            June 30, 2007 and 2006, respectively.

Custodial escrow balances maintained in            connection with the foregoing loan servicing, and included in advances from borrowers            held in escrow, were approximately $386,000 and $433,000 at June 30, 2007 and            2006, respectively.

Mortgage servicing rights are included in assets            on the consolidated balance sheets in the caption titled “Other.” Activity            in mortgage servicing rights as follows:

 

|                                                        |   | **2007** |    | **2006** |   | **2005** |   |
|-------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                        |   |     |    |     |   |     |   |
| Balance, beginning of                            year       |   | $        | 88,911  |     | $      | 144,553  |   | $ | 193,312 |   |
| Servicing rights                            capitalized     |   |     | 7,134   |     |   | 19,998   |   |   | 28,355 |   |
| Amortization of servicing                            rights |   |     | (51,657 | )        |   | (75,640  | )      |   | (77,114 | ) |
| Valuation allowance                                         |   |     | — |     |   | —  |   |   | — |   |
|                                                        |   |     |    |     |   |     |   |   |   |   |
| Balance, end of year                                        |   | $        | 44,388  |     | $      | 88,911   |   | $ | 144,553 |   |

             

             

F-15

----

**Osage Bancshares,            Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30,            2007, 2006 and 2005**

 

There has been no impairment recognized on            mortgage servicing rights. This asset is valued at least annually based on current            terms of the underlying sold loans. Amortization of the asset, which is stratified into            various original lives of the loans, has been accelerated based on estimated current            lives of the underlying loans. This is due to the high level of refinancing that            occurred in prior years.

             

| **Note 5:** | **Premises and Equipment** |
|-------------|----------------------------|

Major classifications of premises and equipment,            stated at cost, are as follows:

 

|                                                         |   | **2007** |      | **2006** |   |
|--------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                         |   |     |      |     |   |
| Land                                                         |   | $        | 126,594   |     | $      | 126,594 |   |
| Buildings and                            improvements        |   |     | 1,896,419 |     |   | 1,723,565 |   |
| Furniture, fixtures and                            equipment |   |     | 832,230   |     |   | 656,571 |   |
| Automobiles                                                  |   |     | 55,727    |     |   | 52,811 |   |
|                                                         |   |     | 2,910,970 |     |   | 2,559,541 |   |
| Less accumulated                            depreciation     |   |     | 1,455,319 |     |   | 1,404,151 |   |
|                                                         |   |     |      |     |   |   |   |
| Net premises and                            equipment        |   | $        | 1,455,651 |     | $      | 1,155,390 |   |

             

| **Note 6:** | **Income Taxes** |
|-------------|------------------|

The provision for income taxes consists            of:

 

|                                               |   | **2007** |    | **2006** |   | **2005** |   |
|----------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                               |   |     |    |     |   |     |   |
| Taxes currently                            payable |   | $        | 508,100 |     | $      | 414,545  |   | $ | 294,524 |   |
| Deferred income taxes                              |   |     | 14,496  |     |   | (69,890  | )      |   | 13,360 |   |
|                                               |   |     |    |     |   |     |   |   |   |   |
| Income tax expense                                 |   | $        | 522,596 |     | $      | 344,655  |   | $ | 307,884 |   |

             

 

 

F-16

----

 

 

 

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

A reconciliation of income tax expense at the            statutory rate to the Company’s actual income tax expense is shown            below:

 

|                                                                                                                    |   | **2007** |    | **2006** |   | **2005** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                                                                                    |   |     |    |     |   |     |   |
| Computed at the statutory rate                            (34%)                                                         |   | $        | 497,266 |     | $      | 330,178  |   | $ | 310,229 |   |
| Increase (decrease) resulting                            from                                                           |   |     |    |     |   |     |   |   |   |   |
| Nontaxable interest income, net                            of nondeductible interest                            expense |   |     | (9,514  | )        |   | (3,635   | )      |   | (1,587 | ) |
| Nontaxable increase in cash value                            of bank-owned life                            insurance    |   |     | (26,197 | )        |   | (25,536  | )      |   | (26,427 | ) |
| Nondeductible meals and                            entertainment costs                                                  |   |     | 3,268   |     |   | 3,170    |   |   | 3,228 |   |
| State income taxes – net of                            federal tax benefit                                        |   |     | 52,155  |     |   | 33,962   |   |   | 31,844 |   |
| Nondeductible stock option                            expense                                                           |   |     | 12,915  |     |   | 12,915   |   |   | 7,534 |   |
| Other                                                                                                                   |   |     | (7,297  | )        |   | (6,399   | )      |   | (16,937 | ) |
|                                                                                                                    |   |     |    |     |   |     |   |   |   |   |
| Actual tax expense                                                                                                      |   | $        | 522,596 |     | $      | 344,655  |   | $ | 307,884 |   |
|                                                                                                                    |   |     |    |     |   |     |   |   |   |   |
| Effective tax rate                                                                                                      |   |     | 35.7    | %        |   | 35.5     | %      |   | 33.7 | % |

             

The tax effects of temporary differences related            to deferred taxes shown on the consolidated balance sheets are:

 

|                                                                                |   | **2007** |     | **2006** |   |
|-------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Deferred tax assets                                                                 |   |     |     |     |   |   |   |
| Allowance for loan                            losses                                |   | $        | 152,153  |     | $      | 151,126 |   |
| Benefit plan accruals                                                               |   |     | 166,198  |     |   | 109,456 |   |
| Nonaccrual loan                            interest                                 |   |     | 135      |     |   | 149 |   |
| Foreclosed assets                            reserve                                |   |     | 3,800    |     |   | — |   |
| Unrealized depreciation on                            available-for-sale securities |   |     | 150,073  |     |   | 157,778 |   |
|                                                                                |   |     | 472,359  |     |   | 418,509 |   |
|                                                                                |   |     |     |     |   |   |   |
| Deferred tax                            liabilities                                 |   |     |     |     |   |   |   |
| Originated mortgage servicing                            rights                     |   |     | (17,196  | )        |   | (34,115 | ) |
| Federal Home Loan Bank stock                            dividends                   |   |     | (223,972 | )        |   | (186,998 | ) |
| Accumulated                            depreciation                                 |   |     | (126,993 | )        |   | (85,279 | ) |
| Benefit plan                            deductions                                  |   |     | (77,021  | )        |   | (62,632 | ) |
| Other                                                                               |   |     | (1,586   | )        |   | (1,693 | ) |
|                                                                                |   |     | (446,768 | )        |   | (370,717 | ) |
|                                                                                |   |     |     |     |   |   |   |
| Net deferred tax asset                                                              |   | $        | 25,591   |     | $      | 47,792 |   |

