UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K


(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the fiscal year ended September 30, 2008


OR


o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from 
to .





Commission
file number: 0-51992





LIBERTY BANCORP, INC.


(Exact
name of registrant as specified in its charter)





Missouri
            
            20-4447023(State or other jurisdiction of incorporation or organization)
            
            (I.R.S. Employer Identification No.)16 West Franklin Street, Liberty,
      Missouri
            
            64068(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code:   (816)
781-4822





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





Title of each class
              
              Name of each exchange on which
      registeredCommon
      stock, par value $0.01
              
              The
      Nasdaq Stock Market LLC





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





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





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





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
              o
              Smaller
      reporting company
              x(Do not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   YES o  NO   x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $27,349,560, based upon the closing price ($10.00 per share)
of the registrant’s common stock as quoted on the Nasdaq Capital Market as of
the last business day of the registrant’s most recently completed second fiscal
quarter (March 31, 2008).




The number of shares outstanding of the
registrant’s common stock as of December 22, 2008 was
3,842,210.





DOCUMENTS
INCORPORATED BY REFERENCE





The
following lists the documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated:





1.
            Portions
      of the registrant’s Proxy Statement for the 2009 Annual Meeting of
      Stockholders.  (Part III)







INDEX
 
 PAGEPART
      IItem
      1.
                  
                  Business
                  1Item
      1A.
                  
                  Risk
      Factors
                  20Item
      1B.
                  
                  Unresolved
      Staff Comments
                  23Item
      2.
                  
                  Properties
                  24Item
      3.
                  
                  Legal
      Proceedings
                  24Item
      4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  24PART
      IIItem
      5.
                  
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases
      of Equity Securities
                  25Item
      6.
                  
                  Selected
      Financial Data
                  26Item
      7.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  26Item
      7A.
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  50Item
      8.
                  
                  Financial
      Statements and Supplementary Data
                  50Item
      9.
                  
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  50Item
      9A(T).
                  
                  Controls
      and Procedures
                  50Item
      9B.
                  
                  Other
      Information
                  51PART
      IIIItem
      10.
                  
                  Directors,
      Executive Officers and Corporate Governance
                  52Item
      11.
                  
                  Executive
      Compensation
                  52Item
      12.
                  
                  Security
      Ownership of Certain Beneficial Owners and Management and RelatedStockholder
      Matters
                  52Item
      13.
                  
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  53Item
      14.
                  
                  Principal
      Accounting Fees and Services
                  53PART
      IVItem
      15.
                  
                  Exhibits
      and Financial Statement Schedules
                  54SIGNATURES
                  
                  55
  
  This report contains
“forward-looking statements” within the meaning of the federal securities
laws.  These statements are not historical facts; rather, they are
statements based on Liberty Bancorp, Inc.’s current expectations regarding its
business strategies, intended results and future
performance.  Forward-looking statements are generally identified by
use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”
“project” and similar expressions.
 
 Management’s
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain.  Factors which could have a material adverse
effect on the operations of Liberty Bancorp, Inc. and its subsidiary include,
but are not limited to, changes in interest rates, national and regional
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality and composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in BankLiberty’s market area, changes in real estate market
values in BankLiberty’s market area, changes in relevant accounting principles
and guidelines and inability or third party service providers to
perform.
 
 These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.  Except as required by applicable
law or regulations, Liberty Bancorp, Inc. does not undertake, and specifically
disclaims any obligation, to release publicly the result of any revisions that
may be made to any forward-looking statements to reflect events or circumstances
after the date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
 
 PART
I
 
 Item
1.Business
 
 General
 
 Liberty
Bancorp, Inc. (the “Company” or “Liberty Bancorp”) was organized as a Missouri
corporation at the direction of BankLiberty, formerly “Liberty Savings Bank,
F.S.B.” (the “Bank” or “BankLiberty”), in February 2006 to become the holding
company for the Bank upon the completion of the “second-step” mutual-to-stock
conversion (the “Conversion”) of Liberty Savings Mutual Holding Company (the
“MHC”).  The Conversion was completed on July 21, 2006.  As
part of the Conversion, the MHC merged into the Bank, thereby ceasing to exist,
and Liberty Savings Bank, F.S.B. changed its name to “BankLiberty.”  A
total of 2,807,383 shares of common stock were sold in the stock offering at the
price of $10.00 per share.  In addition, a total of 1,952,754shares of common stock
were issued to the minority shareholders of the former Liberty Savings Bank,
F.S.B. representing an exchange ratio of 3.5004 shares of Company common stock
for each share of Liberty Savings Bank, F.S.B. common
stock.  Fractional shares in the aggregate, or 36 shares, were
redeemed for cash.  Total shares outstanding after the stock offering
and the exchange totaled 4,760,137 shares.  Net proceeds of $25.6
million were raised in the stock offering, excluding $1.2 million which was
loaned by the Company to a trust for the Amended and Restated Liberty Savings
Bank Employee Stock Ownership Plan (the “ESOP”), enabling it to finance the
acquisition of 153,263 shares of common stock in the offering and
exchange.  Direct offering costs totaled approximately $1.3
million.  In addition, as part of the Conversion and dissolution of
Liberty Savings Mutual Holding Company, the Bank received approximately $694,000
of cash previously held by the MHC.
 
 The
Company has no significant assets, other than all of the outstanding shares of
the Bank and the portion of the net proceeds it retained from the Conversion,
and no significant liabilities.  The Company neither owns nor leases
any property, but instead uses the premises, equipment and furniture of the
Bank.
 
 BankLiberty
is a community-oriented financial institution dedicated to serving the financial
service needs of consumers and businesses within its market area.  We
attract deposits from the general public and use these funds to originate loans
secured by real estate located in our market area.  Our real estate
loans include construction loans, commercial real estate loans, and loans
secured by single-family or multi-family properties.  To a lesser
extent, we originate consumer loans and commercial business
loans.
  1
  The Bank
is subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision (the “OTS”), its primary federal regulator, and the Federal
Deposit Insurance Corporation (the “FDIC”), its deposit insurer.  The
Bank has been a member of the Federal Home Loan Bank System since its inception
and is a member of the Federal Home Loan Bank of Des Moines.
 
 Our
website address is www.banklibertykc.com.  Information
on our website should not be considered a part of this Form 10-K.
 
 Market
Area
 
 The
Bank’s home office is located in the city of Liberty, Missouri, which is in Clay
County, Missouri.  In addition to our main office, BankLiberty
operates six full-service branch offices in the Kansas City, Missouri
metropolitan area.
 
 We
operate primarily in the northern portion of the Kansas City metropolitan area,
which is experiencing relatively weak population and economic growth
similar to the national economy.  The offices are located in four
different counties, including two branches each in Clay and Platte Counties and
single branches in Clinton and Jackson counties.  All of the counties
are included in the Kansas City metropolitan area.
 
 The
following table sets forth demographic information regarding the counties in
which our offices are located.
 
 County
                  
                  Approximate
                    Population
                  
                  
                  Population
                    Growth
                    Since 2000
                  
                  
                  Per Capita
                    Income
                  
                  
                  Median
                    Income
                  
                  
                  Unemployment
                    RateClay
                  
                  
                  207,000
                  
                  
                  
                  12.5
                  %
                  
                  $
                  23,144
                  
                  
                  $
                  54,021
                  
                  
                  
                  4.2
                  %Platte
                  
                  
                  83,000
                  
                  
                  
                  12.5
                  
                  
                  
                  26,356
                  
                  
                  
                  61,030
                  
                  
                  
                  3.7Clinton
                  
                  
                  21,000
                  
                  
                  
                  8.9
                  
                  
                  
                  19,056
                  
                  
                  
                  46,495
                  
                  
                  
                  4.9Jackson
                  
                  
                  664,000
                  
                  
                  
                  1.4
                  
                  
                  
                  20,788
                  
                  
                  
                  42,351
                  
                  
                  
                  5.5
 
 During
the past five years, the population for each county BankLiberty serves has
increased by 1% or more on an annual basis, with the highest growth rate since
2000 in Platte County.  Since 2000, all of the counties experienced
higher population growth than the State of Missouri, and Clay, Clinton and
Platte counties grew faster than the United States population.  In
2006, per capita income for the State of Missouri and the United States was
$19,936 and $21,587, respectively, and median household income was $40,870 and
$43,318, respectively.
 
 Our
market area is the Kansas City metropolitan area, which comprises 11 counties in
Missouri and Kansas.  The four counties that the Bank serves have a
mix of industry groups and employment sectors, including services, manufacturing
and transportation.  In Clay County, top employers include Ford Motor
Co., Cerner Corporation (health care services), a number of casinos and an
amusement park.  Clinton County’s top employers are within the
services sector and include Cameron Regional Medical Center, Cameron R-1 (school
district) and the county government.  Platte County relies on the
transportation sector of employment, attributable to the operations of Kansas
City International Airport.  Other top employers in Platte County
include American Airlines (which operates a maintenance facility), Citicorp
Credit Services Inc. and Harley-Davidson Inc.  Jackson County, the
most populous county served and the most urban, includes Kansas City and its
downtown area.  Manufacturing and services are the top employment
sectors in Jackson County, including the federal government, Health Midwest,
Hallmark Cards Inc. and DST Systems Inc.   As of July 2006, all
of the counties within the Bank’s market area, except Jackson and Clinton
Counties, had unemployment rates below the state and national
rates.
 
 Our
primary market area for deposits includes the communities in which we maintain
our banking office locations.  Our primary lending area is broader
than our primary deposit market area and includes surrounding
counties.
  2
 
 Competition
 
 We face significant competition for the
attraction of deposits and origination of loans.  At June 30, 2008,
which is the most recent date for which data is available from the FDIC, we held
approximately 13.19%, 0.21%, 3.99% and 4.42% of the deposits in Clinton,
Jackson, Platte and Clay Counties, respectively, which was the fourth largest
market share out of eight financial institutions with offices in Clinton County,
the 30th largest market share out of 54 financial institutions with offices in
Jackson County, the 12th largest market share out of 20 financial institutions
with offices in Platte County and the sixth largest market share out of 32
financial institutions with offices in Clay County.  In addition,
large national or regional bank holding companies operate in our market
area.  These institutions are significantly larger than us and,
therefore, have significantly greater resources.
 
 Our most
direct competition for loans and deposits comes primarily from financial
institutions in our market area, and, to a lesser extent, from other financial
service providers, such as brokerage firms, credit unions, mortgage companies
and mortgage brokers.  Our main competitors include a number of
significant independent banks.  We also face competition for
investors’ funds from money market funds and other corporate and government
securities.  Competition for loans also comes from the increasing
number of non-depository financial service companies entering the lending
market, such as insurance companies, securities companies and specialty finance
companies.
 
 We expect
competition to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial
services industry.  Technological advances, for example, have lowered
barriers to entry, allowed banks to expand their geographic reach by providing
services over the Internet and made it possible for non-depository institutions
to offer products and services that traditionally have been provided by
banks.  Changes in federal law permit affiliation among banks,
securities firms and insurance companies, which promotes a competitive
environment in the financial services industry.  Competition for
deposits and the origination of loans could limit our growth in the
future.
 
 Lending
Activities
 
 General.Our loan
portfolio consists primarily of real estate loans, which include real estate
construction loans, single-family residential loans, commercial real estate
loans and multi-family real estate loans.  To a lesser extent, we also
originate commercial business loans and consumer loans.   These
loans are originated primarily in Clay, Clinton, Platte and Jackson Counties in
Missouri, which comprise the northern and eastern portions of the Kansas City,
Missouri metropolitan area.  We sell substantially all new, fixed-rate
conforming single-family loans in the secondary market due to the current low
interest rate environment.
 
 Construction
Lending.  At September 30, 2008, our loan portfolio included
$90.5 million in loans secured by properties under construction, with such loans
representing 32.5%of our total loan portfolio at that date.  Our construction
lending has traditionally involved single-family residential lending to builders
where the residences being built have not been sold prior to commencement of
construction, known as “spec” construction lending, and to custom
homebuilders.  In 2008, we have decreased our construction loans due
to current market conditions.
  3
  Our
construction loans are secured by the following types of real
estate:
 
 At September 30,2008
                    
                    
                    2007(In thousands)Single-family,
      spec
                    
                    $
                    13,247
                    
                    
                    $
                    29,331Single-family,
      custom
      built
                    
                    
                    6,346
                    
                    
                    
                    7,098Multi-family,
      5 or more units
                    
                    
                    821
                    
                    
                    
                    1,495Development
                    
                    
                    36,670
                    
                    
                    
                    36,408Commercial
                    
                    
                    33,398
                    
                    
                    
                    51,020Other
                    
                    
                    —
                    
                    
                    
                    445Total
                    
                    $
                    90,482
                    
                    
                    $
                    125,797
 
 We
originate spec loans only to builders with experience building and selling spec
single-family residences.  Our spec residential mortgage construction
loans generally provide for the payment of interest only during the construction
phase, which is usually 12 months.  Spec loans generally can be made
with a maximum loan-to-value ratio of 85% of the appraised value or 100% of the
cost of the project, whichever is less.  Interest rates on residential
construction loans are set at the prime rate plus a margin, and adjust with
changes in the prime rate.  We also generally charge a fee for
residential construction loans.  At September 30, 2008, loans for the
construction of spec sale homes totaled $13.2 million, or 4.8%of our total loan
portfolio and 14.6%of our portfolio of construction loans.  At September 30, 2008,
the largest spec loan was for $468,180.  This loan was performing
according to its terms at September 30, 2008.  At September 30, 2008,
our largest outstanding indebtedness to a single builder for spec loans totaled
$2.0 million.  All loans to this builder were performing in accordance
with their terms at September 30, 2008.
 
