**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

________________________

**FORM 10-KSB**

**(Mark One)**

| **x** | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE                            SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------------|

For the Fiscal Year Ended**June 30,            2007**

OR

| **o** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE                            SECURITIES EXCHANGE ACT OF 1934** |
|-------|-------------------------------------------------------------------------------------------------------------------|

For the transition period from __________ to __________

Commission File No.**1-33224**

 

| **OSAGE BANCSHARES, INC.**                                                |
|---------------------------------------------------------------------------|
| (Name of Small Business Issuer in its                            Charter) |

 

| **Maryland**                                                    |   | **32-0181888**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other Jurisdiction of

Incorporation or Organization) |   | (I.R.S. Employer Identification No.) |

 

| **239 East Main Street, Pawhuska,                            Oklahoma** |   |   | **74056**  |   |
|-------------------------------------------------------------------------|--------|--------|------------|--------|
| (Address of Principal Executive Offices)                                |   |   | (Zip Code) |   |

 

|   | Issuer’s Telephone Number**(918) 287-2919** |
|--------|---------------------------------------------------|

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

 

| Title of Each Class               |   | Name of Each Exchange on Which Registered |
|-----------------------------------|--------|-------------------------------------------|
| **Common Stock, $0.01 par value** |   | **The Nasdaq Stock Market LLC**           |

 

Securities registered pursuant to Section 12(g) of the Act:**None**

 

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

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

Check if there is no disclosure of delinquent filers in response to Item            405 of Regulation S-B contained in this form, and no disclosure will be contained, to            the best of registrant’s knowledge, in definitive proxy or information statements            incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form            10-KSB. o

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

| YES  o |   | NOx |
|-------------|--------|-----|

State issuer’s revenues for its most recent fiscal year:$**7.7 million**

The aggregate market value of the voting stock held by non-affiliates of            the registrant was approximately $25.2 million as of September 25, 2007 based on the            last sale ($9.04 per share) reported on The Nasdaq Global MarketSM as of            that date. Solely for purposes of this calculation, the term “affiliate”            refers to all directors and executive officers of the registrant, the            registrant’s stock benefit plan trusts and all shareholders beneficially owning            more than 10% of the registrant’s common stock.

As of September 25, 2007, there were 3,603,590 shares of the            registrant’s common stock issued and outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

| 1. | Portions of the Registrant’s Annual Report to                            Shareholders for the fiscal year ended June 30, 2007 (Parts I &                            II) |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | Portions of the Registrant’s definitive Proxy                            Statement for the 2007 Annual Meeting of Shareholders. (Part                            III) |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Transitional Small Business Disclosure Format (Check                            one) YES  o  | NOx |
|--------|--------------------------------------------------------------------------------------------------------|-----|

             

 

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**OSAGE BANCSHARES, INC.**

**ANNUAL REPORT ON FORM 10-KSB**

**for the fiscal year ended June 30, 2007**

 

**INDEX**

 

| PART I                              |
|-------------------------------------|
|                                |   |   |   | **Page** |
| Item                            1.  |   | Description of                            Business |   | 2 |
| Item                            2.  |   | Description                            of Property |   | 26 |
| Item                            3.  |   | Legal                            Proceedings |   | 26 |
| Item                            4.  |   | Submission of                            Matters to a Vote of Security Holders |   | 26 |
|                                |   |   |   |   |
| PART II                             |
|                                |   |   |   |   |
| Item                            5.  |   | Market for Common                            Equity and Related Stockholder Matters and

and Small                            Business Issuer Purchases of Equity                            Securities  |   |  

26 |
| Item                            6.  |   | Management’s                            Discussion and Analysis or Plan of Operation |   | 27 |
| Item                            7.  |   | Financial                            Statements |   | 27 |
| Item                            8.  |   | Changes in and Disagreements with Accountants on Accounting                            and

Financial                            Disclosure  |   |  

27 |
| Item                            8A. |   | Controls and                            Procedures |   | 27 |
| Item                            8B. |   | Other                            Information |   | 27 |
|                                |   |   |   |   |
| PART III                            |
|                                |   |   |   |   |
| Item                            9.  |   | Directors,                            Executive Officers, Promoters, Control Persons and                            Corporate

Governance;                            Compliance With Section 16(a) of the Exchange                            Act  |   |  

27 |
| Item                            10. |   | Executive                            Compensation |   | 28 |
| Item                            11. |   | Security                            Ownership of Certain Beneficial Owners and Management                            and

Related                            Stockholder Matters  |   |  

28 |
| Item                            12. |   | Certain                            Relationships and Related Transactions, and Director                            Independence |   | 29 |
| Item                            13. |   | Exhibits |   | 29 |
| Item                            14. |   | Principal                            Accountant Fees and Services |   | 29 |
|                                |   |   |   |   |
| SIGNATURES                          |   |  |   | 30 |

             

 

1

 

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**PART I**

 

**Forward Looking Statements**

 

When used in this discussion and elsewhere in this Annual Report, the            words or phrases “will likely result,” “are expected to,”            “will continue,” “is anticipated,” “estimate,”            “project,” “intend” or similar expressions are intended to            identify “forward-looking statements” within the meaning of the Private            Securities Litigation Reform Act of 1995. We caution readers not to place undue            reliance on any such forward-looking statements, which speak only as of the date made,            and to advise readers that various factors, including regional and national economic            conditions, unfavorable judicial decisions, substantial changes in levels of market            interest rates, credit and other risks of lending and investment activities and            competitive and regulatory factors could affect our financial performance and could            cause our actual results for future periods to differ materially from those anticipated            or projected.

 

We do not undertake and specifically disclaim any obligations to update            any forward-looking statements to reflect occurrence of anticipated or unanticipated            events or circumstances after the date of such statements.

 

**Item 1. Description of            Business**

 

***The Company.***On January 17, 2007,            Osage Federal MHC (the “MHC”) completed its reorganization into stock form            and Osage Bancshares, Inc. (the “Company”), a Maryland corporation,            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 now owns 100% of the outstanding stock of            Osage Federal Bank.

             

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.

Our executive offices are located at 239 East Main Street, Pawhuska,            Oklahoma 74056 and our main telephone number is (918) 287-2919.

***The Bank***. Osage Federal Bank is a            federally-chartered stock savings bank. It was originally founded in 1918 as the            National Building and Loan Association and was chartered by the State of Oklahoma.            Osage Federal Bank 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”). Osage Federal is regulated            by the Office of Thrift Supervision (“OTS”) and the FDIC.

Osage Federal Bank conducts a traditional community bank operation,            offering retail banking services, one- to four-family mortgage loans, multi-family,            commercial and other real estate mortgage loans, construction loans, automobile loans,            second mortgage loans and other consumer loans. Osage Federal Bank operates from its            main office in Pawhuska, Oklahoma, and a branch office in Bartlesville, Oklahoma. Osage            Federal Bank maintains a website at www.osagefed.com.

 

2

 

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**Market Area**

 

Our main office is located in Pawhuska, Oklahoma and serves a wide area            of Osage County and the northern portion of Pawnee County. Our branch office is located            in Bartlesville, Oklahoma and services Bartlesville and surrounding Washington County            plus the western portion of Nowata County. Osage and Washington counties are generally            rural in nature with older populations. The economies of both counties are based on the            oil and gas industry, and ranching has a presence in Osage County. The current            unemployment rate for Osage County is 4.7% and for Washington County is 4.1%.            ConocoPhillips, an oil and gas company, is the largest employer in our market area with            nearly 3,000 employees. They, as well as other major employers in the area, have hired            nearly 700 employees in the past two years. These positions included technological,            engineering and other white-collar jobs. Due to these increases in employment, there            has been significant one- to-four-family and commercial real estate construction.            Bartlesville and Pawhuska are the county seats of Washington and Osage Counties,            respectively, which provide public sector employment. Bartlesville is a regional            healthcare center with a 311-bed hospital. With their museums and historic areas,            tourism has become an increasingly important industry in Bartlesville and Pawhuska. A            Wal-Mart distribution center opened in 2005 and brought an estimated 650 new jobs to            Bartlesville. The Osage Tribal Council, headquartered in Pawhuska, has opened four            casinos in Osage County in the past few years, which has provided further impetus to            the local economies. The latest casino is located just west of Bartlesville, a city of            35,000.

 

Our business of attracting deposits and making loans is primarily            conducted within our market area. A downturn in the local economy could reduce the            amount of funds available for deposit and the ability of borrowers to repay their            loans. As a result, our profitability could decrease.

 

**Lending Activities**

 

***General.***We have traditionally            focused on the origination of one- to four-family mortgage loans, which comprise a            significant majority of the total loan portfolio. We also originate non-residential            mortgages including multi-family, commercial, land and other real estate mortgage            loans. Construction loans, automobile loans, second mortgage loans, commercial loans            and other consumer loans make up the rest of the total loan portfolio.

Substantially all of our borrowers are residents of Osage and Washington            Counties, Oklahomaand would be expected to be similarly affected            by economic and other conditions in this area. We do not believe that there are any            other concentrations of loans or borrowers exceeding 10% of total loans. Approximately            $7.4 million, or 8.4%, of our loans are to employees of an area-based oil and gas            company.

 

3

 

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***Loan Portfolio Composition.***The            following table analyzes the composition of our loan portfolio by loan category at the            dates indicated.

 

 

|                      |   |                       |
|---------------------------|--------|----------------------------|
|                      |   | **At June 30,**            |
|                      |   | **2007**                   |   | **2006** |   | **2005** |
|                      |   | **Amount**                 |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |
|                      |   | **(Dollars in thousands)** |
| Real estate mortgage      |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family       |   | $                          | 61,986 |   | 68.4 | % |   | $ | 54,742 |   | 68.1 | % |   | $ | 48,348 |   | 72.1 | % |
| Non-residential           |   |                       | 11,957 |   | 13.2 |   |   |   | 7,195 |   | 8.9 |   |   |   | 7,120 |   | 10.6 |   |
| Construction              |   |                       | 2,818 |   | 3.1 |   |   |   | 4,675 |   | 5.8 |   |   |   | 1,749 |   | 2.6 |   |
| Automobile                |   |                       | 5,184 |   | 5.7 |   |   |   | 5,357 |   | 6.7 |   |   |   | 4,450 |   | 6.6 |   |
| Second mortgage           |   |                       | 4,420 |   | 4.9 |   |   |   | 4,098 |   | 5.1 |   |   |   | 3,200 |   | 4.8 |   |
| Commercial                |   |                       | 1,740 |   | 1.9 |   |   |   | 1,756 |   | 2.2 |   |   |   | 379 |   | 0.6 |   |
| Other consumer            |   |                       | 2,577 |   | 2.8 |   |   |   | 2,558 |   | 3.2 |   |   |   | 1,850 |   | 2.7 |   |
| Total loans               |   |                       | 90,682 |   | 100.0 | % |   |   | 80,381 |   | 100.0 | % |   |   | 67,096 |   | 100.0 | % |
|                      |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                     |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans in process          |   |                       | 1,474 |   |   |   |   |   | 2,008 |   |   |   |   |   | 1,306 |   |   |   |
| Net deferred loan fees    |   |                       | 85 |   |   |   |   |   | 46 |   |   |   |   |   | 41 |   |   |   |
| Allowance for loan losses |   |                       | 402 |   |   |   |   |   | 400 |   |   |   |   |   | 393 |   |   |   |
| Total loans, net          |   | $                          | 88,721 |   |   |   |   | $ | 77,927 |   |   |   |   | $ | 65,356 |   |   |   |
|                      |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

***Loan Maturity Schedule.***The            following table sets forth the maturity of our loan portfolio at June 30, 2007.            Demand loans, loans having no stated maturity, and overdrafts are shown as due in one            year or less. This table shows contractual maturities and does not reflect repricing or            the effect of prepayments. Actual maturities may differ.