             

 

F-17

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

Retained earnings at June 30, 2007 and 2006,            include approximately $615,000 for which no deferred federal income tax liability has            been recognized. This amount represents an allocation of income to bad debt deductions            for tax purposes only. If the Bank were to liquidate, the entire amount would have to            be recaptured and would create income for tax purposes only, which would be subject to            the then current corporate income tax rate. The unrecorded deferred income tax            liability on the preceding amount was approximately $246,000 at June 30, 2007 and            2006.

| **Note 7:** | **Deposits** |
|-------------|--------------|

Deposits are summarized as follows:

             

|                                                                                                                                                                                                                                                                                                                                                                                                                                   | **Weighted                            Average Interest Rate** |  |   |  

                             

**2007** |   |   |  

                             

**2006** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------|--|--------|------------------------------------------------------|--------|--------|------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                          |  |   |                                                 |   |   |                                                 |
|                                         Demand and NOW accounts, including                        noninterest                                                                       bearing deposits of $4,177,442 at June 30, 2007 |                                                               |  |        |                                                      |        |        |                                                      |
|                                              and  $4,806,285 at June 30, 2006                                                                                                                                                                                                                                            | 1.15% - 1.29%                                                 |  | $      | 12,447,963                                           |        | $      | 13,417,237                                           |
| Money market                                                                                                                                                                                                                                                                                                                                                                                                                           | 1.50% - 1.41%                                                 |  |   | 5,194,564                                            |   |   | 6,115,958                                            |
| Passbook savings                                                                                                                                                                                                                                                                                                                                                                                                                       | .79% - .76%                                                   |  |   | 3,553,535                                            |   |   | 4,050,637                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                          |  |   | 21,196,062                                           |   |   | 23,583,832                                           |
| Certificates of                            deposit                                                                                                                                                                                                                                                                                                                                                                                     |                                                          |  |   |                                                 |   |   |                                                 |
| 1% to 1.99%                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                          |  |   | 2,198,718                                            |   |   | 3,491,258                                            |
| 2% to 2.99%                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                          |  |   | 3,749,053                                            |   |   | 5,384,893                                            |
| 3% to 3.99%                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                          |  |   | 5,838,105                                            |   |   | 7,962,430                                            |
| 4% to 4.99%                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                          |  |   | 23,392,278                                           |   |   | 20,042,975                                           |
| 5% to 5.99%                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                          |  |   | 16,329,398                                           |   |   | 3,844,346                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                          |  |   | 51,507,552                                           |   |   | 40,725,902                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                          |  |   |                                                 |   |   |                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                          |  | $      | 72,703,614                                           |   | $      | 64,309,734                                           |

             

The aggregate amount of certificates of deposit            with a denomination in excess of $100,000 was $22,761,267 and $14,938,197 at June 30,            2007 and 2006, respectively. Certificates of deposit in excess of $100,000 and            retirement accounts in excess of $250,000 are not federally insured.

At June 30, 2007, scheduled maturities of            certificates of deposit are as follows:

 

|        |   | **2008** |       | **2009** |   | **2010**  |   | **2011** |      | **2012** |   |
|-------------|--------|----------|------------|----------|--------|-----------|--------|----------|-----------|----------|--------|
|        |   |     |       |     |   |      |   |     |      |     |   |
| 1% to 1.99% |   | $        | 2,146,429  |     | $      | 52,289    |   | $        | —   |     | $      | — |   | $ | — |   |
| 2% to 2.99% |   |     | 3,227,955  |     |   | 443,928   |   |     | 77,170    |     |   | — |   |   | — |   |
| 3% to 3.99% |   |     | 2,440,818  |     |   | 1,766,634 |   |     | 708,432   |     |   | 399,370 |   |   | 522,851 |   |
| 4% to 4.99% |   |     | 17,137,936 |     |   | 2,300,560 |   |     | 2,057,739 |     |   | 945,496 |   |   | 950,547 |   |
| 5% to 5.99% |   |     | 14,217,455 |     |   | 464,441   |   |     | 874,472   |     |   | 309,873 |   |   | 463,157 |   |
|        |   |     |       |     |   |      |   |     |      |     |   |   |   |   |   |   |
|        |   | $        | 39,170,593 |     | $      | 5,027,852 |   | $        | 3,717,813 |     | $      | 1,654,739 |   | $ | 1,936,555 |   |

             

 

F-18

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

Interest expense on deposits is summarized as            follows:

 

|                                               |   | **2007** |      | **2006** |   | **2005**  |   |
|----------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                               |   |     |      |     |   |      |   |
| Money market                                       |   | $        | 93,322    |     | $      | 98,445    |   | $ | 147,644 |   |
| Passbook savings                                   |   |     | 34,243    |     |   | 31,531    |   |   | 32,876 |   |
| NOW                                                |   |     | 66,659    |     |   | 91,593    |   |   | 78,654 |   |
| Certificates of                            deposit |   |     | 2,099,601 |     |   | 1,300,501 |   |   | 1,104,631 |   |
|                                               |   |     |      |     |   |      |   |   |   |   |
|                                               |   | $        | 2,293,825 |     | $      | 1,522,070 |   | $ | 1,363,805 |   |

             

| **Note 8:** | **Federal Home Loan Bank Advances** |
|-------------|-------------------------------------|

Advances from the Federal Home Loan Bank consist            of the following:

 

|               |   | **2007**   |       | **2006**               |                      |
|--------------------|--------|------------|------------|------------------------|---------------------------|
|               |   |       |       |                   | **Weighted**

**Average** |   |   |   |   | **Weighted**

**Average** |   |
|  

**Due In** |   | **Amount** |       | **Interest**

**Rate** |                      | **Amount** |   | **Interest**

**Rate** |   |
|                    |        |            |            |                        |                           |  |  |  |  |  |  |
| 2007               |   | $          | —    |                   | 0.00                      | % | $ | 22,350,000 |   | 5.39 | % |
| 2008               |   |       | 2,000,000  |                   | 3.75                      | % |   | 2,000,000 |   | 3.75 | % |
| 2009               |   |       | 2,000,000  |                   | 4.31                      | % |   | 2,000,000 |   | 4.31 | % |
| 2010               |   |       | 1,000,000  |                   | 4.22                      | % |   | 1,000,000 |   | 4.22 | % |
| 2011               |   |       | 2,000,000  |                   | 4.63                      | % |   | 1,000,000 |   | 4.24 | % |
| 2012               |   |       | 2,000,000  |                   | 4.33                      | % |   | 2,000,000 |   | 4.33 | % |
| 2013 and later     |   |       | 4,000,000  |                   | 4.90                      | % |   | 3,000,000 |   | 4.80 | % |
|               |   |       |       |                   |                      |   |   |   |   |   |   |
|               |   | $          | 13,000,000 |                   | 4.45                      | % | $ | 33,350,000 |   | 5.04 | % |

             

The Federal Home Loan Bank requires the Bank to            maintain Federal Home Loan Bank stock, investment securities and first mortgage loans            free of pledges, liens and encumbrances in an amount equal to at least 117% of            outstanding advances as collateral for such borrowings.

| **Note 9:** | **Regulatory Matters** |
|-------------|------------------------|

The Bank is subject to various regulatory capital            requirements administered by the federal 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 and 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 classification are also subject to            qualitative judgments by the regulators about components, risk weightings and other            factors.