 We also
originate construction loans for customers to have their personal residences
custom-built.  We do not approve loans to customers acting as their
own builder for their residences.  A custom-build project loan
requires the use of an approved qualified general contractor experienced in home
building and written approval for permanent financing.  Custom-build
project loans can be made with a maximum loan-to-value ratio of
85%.  At September 30, 2008, the largest outstanding custom-build
project loan was $486,200, of which $364,074 is outstanding.  This
loan was performing according to its terms at September 30, 2008.
 
 We also
make loans for the construction of non single-family residential properties,
including loans for the construction of multi-family residential properties such
as condominiums and planned multi-family communities. We generally do not make
nonresidential construction loans in amounts that exceed a loan-to-value ratio
of 85% where the value is determined by the fully improved, or completed
project’s current appraised market value.  These loans generally have
an interest-only phase during construction, which is usually 12 to 24 months,
and then convert to permanent financing.  Disbursements of funds are
at the sole discretion of the Bank and are based on the progress of
construction.  Interest rates and fees on nonresidential construction
projects are negotiated, but such loans generally carry adjustable rates of
prime, plus a margin.
 
 As part of our nonresidential lending
program, we offer loans to selected developers to acquire land and develop
residential lots or commercial properties.  At September 30, 2008,
such loans amounted to $36.7 million, or 13.2%of our total loan
portfolio.  We make the loans with terms from 12 to 24 months,
depending on the size of the project, at interest rates equal to the prime rate
plus a negotiated margin of between 0.0% and 1.0% and that adjust daily with
changes in the prime rate. We generally originate these loans at a loan-to-value
ratio of the lesser of 75% of the appraised value of the security property or
100% of the cost.  Loans generally are structured so that the loan
will be completely repaid after the developer has sold 75% of the lots being
developed.
 
 We
require that development loans be reviewed by independent architects or
engineers.  Disbursements during the construction phase are based on
monthly on-site inspections and approved certifications.  We generally
commit to provide the permanent financing on residential projects and usually
require some minimum presale commitments.  In the case of construction
loans on commercial projects where we will provide the permanent financing, we
usually require firm lease commitments on some portion of the property under
construction from qualified tenants for a period covering the duration of the
loan and usually also require rent assignments in an amount sufficient to
satisfy debt service requirements.At September 30, 2008,
our largest development loan outstanding was a $6.8 million loan for the
development of a commercial retail project.  This loan was originated
in May 2007.  At September 30, 2008, this loan was performing in
accordance with its terms and conditions.
 
 4
  For the
fiscal year ended September 30, 2008, we originated $50.6 million in
construction loans.  A substantial amount of our construction loans,
except loans to homebuilders, are structured to convert to permanent loans upon
completion of construction, and typically have an initial construction loan term
of 12 to 18 months prior to converting to a permanent loan.  Loan
proceeds are disbursed during the construction phase according to a draw
schedule based on the actual work completed.  Construction projects
are inspected by our officers and, if warranted by the complexity of the
project, an independent contractor.  Construction loans are
underwritten on the basis of the estimated value of the property as completed
and loan-to-value ratios are based on each project’s appraised
value.
 
 Single-Family
Residential Real Estate Lending. Historically, our
primary lending activity was the origination of conventional mortgage loans on
single-family residential dwellings.  However, in recent years, we
have emphasized the origination of real estate construction and commercial real
estate loans.  As of September 30, 2008, loans on single-family one-
to four-unit, residential properties accounted for $40.7 million, or 14.6%, of
our loan portfolio.
 
 We originate fixed-rate fully
amortizing loans with maturities ranging between 10 and 30
years.  Management establishes the loan interest rates based on market
conditions.  We offer mortgage loans that conform to Fannie Mae and
Freddie Mac guidelines, as well as jumbo loans, which presently are loans in
amounts over $417,000.  Substantially all fixed-rate, single-family
loans are sold to secondary market investors.
 
 We also currently offer adjustable-rate
loans, with interest rates that adjust annually after a three-, five- or
seven-year initial fixed period and with terms of up to 30
years.  Interest rate adjustments on such loans are generally limited
to no more than 2% during any adjustment period and 6% over the life of the
loan.  Demand for adjustable-rate loans has been low during the past
two years due to the relatively low interest rates available on fixed-rate
loans.
 
 We underwrite single-family residential
loans with loan-to-value ratios of up to 85%.  We require that title,
hazard and, if appropriate, flood insurance be maintained on all properties
securing real estate loans made by us.  An independent licensed
appraiser generally appraises all properties.
 
 Our
single-family loan originations are generally for terms of 15, 20 or 30 years,
amortized on a monthly basis with interest and principal due each
month.  Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without
penalty.  Therefore, average loan maturity is a function of, among
other factors, the level of purchase and sale activity in the real estate
market, prevailing interest rates and the interest rates payable on outstanding
loans.  Conventional residential mortgage loans we originate
customarily contain “due-on-sale” clauses, which permit the Bank to accelerate
the indebtedness of the loan upon transfer of ownership of the mortgaged
property.
 
 We retain
some of the adjustable-rate mortgages we originate in order to reduce our
exposure to changes in interest rates.  However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage
loans.  During periods of rising interest rates, the risk of default
on adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower.
 
 Multi-Family and
Commercial Real Estate Lending.  We offer
fixed-rate and adjustable-rate mortgage loans secured by income-producing
multi-family and commercial real estate.  Our multi-family and
commercial real estate loans generally are secured by improved property such as
office buildings, retail centers, apartment buildings and churches which are
located in our primary market area.  At September 30, 2008, loans
secured by multi-family properties, i.e., more than four units,
amounted to $17.4 million, or 6.2% of our loan portfolio, and commercial
(non-residential) real estate loans amounted to $102.3 million, or 36.7% of our
loan portfolio.  In the aggregate, multi-family and commercial real
estate lending totaled approximately $119.7 million, or 42.9%, of our total loan
portfolio at that date.
 
  5
  Multi-family
and commercial real estate loans generally amortize over a period of from 15 to
25 years but usually mature in either three or five
years.  Multi-family and commercial real estate loans generally are
made in amounts not exceeding 85% of the lesser of the appraised value or the
purchase price of the property.  While we offer adjustable-rate
multi-family real estate loans and commercial real estate loans, most such loans
have a fixed interest rate indexed to the three- or five-year treasury bill rate
plus a margin.  At September 30, 2008, our largest commercial real
estate loan had an outstanding balance of $9.4 million, was secured by several
retail buildings and was performing in accordance with its terms. At September 30, 2008,
our largest multi-family real estate loan had an outstanding balance of $2.2
million, was secured by a 65-unit apartment complex and was performing in
accordance with its terms.
 
 Consumer
Lending.  We have a
consumer-lending program that primarily targets existing
customers.  The program emphasizes our commitment to community-based
lending and is designed to meet the needs of consumers in our primary market
area.  Our consumer loans consist primarily of home equity loans and
lines of credit, and, to a much lesser extent, automobile loans, loans secured
by deposit accounts and other miscellaneous consumer loans.  As of
September 30, 2008, consumer loans constituted approximately $9.9 million, or
3.6%, of our total loan portfolio.
 
 The
procedures for underwriting consumer loans include an assessment of the
applicant’s payment history and the ability to meet existing obligations and
payments on the proposed loan.  Although the applicant’s
creditworthiness is a primary consideration, the underwriting process also
includes an analysis of the applicant’s employment stability, capacity to pay
debts, and a comparison of the value of the collateral, if any, to the proposed
loan amount.
 
 We
generally offer home equity loans and home equity lines of credit with a maximum
combined loan-to-value ratio of 100%, provided that loans in excess of 85% carry
higher interest rates and are subject to stricter underwriting requirements.
Home equity lines
of credit have adjustable rates of interest that are indexed to the prime rate
as reported in The Wall Street
Journal.  A home equity line of credit may be drawn down by the
borrower for an initial period of 10 years from the date of the loan
agreement.  During this period, the borrower has the option of paying,
on a monthly basis, either principal and interest or only
interest.  At September 30, 2008, home equity loans and lines of
credit totaled $8.7 million, or 3.1% of our loan portfolio.
 
 The Bank
makes loans secured by deposit accounts in amounts that may not exceed the
account balance plus accrued interest at the due date.  The interest
rate is usually set at 2% above the rate being paid on the collateral deposit
account with the account pledged as collateral to secure the loan.  At
September 30, 2008, loans secured by deposit accounts totaled $142,000, or .05%
of our loan portfolio.
 
 Our
automobile loans are generally underwritten in amounts up to 90% of the lesser
of the purchase price of the automobile or, with respect to used automobiles,
the loan value as published by the National Automobile Dealers
Association.  The terms of most such loans do not exceed 60
months.  We require that the vehicles be insured and that we be listed
as mortgagee on the insurance policy.  At September 30, 2008,
automobile loans totaled $446,000, or .16% of our loan portfolio.
 
 Commercial
Lending.  On a limited
basis, we originate commercial business loans to small businesses in our market
area.  At September 30, 2008, commercial business loans totaled $17.8
million, or 6.4% of our total loan portfolio.  We extend commercial
business loans on a secured basis that generally are secured by inventory,
business equipment, marketable securities and/or bonds and cash surrender value
life insurance.  We originate both fixed- and adjustable-rate
commercial loans with terms generally up to five years based on the purpose of
the loan.  Interest rates on adjustable-rate commercial loans are
usually based on the prime rate as published in The Wall Street Journal, plus
a margin, and adjust as the prime rate changes.  We also originate
lines of credit to finance short-term working capital needs, with repayment from
asset conversion in the normal course of business.  Closed end credit
lines are also provided for planned equipment purchases or other finite
purposes.
 
 When
providing commercial business loans, we consider the borrower’s financial
condition, the payment history on corporate and personal debt, debt service
capabilities and actual and projected cash flows.  In addition, the
borrower’s inherent industry risks and the collateral value are
analyzed.  At September 30, 2008, our largest commercial loan was a
$2.3 million loan secured by car hauling equipment.  At September 30,
2008, this loan was performing in accordance with its terms.
  6
 
 Loan
Underwriting Risks
 
 Construction
Loans.  Construction
financing is generally considered to involve a higher degree of risk of loss
than long-term financing on improved, occupied real estate.  Risk of
loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction and the estimated
cost (including interest) of construction.  During the construction
phase, a number of factors could result in delays and cost
overruns.  If the estimate of construction costs proves to be
inaccurate, we may be required to advance funds beyond the amount originally
committed to permit completion of the building or project.  If the
estimate of value proves to be inaccurate, we may be confronted, at or before
the maturity of the loan, with a building or project having a value that is
insufficient to assure full repayment.  If we are forced to foreclose
on a building before or at completion due to a default, there can be no
assurance that we will be able to recover all of the unpaid balance of, and
accrued interest on, the loan as well as related foreclosure and holding
costs.
 
 Adjustable-Rate
Loans.  While we anticipate that adjustable-rate loans will
better offset the adverse effects of an increase in interest rates as compared
to fixed-rate mortgages, the increased mortgage payments required of
adjustable-rate loan borrowers in a rising interest rate environment could cause
an increase in delinquencies and defaults.  The marketability of the
underlying property also may be adversely affected in a high interest rate
environment. In addition, although adjustable-rate mortgage loans help make our
loan portfolio more responsive to changes in interest rates, the extent of this
interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits.
 
 Multi-Family and
Commercial Real Estate Loans.  Loans secured by multi-family
and commercial real estate generally have larger balances and involve a greater
degree of risk than single-family residential mortgage loans.  Of
primary concern in multi-family and commercial real estate lending is the
project’s cash flow potential.  Payments on loans secured by income
properties often depend on successful operation and management of the
properties.  As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy.  To monitor cash flows on income
properties, we generally require borrowers and loan guarantors, if any, to
provide annual financial statements on multi-family and nonresidential real
estate loans.  In reaching a decision on whether to provide a
multi-family or commercial real estate loan, we consider the net operating
income of the property, the borrower’s expertise, credit history and
profitability and the value of the underlying property.  We have
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of net operating income before debt
service to debt service) of at least 1.20x. Environmental surveys are obtained
when circumstances suggest the possibility of the presence of hazardous
materials.
 
 Consumer
Loans.  Consumer loans may entail greater risk than do
residential mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by assets that depreciate rapidly.  In such
cases, repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts against
the borrower.  In addition, consumer loan collections depend on the
borrower’s continuing financial stability, and therefore are more likely to be
adversely affected by job loss, divorce, illness or personal
bankruptcy.  Furthermore, the application of various federal and state
laws, including bankruptcy and insolvency laws, may limit the amount that can be
recovered on such loans.
  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 or other income, and which are secured by real property the value of
which tends to be more easily ascertainable, commercial loans are of higher risk
and 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 loans may depend
substantially on the success of the business itself.  Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value.
  7
  Loan
Originations, Purchases and Sales.  Loan originations are
derived from a number of sources.  Residential mortgage loan
originations primarily come from walk-in customers and referrals by realtors,
depositors and borrowers.  We advertise our mortgage loan services
primarily through local builder periodicals, billboard advertisements, and to a
lesser extent, direct mailings.  Commercial, commercial real estate
and construction loans are typically derived from the business development
efforts of the Bank’s commercial banking officers.  Applications are
taken at all offices but are processed in the Bank’s main office and submitted
for approval.
 