 

|                            |
|---------------------------------|
|                            |   | **Due within****One year after****June 30, 2007** |   | **Due after****1 through 5 years****June 30, 2007** |   | **Due over 5**

**Years after****June 30,                            2007** |   |   | **Total** |   |
|                            |   | **(In thousands)** |   |
| Real estate mortgage            |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family residential |   | $ | 805 |   |   | $ | 2,993 |   |   | $ | 58,188 |   |   | $ | 61,986 |   |
| Nonresidential                  |   |   | 704 |   |   |   | 2,890 |   |   |   | 8,363 |   |   |   | 11,957 |   |
| Construction                    |   |   | 1,010 |   |   |   | — |   |   |   | 1,808 |   |   |   | 2,818 |   |
| Automobile                      |   |   | 361 |   |   |   | 4,445 |   |   |   | 378 |   |   |   | 5,184 |   |
| Second mortgage                 |   |   | 210 |   |   |   | 656 |   |   |   | 3,554 |   |   |   | 4,420 |   |
| Commercial                      |   |   | 1,011 |   |   |   | 285 |   |   |   | 444 |   |   |   | 1,740 |   |
| Other consumer                  |   |   | 1,256 |   |   |   | 682 |   |   |   | 639 |   |   |   | 2,577 |   |
| Total                           |   | $ | 5,357 |   |   | $ | 11,951 |   |   | $ | 73,374 |   |   | $ | 90,682 |   |
|                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

4

 

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The following table sets forth the dollar amount of all loans at June            30, 2007 due after June 30, 2008, which have fixed interest rates and which have            floating or adjustable interest rates.

 

|                  |   |               |   |                             |   |
|-----------------------|--------|--------------------|--------|----------------------------------|--------|
|                  |   | **Fixed Rates**    |   | **Floating or Adjustable Rates** |   |
|                  |   | **(In thousands)** |   |
| Real estate mortgage: |   |               |   |                             |   |
| One- to four-family   |   | $                  | 56,714 |                             | $      | 4,467 |   |
| Non-residential       |   |               | 10,886 |                             |   | 367 |   |
| Construction          |   |               | 1,808  |                             |   | — |   |
| Automobile            |   |               | 4,823  |                             |   | — |   |
| Second mortgage       |   |               | 3,870  |                             |   | 340 |   |
| Commercial            |   |               | 494    |                             |   | 235 |   |
| Other consumer        |   |               | 1,321  |                             |   | — |   |
| Total                 |   | $                  | 79,916 |                             | $      | 5,409 |   |
|                  |   |               |   |                             |   |   |   |

 

***One- to Four-Family Mortgage Loans.***Our primary lending activity consists of the origination of one- to            four-family mortgage loans, substantially all of which are secured by property located            in Osage and Washington Counties, Oklahoma.

We generally originate mortgage loans in amounts up to 80% of the lesser            of the appraised value or purchase price of a mortgaged property, but will also permit            loan-to-value ratios of up to 100%. For loans exceeding an 80% loan-to-value ratio, we            generally require the borrower to obtain private mortgage insurance covering us for any            loss on the amount of the loan in excess of 80% in the event of foreclosure. Most of            our one- to four-family residential loans are originated with fixed rates and have            terms of five to thirty years. The weighted average maturities of our fixed-rate, one-            to four-family mortgage loans in portfolio are approximately 213 months, and depending            on our interest rate risk and liquidity, we sometimes sell our longer-term loans to            Freddie Mac. During this fiscal year, we held most of our originated one- to            four-family fixed-rate loans. We also originate adjustable-rate loans which have            interest rates that adjust annually to the yield on U.S. Treasury securities adjusted            to a constant one-year maturity plus a margin of 275 to 300 basis points. Our            adjustable-rate loans have terms of up to 30 years with an initial fixed-rate period of            one year according to the terms of the loan. We also originate a small amount of hybrid            loans, which have initial 3- or 5-year fixed terms, then convert to an adjustable rate.            Our adjustable-rate mortgages generally have a cap of one percentage point on rate            adjustments during any one year and five percentage points over the life of the loan.            Our fixed-rate mortgage loans are generally originated on documentation and with terms            that qualify them for resale to Freddie Mac.

Substantially all of our residential mortgages include “due on            sale” clauses, which are provisions giving us the right to declare a loan            immediately payable if the borrower sells or otherwise transfers an interest in the            property to a third party. Property appraisals on real estate securing our one- to            four-family residential loans are made by state certified independent appraisers            approved by the board of directors. Appraisals are performed in accordance with            applicable regulations and policies. We generally require title insurance policies on            all first mortgage real estate loans originated, but may also originate loans that will            be retained for our portfolio with an attorney’s opinion in lieu of title            insurance. Homeowner’s, liability, fire and, if required, flood insurance            policies are also required.

 

5

 

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During the 2005 fiscal year, we began offering 100% loan-to-value ratio            one- to four-family residential loans to our most creditworthy borrowers. Borrowers            generally must qualify based on credit criteria, and they are required to obtain            private mortgage insurance covering us for any loss in excess of 80%. The borrower pays            a discount fee for these loans. During the year ended June 30, 2007, we originated $1.6            million of mortgages under this program.

             

***Non-Residential Mortgage            Loans*****.**We originate a            variety of non-residential mortgage loans, including loans on motels, churches,            retail/service properties, apartment and condominium buildings, medical and dental            buildings, and other income-producing properties, including mixed-use properties            combining residential and commercial space. We also originate loans secured by land. At            June 30, 2007 we had approximately $3.0 million in land loans. We generally require a            loan-to-value ratio no greater than 80% for non-residential mortgage loans. Typically,            these loans are made with amortization terms of up to twenty years. The majority of our            non-residential mortgage loans are on properties located within our market            area.

 

Non-residential mortgage loans generally are considered to entail            significantly greater risk than that which is involved with one- to four-family real            estate lending. The repayment of these loans typically is dependent on the successful            operations and income stream of the borrower and the real estate securing the loan as            collateral. These risks can be significantly affected by economic conditions. In            addition, non-residential real estate lending generally requires substantially greater            evaluation and oversight efforts compared to residential real estate            lending.

 

***Construction Lending.***Essentially            all of our construction lending is in our market areas. We will generally originate            construction loans in an amount up to 75% of the appraised value for a multi-family,            commercial or other real estate construction loan, and up to 80% for a one- to            four-family residential construction loan. At June 30, 2007, almost all ($2.7 million)            of our $2.8 million in construction loans were for construction of one- to four-family            residences. Our residential construction lending includes loans to individuals for            construction of a primary residence as well as loans to builders and developers for            multi-unit or multi-house projects. Our construction loans generally have six-month            terms and provide for monthly payments of interest only until maturity. We typically            convert construction loans to individuals to permanent loans on completion of            construction but do not require take-out financing prior to origination. We have no            formal limits as to the number of projects a builder has under construction or            development, and make a case by case determination on loans to builders and developers            who have multiple projects under development. We occasionally make loans to builders            for the construction of residences for which they do not yet have buyers. Our practice            is generally to limit such loans to no more than three homes per builder, with an upper            limit of $500,000, and we typically lend to those builders with whom we have long-term            business relationships. At June 30, 2007, we had approximately $1.0 million in            construction loans to builders for construction of residences which were not            pre-sold.

 

Construction lending is generally considered to involve a higher degree            of credit risk than long-term permanent financing of residential properties. If the            estimate of construction cost proves to be inaccurate, we may be compelled to advance            additional funds to complete the construction with repayment dependent, in part, on the            success of the ultimate project rather than the ability of a borrower or guarantor to            repay the loan. If we are forced to foreclose on a project prior to completion, there            is no assurance that we will be able to recover the entire unpaid portion of the loan.            In addition, we may be required to fund additional amounts to complete a project and            may have to hold the property for an indeterminate period of time.

 

***Automobile Loans.***We offer loans on            new and used automobiles and, in cases of satisfactory credit, will originate such            loans up to the sales price or retail value. Auto loans are generally made with terms            from one to five years and are made on a fixed-rate basis. The bulk of our automobile            lending

 

6

 

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involves direct loans to existing customers for the purchase of a car or            truck. Loans secured by rapidly depreciating assets such as automobiles entail more            risk than residential mortgages. The repossessed collateral for a defaulted automobile            loan may not provide an adequate source of repayment of the outstanding loan balance,            since there is greater likelihood of damage, loss or depreciation of the underlying            collateral. Automobile lending also entails the risks generally associated with            consumer lending described below.

 

***Second Mortgage Loans.***We generally            make second mortgage loans only on properties for which we hold the first mortgage. We            do not make home equity loans on an open-end basis in the form of a line of credit, but            rather as a closed-end amortizing mortgage loan. Our second mortgage loans are            primarily fixed-rate loans for terms of up to twenty years. We generally require that            the aggregate indebtedness against the security property not exceed 80% of its value            (75% if we do not hold the first mortgage). Collateral value is determined through            existing appraisals, new appraisals or evaluations by the loan department. On second            mortgages, we do not require title insurance but do require homeowner, liability, fire            and, if required, flood insurance policies.

 

***Commercial Loans.***Our commercial            loans consist of loans secured by equipment, accounts receivable, inventory, and other            business purpose loans. Such loans are generally secured by either the underlying            collateral and/or by the personal guarantees of the borrower. At June 30, 2007, we had            approximately $1.7 million in commercial loans.

 

Unlike residential mortgage loans, which generally are made on the basis            of the borrower’s ability to make repayment from his or her employment and other            income and which are secured by real property whose value tends to be more easily            ascertainable, commercial business loans typically are made on the basis of the            borrower’s ability to make repayment from the cash flow of the borrower’s            business. As a result, the availability of funds for the repayment of commercial            business loans may be substantially dependent on the success of the business itself and            the general economic environment.

 

***Other Consumer Loans.***Other consumer            loans offered by us consist of loans secured by personal property, including savings            account loans, manufactured home loans and unsecured consumer loans. At June 30, 2007,            we had approximately $812,000 of savings account loans, $274,000 in manufactured home            loans and $229,000 of unsecured consumer loans, including overdrafts. We will generally            lend up to 90% of the account balance on a savings account loan.