 

F-19

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

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 total and Tier I capital (as defined in the regulations)            to risk-weighted assets (as defined) and of Tier I capital (as defined) to adjusted            tangible assets (as defined). Management believes, as of June 30, 2007, that the Bank            meets all capital adequacy requirements to which it is subject.

As of June 30, 2007, the most recent notification            from the Office of Thrift Supervision (OTS) 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 total risk-based, Tier I risk-based and            Tier I leverage ratios as set forth in the table. There are no conditions or events            since that notification that management believes have changed the Bank’s            category.

The Bank’s actual capital amounts and            ratios are also presented in the table. No amount was deducted from capital for            interest-rate risk.

 

|                                                     |   |               | **Actual** |   |      |   | **For Capital**

**Adequacy**

**Purposes** |   |       |   | **To Be Well**

**Capitalized**

**Under Prompt**

**Corrective**

**Action**

**Provisions** |   |
|----------------------------------------------------------|--------|--------------------|------------|--------|-----------|--------|---------------------------------------------|--------|------------|--------|-----------------------------------------------------------------------------------------------|--------|
|                                                     |   |               | **Amount** |   | **Ratio** |   |                                        |   | **Amount** |   | **Ratio**                                                                                     |   |   |   | **Amount** |   | **Ratio** |   |
|                                                     |   | **(In Thousands)** |       |
| As of June 30, 2007                                      |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| Total Risk-Based                            Capital      |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Risk-Weighted                            Assets)     |   | $                  | 23,666     |   | 37.13     | %      |                                        | $      | 5,100      | >   | 8.0                                                                                           | %      |   | $ | 6,375 |   | 10.0 | % |
| Tier I Capital                                           |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Risk-Weighted                            Assets)     |   | $                  | 23,266     |   | 36.50     | %      |                                        | $      | 2,550      | >   | 4.0                                                                                           | %      |   | $ | 3,825 |   | 6.0 | % |
| Tier I                            Capital                |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Adjusted Tangible                            Assets) |   | $                  | 23,266     |   | 18.89     | %      |                                        | $      | 4,927      | >   | 4.0                                                                                           | %      |   | $ | 6,159 |   | 5.0 | % |
| Tangible Capital                                         |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Adjusted Tangible                            Assets) |   | $                  | 23,266     |   | 18.89     | %      |                                        | $      | 1,847      | >   | 1.5                                                                                           | %      |   |   | N/A |   | N/A |   |
|                                                     |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| As of June 30, 2006                                      |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| Total Risk-Based                            Capital      |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Risk-Weighted                            Assets)     |   | $                  | 12,506     |   | 21.07     | %      |                                        | $      | 4,749      | >   | 8.0                                                                                           | %      |   | $ | 5,936 |   | 10.0 | % |
| Tier I Capital                                           |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Risk-Weighted                            Assets)     |   | $                  | 12,108     |   | 20.40     | %      |                                        | $      | 2,375      | >   | 4.0                                                                                           | %      |   | $ | 3,563 |   | 6.0 | % |
| Tier I Capital                                           |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Adjusted Tangible                            Assets) |   | $                  | 12,108     |   | 10.74     | %      |                                        | $      | 4,509      | >   | 4.0                                                                                           | %      |   | $ | 5,636 |   | 5.0 | % |
| Tangible Capital                                         |   |               |       |   |      |   |                                        |   |       |   |                                                                                          |   |   |   |   |   |   |   |
| (to Adjusted Tangible                            Assets) |   | $                  | 12,108     |   | 10.74     | %      |                                        | $      | 1,691      | >   | 1.5                                                                                           | %      |   | $ | N/A |   | N/A |   |

 

Payment of dividends on the common stock is            subject to determination and declaration by the Board of Directors and depends on a            number of factors, including capital requirements, regulatory limitation on payment of            dividends, the Bank’s results of operations and financial condition, tax            considerations, and general economic conditions.

             

F-20

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

A savings institution that is a subsidiary of a            savings and loan holding company, such as the Bank, must file an application or a            notice with the Office of Thrift Supervision at least thirty days before making a            capital distribution. A savings institution must file an application for prior approval            of a capital distribution if: (i) it is not eligible for expedited treatment under the            applications processing rules of the Office of Thrift Supervision; (ii) the total            amount of all capital distributions, including the proposed capital distribution, for            the applicable calendar year would exceed an amount equal to the savings            institution’s net income for that year to date plus the institution’s            retained net income for the preceding two years; (iii) it would not be adequately            capitalized after the capital distribution; or (iv) the distribution would violate an            agreement with the Office of Thrift Supervision or applicable regulations. At June 30,            2007, the Bank had approximately $1.6 million available for dividends that it could pay            to the Company without prior regulatory approval.

             

A reconciliation of the Bank’s equity under            generally accepted accounting principles to regulatory capital shown above is as            follows:

 

|                                                                  |   | **2007**           |   | **2006** |   |
|-----------------------------------------------------------------------|--------|--------------------|--------|----------|--------|
|                                                                  |   | **(In Thousands)** |   |
|                                                                  |   |               |   |     |   |
| GAAP equity                                                           |   | $                  | 23,025 |     | $      | 11,859 |   |
| Plus (Less):                                                          |   |               |   |     |   |   |   |
| Net unrealized losses on equity                            securities |   |               | 245    |     |   | 258 |   |
| Disallowed servicing                            assets                |   |               | (4     | )        |   | (9 | ) |
| Tangible capital                                                      |   |               | 23,266 |     |   | 12,108 |   |
| Plus:                                                                 |   |               |   |     |   |   |   |
| General allowance for                            losses               |   |               | 400    |     |   | 398 |   |
|                                                                  |   |               |   |     |   |   |   |
| Total Risk-Based                            Capital                   |   | $                  | 23,666 |     | $      | 12,506 |   |

             

| **Note 10:** | **Pension Plan** |
|--------------|------------------|

The Company has a defined contribution pension            plan covering all employees who have at least one year of service, have reached the age            of 21 and work greater than 1,000 hours during the plan year. Employees may contribute            up to 15%, subject to Internal Revenue Service limitations, excluding catch-up            adjustments allowed by the Internal Revenue Service, of their compensation with the            Company matching 100% of the employee’s contribution on the first 3%, and 50% on            the next 2%, of the employee’s compensation, for a total of 4%. Employer            contributions charged to expense for the years ended June 30, 2007, 2006 and 2005 were            approximately $34,000, $32,000 and $30,000, respectively.