 We sell
in the secondary market substantially all fixed-rate single-family mortgage
loans we originate that conform to Fannie Mae and Freddie Mac
guidelines.  These loans are sold with servicing
released.  We also sell participation interests in loans to local
financial institutions, primarily on the portion of loans that exceed our
borrowing limits.  We sold $9.5 million, $4.6 million and $8.75
million of participation interests in loans during the fiscal years ended
September 30, 2008, 2007 and 2006, respectively.
 
 In fiscal
2008, we purchased participation interests, primarily in commercial real estate
loans.  The aggregate outstanding balance of all such purchased loans
totaled $13.4
million at September 30, 2008.  We perform our own underwriting
analysis on each of our participation interests before purchasing such loans and
therefore believe there is no greater risk of default on these
obligations.  However, in a purchased participation loan, we do not
service the loan and thus are subject to the policies and practices of the lead
lender with regard to monitoring delinquencies, pursuing collections and
instituting foreclosure proceedings.  We are permitted to review all
of the documentation relating to any loan in which we participate, including any
annual financial statements provided by a borrower.  Additionally, we
receive periodic updates on the loan from the lead lender.  We have
not historically purchased any whole loans.  However, we would
entertain doing so if a loan was presented to us that met our underwriting
criteria and fit within our interest rate strategy.
 
 Loan Approval
Procedures and Authority.Upon receipt of a loan application
from a prospective borrower, a credit report and verifications are ordered to
confirm specific information relating to the loan applicant’s employment, income
and credit history.  Where applicable, an appraisal of the real estate
intended to secure the proposed loan is undertaken by an independent fee
appraiser approved by the Bank.  Our Board of Directors has the
responsibility and authority for general supervision over our lending
policies.  The Board has established written lending policies and has
delegated to the Officers Loan Committee (the “OLC”) the authority to approve
all loan proposals exceeding individual authorities up to a maximum relationship
amount of $750,000.  The individual authority limits range from
$15,000 to $250,000 based on experience, lending history and
seniority.  The OLC consists of the Chief Executive Officer, the Chief
Lending Officer, the Internal Auditor (non-voting member) and all Vice President
loan officers.
 
 The Board
has further established a Directors Loan Committee (the “DLC”) as a joint
Directors and Senior Officers committee.  This committee has approval
authority for all loan proposals in excess of the authority level given to the
OLC and for all loans to directors and executive officers.  The DLC
has approval authority for individual loan proposals exceeding $500,000, or
aggregate relationship proposals exceeding $750,000.  The DLC consists
of the non-officer members of the Board of Directors.
 
 State
certified or licensed appraisers must perform all real estate appraisals
performed in connection with federally related
transactions.  Federally related transactions include real estate
related financial transactions that the Office of Thrift Supervision regulates
and which include mortgages made by the Bank.  Office of Thrift
Supervision regulations require that all federally related transactions having a
transaction value of more than $250,000, other than those involving appraisals
of one- to four-family residential properties, require an appraisal performed by
a state certified appraiser.  Single-family residential property
financing may require an appraisal by a state certified appraiser if the amount
involved exceeds $1.0 million or the financing involves a “complex” one- to
four-family property appraisal.  Appraisals are generally not required
for transactions when the transaction value is $250,000 or less, or when the
transaction is not secured by real estate.  In some instances, an
appropriate evaluation of real estate may be required.
 
 Loans to One
Borrower.  At September 30, 2008, the maximum amount that the
Bank could have loaned to any one borrower under the 30%, 25% and 15% limits of
risk-based capital was approximately $12.3 million,
$10.2 million
and $6.1
million, respectively.  At that date, our largest lending
relationship totaled $16.8 million and
consisted of loans secured by commercial real estate.  This
relationship meets loans to one borrower regulations due to limited guarantor
relationships and different repayment sources.  The loans were
performing according to their original terms at September 30,
2008.  See “Regulation and Supervision—Lending
Limits” for further discussion of loans to one borrower lending
limits.
  8
 
 Loan
Commitments.  We issue commitments for fixed-rate and
adjustable-rate mortgage loans conditioned upon the occurrence of certain
events.  Commitments to originate mortgage loans are legally binding
agreement to lend to our customers.
 
 Interest Rates
and Loan Fees.  The interest rates we charge on mortgage loans
are primarily determined by competitive loan rates offered in its market
area.  Mortgage loan interest rates reflect factors such as general
market interest rate levels, the supply of money available to the financial
institutions industry and the demand for such loans.  These factors
are in turn affected by general economic conditions, the monetary policies of
the Federal government, including the Board of Governors of the Federal Reserve
System (the “Federal Reserve Board”).  In some cases, market interest
rates have caused the Bank to modify borrowers’ interest rates, as an
alternative to refinancing, in order to retain these loans in the Bank’s loan
portfolio.
 
 In
addition to interest earned on loans, we receive fees in connection with loan
commitments and originations, loan modifications, late payments and for
miscellaneous services related to its loans.  Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets we serve.
 
 Investment
Activities
 
 Mortgage-Backed
Securities.We invest in
mortgage-backed securities primarily issued or guaranteed by the United States
government or an agency thereof.  Mortgage-backed securities represent
a participation interest in a pool of single-family or multi-family mortgages,
the principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank.  Such quasi-governmental agencies, which
guarantee the payment of principal and interest to investors, primarily include
Ginnie Mae, Freddie Mac and Fannie Mae.  Mortgage-backed securities
typically are issued with stated principal amounts, and the securities are
backed by pools of mortgages that have loans with varying interest rates and
maturities.  The underlying pool of mortgages can be composed of
either fixed-rate or adjustable-rate mortgages.  As a result, the
interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, are passed on to the certificate
holder.  Historically, we have invested in adjustable-rate and
short-term (five- to seven-year maturities) mortgage-backed securities to
supplement local loan originations, as well as to reduce interest rate risk
exposure, because mortgage-backed securities are more liquid than mortgage
loans.  However, in recent years, we have purchased primarily five- to
seven-year balloon issues and fixed-rate 15-year issues, and, to a lesser
extent, collateralized mortgage obligations.  At September 30, 2008,
our mortgage-backed securities totaled $14.0 million.
 
 Investment
Securities.  It is our policy to consistently maintain a liquid
portfolio.  Liquidity levels may be increased or decreased depending
upon the yields on investment alternatives, our judgment as to the
attractiveness of the yields then available in relation to other opportunities,
our expectations of the level of yield that will be available in the future and
our projections as to the short-term demand for funds to be used in our loan
origination and other activities.
 
 The
general objectives of our investment policy are to (i) maintain liquidity levels
sufficient to meet our operating needs, (ii) minimize interest rate risk by
managing the repricing characteristics of our assets and liabilities, (iii)
reduce credit risk by maintaining a balance of high quality diverse investments,
(iv) absorb excess liquidity when loan demand is low and/or deposit growth is
high, (v) maximize returns without compromising liquidity or creating undue
credit or interest rate risk, and (vi) provide collateral for pledging
requirements.  Our investment activities are conducted by senior
management, specifically, the Chief Financial Officer, and supervised by the
Board of Directors.  The investment policy adopted by the Board
currently provides for maintenance of an investment portfolio for the purposes
of providing earnings, ensuring a minimum liquidity reserve and facilitating our
asset/liability management objectives of limiting the weighted average terms to
maturity or repricing of our interest-earning assets.  In accordance
with the policy, we have invested primarily in government and agency securities
backed by the full faith and credit of the United States and municipal
securities, and as discussed above, mortgage-backed securities and participation
certificates issued by Ginnie Mae, Freddie Mac and Fannie Mae.
  9
 
 For
information regarding the carrying values and market values and other
information for our mortgage-backed securities and other securities, see notes
1, 3 and 4 of the notes to consolidated financial statements included in this
Form 10-k.
 
 Deposit
Activities and Other Sources of Funds
 
 General.  Deposits
are a significant source of funds for lending and other investment
purposes.  In addition to deposits, we derive funds from loan
principal repayments, interest payments and maturing investment
securities.  Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market
conditions.  Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources, or on
a longer-term basis for general business purposes.  During recent
years, we have used FHLB advances and customer deposits to fund
loans.  We continuously monitor and evaluate the pricing of Federal
Home Loan Bank of Des Moines advances as an alternative to retail deposits as a
source of funds.
 
 Deposits.  We
attract principally from within our market area by offering a variety of deposit
instruments, including accounts and certificates of deposit ranging in term from
91 days to 60 months, as well as NOW, passbook and money market deposit
accounts.  Deposit account terms vary, principally on the basis of the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate.  We also offer individual retirement
accounts.
 
 Our
policies are designed primarily to attract deposits from local
residents.  We accept brokered deposits and at September 30, 2008, we
had $15.0 million in brokered deposits.  Brokered deposits represent
an alternative and immediate source of funds but generally bear a higher
interest rate than local retail deposits.  Brokered deposits are
highly susceptible to withdrawal if the rates we pay on such deposits are not
competitive.  We establish interest rates, maturity terms, service
fees and withdrawal penalties on a periodic basis.  Determination of
rates and terms are predicated upon funds acquisition and liquidity
requirements, rates paid by competitors, growth goals and federal
regulations.  In order to increase our transaction accounts, we
continuously evaluate these products and then develop new interest-bearing and
noninterest-bearing checking accounts in order to appeal to varied customer
needs.  Automated teller machine services are offered as an additional
incentive to attract transaction accounts.  Also, we have increased
advertising and marketing efforts in an attempt to attract such
accounts.
 
 Borrowings.  Retail
deposits historically have been the primary source of funds for our lending and
investment activities and for our general business activities.  We
also use advances from the Federal Home Loan Bank of Des Moines to supplement
our supply of lendable funds and to meet deposit withdrawal
requirements.  The Federal Home Loan Bank of Des Moines functions as a
central reserve bank providing credit for savings institutions and certain other
member financial institutions.  As a member, the Bank is required to
own capital stock in the Federal Home Loan Bank of Des Moines and is authorized
to apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met.  Advances from the Federal Home Loan
Bank of Des Moines are secured by our stock in the Federal Home Loan Bank of Des
Moines, a portion of mortgage loans and certain securities.  Advances
from the Federal Home Loan Bank of Des Moines totaled $69.2 million at September
30, 2008, with a weighted average interest rate of  2.58%, and had
maturity dates which varied up to September 2012.
 
 We also
borrow funds pursuant to the Federal Home Loan Bank’s Community Investment
Program, which funds are used to make loans to low and moderate income borrowers
at rates established pursuant to the program.  Community Investment
Program advances amounted to $9.2 million at September 30,
2008.  During the year ended September 30, 2008, we borrowed $7.9
million pursuant to the Community Investment Program.  During the
years ended September 2007 and 2006 we did not borrow any funds under this
Program.
  10
 
 In addition, we borrow funds pursuant
to agreements to repurchase.  Securities sold under agreements to
repurchase are customer funds that are invested overnight in mortgage-related
securities.  These types of accounts are often referred to as sweep
accounts and reprice daily.
 
 Personnel
 
 As of
September 30, 2008, the Bank had 69 full-time and 15 part-time
employees.  The employees are not represented by a collective
bargaining group.  We consider our relations with our employees to be
excellent.
 
 Executive
Officers
 
 The
executive officers of the Company are elected annually by the Board of Directors
and serve at the Board’s discretion.  Unless otherwise stated, each
executive officer has held his position for at least five years.  The
ages presented are as of September 30, 2008.  The executive officers
are:
  Name
                    
                    Age
                    
                    PositionBrent
      M. Giles
                    
                    41
                    
                    President
      and Chief Executive Officer of the Company and the BankMarc
      J. Weishaar
                    
                    47
                    
                    Senior
      Vice President and Chief Financial Officer of the Company and the
      BankMark
      E. Hecker
                    
                    42
                    
                    Senior
      Vice President and Chief Lending Officer of the
  Bank
 
 Brent M.
Giles has served as our President and Chief Executive Officer since
September 2003.  Prior to joining the Bank, from August 2001 to August
2003, Mr. Giles was President of Lawson Bank, Lawson, Missouri, a Missouri-based
community bank.  From May 2000 to July 2001, Mr. Giles served as a
financial services consultant with Rightworks Corporation, San Jose, California,
and from April 1998 to May 2000, Mr. Giles served as Vice President of UMB Bank,
Kansas City, Missouri.  From 1989 to April 1998, Mr. Giles was a
financial institutions examiner with the Federal Deposit Insurance
Corporation.  Director since 2003.
 
 Marc J.
Weishaar is Senior Vice President and Chief Financial Officer of Liberty
Bancorp and the Bank.   He has served as Chief Financial Officer
at the Bank since January 1995.  From November 1991 to January 1995,
Mr. Weishaar was Assistant Vice President, Compliance Officer of the
Bank.  From 1989 to November 1991, Mr. Weishaar was employed as a loan
officer with UMB Bank, Kansas City, Missouri.  From 1985 to 1989, Mr.
Weishaar was employed in public accounting.  He has a B.S. in Business
Administration from the University of Kansas, Lawrence, Kansas and an M.B.A.
from the University of Missouri, Kansas City.
 