 

Consumer loans generally have shorter terms and higher interest rates            than residential loans. The consumer loan portfolio can be helpful in improving the            spread between the average loan yield and the cost of funds and at the same time            improve the matching of rate-sensitive assets and liabilities.

 

Consumer loans entail greater risks than residential mortgage loans,            particularly consumer loans that are unsecured. Further, consumer loan repayment is            dependent on the borrower’s continuing financial stability and is more likely to            be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally,            the application of various federal laws, including federal and state bankruptcy and            insolvency laws, may limit the amount which can be recovered on consumer loans in the            event of a default.

 

Our underwriting standards for consumer loans include a determination of            the applicant’s credit history and an assessment of the applicant’s ability            to meet existing obligations and payments on the proposed loan. The stability of the            applicant’s monthly income may be determined by verification of gross monthly            income from primary employment, and additionally from any verifiable secondary            income.

 

***Loans to One Borrower.***Under federal            law, savings institutions generally may only lend to one borrower an amount equal to            the greater of $500,000 or 15% of the institution’s unimpaired capital            and

 

7

 

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surplus. Accordingly, as of June 30, 2007, our loans to one borrower            limit was approximately $3.5 million.

 

Our largest single borrower had aggregate outstanding loan commitments            of approximately $2.9 million. Total outstanding loans to this borrower as of June 30,            2007 included a loan secured by a personal residence with a line of credit, two rental            duplexes, a speculative construction loan, a short-term note on a single family            residence, and a loan secured by 17 rental duplexes. Our second largest borrower had            aggregate outstanding loan commitments of approximately $2.7 million, with $1.1 million            of the amount participated with another lender. Total outstanding loans to the borrower            as of June 30, 2007 included a loan secured by a personal residence, two loans secured            by commercial real estate, a loan secured by commercial equipment, a line of credit and            an automobile loan. Our third largest borrower had aggregate outstanding balances of            $2.3 million as of June 30, 2007, consisting of three speculative construction loans            and a loan secured by 17 rental duplexes. Our fourth largest borrower had aggregate            outstanding balances of approximately $1.9 million as of June 30, 2007. These loans            consisted of a personal residence and a commercial real estate loan. Our fifth largest            borrower had aggregate outstanding balances of approximately $1.7 million at June 30,            2007, comprised of a commercial real estate loan. All other aggregate lending balances            to a single borrower were below $1 million. At June 30, 2007, all of these lending            relationships were current and all were performing in accordance with the terms of            their loan agreements.

 

***Loan Originations, Purchases and Sales.***Our customary sources of loan applications include repeat customers,            referrals from realtors and other professionals, and “walk-in” customers.            We generally do not purchase loans from other institutions or use mortgage            brokers.

 

Historically, we have primarily originated our own loans and retained            them in our portfolio. Gross loan originations totaled $38.6 million for the year ended            June 30, 2007. We did not purchase any participations during the year, and we had            participations purchased outstanding balances of $234,000 as of June 30, 2007. These            balances were residential and nonresidential real estate loans. We sold loan            participations totaling $1.1 million during the year, and we had participations sold            outstanding balances of $1.2 million as of June 30, 2007. Our fixed-rate one- to            four-family mortgage loans generally meet the secondary mortgage market standards of            Freddie Mac. For the purposes of interest rate risk management, we may sell qualifying            one- to four-family residential mortgages in the secondary market to Freddie Mac on a            non-recourse basis with servicing retained. Management decides at the point of            origination whether or not the loan will be sold and a commitment is made to Freddie            Mac at that time for the individual loan. During the years ended June 30, 2007 and            2006, we sold $1.5 million and $4.8 million of loans, respectively, to Freddie Mac.            Sales had increased during the last several years in connection with our efforts to            mitigate interest rate risk associated with long-term, fixed-rate loans. As refinancing            activity has slowed and as risk management needs change, however, we have reduced our            loan sales. At June 30, 2007, loans serviced for the benefit of others totaled $38.7            million. This includes $97,000 of a local church loan participation sold to two            financial institutions, and a commercial real estate and commercial loan totaling $1.1            million to the same borrower sold to one financial institution.

 

***Loan Commitments.***We give written            commitments to prospective borrowers on all residential and non-residential mortgage            loans. The total amount of commitments to extend credit for mortgage and consumer loans            as of June 30, 2007, was approximately $2.8 million, excluding undisbursed portions of            construction loans totaling $1.5 million. We also had $587,000 of unfunded commitments            on lines of credit as of that date.

 

***Loan Approval Procedures and Authority.***Our lending policies and loan approval limits are recommended by senior            management and approved by the Board of Directors. Our loan committee consists of our            chairman of the board of directors, our president and chief executive officer, our            executive

 

8

 

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vice            president and chief lending officer, our senior vice president, and two vice            presidents. The committee reviews all real estate loans, consumer loans above $15,000            and all loan modifications. Loan committee meetings require a quorum of three members            of the committee. Loans submitted to the loan committee require approval of a majority            of the members voting and approval of all members present if only three members are            present. Consumer loans of $5,000 and below can be approved by individual loan            officers, while consumer loans between $5,000 and $15,000 must be approved by two loan            officers. Loans exceeding the Freddie Mac loan purchase limit require approval by the            board of directors. All closed loans are presented to the Board for ratification on a            monthly basis.

 

**Asset Quality**

 

***Loan Delinquencies and Collection Procedures.***The borrower is notified by both mail and telephone when a loan is            sixteen days past due. If the delinquency continues, subsequent efforts are made to            contact the delinquent borrower and additional collection notices and letters are sent.            When a loan is ninety days delinquent, it is referred to an attorney for repossession            or foreclosure. All reasonable attempts are made to collect from borrowers prior to            referral to an attorney for collection. In certain instances, we may modify the loan or            grant a limited moratorium on loan payments to enable the borrower to reorganize their            financial affairs, and we attempt to work with the borrower to establish a repayment            schedule to cure the delinquency.

 

As to mortgage loans, if a foreclosure action is taken and the loan is            not reinstated, paid in full or refinanced, the property is sold at judicial sale at            which we may be the buyer if there are no adequate offers to satisfy the debt. Any            property acquired as the result of foreclosure or by deed in lieu of foreclosure is            carried as a foreclosed asset held for sale until it is sold or otherwise disposed of.            When foreclosed assets held for sale are acquired, they are recorded at the lower of            the unpaid principal balance of the related loan or its fair market value less            estimated selling costs. The initial writedown of the property is charged to the            allowance for loan losses. Adjustments to the carrying value of the properties that            result from subsequent declines in value are charged to operations in the period in            which the declines occur. At June 30, 2007, we had $43,000 of foreclosed assets held            for sale, which is net of a $10,000 reserve we provided because of flooding in the            home.

 

Loans are reviewed on a regular basis and are placed on non-accrual            status when they are 90 days or more delinquent. Loans may be placed on a non-accrual            status at any time if, in the opinion of management, the collection of additional            interest is doubtful. Interest accrued and unpaid at the time a loan is placed on            non-accrual status is charged against interest income. Subsequent payments are either            applied to the outstanding principal balance or recorded as interest income, depending            on the assessment of the ultimate collectibility of the loan. At June 30, 2007, we had            approximately $13,000 of loans that were held on a non-accrual basis. These loans were            considered when calculating the allowance for loan losses, and there were $2,000 of            specific reserves relating to these loans at June 30, 2007.

 

9

 

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***Non-Performing Assets.***The following            table provides information regarding our non-performing loans and other non-performing            assets. We did not have any troubled debt restructurings within the meaning of SFAS No.            15 at any of the dates indicated.

 

|                                                           |
|----------------------------------------------------------------|
|                                                           |   | **At June 30,** |
|                                                           |   | **2007** |   |   | **2006** |   |   | **2005** |   |
|                                                           |   | **(Dollars in thousands)** |   |
| Loans accounted for on a non-accrual basis:                    |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family                                            |   | $ | 9 |   |   | $ | 7 |   |   | $ | 79 |   |
| Consumer                                                       |   |   | 4 |   |   |   | 4 |   |   |   | 8 |   |
| Total                                                          |   | $ | 13 |   |   | $ | 11 |   |   | $ | 87 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Accruing loans which are contractually pastdue 90 days or more |   | $ | — |   |   | $ | — |   |   | $ | — |   |
| Total                                                          |   | $ | — |   |   | $ | — |   |   | $ | — |   |
| Total non-performing loans                                     |   | $ | 13 |   |   | $ | 11 |   |   | $ | 87 |   |
| Foreclosed assets held for sale, net                           |   | $ | 43 |   |   | $ | 50 |   |   | $ | 32 |   |
| Total non-performing assets                                    |   | $ | 56 |   |   | $ | 61 |   |   | $ | 119 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Total non-performing loans to net loans                        |   |   | 0.02 | % |   |   | 0.01 | % |   |   | 0.13 | % |
| Total non-performing loans to total assets                     |   |   | 0.01 | % |   |   | 0.01 | % |   |   | 0.09 | % |
| Total non-performing assets to total assets                    |   |   | 0.05 | % |   |   | 0.05 | % |   |   | 0.12 | % |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |

 

As of June 30, 2007, there were $44,000 in loans not reflected in the            above table as to which known information about possible credit problems of borrowers            caused management to have serious doubts about the ability of such borrowers to comply            with present loan repayment terms and which may result in such loans being disclosed as            non-performing in the future.

 

During the year ended June 30, 2007, gross interest income of less than            $1,000 would have been recorded on loans accounted for on a non-accrual basis if those            loans had been current, and no interest on such loans was included in income for the            year ended June 30, 2007.

 

***Classified Assets.***Management, in            compliance with Office of Thrift Supervision guidelines, has instituted an internal            loan review program, whereby non-performing loans are classified as substandard,            doubtful or loss. It is our policy to review the loan portfolio, in accordance with            regulatory classification procedures, on a monthly basis. When a loan is classified as            substandard or doubtful, management is required to evaluate the loan for impairment.            When management classifies a portion of a loan as loss, a reserve equal to 100% of the            loss amount is required to be established or the loan is to be charged off.

 

An asset is considered “substandard” if it is inadequately            protected by the paying capacity and net worth of the obligor or the collateral            pledged, if any. Substandard assets include those characterized by the distinct            possibility that the insured institution will sustain some loss if the deficiencies are            not corrected. Assets classified as “doubtful” have all of the weaknesses            inherent in those classified substandard, with the added characteristic that the            weaknesses present make collection or liquidation in full highly questionable and            improbable, on the basis of currently existing facts, conditions, and values. Assets,            or portions thereof, classified as “loss” are considered uncollectible and            of so little value that their continuance as assets without the establishment of a            specific loss reserve is not warranted.