 

F-21

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

| **Note 11:** |   | **Employee Stock Plans** |
|--------------|--------|--------------------------|

***Employee Stock Ownership Plan***

As part of the conversion in March 2004, Osage            Federal Financial, Inc., (OFFO) the prior mid-tier holding company of the Bank,            established an ESOP covering substantially all employees of OFFO. The ESOP acquired            54,751 shares of OFFO common stock at $10.00 per share in the conversion (on a restated            basis, 86,172 shares of Osage Bancshares, Inc. stock) with funds provided by a loan            from OFFO at an annual interest rate of 4.0%. Accordingly, $547,510 representing costs            of unreleased shares acquired by the ESOP was initially shown as a reduction of            stockholders’ equity. In the stock offering on January 17, 2007, the Company            (Osage Bancshares, Inc.) added to those shares, and the ESOP acquired an additional            201,828 shares of the Company’s stock. Shares are released to participants            proportionately as the loan is repaid. Dividends on allocated shares are recorded as            dividends and charged to retained earnings. Dividends on unallocated shares are used to            repay the loan and are treated as a reduction in debt. Compensation expense is recorded            equal to the fair value of shares committed to be released. ESOP expense for the years            ended June 30, 2007, 2006 and 2005 was $129,750, $81,091 and $73,926,            respectively.

A recap of ESOP shares at June 30, 2007 and 2006            is as follows (restated for the reorganization on January 17, 2007):

 

|                                                        |   | **June 30,**

**2007** |      | **June 30,**

**2006** |   |
|-------------------------------------------------------------|--------|------------------------|-----------|------------------------|--------|
|                                                        |   |                   |      |                   |   |
| Allocated shares                                            |   |                   | 42,640    |                   |   | 21,117 |   |
| Shares committed to be                            released  |   |                   | —   |                   |   | — |   |
| Unallocated shares                                          |   |                   | 245,360   |                   |   | 65,055 |   |
|                                                        |   |                   |      |                   |   |   |   |
| Total ESOP shares                                           |   |                   | 288,000   |                   |   | 86,172 |   |
|                                                        |   |                   |      |                   |   |   |   |
| Fair value of unallocated                            shares |   | $                      | 2,075,746 |                   | $      | 826,680 |   |

             

The Company is obligated at the option of each            beneficiary to repurchase shares of the ESOP upon the beneficiary’s termination            or after retirement. At June 30, 2007 and 2006, there were 254 and 219 outstanding            shares, respectively, held by former employees that are subject to an ESOP-related            repurchase option.

 

F-22

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

***Stock Option and Restricted Stock Plans***

On November 17, 2004, the Company held its annual            meeting of shareholders at which the shareholders approved the Osage Bancshares, Inc.            2004 Stock Option Plan (the Plan). The purpose of the Plan is to attract and retain            qualified personnel for positions of substantial responsibility, and to provide            additional incentive to certain officers, directors and other employees. 179,524            options were approved and 161,562 options were granted. The Company is applying FAS            123(R) to account for the stock option plan. The shareholders also approved the Osage            Federal Bank 2004 Restricted Stock Plan (the RSP). The purpose of the RSP is to reward            and retain personnel of experience and ability in key positions of responsibility,            including officers, directors and other employees. The purchase of up to 71,806 shares            was approved and 64,614 shares were granted.

Stock options are granted with an exercise price            equal to the market price of the Company’s stock at the date of grant. Both            option and RSP awards vest 20% annually based on 5 years of continuous service. The            option awards have 10 year contractual terms. Option and share awards provide for            accelerated vesting if there is a change in control as defined in the Plan and            RSP.

The fair value of each stock option is estimated            on the date of grant using the Black-Scholes model that uses the assumptions noted in            the following table. Expected volatilities are based on historical volatility of the            Company’s stock. The Company uses historical data to estimate option exercise and            employee termination within the valuation model. The expected term of options granted            is an estimate by management and represents the period of time that options granted are            expected to be outstanding. The risk-free rate for periods within the contractual life            of the options is based on the U.S. Treasury rate for a similar term in effect at the            time of grant. There were no stock options granted during the years ended June 30, 2007            and 2006.

             

|                                                   |   | **June 30,**

**2005** |   |
|--------------------------------------------------------|--------|------------------------|--------|
|                                                   |   |                   |   |
| Expected volatility                                    |   | 25                     | %      |
| Weighted average                            volatility |   | 25                     | %      |
| Expected dividends                                     |   | 6                      | %      |
| Expected term (in                            years)    |   | 6                      |   |
| Risk-free interest                            rate     |   | 3.47                   | %      |

             

The weighted-average grant-date fair value of            stock options granted during the year ended June 30, 2005 was $1.18. The total            intrinsic value of options exercised during the years ended June 30, 2007 and 2006 were            $7,900 and $13,500, respectively. No options were exercised during the 2005 fiscal            year.

F-23

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June 30, 2007, 2006 and 2005**

 

A summary of option activity under the Plan as of            June 30, 2007 and 2006 and changes during the year and nine months then ended,            respectively, is presented below:

             

|  

                             

                             

**Options** |   |  

                             

                             