 Mark E.
Hecker has served as the Bank’s Senior Vice President and Chief Lending
Officer since June 2004.  From March 1996 to June 2004, Mr. Hecker
served in various capacities, including Commercial Loan Officer and Vice
President, Commercial Manager, in Lee’s Summit, Missouri with Commercial Federal
Bank, Omaha, Nebraska.  From 1990 to March 1996, Mr. Hecker was a
financial institutions examiner with the Federal Deposit Insurance
Corporation.  He has a B.S. in accounting from Central Missouri State
University, Warrensburg, Missouri.
 
 Subsidiaries
 
 As of September 30, 2008, the Bank was
the Company’s only subsidiary.  The Bank is wholly owned by the
Company.
 
 Regulation
and Supervision
 
 General.  As
a federally chartered savings bank, the Bank is subject to extensive regulation
by the OTS.  The lending activities and other investments of the Bank
must comply with various federal regulatory requirements and the FDIC and to OTS
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities and general investment
authority.  The OTS periodically examines the Bank for compliance with
various regulatory requirements and the FDIC also has the authority to conduct
special examinations of insured institutions.  The Bank must file
reports with the OTS describing its activities and financial
condition.  The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.  This supervision and
regulation is intended primarily for the protection of
depositors.  Certain of these regulatory requirements are referred to
below or appear elsewhere herein.  This summary of regulatory
requirements does not purport to be a complete description and is qualified in
its entirety by reference to the actual statutes and regulations
involved.
  11
  Business
Activities.  The activities of federal savings banks are
governed by federal law and regulations.  These laws and regulations
delineate the nature and extent of the activities in which federal savings banks
may engage.  In particular, certain lending authority for federal
savings banks, e.g.,commercial, non-residential real property loans and consumer loans, is
limited to a specified percentage of the institution’s capital or
assets.
 
 Regulatory
Capital Requirements.  Under OTS capital standards, savings
institutions must maintain “tangible” capital equal to 1.5% of adjusted total
assets, “core” or “Tier 1” capital equal to 4% (or 3% if the institution is
rated CAMELS 1 under the OTS examination rating system) of adjusted total assets
and a combination of core and “supplementary” capital equal to 8% of
“risk-weighted” assets.  In addition, the OTS regulations impose
certain restrictions on savings institutions that have a total risk-based
capital ratio that is 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 adjusted total assets of
less than 4% (or 3% if the institution is rated CAMELS 1 under the OTS
examination rating system).  See “—Prompt Corrective Regulatory
Action.”  For purposes of this regulation, Tier 1 capital has
the same definition as core capital, i.e.,common stockholders’
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries.  Core capital is generally reduced by the
amount of the savings institution’s intangible assets.  Limited
exceptions to the deduction requirement are provided for certain mortgage
servicing rights and credit card relationships.  Tangible capital is
given the same definition as core capital and is reduced by the amount of all
the savings institution’s intangible assets with only a limited exception for
certain mortgage servicing rights.
 
 Both core
and tangible capital are further reduced by an amount equal to a savings
institution’s debt and equity investments in 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 subsidiary depository institutions or their holding companies.  At
September 30, 2008, the Bank had no such investments.
 
 Adjusted
total assets include a savings institution’s total assets as determined under
generally accepted accounting principles, increased for certain goodwill amounts
and by a prorated portion of the assets of unconsolidated includable
subsidiaries in which the savings institution holds a minority
interest.  Adjusted total assets are reduced by the amount of assets
that have been deducted from capital, the portion of savings institution’s
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.  At September 30, 2008, the Bank’s adjusted
total assets for purposes of core and tangible capital requirements were $332.2
million.
 
 In
determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core capital and supplementary capital in
its total capital, provided the amount of supplementary capital does not exceed
the savings institution’s core capital.  Supplementary capital
includes certain preferred stock issues, certain approved subordinated debt,
specified other capital instruments, a portion of the savings institution’s
general loss allowances and up to 45% of unrealized gains of equity
securities.  Total core and supplementary capital are reduced by the
amount on capital instruments held by other depository institutions pursuant to
reciprocal arrangements and all equity investments.  At September 30,
2008, the Bank had no equity investments for which OTS regulations require a
deduction from total capital.
 
 The
risk-based capital requirement is measured against risk-weighted assets which
equal the sum of each asset and the credit-equivalent amount of each off-balance
sheet item after being multiplied by an assigned risk weight.  Under
the OTS risk-weighting system, one- to four-family first mortgages with
specified loan-to-value ratios that are not more than 90 days past due are
assigned a risk weight of 50%.  Consumer and residential construction
loans are assigned a risk weight of 100%.  Mortgage-backed securities
issued, or fully guaranteed as to principal and interest by the FNMA or FHLMC
are assigned a 20% risk weight.  Cash and U.S. Government securities
backed by the full faith and credit of the U.S. Government (such as
mortgage-backed securities issued by GNMA) are given a 0% risk
weight.  As of September 30, 2008, the Bank’s risk-weighted assets
were approximately $284.3 million.
  12
 
 The table
below provides information with respect to the Bank’s compliance with its
regulatory capital requirements at September 30, 2008.
 
 Amount
                    
                    
                    Percent ofAssets (1)(Dollars
      in thousands)Tangible
      capital
                    
                    $
                    38,333
                    
                    
                    
                    11.5%Tangible
      capital
      requirement
                    
                    
                    4,983
                    
                    
                    
                    1.5Excess
                    
                    
                    33,350
                    
                    
                    
                    10.0Tier
      1/core
      capital
                    
                    $
                    38,333
                    
                    
                    
                    11.5%Tier
      1/core capital requirement
      (2)
                    
                    
                    13,288
                    
                    
                    
                    4.0Excess
                    
                    
                    25,045
                    
                    
                    
                    7.5Tier
      1/risk-based
      capital
                    
                    $
                    38,333
                    
                    
                    
                    13.5%Tier
      1/risk-based capital
      requirement
                    
                    
                    11,371
                    
                    
                    
                    4.0Excess
                    
                    
                    26,962
                    
                    
                    
                    9.5Total
      risk-based
      capital
                    
                    $
                    40,966
                    
                    
                    
                    14.4%Total
      risk-based capital
      requirement
                    
                    
                    22,741
                    
                    
                    
                    8.0Excess
                    
                    
                    18,225
                    
                    
                    
                    6.4
 
 (1)
                Based
      upon adjusted total assets for purposes of the tangible capital and core
      capital requirements, and risk-weighted assets for purposes of the
      risk-based capital
requirements.
 (2)
                Reflects
      the capital requirement that we must satisfy to avoid regulatory
      restrictions that may be imposed pursuant to prompt corrective action
      regulations.
 
 In
addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution.  Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from nontraditional activities.  The OTS may treat the failure
of any savings institution to maintain capital at or above such level as an
unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the OTS to submit and adhere to a plan for increasing
capital.
 
 At
September 30, 2008, the Bank exceeded all regulatory minimum capital
requirements.
 
 Prompt Corrective
Regulatory Action.Under the Federal
Deposit Insurance Corporation Improvement Act (“FDICIA”), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution.  All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements.  An institution that fails to meet the minimum level for
any relevant capital measure (an “undercapitalized institution”) may be: (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of
businesses.  The capital restoration plan must include a guarantee by
the institution’s holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters, under which the holding company would be liable up to the lesser of 5%
of the institution’s total assets or the amount necessary to bring the
institution into capital compliance as of the date it failed to comply with its
capital restoration plan.
  13
  A
“significantly undercapitalized” institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution.  Any company controlling
the institution may also be required to divest the institution or the
institution could be required to divest subsidiaries.  The senior
executive officers of a significantly undercapitalized institution may not
receive bonuses or increases in compensation without prior approval and the
institution is prohibited from making payments of principal or interest on its
subordinated debt.  In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions.  If an
institution’s ratio of tangible capital to total assets falls below the
“critical capital level” established by the appropriate federal banking
regulator, the institution will be subject to conservatorship or receivership
within specified time periods.
 
 Under the
implementing regulations, the federal banking regulators, including the OTS,
generally measure an institution’s capital adequacy on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets).  The following table shows the capital ratios
required for the various prompt corrective action categories.
 
 Adequately
                                      
                                      
                                      
                                      SignificantlyWell Capitalized
                                      
                                      Capitalized
                                      
                                      Undercapitalized
                                      
                                      UndercapitalizedTotal risk-basedcapital
      ratio
                                      
                                      10.0%
      or more
                                      
                                      8.0%
      or more
                                      
                                      Less
      than 8.0%
                                      
                                      Less
      than 6.0%Tier
      1 risk-basedcapital ratio
                                      
                                      6.0%
      or more
                                      
                                      4.0%
      or more
                                      
                                      Less
      than 4.0%
                                      
                                      Less
      than 3.0%Leverage
      ratio
                                      
                                      5.0%
      or more
                                      
                                      4.0%
      or more *
                                      
                                      Less
      than 4.0% *
                                      
                                      Less
      than
3.0%
 ___________
 *  3.0%
if institution has a composite 1 CAMELS rating.
  A “critically undercapitalized” savings
institution is defined as an institution that has a ratio of “tangible equity”
to total assets of less than 2.0%.  Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased
mortgage servicing rights.  The OTS may reclassify a well capitalized
savings institution as adequately capitalized and may require an adequately
capitalized or undercapitalized institution to comply with the supervisory
actions applicable to institutions in the next lower capital category (but may
not reclassify a significantly undercapitalized institution as critically
undercapitalized) if the OTS determines, after notice and an opportunity for a
hearing, that the savings institution is in unsafe or unsound condition or that
the institution has received and not corrected a less-than-satisfactory rating
for any CAMELS rating category.
 
 Qualified Thrift
Lender Test.  The Bank is subject to OTS regulations which use
the concept of a qualified thrift lender (“QTL”).  A savings
institution that does not meet the Qualified Thrift Lender Test (“QTL Test”)
must either convert to a bank charter or comply with the following restrictions
on its operations: (i) the institution may not engage in any new activity or
make any new investment, directly or indirectly, unless such activity or
investment is permissible for both a national bank and savings association; (ii)
the branching powers of the institution shall be restricted to those of a
national bank located in the institution’s home state; and (iii) payment of
dividends by the institution shall be subject to the rules regarding payment of
dividends by a national bank.  In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as, and to be deemed, a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 (the “BHCA”) and other
statutes applicable to bank holding companies.  Upon the expiration of
three years from the date the institution ceases to be a QTL, it must cease any
activity and dispose of any investment not permissible for a national
bank.
 
 To comply
with the QTL test, a savings institution must either qualify as a “domestic
building and loan association” under the Internal Revenue Code or maintain at
least 65% of its “portfolio assets” in Qualified Thrift
Investments.  Portfolio assets are defined as total assets less
intangibles, the value of property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of total
assets.  Qualified Thrift Investments include loans made to purchase,
refinance, construct or improve residential or manufactured housing, home equity
loans, mortgage-backed securities, education, credit card and small business
loans and other specified investments.
  14
 
 A savings
institution must maintain its status as a QTL on a monthly basis in nine out of
every 12 months.  A savings institution that fails to maintain QTL
status will be permitted to requalify once, and if it fails the QTL test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired.
 
 At
September 30, 2008 the percentage of the Bank’s portfolio assets invested in
Qualified Thrift Investments was in excess of the percentage required to qualify
the Bank under the QTL Test.
 
 Dividend
Restrictions.Under OTS regulations,
the Bank may not pay dividends on its capital stock if its regulatory capital
would thereby be reduced below the amount then required for the liquidation
account established for the benefit of certain depositors of the Bank at the
time of the Bank’s conversion to stock form.
 
 OTS
regulations require that savings institutions submit notice to the OTS prior to
making a capital distribution if (a) they would not be well capitalized after
the distribution, (b) the distribution would result in the retirement of any of
the institution’s common or preferred stock or debt counted as its regulatory
capital, or (c) like the Bank, the institution is a subsidiary of a holding
company.  A savings institution must apply to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution’s total distributions for the
calendar year exceeds the institution’s net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS.  If neither the
savings institution nor the proposed capital distribution meet any of the
foregoing criteria, then no notice or application is required to be filed with
the OTS before making a capital distribution.  The OTS may disapprove
or deny a capital distribution if in the view of the OTS, the capital
distribution would constitute an unsafe or unsound practice.
 
 Under the
OTS’ prompt corrective action regulations, the Bank is also prohibited from
making any capital distributions if, after making the distribution, the Bank
would fail to meet any of the regulatory capital requirements.
 
 In
addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions.  See “Taxation.”
 