 

10

 

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Management’s classification of assets is reviewed by the Board on            a regular basis and by the regulatory agencies as part of their examination process.            The following table discloses our classification of assets as of June 30, 2007, 2006            and 2005. At June 30, 2007, $43,000 (net of a $10,000 reserve) of the classified assets            were foreclosed assets held for sale.

 

 

|                         |   |   |               |    |   |     |   |    |     |   |
|------------------------------|--------|--------|--------------------|---------|--------|----------|--------|---------|----------|--------|
|                         |   |   | **At June 30,**    |    |
|                         |   |   | **2007**           |    |   | **2006** |   |    | **2005** |   |
|                         |   |   | **(In thousands)** |    |
|                         |   |   |               |    |   |     |   |    |     |   |
| Substandard (net of reserve) |   |   | $                  | 91      |   |     | $      | 124     |     |   | $ | 193 |   |
| Doubtful                     |   |   |               | — |   |     |   | — |     |   |   | — |   |
| Loss                         |   |   |               | — |   |     |   | — |     |   |   | — |   |
| Total                        |   |   | $                  | 91      |   |     | $      | 124     |     |   | $ | 193 |   |
|                         |   |   |               |    |   |     |   |    |     |   |   |   |   |

 

At June 30, 2007, $58,000 of the loans and foreclosed assets prior to            reserves classified as “substandard,” are included under non-performing            assets, as shown in the table on the preceding page. Management has recorded $12,000 of            valuation reserves for these assets. Management considers the remaining substandard            assets to be adequately protected by the paying capacity and net worth of the borrower,            or by the pledged collateral.

 

**Allowance for Loan Losses**

 

The allowance for loan losses is a valuation account that reflects our            estimation of the losses in our loan portfolio to the extent they are both probable and            reasonable to estimate. The allowance is maintained through provisions for loan losses            that are charged to income in the period they are established. We charge losses on            loans against the allowance for loan losses when we believe the collection of loan            principal is unlikely. Recoveries on loans previously charged off are added back to the            allowance.

 

This estimation is inherently subjective as it requires estimates and            assumptions that are susceptible to significant revisions as more information becomes            available or as future events change. The level of allowance is based on estimates and            the ultimate losses may vary from these estimates. Future additions to the allowance            for loan losses may be necessary if economic and other conditions in the future differ            substantially from the current operating environment. In addition, the Office of Thrift            Supervision as an integral part of its examination process, periodically reviews our            loan and foreclosed real estate portfolios and the related allowance for loan losses            and valuation allowance for foreclosed real estate. The Office of Thrift Supervision            may require the allowance for loan losses or the valuation allowance for foreclosed            real estate to be increased based on its review of information available at the time of            the examination, which would negatively affect our earnings.

 

There were $8,000 in net loan charge-offs during 2007, including $7,000            related to vehicles, and $1,000 on unsecured consumer loans. There were no real estate            or commercial loan charge-offs.

 

11

 

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            ***Analysis of Loan Loss Allowance.***The            following table sets forth information with respect to activity in our allowance for            loan losses at the dates indicated:

 

 

|                                                                                            |   |                             |   |   |     |   |   |     |   |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------|----------|--------|--------|----------|--------|
|                                                                                            |   | **For the Years Ended June 30,** |
|                                                                                            |   | **2007**                         |   |   | **2006** |   |   | **2005** |   |
|                                                                                            |   | **(Dollars in thousands)**       |   |
|                                                                                            |   |                             |   |   |     |   |   |     |   |
| Allowance balance (at beginning of period)                                                      |   | $                                | 400    |   |     | $      | 393    |     |   | $ | 409 |   |
|                                                                                            |   |                             |   |   |     |   |   |     |   |   |   |   |
| Charge-offs                                                                                     |   |                             | (17    | )      |     |   | (21    | )        |   |   | (16 | ) |
| Recoveries                                                                                      |   |                             | 9      |   |     |   | 1      |     |   |   | — |   |
| Net (charge-offs) recoveries                                                                    |   |                             | (8)    |   |     |   | (20    | )        |   |   | (16 | ) |
| Provision for loan losses                                                                       |   |                             | 10     |   |     |   | 27     |     |   |   | — |   |
| Allowance balance (at end of period)                                                            |   | $                                | 402    |   |     | $      | 400    |     |   | $ | 393 |   |
|                                                                                            |   |                             |   |   |     |   |   |     |   |   |   |   |
| Total loans outstanding                                                                         |   | $                                | 90,682 |   |     | $      | 80,381 |     |   | $ | 67,096 |   |
| Average loans outstanding                                                                       |   | $                                | 83,544 |   |     | $      | 72,388 |     |   | $ | 61,957 |   |
| Allowance for loan losses as a percentage of total loans                            outstanding |   |                             | 0.45   | %      |     |   | 0.51   | %        |   |   | 0.59 | % |
| Net loans charged off as a percentage of average loans                            outstanding   |   |                             | 0.01   | %      |     |   | 0.03   | %        |   |   | 0.03 | % |
|                                                                                            |   |                             |   |   |     |   |   |     |   |   |   |   |

 

 

12

 

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***Allocation of Allowance for Loan Losses.***The following table sets forth the allocation of our allowance for loan            losses by loan category and the percent of loans in each category to total loans            receivable, net, at the dates indicated. The portion of the loan loss allowance            allocated to each loan category does not represent the total available for losses which            may occur within the loan category since the total loan loss allowance is a valuation            reserve applicable to the entire loan portfolio.

 

 

|                           |   | **At June 30,**            |
|--------------------------------|--------|----------------------------|
|                           |   | **2007**                   |   | **2006** |   | **2005** |
|                           |   | **Amount**                 |   |   | **Percent of Loans to Total Loans** |   |   | **Amount** |   |   | **Percent of Loans to Total Loans** |   |   | **Amount** |   |   | **Percent of Loans to Total Loans** |   |
|                           |   | **(Dollars in thousands)** |   |
|                           |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At end of period allocated to: |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate mortgage:          |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family            |   | $                          | 139 |   |   | 68.4 | % |   | $ | 156 |   |   | 68.1 | % |   | $ | 189 |   |   | 72.1 | % |
| Non-residential                |   |                       | 107 |   |   | 13.2 |   |   |   | 57 |   |   | 8.9 |   |   |   | 74 |   |   | 10.6 |   |
| Construction                   |   |                       | 25 |   |   | 3.1 |   |   |   | 39 |   |   | 5.8 |   |   |   | 14 |   |   | 2.6 |   |
| Automobile                     |   |                       | 56 |   |   | 5.7 |   |   |   | 60 |   |   | 6.7 |   |   |   | 57 |   |   | 6.6 |   |
| Second mortgage                |   |                       | 20 |   |   | 4.9 |   |   |   | 16 |   |   | 5.1 |   |   |   | 15 |   |   | 4.8 |   |
| Commercial                     |   |                       | 23 |   |   | 1.9 |   |   |   | 39 |   |   | 2.2 |   |   |   | 15 |   |   | 0.6 |   |
| Other consumer                 |   |                       | 32 |   |   | 2.8 |   |   |   | 33 |   |   | 3.2 |   |   |   | 29 |   |   | 2.7 |   |
| Total allowance                |   | $                          | 402 |   |   | 100.0 | % |   | $ | 400 |   |   | 100.0 | % |   | $ | 393 |   |   | 100.0 | % |
|                           |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

**Securities Portfolio**

 

***General.***Federally chartered savings            banks have the authority to invest in various types of liquid assets. The investments            authorized by our investment policy, as approved by the Board, include U.S. government            and government agency obligations, mortgage-related securities of various U.S.            government agencies or government-sponsored entities and private corporate issuers            (including securities collateralized by mortgages), corporate bonds, commercial paper,            certificates of deposits of insured banks and savings institutions and municipal            securities. The Investment Committee, comprised of Directors Formby, Labadie, Strahan            and White, is responsible for the review of investment strategies and the approval of            investment decisions.

 

Our primary objective in operating the securities portfolio is to assist            in management of interest rate risk by matching our interest-sensitive liabilities. Our            other objectives are to provide liquidity and earnings, in that order of priority.            Individual investment decisions take into account, among other considerations, the            interest rate, tax considerations, yield, settlement date and maturity of the security,            our liquidity position, and anticipated cash needs and sources. The effect that the            proposed security would have on our credit and interest rate risk and risk-based            capital is also considered. All of our securities carry market risk insofar as            increases in market rates of interest may cause a decrease in their market            value.

 

We do not currently participate in hedging programs, interest rate caps,            floors or swaps, or other activities involving the use of off-balance sheet derivative            financial instruments. Further, we do not invest in securities which are not rated            investment grade.

 

13

 

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Our securities portfolio at June 30, 2007 did not contain securities of            any issuer with an aggregate book value in excess of 10% of our equity, excluding those            issued by the United States government or government agencies, other than our            investment in the AMF Ultra Short Mortgage Fund, a mutual fund which invests in            adjustable-rate mortgage-backed securities, with a carrying value of approximately            $12.7 million at June 30, 2007.All such mortgage-backed            securities are either issued by U.S. government agencies or government-sponsored            enterprises or rated in the two highest investment grades. This fund is rated AAA by            Standard & Poor’s.

 

In April 2005, we initiated a strategy in which we used one-month FHLB            advances to fund the purchase of a select portfolio of available-for-sale variable-rate            highly rated mortgage-related securities. All such securities must be rated            “AA” or higher. The objective of this strategy was to leverage our capital            and generate earnings without excessive exposure to interest rate risk. Because of the            current and near-term anticipated rate environment, we have stopped the wholesale            strategy we began in 2005. When we received proceeds from the January 17, 2007            reorganization, we used part of these proceeds to pay off the FHLB short-term advances            we were using to fund these securities. We continue to hold the securities in our            portfolio.

 

Statement of Financial Accounting Standards No. 115, “Accounting            for Certain Investments in Debt and Equity Securities,” requires that securities            be categorized as “held-to-maturity,” “trading securities” or            “available-for-sale,” based on management’s intent as to the ultimate            disposition of each security. Statement No. 115 allows debt securities to be classified            as “held-to-maturity” and reported in financial statements at amortized            cost only if the reporting entity has the positive intent and ability to hold these            securities to maturity. Securities that might be sold in response to changes in market            interest rates, changes in the security’s prepayment risk, increases in loan            demand, or other similar factors cannot be classified as            “held-to-maturity.”

 

We do not currently use or maintain a trading account. Securities not            classified as “held-to-maturity” are classified as            “available-for-sale.” These securities are reported at fair value, and            unrealized gains and losses on the securities are excluded from earnings and reported,            net of deferred taxes, as a separate component of equity. Approximately $7.1 million of            our securities portfolio is pledged as collateral for deposits.