**Shares** |   | **Weighted-**

**Average**

**Exercise**

**Price** |   | **Weighted-**

**Average**

**Remaining**

**Contractual Term** |   |  

**Aggregate**

**Intrinsic**

**Value** |
|---------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------------------|--------|-------------------------------------------------|
|                                                                                        |   |                                                                                       |   |                                                |   |                                                            |   |                                            |
| Outstanding at July 1,                            2004                                      |   | —                                                                                    |   | $0.00                                               |   |                                                            |   |                                            |
| Granted                                                                                     |   | 161,562                                                                                    |   | 7.69                                                |   |                                                            |   |                                            |
|                                                                                        |   |                                                                                       |   |                                                |   |                                                            |   |                                            |
| Outstanding at July 1,                            2005                                      |   | 161,562                                                                                    |   | 7.69                                                |   | 9 years, 6 months                                               |   |                                            |
| Granted                                                                                     |   | —                                                                                    |   | —                                             |   |                                                            |   |                                            |
| Exercised                                                                                   |   | 8,975                                                                                      |   | 7.69                                                |   |                                                            |   |                                            |
|                                                                                        |   |                                                                                       |   |                                                |   |                                                            |   |                                            |
| Outstanding at July 1,                            2006                                      |   | 152,587                                                                                    |   | 7.69                                                |   | 8 years, 6 months                                               |   |                                            |
| Granted                                                                                     |   | —                                                                                    |   | 0.00                                                |   |                                                            |   |                                            |
| Exercised                                                                                   |   | 3,590                                                                                      |   | 7.69                                                |   |                                                            |   |                                            |
|                                                                                        |   |                                                                                       |   |                                                |   |                                                            |   |                                            |
| Outstanding at June 30,                            2007                                     |   | 149,997                                                                                    |   | $7.69                                               |   | 7 years, 6 months                                               |   | $114,728                                        |
|                                                                                        |   |                                                                                       |   |                                                |   |                                                            |   |                                            |
| Exercisable at June 30,                            2007                                     |   | 52,058                                                                                     |   | $7.69                                               |   |                                                            |   | $ 40,085                                        |

             

A summary of the status of the Company’s            nonvested shares as of June 30, 2007, and changes during the year ended June 30, 2007,            is presented below:

 

|                                                    |   | **Shares** |   | **Weighted-**

**Average**

**Grant-Date**

**Fair Value** |   |
|---------------------------------------------------------|--------|------------|--------|------------------------------------------------------------|--------|
|                                                    |   |       |   |                                                       |   |
| Nonvested, beginning of                            year |   | 129,255    |   | $                                                          | 7.69   |   |
| Granted                                                 |   | —    |   |                                                       | 0.00   |   |
| Vested                                                  |   | 32,316     |   |                                                       | 7.69   |   |
| Forfeited                                               |   | —    |   |                                                       | 0.00   |   |
|                                                    |   |       |   |                                                       |   |   |
| Nonvested, end of year                                  |   | 96,939     |   | $                                                          | 7.69   |   |

             

As of June 30, 2007, there was $92,000 of total            unrecognized compensation cost related to nonvested share-based compensation            arrangements granted under the Plan. That cost is expected to be recognized over a            weighted-average period of 2.4 years. The total fair value of shares vested during the            year ended June 30, 2007, was $371,000.

Expense recognized for the stock option plan and            the restricted stock plan was $37,986 and $114,261, respectively for the year ended            June 30, 2007. This includes $14,896 of dividends for unearned shares in the restricted            stock plan which are accounted for as compensation expense.

Expense recognized for the stock option plan and            the restricted stock plan was $37,986 and $150,857, respectively for the year ended            June 30, 2006. This includes $51,492 of dividends for unearned shares in the restricted            stock plan which are accounted for as compensation expense.

 

F-24

----

 

 

 

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 
| **Note 12:** |   | **Other Operating Expenses** |
|--------------|--------|------------------------------|

Other operating expenses consist of the            following:

 

|                                                        |   | **2007** |    | **2006** |   | **2005** |   |
|-------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                        |   |     |    |     |   |     |   |   |   |   |
| Bank charges                                                |   | $        | 78,004  |     | $      | 83,806   |   | $ | 82,986 |   |
| Professional services                                       |   |     | 128,404 |     |   | 121,011  |   |   | 133,931 |   |
| Postage                                                     |   |     | 46,216  |     |   | 45,057   |   |   | 40,453 |   |
| Telephone                                                   |   |     | 17,344  |     |   | 16,447   |   |   | 16,917 |   |
| Operating supplies                                          |   |     | 32,912  |     |   | 31,888   |   |   | 32,832 |   |
| Insurance                                                   |   |     | 16,667  |     |   | 13,143   |   |   | 11,394 |   |
| Electronic data                            processing       |   |     | 134,007 |     |   | 115,470  |   |   | 102,934 |   |
| Advertising and public                            relations |   |     | 105,570 |     |   | 81,691   |   |   | 72,737 |   |
| Donations                                                   |   |     | 4,691   |     |   | 7,659    |   |   | 11,347 |   |
| Directors’ fees                                       |   |     | 76,400  |     |   | 76,400   |   |   | 76,400 |   |
| OTS assessments                                             |   |     | 41,758  |     |   | 34,614   |   |   | 33,104 |   |
| Other                                                       |   |     | 180,819 |     |   | 136,217  |   |   | 145,090 |   |
|                                                        |   |     |    |     |   |     |   |   |   |   |
|                                                        |   | $        | 862,792 |     | $      | 763,403  |   | $ | 760,125 |   |

             
| **Note 13:** |   | **Disclosures about the Fair Value of Financial Instruments** |
|--------------|--------|---------------------------------------------------------------|

The following table presents estimated fair            values of the Company’s financial instruments. The fair values of certain of            these instruments were calculated by discounting expected cash flows, which involves            significant judgments by management and uncertainties. Fair value is the estimated            amount at which financial assets or liabilities could be exchanged in a current            transaction between willing parties, other than in a forced or liquidation sale.            Because no market exists for certain of these financial instruments and because            management does not intend to sell these financial instruments, the Company does not            know whether the fair values shown below represent values at which the respective            financial instruments could be sold individually or in the aggregate.

 

|                                                       |   | **2007**                 |       | **2006**       |   |
|------------------------------------------------------------|--------|--------------------------|------------|----------------|--------|
|                                                       |   | **Carrying**

**Amount** |       | **Fair Value** |   | **Carrying**

**Amount** |   | **Fair Value** |   |
| Financial assets                                           |   |                     |       |           |   |   |   |   |   |   |   |   |   |
| Cash and cash                            equivalents       |   | $                        | 4,969,820  |           | $      | 4,969,820 |   | $ | 2,455,016 |   | $ | 2,455,016 |   |
| Available-for-sale                            securities   |   |                     | 15,911,147 |           |   | 15,911,147 |   |   | 17,835,601 |   |   | 17,835,601 |   |
| Held-to-maturity                            securities     |   |                     | 6,962,431  |           |   | 6,590,089 |   |   | 8,220,499 |   |   | 7,753,178 |   |
| Loans, net                                                 |   |                     | 88,721,198 |           |   | 89,003,988 |   |   | 77,927,235 |   |   | 76,502,603 |   |
| Interest receivable                                        |   |                     | 476,381    |           |   | 476,381 |   |   | 430,610 |   |   | 430,610 |   |
| Federal Home Loan Bank                            stock    |   |                     | 1,808,300  |           |   | 1,808,300 |   |   | 1,711,000 |   |   | 1,711,000 |   |
|                                                       |   |                     |       |           |   |   |   |   |   |   |   |   |   |
| Financial liabilities                                      |   |                     |       |           |   |   |   |   |   |   |   |   |   |
| Deposits                                                   |   |                     | 72,703,614 |           |   | 72,403,268 |   |   | 64,309,734 |   |   | 63,593,784 |   |
| Accrued interest                            payable        |   |                     | 29,479     |           |   | 29,479 |   |   | 11,968 |   |   | 11,968 |   |
| Federal Home Loan Bank                            advances |   |                     | 13,000,000 |           |   | 12,611,239 |   |   | 33,350,000 |   |   | 32,805,044 |   |

             

F-25

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

             

The fair value of off-balance sheet items such as            loan commitments are not material. The following methods and assumptions were used to            estimate the fair value of each class of financial instruments.