 Safety and
Soundness Standards.  By statute, each federal banking agency
was required to establish safety and soundness standards for institutions under
its authority.  The federal banking agencies, including the OTS, have
released Interagency Guidelines Establishing Standards for Safety and Soundness
establishing deadlines for submission and review of safety and soundness
compliance plans.  The guidelines require savings institutions to
maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution’s
business.  The guidelines also establish certain basic standards for
loan documentation, credit underwriting, interest rate risk exposure and asset
growth.  The guidelines further provide that savings institutions
should maintain safeguards to prevent the payment of compensation, fees and
benefits that are excessive or that could lead to material financial loss, and
should take into account factors such as comparable compensation practices at
comparable institutions.  Additionally, the federal banking agencies
have established standards relating to the asset quality and earnings that the
agencies determine to be appropriate.  Under these guidelines, a
savings institution should maintain systems, commensurate with its size and the
nature and scope of its operations, to identify problem assets and prevent
deterioration in those assets, as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and
reserves.  The federal banking agencies have also issued guidelines
for information security.  If the OTS determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable compliance plan to the OTS
within 30 day of receipt of a request for such a plan.  Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions.
  15
 
 Federal
banking regulations also require that savings institutions adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate.  These
policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements.  A savings institution’s real estate lending
policy must reflect consideration of the Interagency Guidelines for Real Estate
Lending Policies (the “Real Estate Lending Guidelines”) that have been adopted
by the federal banking regulators.  The Real Estate Lending
Guidelines, among other item, call upon savings institutions to establish
internal loan-to-value limits for real estate loans that are not in excess of
the specified loan-to-value limits for the various types of real estate
loans.  The Real Estate Lending Guidelines state, however, that it may
be appropriate in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value
limits.
 
 Lending Limits.With
certain limited exceptions, the maximum amount that a savings institution may
lend to any borrower outstanding at one time may not exceed 15% of the
unimpaired capital and surplus of the institution.  Loans and
extensions of credit fully secured by specified readily marketable collateral
(having a market value at least equal to the funds outstanding) may comprise an
additional 10% of unimpaired capital and surplus.  Savings
institutions are additionally authorized to make loans to one borrower, for any
purpose: (i) in an amount not to exceed $500,000; or (ii) by order of the
Director of OTS, in an amount not to exceed the lesser of $30.0 million or 30%
of unimpaired capital and surplus to develop residential housing, provided: (a)
the purchase price of each single-family dwelling in the development does not
exceed $500,000; (b) the savings institution is and continues to be in
compliance with regulatory capital requirements; (c) the loans comply with
applicable loan-to-value requirements; and (d) the aggregate amount of loans
made under this authority does not exceed 150% of unimpaired capital and
surplus; or (iii) loans to finance the sale of real property acquired in
satisfaction of debts previously contracted in good faith, not to exceed 50% of
unimpaired capital and surplus of the institution.
 
 Transactions with
Related Parties.  The Bank’s authority to engage in
transactions with “affiliates” (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by federal
law.  The aggregate amount of covered transactions with any individual
affiliate is limited to 10% of the capital and surplus of the savings
institution.  The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institution’s capital and
surplus.  Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal
law.  The purchase of low quality assets from affiliates is generally
prohibited.  The transactions with affiliates must be on terms and
under circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.  In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
 
 The Bank’s authority to extend credit
to executive officers, directors and 10% shareholders (“insiders”), as well as
entities such persons control, is limited.  Federal law limits both
the individual and aggregate amount of loans the Bank may make to insiders
based, in part, on the Bank’s capital position and requires certain board
approval procedures to be followed.  Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and do not involve more than the normal risk of
repayment.  There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other
employees.  Loans to executive officers are further restricted as to
types and amounts that are permissible.
 
 Enforcement.  The
OTS has primary enforcement responsibility over savings institutions and has the
authority to bring actions against the institution and all
institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured
institution.  Formal enforcement action may range from the issuance of
a capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance.  Civil penalties cover a wide range of violations
and can amount to $25,000 per day, or even $1.0 million per day in especially
egregious cases.  The FDIC has the authority to recommend to the OTS
Director that enforcement action be taken with respect to a particular savings
institution.  If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances.  Federal
law also establishes criminal penalties for certain violations.
  16
  Assessments.  Savings
institutions are required to pay assessments to the Office of Thrift Supervision
to fund the agency’s operations.  The general assessments, paid on a
semi-annual basis, are computed based upon the savings institution’s (including
consolidated subsidiaries) total assets, financial condition and complexity of
its portfolio.  The Office of Thrift Supervision assessments paid by
the Bank for the fiscal year ended September 30, 2008 totaled
$87,227.
 
 Insurance of
Deposit Accounts.  The Bank’s deposits are insured up to
applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation.  The Deposit Insurance Fund is the successor to the Bank
Insurance Fund and the Savings Association Insurance Fund, which were merged in
2006.  The Federal Deposit Insurance Corporation established its
risk-based assessment system to implement authority granted by the Federal
Deposit Insurance Reform Act of 2005 (“Reform Act”).  Under this
risk-based assessment system, insured institutions are assigned to one of four
risk categories based on supervisory evaluations, regulatory capital levels and
certain other factors.  An institution’s assessment rate depends upon
the category to which it is assigned.  Risk category
I.  Unlike the other categories, Risk Category I contains further risk
differentiation based on the Federal Deposit Insurance Corporation’s analysis of
financial ratios, examination component ratings and other
information.  Assessment rates are determined by the Federal Deposit
Insurance Corporation and currently range from five to seven basis points for
the healthiest institutions (Risk Category I) to 43 basis points of assessable
deposits for the riskiest (Risk Category IV).  The Federal Deposit
Insurance Corporation may adjust rates uniformly from one quarter to the next,
except that no single adjustment can exceed three basis points.  No
insured institution may make a capital distribution if in default of its FDIC
assessment.
 
 The Reform Act also provided for a
one-time credit for eligible institutions based on their assessment base as of
December 31, 1996.  Subject to certain limitations with respect to
institutions that are exhibiting weaknesses, credits can be used to offset
assessments until exhausted.  The Bank’s one-time credit approximated
$154,000, of which, no amount remains unused.  The Reform Act also
provided for the possibility that the Federal Deposit Insurance Corporation may
pay dividends to insured institutions once the Deposit Insurance fund reserve
ratio equals or exceeds 1.35% of estimated insured deposits.
 
 In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund.  This payment is established quarterly and for
the quarter ended September 30, 2008, the annualized FICO assessment was equal
to 1.10 basis points for each $100 in domestic deposits maintained by the
Bank.
 
 The Reform Act provided the Federal
Deposit Insurance Corporation with authority to adjust the Deposit Insurance
Fund ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to
the prior statutorily fixed ratio of 1.25%.  The ratio, which is
viewed by the Federal Deposit Insurance Corporation as the level that the fund
should achieve, was established by the agency at 1.25% for 2008, which remains
unchanged from 2007.
 
 The Federal Deposit Insurance
Corporation has authority to increase insurance assessments and, given recent
failures, the likelihood of such an increase has risen.  A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.  Management
cannot predict what insurance assessment rates will be in the
future.
 
 Insurance of deposits may be terminated
by the Federal Deposit Insurance Corporation upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the Federal Deposit Insurance Corporation or the
Office of Thrift Supervision.  The management of the Bank does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
 
 Federal Home Loan
Bank System.  The Bank is a member of the Federal Home Loan
Bank System, which consists of 12 district Federal Home Loan Banks subject to
supervision and regulation by the Federal Housing Finance Board
(“FHFB”).  The Federal Home Loan Banks provide a central credit
facility primarily for member institutions.  As a member of the
Federal Home Loan Bank of Des Moines, the Bank is required to acquire and hold
shares of capital stock in the Federal Home Loan Bank of Des
Moines.  The Bank was in compliance with this requirement with
investment in Federal Home Loan Bank of Des Moines stock at September 30, 2008
of $3,576,300.  The
Federal Home Loan Bank of Des Moines serves as a reserve or central bank for its
member institutions within its assigned district.  It offers advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the Federal Home Loan Bank of Des
Moines.  Long-term advances may be used for the purpose of funding
loans to residential housing finance, small businesses, small farms and small
agri-businesses.  At September 30, 2008, the Bank had $69.2 millionin
advances outstanding from the Federal Home Loan Bank of Des
Moines.  See “Business―Deposit
Activity and Other Sources of Funds―Borrowings.”
  17
 
 Federal Reserve
System.  Pursuant to regulations of the Federal Reserve Board,
all FDIC-insured depository institutions must maintain average daily reserves
against their transaction accounts.  In 2008, the Bank must maintain
reserves equal to 3% on transaction accounts of over $9.3 million up to
$43.9 million, plus 10% on the remainder.  These requirements are
subject to adjustment annually by the Federal Reserve Board.  Because
required reserves must be maintained in the form of vault cash or in a
noninterest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution’s interest-earning
assets.  As of September 30, 2008, the Bank met its reserve
requirements applicable at that time.  On October 9, 2008, the Federal
Reserve Banks began paying interest on reserve balances.
 
 Community
Reinvestment Act.Under the Community Reinvestment Act (the
“CRA”), as implemented by OTS regulations, a 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 CRA 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 CRA
requires the OTS, in connection with its examination of a bank, to assess the
institution’s record of meeting the credit needs of its community and to take
the record into account in its evaluation of certain applications by the
institution.  The CRA also requires all institutions to make public
disclosure of their CRA ratings.  The Bank received a “satisfactory”
rating as a result of its most recent CRA assessment.
 
 Regulation
of the Holding Company
 
 General.  Liberty
Bancorp is a nondiversified unitary savings and loan holding
company.  Under prior law, a unitary savings and loan holding company,
such as Liberty Bancorp, was not generally restricted as to the types of
business activities in which it may engage, provided that the Bank continued to
be a qualified thrift lender.  See “—Qualified Thrift Lender
Test.”  The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings institution after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below.  Further, the Gramm-Leach-Bliley Act specifies that
existing savings and loan holding companies may only engage in such
activities.  The Gramm-Leach-Bliley Act, however, grandfathered the
unrestricted authority for activities with respect to unitary savings and loan
holding companies existing prior to May 4, 1999, so long as the holding
company’s savings institution subsidiary continues to comply with the QTL
Test.  Liberty Bancorp does not qualify for the
grandfathering.  Liberty Bancorp is therefore limited to activities
permissible for financial holding companies under the Bank Holding Company Act
of 1956 and activities permitted for multiple holding
companies.  These include activities that are financial in nature but
exclude commercial activities.  Upon any non-supervisory acquisition
by Liberty Bancorp of another savings institution or savings bank that meets the
qualified thrift lender test and is deemed to be a savings institution by the
Office of Thrift Supervision, Liberty Bancorp would become a multiple savings
and loan holding company (if the acquired institution is held as a separate
subsidiary) and would generally be limited to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject
to the prior approval of the Office of Thrift Supervision, and certain
activities authorized by Office of Thrift Supervision
regulation.  However, the Office of Thrift Supervision has issued an
interpretation concluding that multiple savings and loan holding companies may
also engage in activities permitted for financial holding
companies.
 
 A savings and loan holding company is
prohibited from, directly or indirectly, acquiring more than 5% of the voting
stock of another savings institution or savings and loan holding company,
without prior written approval of the Office of Thrift Supervision and from
acquiring or retaining control of a depository institution that is not insured
by the Federal Deposit Insurance Corporation.  In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision considers the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the deposit insurance funds, the convenience and needs of the
community and competitive factors.
  18
 
 The Office of Thrift Supervision may
not approve any acquisition that would result in a multiple savings and loan
holding company controlling savings institutions in more than one state, subject
to two exceptions:  (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.  The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
 
 Although savings and loan holding
companies are not currently subject to specific regulatory capital requirements
or specific restrictions on the payment of dividends or other capital
distributions, federal regulations do prescribe such restrictions on subsidiary
savings institutions.  The Bank must notify the Office of Thrift
Supervision 30 days before declaring any dividend to Liberty
Bancorp.  In addition, the financial impact of a holding company on
its subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
 
 Acquisition of
the Company.Under the Federal
Change in Bank Control Act, a notice must be submitted to the Office of Thrift
Supervision if any person (including a company), or group acting in concert,
seeks to acquire “control” of a savings and loan holding company or savings
association.  Under certain circumstances, a change of control may
occur, and prior notice is required, upon the acquisition of 10% or more of
Liberty Bancorp’s outstanding voting stock, unless the Office of Thrift
Supervision has found that the acquisition will not result in a change of
control of Liberty Bancorp.  Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice to
act, taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition.  Any company that acquires control would then be subject
to regulation as a savings and loan holding company.
 
 Federal
and State Taxation
 
 General.The
Bank and Company file a consolidated tax return and report their taxable income
on a fiscal year basis ending September 30, using the accrual method of
accounting.  The federal income tax laws apply to us in the same
manner as other corporations with some exceptions, including particularly our
reserve for bad debts discussed below.  The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to us.  Our last
federal audit by the Internal Revenue Service (the “IRS”) was for the fiscal
year ended September 30, 1993 and was audited in 1995.  As a result of
this audit, the IRS disallowed certain minor deductions.
 
 Bad Debt
Reserves.  For fiscal years beginning before June 30, 1996,
thrift institutions that qualified under certain definitional test and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve.  A reserve could be established
for bad debts on qualifying real property loans, generally secured by interests
in real property improved or to be improved, under the percentage of taxable
income method or the experience method.  The reserve for nonqualifying
loans was computed using the experience method.  Federal legislation
enacted in 1996 repealed the reserve method of accounting for bad debts and the
percentage of taxable income method for tax years beginning after 1995 and
require savings institutions to recapture or take into income certain portions
of their accumulated bad debt reserves.  Approximately $3.6 million of
our accumulated bad debt reserves would not be recaptured into taxable income
unless BankLiberty makes a “non-dividend distribution” to Liberty Bancorp as
described below.
 