 

***Mortgage-Related Securities.***Mortgage-related securities represent a participation interest in a pool            of one- to four-family or multi-family mortgages, although we focus primarily on            mortgage-related securities secured by one- to four-family mortgages. Our            mortgage-related securities portfolio includes mortgage-backed securities and            collateralized mortgage obligations issued by U.S. government agencies or            government-sponsored entities, such as Federal Home Loan Mortgage Corporation, the            Government National Mortgage Association, and the Federal National Mortgage            Association, as well as by private corporate issuers. The portfolio also includes an            investment in an adjustable rate mortgage mutual fund, with a carrying value of            approximately $12.7 million at June 30, 2007.

 

The mortgage originators use intermediaries (generally government            agencies and government-sponsored enterprises, but also a variety of private corporate            issuers) to pool and repackage the participation interests in the form of securities,            with investors such as us receiving the principal and interest payments on the            mortgages. Securities issued or sponsored by U.S. government agencies and            government-sponsored entities are guaranteed as to the payment of principal and            interest to investors. Privately issued securities typically offer rates above those            paid on government agency issued or sponsored securities, but lack the guaranty of            those agencies and are generally less liquid investments. In the absence of an agency            guarantee, our policy requires that we purchase only privately-issued mortgage-related            securities that have been assigned credit ratings of AA or AAA by the applicable            securities rating agencies.

 

14

 

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Mortgage-backed securities are pass-through securities typically issued            with stated principal amounts, and the securities are backed by pools of mortgages that            have loans with interest rates that are within a specific range and have varying            maturities. The life of a mortgage-backed security thus approximates the life of the            underlying mortgages. Mortgage-backed securities generally yield less than the mortgage            loans underlying such securities. The characteristics of the underlying pool of            mortgages,*i.e.*, fixed-rate or            adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.            Mortgage-backed securities are generally referred to as mortgage participation            certificates or pass-through certificates. At June 30, 2007, we had $819,000 of            mortgage-backed securities classified as “held-to-maturity,” and $2.0            million of mortgage-backed securities classified as            “available-for-sale.”

 

Collateralized mortgage obligations are mortgage-derivative products            that aggregate pools of mortgages and mortgage-backed securities and create different            classes of securities with varying maturities and amortization schedules as well as a            residual interest with each class having different risk characteristics. The cash flows            from the underlying collateral are usually divided into “tranches” or            classes whereby tranches have descending priorities with respect to the distribution of            principal and interest repayment of the underlying mortgages and mortgage-backed            securities as opposed to pass through mortgage-backed securities where cash flows are            distributed pro rata to all security holders. Unlike mortgage-backed securities from            which cash flow is received and prepayment risk is shared pro rata by all securities            holders, cash flows from the mortgages and mortgage-backed securities underlying            collateralized mortgage obligations are paid in accordance with a predetermined            priority to investors holding various tranches of the securities or obligations. A            particular tranche or class may carry prepayment risk which may be different from that            of the underlying collateral and other tranches. Investing in collateralized mortgage            obligations allows us to better manage the prepayment and extension risk associated            with conventional mortgage-related securities. Management believes collateralized            mortgage obligations represent attractive alternatives relative to other investments            due to the wide variety of maturity, repayment and interest rate options available. At            June 30, 2007, we had collateralized mortgage obligations classified as            “held-to-maturity” of $6.1 million, all of which were issued or guaranteed            by U.S. government agencies or government-sponsored enterprises. Our securities            portfolio also contained $1.2 million and $77,000 of private placement collateralized            mortgage obligations classified as “available-for-sale” and            “held-to-maturity,” respectively. At June 30, 2007, all of our            collateralized mortgage obligations were short duration, first tranche, fully            amortizing securities.

             

***Other Securities.***In addition, at            June 30, 2007 we held an approximate investment of $1.8 million in FHLB of Topeka            common stock (this amount is not shown in the securities portfolio). As a member of the            FHLB of Topeka, ownership of FHLB of Topeka common shares is required.

 

15

 

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The following table sets forth the carrying value of our securities            portfolio at the dates indicated. Securities that are held-to-maturity are shown at our            amortized cost, and securities that are available-for-sale are shown at the current            market value.

 

|                                       |   | **At June 30,**    |   |
|--------------------------------------------|--------|--------------------|--------|
|                                       |   | **2007**           |   | **2006** |   | **2005** |   |
|                                       |   | **(In thousands)** |   |
| Securities Held-to-Maturity:               |   |               |   |   |   |   |   |   |   |   |
| Mortgage-backed securities and CMOs        |   | $                  | 6,963  |   | $ | 8,221 |   | $ | 11,379 |   |
|                                       |   |               |   |   |   |   |   |   |   |   |
| Securities Available-for-Sale:             |   |               |   |   |   |   |   |   |   |   |
| AMF Ultra-Short Mortgage Fund(1)           |   |               | 12,690 |   |   | 12,086 |   |   | 11,723 |   |
| Mortgage-backed securities and CMO’s |   |               | 3,221  |   |   | 5,749 |   |   | 3,089 |   |
| Total                                      |   | $                  | 22,874 |   | $ | 26,056 |   | $ | 26,191 |   |
|                                       |   |               |   |   |   |   |   |   |   |   |

             

__________ 

|   | (1) | Consisting primarily of mortgage-related                            securities. |
|--------|-----|---------------------------------------------------------------------------------|

 

 

 

16

 

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The following table sets forth the carrying values, weighted average            yields and maturities of our securities portfolio at June 30, 2007. This table shows            contractual maturities and does not reflect repricing or the effect of prepayments.            Actual maturities may differ.

             

 

|                               |   |   | **At June 30, 2007**       |   |
|------------------------------------|--------|--------|----------------------------|--------|
|                               |   |   | **One Year or Less**       |   |   | **One to Five Years** |   |   | **Five to Ten Years** |   |   | **Over Ten Years** |   |   | **Total Securities** |   |
|                               |   |   | **Carrying****Value**      |   | **Average****Yield** |   |   | **Carrying****Value** |   | **Average****Yield** |   |   | **Carrying****Value** |   | **Average****Yield** |   |   | **Carrying****Value** |   | **Average****Yield** |   |   | **Carrying****Value** |   | **Average****Yield** |   |   | **Market****Value** |   |
|                               |   |   | **(Dollars in thousands)** |   |
|                               |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securitiesand CMOs |   |   | $                          | 216    |   | 4.73 | % |   |   | $ | 5,990 |   | 4.59 | % |   |   | $ | 2,888 |   | 4.53 | % |   |   | $ | 1,090 |   | 5.00 | % |   |   | $ | 10,184 |   | 4.62 | % |   | $ | 9,811 |   |
| AMF Ultra Short Mortgage Fund (1)  |   |   |                       | 12,690 |   | 5.28 |   |   |   |   | — |   | — |   |   |   |   | — |   | — |   |   |   |   | — |   | — |   |   |   |   | 12,690 |   | 5.28 |   |   |   | 12,690 |   |
| Total                              |   |   | $                          | 12,906 |   | 5.27 | % |   |   | $ | 5,990 |   | 4.59 | % |   |   | $ | 2,888 |   | 4.53 | % |   |   | $ | 1,090 |   | 5.00 | % |   |   | $ | 22,874 |   | 4.99 | % |   | $ | 22,501 |   |
|                               |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

________________________

| (1) | Consisting primarily of mortgage-related                            securities. |
|-----|---------------------------------------------------------------------------------|

 

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**Sources of Funds**

 

***General.***Deposits are our major            source of funds for lending and other investment purposes. In addition, we derive funds            from loan and mortgage-backed securities principal repayments, and proceeds from the            maturity of securities. Loan and securities payments are a relatively stable source of            funds, while deposit inflows are significantly influenced by general interest rates and            money market conditions. Borrowings (principally from the FHLB) are also used to            supplement the amount of funds for lending and investment.

 

***Deposits.***Our current deposit            products include checking, savings, money market, savings accounts, and certificates of            deposit accounts ranging in terms from thirty days to sixty-one months, and individual            retirement accounts with terms starting at eighteen months. Deposit account terms vary,            primarily as to the required minimum balance amount, the amount of time that the funds            must remain on deposit and the applicable interest rate.

 

Deposits are obtained primarily from within Osage and Washington            Counties, Oklahoma. In order to attract new customers and deposits, we began a new            advertising campaign, “bank more”, including print and broadcast media,            cable TV, direct mail and inserts included with customer statements. We began offering            internet banking early in 2007, with free bill pay to follow later in 2007. We do not            currently use deposit brokers. Approximately $8.5 million, or 12% of our deposits are            from one public unit.

 

The determination of interest rates is based upon a number of factors,            including: (1) our need for funds based on loan demand, current maturities of            deposits and other cash flow needs; (2) a weekly survey of general market rates            and rates of a selected group of competitors’ rates for similar products;            (3) our current cost of funds and yield on assets; and (4) the alternate cost            of funds on a wholesale basis, in particular the cost of advances from the FHLB.            Interest rates are reviewed by senior management on a weekly basis and evaluated by the            ALCO committee monthly.

 

A large percentage of our deposits are in certificates of deposit. Our            liquidity could be reduced if a significant amount of certificates of deposit, maturing            within a short period of time, were not renewed. Historically, a significant portion of            the certificates of deposit remain with us after they mature and we believe that this            will continue. However, the need to retain these time deposits could result in an            increase in our cost of funds.

 

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 FHLB 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.

 

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***Deposit Distribution.***The following            table sets forth the average balance and the weighted average rates for each period on            each category of deposits presented.

 

 

|                                    |   | **Year Ended June 30,**    |
|-----------------------------------------|--------|----------------------------|
|                                    |   | **2007**                   |   | **2006** |   | **2005** |
|                                    |   |                       |   | **Weighted** |   |   |   |   | **Weighted** |   |   |   |   | **Weighted** |   |
|                                    |   | **Average**                |   | **Average** |   |   | **Average** |   | **Average** |   |   | **Average** |   | **Average** |   |
|                                    |   | **Balance**                |   | **Rate** |   |   | **Balance** |   | **Rate** |   |   | **Balance** |   | **Rate** |   |
|                                    |   | **(Dollars in thousands)** |
|                                    |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                         |   | $                          | 5,092 |   | 0.00 | % |   | $ | 4,421 |   | 0.00 | % |   | $ | 2,999 |   | 0.00 | % |
| Interest-bearing demandand NOW deposits |   |                       | 8,311 |   | 0.81 |   |   |   | 9,317 |   | 0.99 |   |   |   | 9,072 |   | 0.87 |   |
| Money market savings                    |   |                       | 5,910 |   | 1.57 |   |   |   | 7,035 |   | 1.39 |   |   |   | 10,376 |   | 1.42 |   |
| Savings accounts                        |   |                       | 4,436 |   | 0.77 |   |   |   | 4,096 |   | 0.78 |   |   |   | 4,243 |   | 0.77 |   |
| Certificates of deposit                 |   |                       | 49,113 |   | 4.28 |   |   |   | 37,323 |   | 3.48 |   |   |   | 35,835 |   | 3.08 |   |
|                                    |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total deposits                          |   | $                          | 72,862 |   | 3.15 | % |   | $ | 62,192 |   | 2.45 | % |   | $ | 62,525 |   | 2.18 | % |
|                                    |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

***Jumbo Certificates of Deposit.***The            following table shows the amount of certificates of deposit of $100,000 or more at            Osage Federal Bank, by time remaining until maturity as of June 30, 2007.