***Cash and Cash Equivalents, and Federal Home Loan Bank            Stock***

The carrying amount approximates fair            value.

***Securities***

Fair values equal quoted market prices, if            available. If quoted market prices are not available, fair value is estimated based on            quoted market prices of similar securities.

***Loans***

The fair value of loans is estimated by            discounting the future cash flows using the current rates at which similar loans would            be made to borrowers with similar credit ratings and for the same remaining maturities.            Loans with similar characteristics were aggregated for purposes of the calculations.            The carrying amount of interest receivable approximates its fair value.

***Deposits and Accrued Interest Payable***

The fair value of demand deposits, savings            accounts, NOW accounts and certain money market deposits is the amount payable on            demand at the reporting date,*i.e*.,            their carrying amount. The fair value of fixed-maturity time deposits is estimated            using a discounted cash flow calculation that applies the rates currently offered for            deposits of similar remaining maturities. The carrying amount of accrued interest            payable approximates its fair value.

***Federal Home Loan Bank Advances***

Rates currently available to the Company for debt            with similar terms and remaining maturities are used to estimate fair value of existing            debt.

 

F-26

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 
| **Note 14:** |   | **Earnings Per Share** |
|--------------|--------|------------------------|

Earnings per share (EPS) were computed as follows            for the years ended June 30, 2007, 2006 and 2005.

 

|                                                                 |   | **Years Ended** |      |
|----------------------------------------------------------------------|--------|-----------------|-----------|
|                                                                 |   | **2007**        |      | **2006** |   | **2005** |   |
|                                                                 |   |            |      |   |   |   |   |   |   |   |
| Net income                                                           |   | $               | 939,956   |   | $ | 626,457 |   | $ | 604,554 |   |
|                                                                 |   |            |      |   |   |   |   |   |   |   |
| Average common shares                            outstanding         |   |            | 3,303,551 |   |   | 3,283,209 |   |   | 3,498,843 |   |
|                                                                 |   |            |      |   |   |   |   |   |   |   |
| Average diluted common shares                            outstanding |   |            | 3,336,665 |   |   | 3,292,893 |   |   | 3,506,968 |   |
|                                                                 |   |            |      |   |   |   |   |   |   |   |
| Basic earnings per                            share                  |   | $               | .28       |   | $ | .19 |   | $ | .17 |   |
|                                                                 |   |            |      |   |   |   |   |   |   |   |
| Fully diluted earnings per                            share          |   | $               | .28       |   | $ | .19 |   | $ | .17 |   |

             
| **Note 15:** |   | **Related Party Transactions** |
|--------------|--------|--------------------------------|

At June 30, 2007 and 2006, the Company had            loans outstanding to executive officers, directors, significant shareholders and their            affiliates. These loans are summarized as follows:

 

|                                                  |   | **June** **30,****2007** |    | **June** **30,****2006** |   |
|-------------------------------------------------------|--------|-------------------------------|---------|-------------------------------|--------|
|                                                  |   |                          |    |                          |   |   |   |
| Balance, beginning of                            year |   | $                             | 451,000 |                          | $      | 455,000 |   |
| New loans                                             |   |                          | 37,000  |                          |   | 133,000 |   |
| Payments                                              |   |                          | (58,000 | )                             |   | (137,000 | ) |
|                                                  |   |                          |    |                          |   |   |   |
| Balance, end of year                                  |   | $                             | 430,000 |                          | $      | 451,000 |   |

             

In management’s opinion, such loans and            other extensions of credit and deposits were made in the ordinary course of business            and were made on substantially the same terms (including interest rates and collateral)            as those prevailing at the time for comparable transactions with other persons.            Further, in management’s opinion, these loans did not involve more than normal            risk of collectibility or present other unfavorable features.

 

F-27

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 
| **Note 16:** |   | **Deferred Compensation Agreements** |
|--------------|--------|--------------------------------------|

The Company has deferred compensation agreements            with selected officers and directors that provide, upon disability or retirement, a            predetermined benefit amount annually for life. Upon death, the agreement provides for            reduced payments to continue to the surviving spouse. The present value of total            estimated deferred compensation is being accrued using the straight-line method over            the remaining years to the full eligibility date. Expense for the years ended            June 30, 2007, 2006 and 2005 was $80,502, $71,056 and $63,827,            respectively.

             
| **Note 17:** |   | **Significant Estimates and Concentrations** |
|--------------|--------|----------------------------------------------|

Accounting principles generally accepted in            the United States of America require disclosure of certain significant estimates and            current vulnerabilities due to certain concentrations. Estimates related to the            allowance for loan losses are reflected in*Notes 1*and*3*. Current            vulnerabilities due to certain concentrations of credit risk are discussed in*Note 18*.

             
| **Note 18:** |   | **Commitments and Credit Risk** |
|--------------|--------|---------------------------------|
> 
The Company grants real estate, consumer and                other loans, generally secured by real estate or other assets, throughout its                defined lending area which is primarily located in north central                Oklahoma.

Commitments to extend credit are agreements to            lend to a customer as long as there is no violation of any condition established in the            contract. Commitments generally have fixed expiration dates or other termination            clauses and may require payment of a fee. Since a portion of the commitments may expire            without being drawn upon, the total commitment amounts do not necessarily represent            future cash requirements. Each customer’s creditworthiness is evaluated on a            case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on            management’s credit evaluation of the counterparty. Collateral consists primarily            of residential real estate and other consumer collateral.

At June 30, 2007 and 2006, the Company had            outstanding commitments to originate loans aggregating approximately $2,820,000 and            $5,655,000, respectively. The commitments extend over varying periods of time with the            majority being disbursed within a one-year period. All loan commitments at            June 30, 2007 were at fixed rates of interest, and loan commitments at fixed rates            of interest at June 30, 2006 were approximately $5,311,000, with the remainder at            floating market rates. At June 30, 2007, the interest rates on those commitments            ranged from 6.00% to 8.50%.