 Distributions.  If
BankLiberty makes “non-dividend distributions” to Liberty Bancorp, such
distributions will be considered to have been made from BankLiberty’s
unrecaptured tax bad debt reserve as of September 30, 1988 (the “base year
reserve”), to the extent thereof and then from BankLiberty’s supplemental
reserve for losses on loans, to the extent of those reserves, and an amount
based on the amount distributed, but not more than the amount of those reserves,
will be included in BankLiberty’s taxable income.  Non-dividend
distributions include distributions in excess of the Bank’s current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation.  Dividends paid out
of the Bank’s current or accumulated earnings and profits will not be included
in the Bank’s income.
  19
  The amount of additional income created
from a non-dividend distribution is equal to the lesser of the base year reserve
and supplemental reserve for losses on loans or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the
distribution.  Thus, in some situations, approximately one and
one-half times the non-dividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.  BankLiberty does not intend to pay dividends that would result in
the recapture of any portion of the bad debt reserves.
 
 Corporate
Alternative Minimum Tax.  The Code imposes a tax on alternative
minimum taxable income at a rate of 20%.  Only 90% of alternative
minimum taxable income can be offset by alternative minimum tax net operating
loss carryovers of which the Bank currently has none.  Alternative
minimum taxable income is also adjusted by determining the tax treatment of
certain items in a manner that negates the deferral of income resulting from the
regular tax treatment of those items.  Alternative minimum tax is due
when it exceeds the regular income tax.  The Bank has not had a
liability for a tax on alternative minimum taxable income during the past five
years.
 
 Dividends
Received Deduction and Other Matters.The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.  The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
 
 State
Taxation
 
 Missouri
Taxation.  The Company and Bank file Missouri income tax
returns.  Missouri-based thrift institutions are subject to a special
financial institutions tax, based on net income without regard to net operating
loss carryforwards, at the rate of 7.0% of net income.  This tax is in
lieu of certain other state taxes on thrift institutions, on their property,
capital or income, except taxes on tangible personal property owned by the Bank
and held for lease or rental to others and on real estate, contributions paid
pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales taxes and use taxes.  In addition, the Bank is entitled
to credit against this tax all taxes paid to the State of Missouri or any
political subdivision except taxes on tangible personal property owned by the
Bank and held for lease or rental to others and on real estate, contributions
paid pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales and use taxes and taxes imposed by the Missouri Financial
Institutions Tax Law.  Missouri thrift institutions are not subject to
the regular state corporate income tax.  In January 2006, the Bank
completed a routine sales/use tax return audit for the year ended June 30, 2005,
under which we were found to owe no additional funds.  The Company is
subject to the regular state corporate income tax at the rate of 6.25% of
taxable income derived from Missouri sources.
 
 Item1A.Risk
Factors
 
 Our
emphasis on construction, commercial and multi-family real estate lending and
commercial business lending may expose us to increased lending
risks.
 
 At
September 30, 2008, we had $90.5 million in real estate construction loans,
$102.3 million in commercial real estate loans, $17.4 million in multi-family
loans and $17.8 million in commercial business loans, which represented 32.5%,
36.7%, 6.2% and 6.4%, respectively, of our total loan portfolio.  Moreover,
we intend to increase our emphasis on commercial real estate, multi-family,
commercial and multi-family real estate construction and commercial business
lending.  These types of loans generally expose a lender to greater
risk of non-payment and loss than single-family residential mortgage loans
because repayment of the loans often depends on the successful operation of the
property, the income stream of the borrowers and, for construction loans, the
accuracy of the estimate of the property’s value at completion of construction
and the estimated cost of construction.  Such loans typically involve
larger loan balances to single borrowers or groups of related borrowers compared
to single-family residential mortgage loans.  Commercial business loans
expose us to additional risks since they typically are made on the basis of the
borrower’s ability to make repayments from the cash flow of the borrower’s
business and are secured by non-real estate collateral that may depreciate over
time.  Nonperforming assets totaled $13.1 million, or 3.91% of total
assets, at September 30, 2008, which was an increase of $8.0 million, or 2.38%,
from $5.1 million, or 1.53% of total assets, at September 30,
2007.  Nonperforming assets at September 30, 2008 consisted of $8.2
million in nonaccrual loans and $4.9 million in foreclosed real
estate.  At September 30, 2008, nonaccrual loans consisted of $3.2
million in real estate construction loans, $5.0 million in land development
loans and commercial real estate loans and consumer loans totaling
$9,000.
  20
  
 At
September 30, 2008, we had no loans which were not currently classified as
nonaccrual, 90 days past due, restructured or impaired but where known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and would result in disclosure as non-accrual, 90 days past
due, restructured or impaired.
 
 Our
loan portfolio has significant concentrations among a small number of borrowers;
as a result, we could be adversely affected by difficulties experienced by a
small number of borrowers.
  As a
result of large loan concentrations among a relatively small number of
borrowers, we could incur significant losses if a small number of our borrowers
are unable to repay their loans to us.  At September 30, 2008, we had
41 borrowers with aggregate loan balances exceeding 5% of our consolidated
stockholders’ equity at that date.  Loans to these borrowers
aggregated $205.4 million, which represented 73.7% of our total loan portfolio
at that date.  These loans primarily are residential real estate
development, residential real estate construction or commercial real estate
loans.  Aggregate loan balances to these customers ranged from $2.0
million to $16.8 million for our largest borrower.  While we seek to
control our risk and minimize losses on these large loan concentrations, if one
or more of our large borrowers were to default on their loans we could incur
significant losses.
 
 A
downturn in the local economy or a decline in real estate values could hurt our
profits.
 
 Nearly
all of our real estate loans are secured by real estate in the Kansas City
metropolitan area.  In addition, through our portfolio of real estate
construction loans, which includes loans to acquire land for development of
residential property and loans to builders for the construction of residences,
we have significant exposure to the residential construction market in the
Kansas City metropolitan area.  As a result, a downturn in the local
economy, and, particularly, a downturn in the residential construction industry,
could cause significant increases in non-performing loans, which would adversely
affect our profits.  Additionally, a decrease in asset quality could
require additions to our allowance for loan losses through increased provisions
for loan losses, which would negatively affect our profits.  A decline
in real estate values could cause some of our mortgage loans to become
inadequately collateralized, which would expose us to a greater risk of loss.
 For a discussion of our market area, see “Item 1. Business – Market
Area.”
 
 Strong
competition within our market area could hurt our profits and slow
growth.
 
 We face
intense competition both in making loans and attracting
deposits.  This competition has made it more difficult for us to make
new loans and has occasionally forced us to offer higher deposit
rates.  Price competition for loans and deposits might result in our
earning less on our loans and paying more on our deposits, which reduces net
interest income.  Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide.  We expect competition to increase in
the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry.  See “Item
1. Business – Competition.”
 
 We
will incur additional expenses relating to our strategic plan to expand through
de novo branching in the Kansas City metropolitan area.
  We opened
one new branch in Independence, Missouri in May 2005, a second new branch in
Kansas City, Missouri in January 2006 and a third new branch in Gladstone,
Missouri in September 2007.  We anticipate that over the next three to five
years, based on and subject to local market conditions, we will open additional
branch offices in suburban Kansas City growth areas that complement our existing
branch network.  In connection with the expansion of our branch
network, we intend to hire additional lending and other employees to support our
expanded infrastructure.
  21
 
 While we
anticipate that this expansion strategy will enhance long-term stockholder
value, it is possible that our branch expansion strategy may not become
accretive to our earnings over the short term.  New branches generally
require a significant initial capital investment and take three years or longer
to become profitable.  New branches require an upfront investment of
between $2.0 million and $3.0 million for land and building
expenses.  Accordingly, we anticipate that, in the short term, net
income will be negatively affected as we incur significant capital expenditures
and noninterest expense in opening and operating new branches before the new
branches can produce sufficient net interest income to offset the increased
expense.  In addition, the need to use capital to fund de novo
branching may limit our ability to pay or increase dividends on our common
stock.  There also is implementation risk associated with new
branches.  Numerous factors will determine whether our branch
expansion strategy will be successful, such as our ability to select suitable
branch locations, real estate acquisition costs, competition, interest rates,
managerial resources, our ability to hire and retain qualified personnel, the
effectiveness of our marketing strategy and our ability to attract
deposits.
  Certain
interest rate movements could reduce our net interest income and
earnings.
  Our net
interest income is the interest we earn on loans and investments less the
interest we pay on our deposits and borrowings.  Our net interest
margin is the difference between the yield we earn on our assets and the
interest rate we pay for deposits and our other sources of
funding.  Changes in interest rates—up or down—could adversely affect
our net interest margin and, as a result, our net interest
income.  Although the yield we earn on our assets and our funding
costs tend to move in the same direction in response to changes in interest
rates, one can rise or fall faster than the other, causing our net interest
margin to expand or contract.  Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in
interest rates.  As a result, when interest rates rise, our funding
costs may rise faster than the yield we earn on our assets, causing our net
interest margin to contract until the yield catches up.  Changes in
the slope of the “yield curve”—or the spread between short-term and long-term
interest rates—could also reduce our net interest margin.  Normally,
the yield curve is upward sloping, meaning short-term rates are lower than
long-term rates.  Because our liabilities tend to be shorter in
duration than our assets, when the yield curve flattens or even inverts, we
could experience pressure on our net interest margin as our cost of funds
increases relative to the yield we can earn on our
assets.
 
 The
loss of our President and Chief Executive Officer could hurt our
operations.
 
 We rely heavily on our President and
Chief Executive Officer, Brent M. Giles.  The loss of Mr. Giles could
have an adverse effect on us because, as a small community bank, Mr. Giles has
more responsibility than would be typical at a larger financial institution with
more employees.  In addition, as a small community bank, we have fewer
management-level personnel who are in position to succeed and assume the
responsibilities of Mr. Giles.  We have entered into a three-year
employment contract with Mr. Giles.
 
 We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.
 
 The Bank is subject to extensive
regulation, supervision and examination by the Office of Thrift Supervision, our
primary federal regulator, and by the Federal Deposit Insurance Corporation, as
insurer of its deposits.  Liberty Bancorp will also be subject to
regulation and supervision by the Office of Thrift Supervision.  Such
regulation and supervision govern the activities in which an institution and its
holding company may engage, and are intended primarily for the protection of the
insurance fund and for the depositors and borrowers of the Bank.  The
regulation and supervision by the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation are not intended to protect the interests of
investors in Liberty Bancorp common stock.  Regulatory authorities
have extensive discretion in their supervisory and enforcement activities,
including the imposition of restrictions on our operations, the classification
of our assets and determination of the level of our allowance for loan
losses.  Any change in such regulation and oversight, whether in the
form of regulatory policy, regulations, legislation or supervisory action, may
have a material impact on our operations.
  22
 
 Office
of Thrift Supervision regulations and anti-takeover provisions in our articles
of incorporation restrict the accumulation of our common stock, which may
adversely affect our stock price.
 
 Office of Thrift Supervision
regulations provide that, for a period of three years following the date of
completion of the conversion, no person, acting alone, together with associates
or in a group of persons acting in concert, may directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of our common stock
without the prior written approval of the Office of Thrift
Supervision.  In addition, Liberty Bancorp’s articles of incorporation
provide that, for a period of five years from the date of the conversion, no
person may acquire directly or indirectly the beneficial ownership of more than
10% of any class of any equity security of Liberty Bancorp.  In the
event a person acquires shares in violation of this charter provision, all
shares beneficially owned by such person in excess of 10% will be considered
“excess shares” and will not be counted as shares entitled to vote or counted as
voting shares in connection with any matters submitted to the stockholders for a
vote.  These factors may make it more difficult and less attractive
for stockholders to acquire a significant amount of our common stock, which may
adversely affect our stock price.
 