 

 

|                      |   |                            |   |
|---------------------------|--------|---------------------------------|--------|
| **Maturity Period**       |   | **Certificates****of Deposits** |   |
|                      |   | **(In thousands)**              |   |
|                      |   |                            |   |   |
| Within three months       |   | $                               | 10,627 |   |
| Three through six months  |   |                            | 9,560  |   |
| Six through twelve months |   |                            | 3,296  |   |
| Over twelve months        |   |                            | 3,378  |   |
|                      |   | $                               | 26,861 |   |
|                      |   |                            |   |   |

 

Approximately 41.1% of our deposits of $100,000 or more are public            deposits for which we are required to pledge securities as collateral. Although these            deposits may be subject to competitive bidding, they have been a stable source of funds            in the past. No assurance can be given, however, that we will be able to retain these            deposits in the future.

 

***Borrowings.***To supplement our            deposits as a source of funds for lending or investment, we borrow funds in the form of            advances from the FHLB of Topeka. We regularly make use of long-term FHLB advances as            part of our interest rate risk management, primarily to extend the duration of funding            to match the longer-term, fixed-rate loans held in the loan portfolio as part of our            growth strategy. During the fiscal year ended June 30, 2007, we used our line of credit            facility at the FHLB as a short-term measure to fund the significant loan growth we            experienced. We used funds provided by the January 17, 2007 reorganization to pay off            this line of credit as well as borrowings used to fund the wholesale securities            strategy we began in 2005. Our long-term advances are non-amortizing, and range in            original

 

19

 

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terms from three to seven years and are laddered with approximately $1.0            million maturing every six months.

 

Advances from the FHLB are typically secured by the FHLB stock we own            and a portion of our residential mortgage loans and may be secured by other assets,            mainly securities that are obligations of or guaranteed by the U.S. government. At June            30, 2007, our borrowing limit with the FHLB was approximately $53.3 million. Additional            information regarding our FHLB advances is included under Note 8 of the Notes to the            Consolidated Financial Statements.

 

The following table sets forth information regarding the balances and            rates on our FHLB advances.

 

 

|                                                                        |   |                                  |   |     |   |     |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------|--------|----------|--------|----------|--------|
|                                                                        |   | **At or for the Year Ended June 30,** |
|                                                                        |   | **2007**                              |   | **2006** |   | **2005** |   |
|                                                                        |   | **(Dollars in thousands)**            |   |
|                                                                        |   |                                  |   |     |   |     |   |
| Average balance outstanding, during the                            period   |   | $                                     | 21,430 |     | $      | 28,560   |   | $ | 14,583 |   |
| Maximum amount outstanding at any month-endduring the period                |   | $                                     | 33,150 |     | $      | 33,350   |   | $ | 21,650 |   |
| Balance outstanding at end of period                                        |   | $                                     | 13,000 |     | $      | 33,350   |   | $ | 21,650 |   |
| Weighted average interest rate during the                            period |   |                                  | 4.86   | %        |   | 4.52     | %      |   | 4.56 | % |
| Weighted average interest rate at end of                            period  |   |                                  | 4.45   | %        |   | 5.04     | %      |   | 4.27 | % |
|                                                                        |   |                                  |   |     |   |     |   |   |   |   |

 

**Subsidiary Activity**

 

Osage Federal Bank has no subsidiaries.

 

**Personnel**

 

As of June 30, 2007, we had 30 full-time employees and one part-time            employee. Our employees are not represented by a collective bargaining unit. We believe            our relationship with our employees is satisfactory.

 

**Competition**

 

We face substantial competition in our attraction of deposits, which are            our primary source of funds for lending, and in the origination of loans. Many of our            competitors are significantly larger institutions and have greater financial and            managerial resources. Our ability to compete successfully is a significant factor            affecting our profitability.

 

Our competition for deposits and loans historically has come from other            insured financial institutions such as local and regional commercial banks, savings            institutions, and credit unions located in our primary market area. We also compete            with mortgage banking companies for real estate loans, and commercial banks and savings            institutions for consumer loans; and face competition for funds from investment            products such as mutual funds, short-term money funds and corporate and government            securities.

 

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Osage Federal Bank is the second largest of the three financial            institutions that are headquartered or have offices in Pawhuska, Oklahoma. Osage            Federal Bank is the fifth largest of the eight financial institutions that are            headquartered or have branch offices in Bartlesville, Oklahoma. According to the            Federal Deposit Insurance Corporation data as of June 30, 2006, the latest date for            which data is available, Osage Federal Bank has the third largest share of Federal            Deposit Insurance Corporation-insured deposits in Osage County with 13.4% and the fifth            largest share in Washington County. Such data does not reflect deposits at credit            unions operating in these markets.

 

**REGULATION**

 

Set forth below is a brief description of certain banking laws governing            Osage Federal Bank and Osage Bancshares, Inc. The description does not purport to be            complete and is qualified in its entirety by reference to applicable laws and            regulations. We operate in a highly regulated industry. This regulation and supervision            establishes a comprehensive framework of activities in which a federal savings bank may            engage and is intended primarily for the protection of the deposit insurance fund and            depositors.

 

**Regulation of Osage Bancshares, Inc.**

 

***General.***Osage Bancshares, Inc. is a            savings and loan holding company within the meaning of Section 10 of the Home            Owners’ Loan Act, and is required to file reports with the Office of Thrift            Supervision and is subject to regulation and examination by the Office of Thrift            Supervision. In addition, the Office of Thrift Supervision has enforcement authority            over Osage Bancshares, Inc. and any non-savings institution subsidiaries. This permits            the Office of Thrift Supervision to restrict or prohibit activities that it determines            to be a serious risk to Osage Federal. This regulation is intended primarily for the            protection of the depositors and not for the benefit of shareholders of Osage            Bancshares, Inc.

 

***Activities Restrictions.***As a            savings and loan holding company, Osage Bancshares, Inc. is subject to statutory and            regulatory restrictions on its business activities. The non-banking activities of Osage            Bancshares, Inc. and its non-savings institution subsidiaries are restricted to certain            activities specified by Office of Thrift Supervision regulation, which include            performing services and holding properties used by a savings institution subsidiary,            activities authorized for savings and loan holding companies as of March 5, 1987, and            non-banking activities permissible for bank holding companies pursuant to the Bank            Holding Company Act of 1956 or authorized for financial holding companies pursuant to            the Gramm-Leach-Bliley Act. Before engaging in any non-banking activity or acquiring a            company engaged in any such activities, Osage Bancshares, Inc. must file with the            Office of Thrift Supervision either a prior notice or (in the case of non-banking            activities permissible for bank holding companies) an application regarding its planned            activity or acquisition.

 

***Mergers and Acquisitions.***Osage            Bancshares, Inc. must obtain approval from the Office of Thrift Supervision before            acquiring more than 5% of the voting stock of another savings institution or savings            and loan holding company or acquiring such an institution or holding company by merger,            consolidation or purchase of its assets. In evaluating an application for Osage            Bancshares, Inc. to acquire control of a savings institution, the Office of Thrift            Supervision considers the financial and managerial resources and future prospects of            Osage Bancshares, Inc. and the target institution, the effect of the acquisition on the            risk to the insurance funds, the convenience and the needs of the community (including            Osage Federal Bank’s performance under the Community Reinvestment Act) and            competitive factors.

 

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**Regulation of Osage Federal Bank**

 

***General.***As a federally chartered            savings bank with deposits insured by the Federal Deposit Insurance Corporation, Osage            Federal Bank is subject to extensive regulation by the Office of Thrift Supervision and            the Federal Deposit Insurance Corporation. This regulatory structure gives the            regulatory authorities extensive discretion in connection with their supervisory and            enforcement activities and examination policies, including policies regarding the            classification of assets and the level of the allowance for loan losses. The activities            of federal savings banks are subject to extensive regulation including restrictions or            requirements with respect to loans to one borrower, the percentages of various types of            loans and investments to total assets, capital distributions, permissible investments            and lending activities, liquidity, transactions with affiliates and community            reinvestment. Federal savings banks are also subject to reserve requirements imposed by            the Federal Reserve System. A federal savings bank’s relationship with its            depositors and borrowers is regulated by both state and federal law, especially in such            matters as the ownership of savings accounts and the form and content of the            bank’s mortgage documents.

 

Osage Federal Bank must file reports with the Office of Thrift            Supervision concerning its activities and financial condition, and must obtain            regulatory approvals prior to entering into transactions such as mergers with or            acquisitions of other financial institutions. The Office of Thrift Supervision            regularly examines Osage Federal Bank and prepares reports to our Board of Directors on            deficiencies, if any, found in its operations.

 

***Deposit Insurance.***Osage Federal            Bank’s deposits are insured to applicable limits by the Federal Deposit Insurance            Corporation. Although the Federal Deposit Insurance Corporation is authorized to assess            premiums under a risk-based system for such deposit insurance, most insured depository            institutions have not been required to pay premiums for the last ten years. The Federal            Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed            into law on February 15, 2006, has resulted in significant changes to the federal            deposit insurance program: (i) effective July 1, 2006, the Bank Insurance Fund (which            formerly insured the deposits of banks) and the Savings Association Insurance Fund            (which formerly insured the deposits of savings associations like Osage Federal Bank)            were merged into a new combined fund, called the Deposit Insurance Fund; (ii) the            current $100,000 deposit insurance coverage will be indexed for inflation (with            adjustments every five years, commencing January 1, 2011); and (iii) deposit insurance            coverage for retirement accounts has been increased to $250,000 per participant subject            to adjustment for inflation. The Federal Deposit Insurance Corporation has been given            greater latitude in setting the assessment rates for insured depository institutions,            which could be used to impose minimum assessments.

             

The Federal Deposit Insurance Corporation is authorized to set the            reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of            estimated insured deposits. If the Deposit Insurance Fund’s reserves exceed the            designated reserve ratio, the Federal Deposit Insurance Corporation is required to pay            out all or, if the reserve ratio is less than 1.5%, a portion of the excess as a            dividend to insured depository institutions based on the percentage of insured deposits            held on December 31, 1996 adjusted for subsequently paid premiums. Insured depository            institutions that were in existence on December 31, 1996 and paid assessments prior to            that date (or their successors) are entitled to a one-time special assessment credit            against future assessments based on their past contributions to the BIF or            SAIF.