The Company also had $587,000 of unfunded lines            of credit as of that date, of which $159,000 were at fixed rates and $428,000 were at            floating market rates.

 

F-28

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

             

Mortgage loans in the process of origination            represent amounts which the Company plans to fund within a normal period of 60 to 90            days. A portion of these loans is intended for sale to investors in the secondary            market. Commitments to originate mortgage loans for sale are considered by the Company            to be derivatives and are recorded on the balance sheet until the commitment is            fulfilled in accordance with SFAS 149 if deemed material. Forward commitments to sell            mortgage loans are obligations to deliver loans at a specified price on or before a            specified future date. The Company may acquire such commitments to reduce market risk            on saleable mortgage loans in the process of origination and mortgage loans held for            sale.

At June 30, 2007 and 2006, total mortgage            loans in the process of origination amounted to approximately $2,481,000 and            $2,910,000, respectively. There were no related forward commitments to sell mortgage            loans at June 30, 2007 and approximately $1,091,000 at June 30, 2006.            Included in mortgage loans in the process of origination were commitments to originate            loans at fixed rates of interest of approximately $2,481,000 and $2,567,000 at            June 30, 2007 and 2006, respectively.

Loans aggregating approximately $7,445,000 or            8.4% of the portfolio at June 30, 2007 were outstanding to borrowers employed by            an area-based petroleum refining company.

Deposits of approximately $8,500,000 or 12% of            the Company’s total deposits were from one customer.

             
| **Note 19:** |   | **Condensed Parent Company Statements** |
|--------------|--------|-----------------------------------------|
> 
The condensed balance sheets at June 30,                2007 and 2006 and statements of income and cash flows for the years ended                June 30, 2007, 2006 and 2005, for the parent company, Osage Bancshares, Inc.,                and Osage Federal Financial, Inc., (who was the parent company of Osage Federal                Bank until January 17, 2007), are as follows:

             

|                                                      |   | **2007** |       | **2006** |   |
|-----------------------------------------------------------|--------|----------|------------|----------|--------|
| **Balance Sheets**                                        |   |     |       |     |   |   |   |
| **Assets**                                                |   |     |       |     |   |   |   |
| Cash                                                      |   | $        | 12,514,434 |     | $      | 1,432,374 |   |
| Investment in subsidiary                            bank  |   |     | 22,683,620 |     |   | 11,695,735 |   |
|                                                      |   |     |       |     |   |   |   |
| Total assets                                              |   | $        | 35,198,062 |     | $      | 13,128,109 |   |
|                                                      |   |     |       |     |   |   |   |
| **Stockholders’                            Equity** |   | $        | 35,198,062 |     | $      | 13,128,109 |   |

 

F-29

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 

|                                                                                                         |   | **2007** |        | **2006** |   | **2005**   |   |
|--------------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|------------|--------|
| **Statements of                            Income**                                                          |   |     |        |     |   |       |   |   |   |   |
| **Income**                                                                                                   |   |     |        |     |   |       |   |   |   |   |
| Interest and dividend                            income                                                      |   | $        | —     |     | $      | —    |   | $ | — |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Income Before Income Tax and                            Equity in Undistributed Earnings of Subsidiaries** |   |     | —     |     |   | —    |   |   | — |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Provision for Income                            Taxes**                                                    |   |     | —     |     |   | —    |   |   | — |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Income Before Equity in                            Earnings of Subsidiaries**                              |   |     | —     |     |   | —    |   |   | — |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Equity in Undistributed                            Earnings of Subsidiaries**                              |   |     | 939,956     |     |   | 626,457    |   |   | 604,554 |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Net Income**                                                                                               |   | $        | 939,956     |     | $      | 626,457    |   | $ | 604,554 |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Statements of Cash                            Flows**                                                      |   |     |        |     |   |       |   |   |   |   |
| **Operating                            Activities**                                                          |   |     |        |     |   |       |   |   |   |   |
| Net income                                                                                                   |   | $        | 939,956     |     | $      | 626,457    |   | $ | 604,554 |   |
| Item not providing                            cash                                                           |   |     |        |     |   |       |   |   |   |   |
| Equity in undistributed earnings                            of subsidiary                                    |   |     | (939,956    | )        |   | (626,457   | )      |   | (604,554 | ) |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| Net cash provided by operating                            activities                                         |   |     | 0           |     |   | 0          |   |   | 0 |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Investing                            Activities**                                                          |   |     |        |     |   |       |   |   |   |   |
| Investment in subsidiary                            bank                                                     |   |     | (11,757,556 | )        |   | —    |   |   | — |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| Net cash used in investing                            activities                                             |   |     | (11,757,556 | )        |   | —    |   |   | — |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Financing                            Activities**                                                          |   |     |        |     |   |       |   |   |   |   |
| Payment of dividends, net of                            restricted stock dividends                           |   |     | (658,075    | )        |   | (984,033   | )      |   | (185,500 | ) |
| Net proceeds from sale of common                            stock                                            |   |     | 23,515,112  |     |   | —    |   |   | — |   |
| Restricted stock                            dividend                                                         |   |     | (17,421     | )        |   | (56,702    | )      |   | — |   |
| Other                                                                                                        |   |     | —     |     |   | —    |   |   | (2,709 | ) |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| Net cash (used in) provided by                            financing activities                               |   |     | 22,839,616  |     |   | (1,040,735 | )      |   | (188,209 | ) |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Increase (Decrease) in                            Cash**                                                   |   |     | 11,082,060  |     |   | (1,040,735 | )      |   | (188,209 | ) |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Cash, Beginning of                            Year**                                                       |   |     | 1,432,374   |     |   | 2,473,109  |   |   | 2,661,318 |   |
|                                                                                                         |   |     |        |     |   |       |   |   |   |   |
| **Cash, End of                            Year**                                                             |   | $        | 12,514,434  |     | $      | 1,432,374  |   | $ | 2,473,109 |   |

 

 

F-30

----

**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

 
| **Note 20:** |   | **Recent Accounting Pronouncements** |
|--------------|--------|--------------------------------------|
> 
In February 2006, the FASB issued SFAS                No. 155 (FAS 155),*Accounting for Certain Hybrid                Financial Instruments: an amendment of FASB Statements                No.* *133 and                140*. FAS 155 permits fair value re-measurement for any                hybrid financial instrument that contains an embedded derivative that otherwise                would require bifurcation, clarifies which interest-only strips and principal-only                strips are not subject to the requirements of Statement 133, establishes a                requirement to evaluate interests in securitized financial assets to identify                interests that are freestanding derivatives or that are hybrid financial                instruments that contain an embedded derivative requiring bifurcation, clarifies                that concentrations of credit risk in the form of subordination are not embedded                derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying                special purpose entity from holding a derivative financial instrument that pertains                to a beneficial interest other than another derivative financial instrument. FAS                155 is effective for all financial instruments acquired or issued after the                beginning of an entity’s first fiscal year that begins after September 15,                2006. The adoption of this statement will not have a material effect on the                Company’s consolidated financial statements.