 Item
1B.  Unresolved Staff Comments
 
 None.
  23
  Item
2.  Properties
 
 The
following table sets forth the location and certain additional information
regarding the Bank’s offices at September 30, 2008, all of which it
owns.
 Year
                              Opened
                            
                            Square
                              Footage
                            
                            
                            Date of Lease
                              Expiration
                            
                            Owned/
                              Leased
                            
                            Deposits
                              as of
                              September 30,
                              2008
                            
                            
                            Net Book
                              Value
                              as of
                              September 30,
                              2008(In
      thousands)Main
      Office:16
      West Franklin
                              Liberty,
      Missouri
                            1955
                            
                            
                            6,000
                            
                            
                            
                            N/A
                            
                            Owned
                            
                            $
                            77,885
                            (1)
                            
                            $
                            782Branch
      Offices:Hwy.
      92 & Bello Mondo Drive
                              Platte
      City, Missouri
                            1973
                            
                            
                            1,500
                            
                            
                            
                            N/A
                            
                            Owned
                            
                            
                            21,322
                            
                            
                            
                            2741206
      West Clay
                              Plattsburg,
      Missouri
                            1974
                            
                            
                            1,650
                            
                            
                            
                            N/A
                            
                            Owned
                            
                            
                            27,373
                            
                            
                            
                            879200
      N.E. Barry Road
                              Kansas
      City, Missouri
                            2001
                            
                            
                            6,160
                            
                            
                            
                            N/A
                            
                            Owned
                            
                            
                            41,086
                            
                            
                            
                            2,7744315
      S. Noland Road
                              Independence,
      Missouri
                            2005
                            
                            
                            3,000
                            
                            
                            
                            N/A
                            
                            Owned
                            
                            
                            27,632
                            
                            
                            
                            1,2478740
      N. Ambassador Drive
                              Kansas
      City, Missouri
                            2006
                            
                            
                            5,000
                            
                            
                            11/30/2021
                            
                            Leased
      (2)
                            
                            
                            17,554
                            
                            
                            
                            1,1556410
      N. Prospect
                              Gladstone,
      Missouri
                            2007
                            
                            
                            4,000
                            
                            
                            
                            N/A
                            
                            Owned
                            
                            
                            6,912
                            
                            
                            
                            2,291Building
      in Progress
                              (Future
      Branch Location)(3)
                            —
                            
                            
                            —
                            
                            
                            
                            —
                            
                            Owned
                            
                            
                            —
                            
                            
                            
                            1,180$
                            219,764
                            
                            
                            $
                            9,790
 ______________________________________________________________________
 (1)  Includes
$15.0 million in brokered deposits serviced at the Bank’s main
office.
 (2)  The
lease is on the land only.  The branch building is owned by the
Bank.
 (3)  Includes
land for future branch location.
 
 For
additional information regarding premises and equipment, see note 6 of the notes
to consolidated financial statements.
 
 Item
3.Legal
Proceedings
 
 Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens and contracts, condemnation proceedings on properties in which we
hold security interest, claims involving the making and servicing of real
property loans and other issues incident to our business.  We are not
a party to any pending legal proceedings that we believe would have a material
adverse effect on our financial condition, results of operations or cash
flows.
 
 Item
4.Submission
of Matters to a Vote of Security Holders
 
 None.
  24
  PART
II
 
 Item
5.Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 
 Market
for Common Stock and Related Stockholder Matters
 
 The common stock of Liberty Bancorp,
Incis traded on the NASDAQ Capital Market under the symbol “LBCP.”  As
of September 30, 2008, the Company had approximately 387 stockholders of record
(excluding the number of persons or entities holding stock in “street” name
accounts through various brokerage firms), and 4,761,712 shares issued and
3,936,710 shares outstanding.
 
 The following table sets forth the high
and low sales prices for the common stock and dividends per share for the fiscal
years ended September 30, 2008 and 2007, as reported by NASDAQ. The prices do
not necessarily reflect inter-dealer prices without retail markup, markdown or
commissions and may not reflect actual transmissions.
 
 High
                    
                    
                    Low
                    
                    
                    Dividend Paid
                      per ShareYear Ended
      September 30, 2008Fourth
      quarter
                    
                    $
                    9.300
                    
                    
                    $
                    7.500
                    
                    
                    $
                    0.025Third
      quarter
                    
                    
                    10.395
                    
                    
                    
                    9.010
                    
                    
                    
                    0.025Second
      quarter
                    
                    
                    10.650
                    
                    
                    
                    10.000
                    
                    
                    
                    0.025First
      quarter
                    
                    
                    10.790
                    
                    
                    
                    10.100
                    
                    
                    
                    0.025Year
      Ended September 30, 2007Fourth
      quarter
                    
                    $
                    11.000
                    
                    
                    $
                    10.080
                    
                    
                    $
                    0.025Third
      quarter
                    
                    
                    11.380
                    
                    
                    
                    10.730
                    
                    
                    
                    0.025Second
      quarter
                    
                    
                    11.450
                    
                    
                    
                    10.500
                    
                    
                    
                    0.025First
      quarter
                    
                    
                    10.730
                    
                    
                    
                    9.960
                    
                    
                    
                    0.025
 
 Liberty
Bancorp is subject to Missouri law, which generally permits Liberty Bancorp to
pay dividends on its common stock as long as no dividend is declared or paid at
a time when the net assets of the corporation are less than its stated capital
or when the payment of such dividends would reduce the net assets of the
corporation below its stated capital.  Dividend payments by the
Company depend primarily on dividends received by the Company from the Bank. See
Note 13 to the Notes to the Consolidated Financial Statements for information
regarding the dividend restrictions applicable to the Company and the
Bank.
  25
 
 Issuer
Purchases of Equity Securities
 
 The following table sets forth
information regarding the Company’s repurchases of its common stock during the
quarter ended September 30, 2008.
 Period
                  
                  Total
                    Number of
                    Shares
                    Purchased
                  
                  
                  Average
                    Price Paid
                    per Share
                  
                  
                  Total Number
                    Of Shares
                    Purchased
                    as Part of
                    Publicly
                    Announced Plans
                    or
                    Programs
                  
                  
                  Maximum
                    Number of Shares
                    that May Yet Be
                    Purchased Under
                    the Plans or
                    ProgramsJuly
      1, 2008 through
                    July
      31, 2008
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  
                  297,001August
      1, 2008 through
                    August
      31, 2008
                  
                  
                  7,666
                  
                  
                  
                  8.36
                  
                  
                  
                  7,666
                  
                  
                  
                  289,335September
      1, 2008 through
                    September
      30, 2008
                  
                  
                  8,000
                  
                  
                  
                  8.82
                  
                  
                  
                  8,000
                  
                  
                  
                  281,335Total
                  
                  
                  15,666
                  
                  
                  $
                  8.59
                  
                  
                  
                  15,666
 
 Item 6.  Selected
Financial Data.
 
 This item is not applicable as the
Company is a smaller reporting company.
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operation.
 
 Overview
  Income.
 Our primary
source of pre-tax income is net interest income. Net interest income is the
difference between interest income, which is the income that we earn on our
loans and securities, and interest expense, which is the interest that we pay on
our deposits and borrowings. Other significant sources of pre-tax income are
service charges on deposit accounts, gains on sales of loans and other loan
service charges. In addition, we recognize income or losses from the sale of
investments in years that we have such sales.
  Allowance for
Loan Losses. The allowance for loan losses is a valuation allowance for
probable losses inherent in the loan portfolio. Provisions for loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. We estimate the allowance balance required using past loan loss
experience, the nature and value of the portfolio, information about specific
borrower situations, and estimated collateral values, economic conditions and
other factors. Allocation of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in our judgment, should be
charged off.
 
 Expenses.
 The noninterest
expenses we incur in operating our business consist of compensation and employee
benefit expenses, occupancy expense, equipment and data processing expenses,
advertising expenses, federal deposit insurance premiums and various other
miscellaneous expenses.
 
 Compensation
and employee benefits consist primarily of salaries and wages paid to our
employees, director and committee fees, payroll taxes, expenses for health
insurance and other employee benefits.
  Occupancy
and equipment expenses, which are the fixed and variable costs of buildings and
equipment, consist primarily of depreciation charges, furniture and equipment
expenses, rent expense, maintenance, real estate taxes and costs of utilities.
Depreciation of premises and equipment is computed using the straight-line
method based on the useful lives of the related assets, which range from three
to 40 years.
  26
  Data
processing expenses include fees paid to our third party data processing service
and ATM expense.
  Advertising
expenses include expenses for print, radio and television advertisements,
promotions, third-party marketing services and premium items.
  Federal
deposit insurance premiums are primarily payments we make to the Federal Deposit
Insurance Corporation for insurance of our deposit accounts.
  Other
expenses include correspondent banking charges, operations from foreclosed real
estate, professional and regulatory services, expenses for supplies, telephone
and postage, contributions and donations, insurance and surety bond premiums and
other fees and expenses.
  We expect
that noninterest expenses will increase as a result of our strategy to expand
our branch network. These additional expenses will consist primarily of salaries
and employee benefits and occupancy and equipment expenses. Initially, we expect
that these expenses will be greater than the additional income that we generate
through our new facilities. Over time, we anticipate that we will generate
sufficient income to offset the expenses related to our new facilities and new
employees, but we cannot provide assurances as to when or if our branch
expansion strategy will be accretive to our earnings.
 
 Critical
Accounting Policies
 
 Our
accounting and reporting policies were prepared in accordance with U.S.
generally accepted accounting principles (“US GAAP”) and to general practices
within the financial services industry. The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. Management
has identified the accounting policies described below as those that, due to the
judgments, estimates and assumptions inherent in those policies, are critical to
an understanding of our financial statements and management’s discussion and
analysis.
 
 Income
Recognition.  We recognize interest
income by methods conforming to US GAAP that include general accounting
practices within the financial services industry. Interest income on loans and
investment securities is recognized by methods that result in level rates of
return on principal amounts outstanding, including yield adjustments resulting
from the amortization of loan costs and premiums on investment securities and
accretion of loan fees and discounts on investment securities.
 
 In the
event management believes collection of all or a portion of contractual interest
on a loan has become doubtful, which generally occurs after the loan is 90 days
past due, the accrual of interest is discontinued. In addition, previously
accrued interest deemed uncollectible that was recognized in income is reversed.
Interest received on nonaccrual loans is included in income only if principal
recovery is reasonably assured. A non-accrual loan is restored to accrual status
when it is brought current or has performed in accordance with contractual terms
for a reasonable period of time, and the collectibility of the total contractual
principal and interest is no longer doubtful.
 
 Allowance for
Loan Losses. Valuation allowances are established for impaired loans for
the difference between the loan amount and the fair value of collateral less
estimated selling costs. We consider a loan to be impaired when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement on a
timely basis. The types of loans for which impairment is measured include
nonaccrual income property loans (excluding those loans included in the
homogenous portfolio which are collectively reviewed for impairment), large,
non-accrual single-family loans and troubled debt restructurings. Such loans are
generally placed on non-accrual status at the point deemed uncollectible.
Impairment losses are recognized through an increase in the allowance for loan
losses. See note 5 of the notes to consolidated financial statements for
information regarding impaired loans at September 30, 2008 and
2007.
 
 Allowances
for loan losses are available to absorb losses incurred on loans and represent
additions charged to expense, less net charge-offs. The allowances are evaluated
on a regular basis by management and are based on management’s periodic review
of the collectibility of loans, in light of historical experience, fair value of
the underlying collateral, changes in the types and mix of loans originated and
prevailing economic conditions.
  27
 
 Operating
Strategy
 
 Our mission is to operate and further
expand a profitable and diversified community banking franchise. We plan to
achieve this by executing our strategy of:
 
 ·
              expanding
      through de novo branching in the Kansas City metropolitan area;
      and
 
 ·
              continuing
      to transform our balance sheet to emphasize assets and liabilities that
      allow us to increase our net interest margin while reducing our exposure
      to risk from interest rate
fluctuations.
 
 Expansion Through
De Novo Branching. In 2004, the Board of Directors, with the assistance
of our Chief Executive Officer hired in September 2003, determined to pursue a
strategic plan to enhance long-term shareholder value through franchise growth.
The strategic plan calls for expansion through de novo branching in the Kansas
City metropolitan area to enable us to take advantage of the opportunities
afforded by recent and forecasted economic growth in that market. We believe
that the increased asset size to be achieved through the planned expansion will
enable us to leverage better efficiencies and technology but still attract
customers based on personal service and relationships. Our first new branch was
opened in Independence, Missouri in May 2005, a second new branch was opened in
Kansas City, Missouri in January 2006, and a third new branch was opened in
Gladstone, Missouri in September 2007. We anticipate that over the next three to
five years, based on and subject to local market conditions, we will open
additional branch offices in suburban Kansas City growth areas that complement
our existing branch network.
 
 While we
anticipate that this expansion strategy will enhance long-term shareholder
value, w e cannot assure you when or if our branch expansion strategy will be
accretive to our earnings.  New branches generally require a significant
initial capital investment and take approximately three years or longer to
become profitable. New branches require an upfront investment of between $2.0
million and $3.0 million each for land and building expenses. Accordingly, we
anticipate that, in the short term, net income will be negatively affected as we
incur significant capital expenditures and noninterest expense in opening and
operating new branches before the new branches can produce sufficient net
interest income to offset the increased expense. In addition, the need to use
capital to fund de novo branching may limit our ability to pay or increase
dividends on our common stock. There also is implementation risk associated with
new branches. Numerous factors will determine whether our branch expansion
strategy will be successful, such as our ability to select suitable branch
locations, real estate acquisition costs, competition, interest rates,
managerial resources, our ability to hire and retain qualified personnel, the
effectiveness of our marketing strategy and our ability to attract
deposits.
 
 Continued
Transformation of Our Balance Sheet. Our strategic plan also
calls for us to transform our balance sheet to emphasize assets and liabilities
that allow us to increase our net interest margin while reducing our exposure to
risk from interest rate fluctuations.
 
 With
respect to our assets, our strategy has been, and continues to be, to increase
the percentage of assets invested in commercial business, commercial real estate
and multi-family loans, which tend to have higher yields than traditional
single-family residential mortgage loans and which have shorter terms to
maturity or adjustable interest rates. In addition, in recent years we have
sought to increase our originations of real estate construction loans, which
also have short terms and adjustable interest rates, although in the future we
will seek to maintain construction loans approximately at current levels so as
not to unduly concentrate credit risk in the real estate construction market. At
the same time, we have sought to decrease our reliance on single-family
residential mortgage loans. Currently, we sell substantially all new, fixed-rate
conforming single-family loans in the secondary market.
 