 

Pursuant to the Reform Act, the FDIC has determined to maintain the            designated reserve ratio at its current 1.25%. The FDIC has also adopted a new            risk-based premium system that provides for quarterly assessments based on an insured            institution’s ranking in one of four risk categories based on their examination            ratings and capital ratios. Beginning in 2007, well-capitalized institutions with the            CAMELS ratings of 1 or 2 are grouped in Risk Category I and are assessed for deposit            insurance at an

 

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annual rate of between five and seven basis points with the assessment            rate for an individual institution to be determined according to a formula based on a            weighted average of the institution’s individual CAMEL component ratings plus            either five financial ratios or the average ratings of its long-term debt. Institutions            in Risk Categories II, III and IV are assessed at annual rates of 10, 28 and 43 basis            points, respectively. Osage Federal Bank anticipates that it will be able to offset its            deposit insurance premium for 2007 with the special assessment credit.

             

In addition, all Federal Deposit Insurance Corporation-insured            institutions are required to pay assessments to the Federal Deposit Insurance            Corporation to fund interest payments on bonds issued by the Financing Corporation, an            agency of the federal government established to recapitalize the predecessor to the            Savings Association Insurance Fund. These assessments will continue until the Financing            Corporation bonds mature in 2019.

 

***Regulatory Capital Requirements.***Office of Thrift Supervision capital regulations require savings            institutions to meet three capital standards: (1) tangible capital equal to 1.5% of            total adjusted assets, (2) “Tier 1” or “core” capital equal to            at least 4% (3% if the institution has received the highest possible rating on its most            recent examination) of total adjusted assets, and (3) risk-based capital equal to 8% of            total risk-weighted assets.

 

In addition, the Office of Thrift Supervision may require that a savings            institution that has a risk-based capital ratio of less than 8%, a ratio of Tier 1            capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total            adjusted assets of less than 4% (3% if the institution has received the highest rating            on its most recent examination) take action to increase its capital ratios. If the            savings institution’s capital is significantly below the minimum required levels            of capital or if it is unsuccessful in increasing its capital ratios, the Office of            Thrift Supervision may restrict its activities.

 

Tier 1 capital is defined as common stockholders’ equity,            non-cumulative perpetual preferred stock and related surplus, minority interests in the            equity accounts of consolidated subsidiaries, and certain non-withdrawable accounts and            pledged deposits of mutual savings banks. Osage Federal does not have any subsidiaries,            non-withdrawable accounts or pledged deposits. Tier 1 capital is reduced by an            institution’s intangible assets, with limited exceptions for certain servicing            rights, interest-only strips and purchased credit card relationships. Core capital is            further reduced by an amount equal to the savings institution’s debt and equity            investments in “non-includable” subsidiaries engaged in activities not            permissible for national banks other than subsidiaries engaged in activities undertaken            as agent for customers or in mortgage banking activities and subsidiaries that are            depository institutions or their holding companies.

 

Total capital equals the sum of Tier 1 and supplementary capital. The            components of supplementary capital include, among other items, cumulative perpetual            preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt,            intermediate-term preferred stock, the portion of the allowance for loan losses not            designated for specific loan losses (up to 1.25% of risk-weighted assets) and up to 45%            of unrealized gains on equity securities. Overall, supplementary capital is limited to            100% of Tier 1 capital. For purposes of determining total capital, a savings            institution’s assets are reduced by the amount of capital instruments held by            other depository institutions pursuant to reciprocal arrangements and by the amount of            the institution’s equity investments (other than those deducted from core and            tangible capital) and its high loan-to-value ratio land loans and non-residential            construction loans. A savings institution’s risk-based capital requirement is            measured against risk-weighted assets, which equal the sum of each on-balance-sheet            asset and the credit-equivalent amount of each off-balance-sheet item after being            multiplied by an assigned risk weight. These risk weights range from 0% for cash to            100% for delinquent loans, property acquired through foreclosure, commercial loans, and            certain other assets.

 

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***Prompt Corrective Regulatory Action.***Under the Office of Thrift Supervision Prompt Corrective Action            regulations, the Office of Thrift Supervision is required to take supervisory actions            against undercapitalized institutions, the severity of which depends upon the            institution’s level of capital. Generally, a savings institution that has total            risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1 core capital            ratio that is less than 4.0%, is considered to be undercapitalized. A savings            institution that has total risk-based capital less than 6.0%, a Tier 1 core risk-based            capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is            considered to be “significantly undercapitalized.” A savings institution            that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be            “critically undercapitalized.” Generally, the banking regulator is required            to appoint a receiver or conservator for an institution that is “critically            undercapitalized.” The regulation also provides that a capital restoration plan            must be filed with the Office of Thrift Supervision within forty-five days of the date            an institution receives notice that it is “undercapitalized,”            “significantly undercapitalized” or “critically            undercapitalized.” In addition, numerous mandatory supervisory actions become            immediately applicable to the institution, including, but not limited to, restrictions            on growth, investment activities, capital distributions, and affiliate transactions.            The Office of Thrift Supervision may also take any one of a number of discretionary            supervisory actions against undercapitalized institutions, including the issuance of a            capital directive and the replacement of senior executive officers and            directors.

 

***Dividend and Other Capital Distribution            Limitations.***The Office of Thrift Supervision imposes            various restrictions or requirements on the ability of savings institutions to make            capital distributions, including cash dividends.

 

A savings institution that is a subsidiary of a savings and loan holding            company, such as Osage Federal 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.

 

The Office of Thrift Supervision may disapprove a notice or deny an            application for a capital distribution if: (i) the savings institution would be            undercapitalized following the capital distribution; (ii) the proposed capital            distribution raises safety and soundness concerns; or (iii) the capital distribution            would violate a prohibition contained in any statute, regulation or            agreement.

 

A savings association may not make a capital distribution if, after            making the distribution, it would be undercapitalized. In addition, a savings            association that has converted from mutual to stock form may not pay dividends in an            amount that would reduce its regulatory capital below the amount required for its            liquidation account.

 

***Qualified Thrift Lender Test.***Federal savings institutions must meet a qualified thrift lender test or            they become subject to the business activity restrictions and branching rules            applicable to national banks. To qualify as a qualified thrift lender, a savings            institution must either (i) be deemed a “domestic building and loan            association” under the Internal Revenue Code by maintaining at least 60% of its            total assets in specified types of assets, including cash, certain government            securities, loans secured by and other assets related to residential real property,            educational loans and investments in premises of the institution or (ii) satisfy the            statutory qualified thrift lender test set forth in the Home Owners’ Loan Act by            maintaining at least 65% of its portfolio assets in qualified thrift investments            (defined to include

 

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residential mortgages and related equity investments, certain            mortgage-related securities, small business loans, student loans and credit card loans,            and 50% of certain community development loans). For purposes of the statutory            qualified thrift lender test, portfolio assets are defined as total assets minus            intangible assets, property used by the institution in conducting its business, and            liquid assets equal to 20% of total assets. A savings institution must maintain its            status as a qualified thrift lender on a monthly basis in at least nine out of every            twelve months. Osage Federal Bank met the qualified thrift lender test as of June 30,            2007 and in each of the last twelve months and, therefore, qualifies as a qualified            thrift lender.

 

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

 

***Community Reinvestment Act**.*Under the Community Reinvestment Act, every insured depository            institution, including Osage Federal Bank, has a continuing and affirmative obligation            consistent with its safe and sound operation to help meet the credit needs of its            entire community, including low and moderate income neighborhoods. The Community            Reinvestment Act does not establish specific lending requirements or programs for            financial institutions nor does it limit an institution’s discretion to develop            the types of products and services that it believes are best suited to its particular            community. The Community Reinvestment Act requires the Office of Thrift Supervision to            assess the depository institution’s record of meeting the credit needs of its            community and to take such record into account in its evaluation of certain            applications by such institution, such as a merger or the establishment of a branch            office by Osage Federal Bank. An unsatisfactory Community Reinvestment Act examination            rating may be used by the Office of Thrift Supervision as the basis for the denial of            an application. Osage Federal Bank received a satisfactory Community Reinvestment Act            rating in its most recent Community Reinvestment Act examination by the Office of            Thrift Supervision.

 

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

 

As a member, Osage Federal Bank is required to purchase and maintain            stock in the FHLB of Topeka in an amount equal to the greater of 1% of our aggregate            unpaid residential mortgage loans, home purchase contracts or similar obligations at            the beginning of each year or 5% of FHLB advances. We are in compliance with this            requirement. The FHLB imposes various limitations on advances such as limiting the            amount of certain types of real estate related collateral to 30% of a member’s            capital and limiting total advances to a member.

 

The FHLB’s are required to provide funds for the resolution of            troubled savings institutions and to contribute to affordable housing programs through            direct loans or interest subsidies on advances targeted for community investment and            low- and moderate-income housing projects. These contributions have adversely affected            the level of FHLB dividends paid and could continue to do so in the future.            In

 

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addition, the Federal Housing Finance Board has proposed that the            FHLB’s increase their capital levels by retaining more earnings which has led            several FHLB’s to reduce their dividends.

 

**Item 2. Description of            Property**

 

At June 30, 2007, our net investment in property and equipment totaled            $1.5 million. We use an outside service company for data processing. The following            table sets forth the location of our main office and branch office, the year the            offices were opened and the net book value of each office.

 

 

|                                                                      |   |                        |   |   |                   |   |                                   |   |
|---------------------------------------------------------------------------|--------|-----------------------------|--------|--------|------------------------|--------|----------------------------------------|--------|
| **Office Location**                                                       |   | **Year Facility****Opened** |   |   | **Leased or****Owned** |   | **Net Book Value at****June 30, 2007** |   |
|                                                                      |   |                        |   |   |                   |   | **(In thousands)**                     |   |
| **Main Office**239 East Main StreetPawhuska, OK 74056                     |   | 1978                        |   |   | Owned                  |   | $                                      | 737    |   |
| **Branch Office**3309 S.E. Frank Phillips BoulevardBartlesville, OK 74005 |   | 1991                        |   |   | Owned                  |   | $                                      | 719    |   |
|                                                                      |   |                        |   |   |                   |   |                                   |   |   |

 

**Item 3. Legal            Proceedings**

 

Osage Federal Bank, from time to time, is a party to routine litigation,            which arises in the normal course of business, such as claims to enforce liens,            condemnation proceedings on properties in which the bank holds security interests,            claims involving the making and servicing of real property loans, and other issues            incident to the business of the bank. There were no lawsuits pending or known to be            contemplated against Osage Federal Bank at June 30, 2007 that would have a material            effect on our financial condition, operations, income or cash flows.

             

**Item 4. Submission of Matters to a Vote of            Security-Holders**

 

There were no matters submitted to a vote of the security holders during            the fourth quarter of fiscal year 2007.

 

**PART II**

 

**Item 5. Market for Common Equity and Related Stockholder Matters            and Small Issuer Purchases of Equity            Securities**

 

(a)        ***Market Information.***The information            contained under the section captioned “Stock Market Information” in the            Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2007            (the “Annual Report”) filed as Exhibit 13 to this Annual Report on Form            10-KSB is incorporated herein by reference. During the period under report, the Company            did not sell any equity securities that were not registered under the Securities Act of            1933.