In March 2006, the FASB issued Statement of            Financial Accounting Standards No. 156 (SFAS No.156),*Accounting for Servicing of Financial Assets, an amendment of FASB            Statement No.* *140, Accounting            for Transfers and Servicing of Financial Assets and Extinguishments of            Liabilities*, which requires that all separately recognized            servicing assets and servicing liabilities be initially measured at fair value, if            practicable and permits the entities to elect either fair value measurement with            changes in fair value reflected in earnings or the amortization and impairment            requirements of Statement 140 for subsequent measurement. The subsequent measurement of            separately recognized servicing assets and servicing liabilities at fair value            eliminates the necessity for entities that manage the risks inherent in servicing            assets and servicing liabilities with derivatives to qualify for hedge accounting            treatment and eliminates the characterization of declines in fair value as impairments            or direct write-downs. Statement No. 156 is effective as of the beginning of an            entity’s first fiscal year that begins after September 15, 2006. Earlier            adoption is permitted as of the beginning of an entity’s fiscal year, provided            the entity has not yet issued financial statements, including interim financial            statements for any period of that fiscal year. The adoption of this statement will not            have a material effect on the Company’s consolidated financial            statements.

In March 2006 and updated in September 2006, The            Emerging Issues Task Force released Draft Abstract No. 06-4, Accounting for Deferred            Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life            Insurance Arrangements. This abstract deals with whether the postretirement benefit            associated with an endorsement split-dollar arrangement is effectively settled in            accordance with either Statement 106 or Opinion 12 upon entering into such arrangement.            The EITF reached a consensus that employers actually incur a liability for the death            benefit associated with these types of policies, even though the insurance company            undertakes the legal obligation to provide a benefit to individuals insured under these            arrangements. The adoption of this statement will not have a material effect on the            Company’s consolidated financial statements

 

F-31

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**Osage Bancshares, Inc.**

**Notes to Consolidated Financial            Statements**

**Years Ended June**  **30, 2007, 2006 and            2005**

             

In September 2006, the Financial Accounting            Standards Board (FASB) issued Statement No. 157,*Fair Value            Measurements*. The statement defines fair value, establishes a            framework for measuring fair value in generally accepted accounting principles, and            expands disclosures about fair value measurements.  This statement applies to            other accounting pronouncements that require or permit fair value measurements, the            Board having previously concluded in those accounting pronouncements that fair value is            the relevant measurement attribute.  This statement does not require any new fair            value measurements and is effective for the Company beginning July 1, 2008. Management            has not completed its review of the new guidance; however, the effect of the            statement’s implementation is not expected to be material to the Company’s            financial statements or results of operations.

In February 2007, the FASB issued Statement            No. 159,*The Fair Value Option for Financial Assets and            Financial Liabilities*. This statement permits entities to            choose to measure eligible items at fair value at specified election dates. For items            for which the fair value option has been elected, unrealized gains and losses are to be            reported in earnings at each subsequent reporting date. The fair value option is            irrevocable unless a new election date occurs, may be applied instrument by instrument,            with a few exceptions, and applies only to entire instruments and not to portions of            instruments. This statement provides an opportunity to mitigate volatility in reported            earnings caused by measuring related assets and liabilities differently without having            to apply complex hedge accounting. Statement No. 159 is effective for the Company            beginning July 1, 2008. Management has not completed its review of the new guidance;            however, the effect of the statement’s implementation is not expected to be            material to the Company’s results of operations or financial            position

In May 2005, the Financial Accounting            Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No.            154,*Accounting Changes and Error Corrections – a            replacement of APB Opinion No. 20 and FASB Statement No. 3*.            SFAS 154 changes the requirements for the accounting for, and reporting of, a change in            accounting principle. SFAS 154 requires that a voluntary change in accounting principle            be applied retrospectively with all prior period financial statements presented using            the accounting principle. SFAS 154 is effective for accounting changes and corrections            of errors in fiscal years beginning after December 15, 2005. The Company adopted SFAS            154 effective July 1, 2006. Since there have been no material accounting changes or            errors for the year ended June 30, 2007, the adoption did not have a material            impact on the Company’s results of operations or financial            condition.

In June 2006, the FASB issued FASB            Interpretation No. 48,*Accounting for Uncertainty in Income            Taxes, and Interpretation of FASB Statement No. 109*(FIN 48).            FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an            enterprise’s financial statements and prescribes a recognition threshold and            measurement attribute for financial statement recognition and measurement of a tax            position taken or expected to be taken in a tax return. This Interpretation also            provides related guidance on under recognition, classification, interest and penalties,            accounting in interim periods and disclosure. FIN 48 is effective for the Company            beginning July 1, 2007. The adoption of the interpretation is not expected to be            material.

 

 

F-32

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**OSAGE BANCSHARES,            INC.**

239            E. Main Street

Pawhuska, Oklahoma 74056-5215

(918)            287-2919

 

| **Board of Directors**                                                                             |
|----------------------------------------------------------------------------------------------------|
| Milton V. Labadie, Chairman

Retired CEO of Osage Federal Bank

                              |
| Mark S. White

President and CEO

Osage Federal Bank                                               |   | Richard Trolinger

Executive Vice President

Osage Federal Bank

                              |
| Martha Hayes

Senior Vice President

Osage Federal Bank                                            |   | Mark A. Formby

Private Investor

                              |
| Harvey Payne

Attorney                                                                             |   | Gary Strahan

Certified Public Accountant |

 

|        | **                                           Executive Officers** |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |  

Mark S. White, President and CEO                                                                                                |
|        | Richard Trolinger, Executive Vice President                                                                                             |
|        | Martha Hayes, Senior Vice President                                                                                                     |
|        | Sue Allen Smith, Vice President, CFO and                            Treasurer                                                           |
|        | Frances Altaffer, Vice President and                            Secretary                                                               |

 

 

 

| **Special Counsel**                                                                                      | **Independent Auditor**                                    | **Transfer Agent and Registrar**                                                                |
|----------------------------------------------------------------------------------------------------------|------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|  

Malizia Spidi & Fisch, PC

901 New York Avenue, N.W.

Suite 210 East

Washington, D.C. 20001 |  

BKD, LLP

3230 Hammons Boulevard

Joplin, MO 68402 |  

Registrar & Transfer Company

10 Commerce Drive

Cranford, NJ 07016

(800) 368-5948 |