 

|   | (b) | ***Use of Proceeds.***Not                            applicable. |
|--------|-----|------------------------------------------------------------------|

 

|   | (c) | ***Issuer Purchases of Equity                            Securities.***Not applicable. |
|--------|-----|----------------------------------------------------------------------------------------|

 

26

 

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**Item 6. Management’s Discussion and Analysis or Plan of            Operation**

 

The information contained in the section captioned            “Management’s Discussion and Analysis of Financial Condition and Results of            Operations” in the Annual Report is incorporated herein by reference.

 

**Item 7. Financial            Statements**

 

The Company’s consolidated financial statements are incorporated            herein by reference from the Annual Report.

 

**Item 8. Changes in and Disagreements with Accountants on            Accounting and Financial Disclosure**

 

Not applicable.

             

**Item 8A. Controls and            Procedures.**

 

The Company’s management evaluated, with the participation of the            Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness            of the Company’s disclosure controls and procedures, as of the end of the period            covered by this report. Based on that evaluation, the Chief Executive Officer and Chief            Financial Officer concluded that the Company’s disclosure controls and procedures            are effective to ensure that information required to be disclosed by the Company in the            reports that it files or submits under the Securities Exchange Act of 1934 is recorded,            processed, summarized and reported within the time periods specified in the Securities            and Exchange Commission’s rules and forms.

 

There were no changes in the Company’s internal control over            financial reporting that occurred during the Company’s last fiscal quarter that            have materially affected, or are reasonably likely to materially affect, the            Company’s internal control over financial reporting.

 

**Item 8B. Other            Information.**

 

Not applicable.

 

**PART III**

 

**Item 9. Directors, Executive Officers, Promoters, Control Persons            and Corporate Governance; Compliance with Section 16(a) of the Exchange            Act**

 

The information contained under the sections captioned “Corporate            Governance,” “Section 16(a) Beneficial Ownership Reporting            Compliance” and “Proposal I -- Election of Directors” in the            Company’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders            is incorporated herein by reference.

 

The Company has adopted a Code of Ethics that applies to its principal            executive officer, principal financial officer, principal accounting officer or            controller or persons performing similar functions. A copy of the Company’s Code            of Ethics will be provided to any person without charge upon written request to Sue            Allen Smith, Chief Financial Officer, Osage Bancshares, Inc., 239 East Main Street,            Pawhuska, Oklahoma 74056.

 

27

 

----

**Item 10. Executive            Compensation**

 

The information contained under the section captioned “Proposal I            -- Election of Directors - Executive Compensation” and “Director            Compensation” in the Proxy Statement is incorporated herein by            reference.

 

**Item 11. Security Ownership of Certain Beneficial Owners and            Management and Related Stockholder            Matters**

 

|   | **(a)** | **Security Ownership of Certain Beneficial                            Owners** |
|--------|---------|--------------------------------------------------------------------------------|

 

Information required by this item is incorporated herein by reference to            the Section captioned “Principal Holders of the Common Stock” of the Proxy            Statement.

 

|   | **(b)** | **Security Ownership of Management** |
|--------|---------|--------------------------------------|

 

Information required by this item is incorporated herein by reference to            the section captioned “Proposal I -- Election of Directors” of the Proxy            Statement.

 

|   | **(c)** | **Changes in Control** |
|--------|---------|------------------------|

 

Management of the Company knows of no arrangements, including any pledge            by any person of securities of the Company, the operation of which may at a subsequent            date result in a change in control of the registrant.

 

|   | **(d)** | **Securities Authorized for Issuance Under Equity                            Compensation Plans** |
|--------|---------|---------------------------------------------------------------------------------------------------|

 

The information required by this item is set forth below.

             

 

|                                                              |   |                                                                                                                       |    |                                                                                                       |   |                                                                                                                                                                                                   |   |
|-------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|---------|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                              |   | **(a)**                                                                                                                    |    | **(b)**                                                                                                    |   | **(c)**                                                                                                                                                                                                |   |
|                                                              |   | **Number of Securities to be issued upon exercise of                            outstanding options, warrants and rights** |    | **Weighted-average exercise price of outstanding                            options, warrants and rights** |   | **Number of securities remaining available for future                            issuance under equity compensation plans, (excluding securities                            reflected in column (a))** |   |
|                                                              |   |                                                                                                                       |    |                                                                                                       |   |                                                                                                                                                                                                   |   |
| **Equity compensation plans****approved by shareholders**         |   |                                                                                                                       |    |                                                                                                       |   |                                                                                                                                                                                                   |   |   |   |   |   |   |   |   |
| 2004 Stock Option Plan                                            |   |                                                                                                                       | 148,997 |                                                                                                       |   |                                                                                                                                                                                                   | $      | 7.69 |   |   |   | 17,962 |   |   |
| 2004 Restricted Stock Plan                                        |   |                                                                                                                       | 38,775  |                                                                                                       |   |                                                                                                                                                                                                   |   | -- |   |   |   | 7,192 |   |   |
|                                                              |   |                                                                                                                       |    |                                                                                                       |   |                                                                                                                                                                                                   |   |   |   |   |   |   |   |   |
| **Equity compensation plans not****approved by security holders** |   |                                                                                                                       | N/A     |                                                                                                       |   |                                                                                                                                                                                                   |   | N/A |   |   |   | N/A |   |   |
| TOTAL                                                             |   |                                                                                                                       | 187,772 |                                                                                                       |   |                                                                                                                                                                                                   | $      | 7.69 |   |   |   | 25,154 |   |   |

 

 

28

 

----

**Item 12. Certain Relationships and Related Transactions and            Director Independence**

 

The information required by this item is incorporated herein by            reference to the section captioned “Related Party Transactions” and            “Corporate Governance” in the Proxy Statement.

 

**Item 13. Exhibits**

 

The following exhibits are either filed as part of this Annual Report on            Form 10-KSB or incorporated herein by reference:

 

|   |       |   |                                                                                                                |
|--------|------------|--------|---------------------------------------------------------------------------------------------------------------------|
|   | **Number** |   | **Description**                                                                                                     |
|   | 3(i)       |   | Articles of Incorporation *                                                                                         |
|   | 3(ii)      |   | Bylaws                                                                                                              |
|   | 4          |   | Form of Common Stock Certificate **                                                                                 |
|   | 10.1       |   | Executive Salary Continuation Plan and Split Dollar                            Agreements with Mark S. White***     |
|   | 10.2       |   | Executive Salary Continuation Plan and Split Dollar                            Agreements with Richard Trolinger*** |
|   | 10.3       |   | Executive Salary Continuation Plan and Split Dollar                            Agreements with Martha Hayes***      |
|   | 10.4       |   | Executive Salary Continuation Plan and Split Dollar                            Agreements with Sue Allen Smith***   |
|   | 10.5       |   | Director Supplemental Income Plan and Split Dollar                            Agreements with Mark A. Formby***     |
|   | 10.6       |   | Director Supplemental Income Plan and Split Dollar                            Agreements with Harvey Payne***       |
|   | 10.7       |   | Director Supplemental Income Plan and Split Dollar                            Agreements with Gary Strahan***       |
|   | 10.8       |   | Osage Bancshares, Inc. 2004 Stock Option                            Plan****                                        |
|   | 10.9       |   | Osage Federal Bank 2004 Restricted Stock                            Plan****                                        |
|   | 31.1       |   | Rule 13a-14(a)/15d-14(a) Certification of Chief                            Executive Officer                        |
|   | 31.2       |   | Rule 13a-14(a)/15d-14(a) Certification of Chief                            Financial Officer                        |
|   | 32         |   | Section 1350 Certification                                                                                          |
|   |       |   |                                                                                                                |

             

_______________

|   | * | Incorporated by reference from Pre-Effective Amendment                            No. 1 to the Registrant’s Registration Statement on Form S-1                            (File No. 333-137377). |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ** | Incorporated by reference from the Registrant’s                            Registration Statement on Form S-1 (File No. 333-137377) |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | *** | Incorporated by reference from the Quarterly Report on                            Form 10-QSB of Osage Federal Financial, Inc. for the Quarter Ended                            March 31, 2005. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **** | Incorporated by reference to the Registrant’s                            Registration Statement on Form S-8 (File No. 333-140308). |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item 14. Principal Accountant Fees and            Services**

 

The information set forth under the caption “Relationship with            Independent Auditors” in the Proxy Statement is incorporated herein by            reference.

 

 

29

 

----

 

| **SIGNATURES**                                                                                                                                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                   |
| In accordance with Section 13 or 15(d) of the Exchange                            Act, the registrant has duly caused this report to be signed on its                            behalf by the undersigned, thereunto duly authorized. |
|                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                   |   | **OSAGE BANCSHARES, INC.** |
|  

                             

Date: September 28, 2007                                                                                                                                                                   |   |  

                             

                              |  

                             

/s/ Mark S. White |
|                                                                                                                                                                                                                                   |   | By: | Mark S. White

President and Chief Executive Officer

(Duly Authorized Representative) |
|                                                                                                                                                                                                                                   |
| In accordance with the Exchange Act, this report has                            been signed below by the following persons on behalf of the registrant                            and in the capacities and on the dates indicated.    |
|  

                             

/s/ Mark S. White                                                                                                                                                                          |   |  

                             

Date: September 28, 2007 |
| Mark S. White

President, Chief Executive Officer and                            Director

(Principal Executive Officer)                                                                                                               |   |   |
|  

                             

/s/ Milton V. Labadie                                                                                                                                                                      |   |  

                             

Date: September 28, 2007 |
| Milton V. Labadie

Chairman of the Board and Director                                                                                                                                                                                  |   |   |
|  

                             

/s/ Sue Allen Smith                                                                                                                                                                        |   |  

                             

Date: September 28, 2007 |
| Sue Allen Smith

Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)                                                                                                                              |   |   |
|  

                             

/s/ Mark A. Formby                                                                                                                                                                         |   |  

                             

Date: September 28, 2007 |
| Mark A. Formby

Director                                                                                                                                                                                                               |   |   |
|  

                             

/s/ Martha M. Hayes                                                                                                                                                                        |   |  

                             

Date: September 28, 2007 |
| Martha M. Hayes

Director                                                                                                                                                                                                              |   |   |
|  

                             

/s/ Harvey Payne                                                                                                                                                                           |   |  

                             

Date: September 28, 2007 |
| Harvey Payne

Director                                                                                                                                                                                                                 |   |   |
|  

                             

/s/ Gary Strahan                                                                                                                                                                           |   |  

                             

Date: September 28, 2007 |
| Gary Strahan

Director                                                                                                                                                                                                                 |   |   |
|  

                             

/s/ Richard Trolinger                                                                                                                                                                      |   |  

                             

Date: September 28, 2007 |
| Richard Trolinger

Executive Vice President, Chief Lending Officer and                            Director                                                                                                                             |   |   |
|                                                                                                                                                                                                                                        |  |  |  |  |

 

 

33