 Commercial
real estate, commercial business and multi-family real estate loans provide us
with the opportunity to earn more income because they tend to have higher
interest rates than residential mortgage loans. In addition, these loans are
beneficial for interest rate risk management because they typically have shorter
terms and adjustable interest rates. There are many multi-family and commercial
properties and businesses located in our market area, and with the additional
capital raised in the offering we intend to pursue the larger lending
relationships associated with these opportunities. To facilitate our growth, we
have added expertise in our commercial loan department in recent years through
the hiring of experienced personnel, including a new chief lending
officer.
  28
 
 As a
result of these efforts, our commercial real estate loans have increased from
$16.2 million, or 12.18% of total loans, at September 30, 2001 to $102.3
million, or 36.73% of total loans, at September 30, 2008. In addition,
commercial business loans have increased from $2.7 million, or 2.04% of total
loans, at September 30, 2001 to $17.8 million, or 6.39% of total loans, at
September 30, 2008, and multi-family real estate loans have increased from $3.4
million, or 2.56% of total loans, at September 30, 2001 to $17.4 million, or
6.23% of total loans, at September 30, 2008. The percentage of our total loan
portfolio comprised of residential mortgage loans has decreased in recent years,
amounting to 28.71%, 20.71%, 18.48%, 15.64% and 14.62% at September 30, 2004,
2005, 2006, 2007 and 2008, respectively.
 
 With
respect to liabilities, our strategy is to emphasize transaction and money
market accounts, as well as shorter term certificates of deposit. We value these
types of deposits because they represent longer-term customer relationships and
a lower cost of funding compared to longer-term certificates of deposit. We
aggressively seek transaction and money market deposits through competitive
products and pricing and targeted advertising. In addition, we offer business
checking accounts for our commercial customers. We also hope to increase core
deposits through our de novo branching strategy.
 
 Balance
Sheet Analysis
 
 Loans.
 Our primary
lending activity is the origination of loans secured by real estate. We
originate construction loans, single-family residential loans and multi-family
and commercial real estate loans. To a lesser extent, we also originate
commercial business and consumer loans.
 
 At September 30, 2008, construction
loans totaled $90.5 million and represented 32.47% of total loans, compared to
$125.8 million, or 47.12% of total loans, at September 30, 2007.  The
size of our real estate construction loan portfolio has decreased $35.3 million
over this period due primarily to the soft real estate
market.  Commercial real estate construction loans decreased by $17.6
million, or 34.54%, from $51.0 million at September 30, 2007 to $33.4 million at
September 30, 2008. Development loans increased by $262,000, or .72%, from $36.4
million at September 30, 2007 to $36.7 million at September 30, 2008.
Single-family – spec loans decreased by $16.1 million, or 54.84%, from
$29.3 million at September 30, 2007 to $13.2 million at September 30, 2008.
Single-family – custom construction loans decreased by $751,000, or 10.59%,
from $7.1 million at September 30, 2007 to $6.3 million at September 30, 2008.
Decreases in single-family spec and custom construction loans reflect loan
portfolio adjustments to current market conditions.
 
 Single-family residential loans totaled
$40.7 million and represented 14.62% of total loans at September 30, 2008,
compared to $41.7 million, or 15.64% of total loans, at September 30, 2007. The
Bank has pursued the strategy of selling substantially all new, fixed-rate
residential loans we originate because of the relatively low yields that have
been attainable on residential loans over the last several years and to decrease
the interest rate risk resulting from the retention of longer term fixed-rate
loans.
 
 Commercial real estate loans increased
by $45.1 million, or 78.83%, to $102.3 million and represented 36.73% of total
loans at September 30, 2008, compared to $57.2 million, or 21.44% of total
loans, at September 30, 2007. These increases were due to our strategic decision
to emphasize lending on income producing property projects. Currently, the Bank
offers a variety of commercial real estate products to owner occupants and
investors. Our primary commercial real estate lending focus areas are retail,
office and industrial uses.
 
 Multi-family loans totaled $17.4
million and represented 6.23% of total loans at September 30, 2008, compared to
$12.2 million, or 4.57% of total loans, at September 30, 2007.
 
 We also originate a variety of consumer
loans and home equity loans, as well as loans secured by deposit accounts,
automobile loans and other miscellaneous loans. Consumer loans totaled $9.9
million and represented 3.56% of total loans at September 30, 2008, compared to
$12.0 million, or 4.51% of total loans, at September 30, 2007. The decrease in
consumer loans was due primarily to a decrease in home equity
loans.
 
 Commercial business loans decreased to
$17.8 million or 6.39% of total loans at September 30, 2008 from $18.0 million,
or 6.72% of total loans at September 30, 2007.
  29
 
 Set forth
below is selected data relating to the composition of our loan portfolio at the
dates indicated.
  At
      September 30,2008
                                                                
                                                                
                                                                2007
                                                                
                                                                
                                                                2006
                                                                
                                                                
                                                                2005
                                                                
                                                                
                                                                2004Amount
                                                                
                                                                
                                                                %
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                %
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                %
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                %
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                %(Dollars
      in thousands)Type
      of Loan:Real
      estate loans:Single-family
      1-4 units
                                                                
                                                                $
                                                                40,727
                                                                
                                                                
                                                                
                                                                14.62
                                                                %
                                                                
                                                                $
                                                                41,749
                                                                
                                                                
                                                                
                                                                15.64
                                                                %
                                                                
                                                                $
                                                                42,623
                                                                
                                                                
                                                                
                                                                18.48
                                                                %
                                                                
                                                                $
                                                                39,435
                                                                
                                                                
                                                                
                                                                20.71
                                                                %
                                                                
                                                                $
                                                                53,098
                                                                
                                                                
                                                                
                                                                28.71
                                                                %Multi-family,
      5 or more units
                                                                
                                                                
                                                                17,368
                                                                
                                                                
                                                                
                                                                6.23
                                                                
                                                                
                                                                
                                                                12,198
                                                                
                                                                
                                                                
                                                                4.57
                                                                
                                                                
                                                                
                                                                10,416
                                                                
                                                                
                                                                
                                                                4.52
                                                                
                                                                
                                                                
                                                                15,603
                                                                
                                                                
                                                                
                                                                8.20
                                                                
                                                                
                                                                
                                                                12,877
                                                                
                                                                
                                                                
                                                                6.96Real
      estate construction loans
                                                                
                                                                
                                                                90,482
                                                                
                                                                
                                                                
                                                                32.47
                                                                
                                                                
                                                                
                                                                125,797
                                                                
                                                                
                                                                
                                                                47.12
                                                                
                                                                
                                                                
                                                                99,759
                                                                
                                                                
                                                                
                                                                43.25
                                                                
                                                                
                                                                
                                                                79,979
                                                                
                                                                
                                                                
                                                                42.01
                                                                
                                                                
                                                                
                                                                71,875
                                                                
                                                                
                                                                
                                                                38.86Commercial
      real estate loans
                                                                
                                                                
                                                                102,364
                                                                
                                                                
                                                                
                                                                36.73
                                                                
                                                                
                                                                
                                                                57,241
                                                                
                                                                
                                                                
                                                                21.44
                                                                
                                                                
                                                                
                                                                53,360
                                                                
                                                                
                                                                
                                                                23.13
                                                                
                                                                
                                                                
                                                                37,568
                                                                
                                                                
                                                                
                                                                19.74
                                                                
                                                                
                                                                
                                                                30,294
                                                                
                                                                
                                                                
                                                                16.38Total
      real estate loans
                                                                
                                                                
                                                                250,941
                                                                
                                                                
                                                                
                                                                90.05
                                                                
                                                                
                                                                
                                                                236,985
                                                                
                                                                
                                                                
                                                                88.77
                                                                
                                                                
                                                                
                                                                206,158
                                                                
                                                                
                                                                
                                                                89.38
                                                                
                                                                
                                                                
                                                                172,585
                                                                
                                                                
                                                                
                                                                90.66
                                                                
                                                                
                                                                
                                                                168,144
                                                                
                                                                
                                                                
                                                                90.91Consumer
      loans:Loans
      secured by deposit accounts
                                                                
                                                                
                                                                142
                                                                
                                                                
                                                                
                                                                0.05
                                                                
                                                                
                                                                
                                                                228
                                                                
                                                                
                                                                
                                                                0.09
                                                                
                                                                
                                                                
                                                                211
                                                                
                                                                
                                                                
                                                                0.09
                                                                
                                                                
                                                                
                                                                128
                                                                
                                                                
                                                                
                                                                0.07
                                                                
                                                                
                                                                
                                                                167
                                                                
                                                                
                                                                
                                                                0.09Automobile
      loans
                                                                
                                                                
                                                                446
                                                                
                                                                
                                                                
                                                                0.16
                                                                
                                                                
                                                                
                                                                477
                                                                
                                                                
                                                                
                                                                0.18
                                                                
                                                                
                                                                
                                                                608
                                                                
                                                                
                                                                
                                                                0.26
                                                                
                                                                
                                                                
                                                                867
                                                                
                                                                
                                                                
                                                                0.46
                                                                
                                                                
                                                                
                                                                1,097
                                                                
                                                                
                                                                
                                                                0.59Home
      equity loans
                                                                
                                                                
                                                                8,722
                                                                
                                                                
                                                                
                                                                3.13
                                                                
                                                                
                                                                
                                                                10,713
                                                                
                                                                
                                                                
                                                                4.01
                                                                
                                                                
                                                                
                                                                11,662
                                                                
                                                                
                                                                
                                                                5.06
                                                                
                                                                
                                                                
                                                                10,266
                                                                
                                                                
                                                                
                                                                5.39
                                                                
                                                                
                                                                
                                                                9,764
                                                                
                                                                
                                                                
                                                                5.28Other
                                                                
                                                                
                                                                610
                                                                
                                                                
                                                                
                                                                0.22
                                                                
                                                                
                                                                
                                                                620
                                                                
                                                                
                                                                
                                                                0.23
                                                                
                                                                
                                                                
                                                                738
                                                                
                                                                
                                                                
                                                                0.32
                                                                
                                                                
                                                                
                                                                1,129
                                                                
                                                                
                                                                
                                                                0.59
                                                                
                                                                
                                                                
                                                                1,037
                                                                
                                                                
                                                                
                                                                0.56Total
      consumer loans
                                                                
                                                                
                                                                9,920
                                                                
                                                                
                                                                
                                                                3.56
                                                                
                                                                
                                                                
                                                                12,038
                                                                
                                                                
                                                                
                                                                4.51
                                                                
                                                                
                                                                
                                                                13,219
                                                                
                                                                
                                                                
                                                                5.73
                                                                
                                                                
                                                                
                                                                12,390
                                                                
                                                                
                                                                
                                                                6.51
                                                                
                                                                
                                                                
                                                                12,065
                                                                
                                                                
                                                                
                                                                6.52Commercial
      business loans
                                                                
                                                                
                                                                17,805
                                                                
                                                                
                                                                
                                                                6.39
                                                                
                                                                
                                                                
                                                                17,951
                                                                
                                                                
                                                                
                                                                6.72
                                                                
                                                                
                                                                
                                                                11,270
                                                                
                                                                
                                                                
                                                                4.89
                                                                
                                                                
                                                                
                                                                5,397
                                                                
                                                                
                                                                
                                                                2.83
                                                                
                                                                
                                                                
                                                                4,754
                                                                
                                                                
                                                                
                                                                2.57Total
      gross loans
                                                                
                                                                
                                                                278,666
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                
                                                                266,974
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                
                                                                230,647
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                
                                                                190,372
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                
                                                                184,963
                                                                
                                                                
                                                                
                                                                100.00
                                                                %Loans
      in process
                                                                
                                                                
                                                                (19,028
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (31,316
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (27,962
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (24,444
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (22,549
                                                                )Deferred
      loan fees, net
                                                                
                                                                
                                                                (279
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (339
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (314
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (316
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (368
                                                                )Unearned
      discounts, net
                                                                
                                                                
                                                                (13
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (5
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (7
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (182
                                                                )Allowance
      for loan losses
                                                                
                                                                
                                                                (2,633
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (3,011
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (2,144
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (1,762
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (2,024
                                                                )Total
                                                                
                                                                $
                                                                256,713
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                232,308
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                200,222
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                163,843
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                159,840
  30
 
 The
following table sets forth certain information at September 30, 2008, regarding
the dollar amount of loan principal repayments coming due during the years
indicated. The table below does not include any estimate of prepayments, which
significantly shorten the average life of all loans and may cause our actual
repayment experience to differ from that shown below. Demand loans having no
stated schedule of repayments and no stated maturity are reported as due in one
year or less.
 
 Due during the Year
                    Ended September 30,
                  
                  
                  Due After 3
                    through 5
                    years after
                  
                  
                  Due After 5
                    through 10
                    years after
                  
                  
                  Due After
                    10 through
                    15 years
                    after
                  
                  
                  Due After 15
                    years after2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  9/30/08
                  
                  
                  9/30/08
                  
                  
                  9/30/08
                  
                  
                  9/30/08
                  
                  
                  Total(Dollars
      in thousands)Single-family
      mortgage loans
                  
                  $
                  1,288
                  
                  
                  $
                  1,368
                  
                  
                  $
                  1,454
                  
                  
                  $
                  3,180
                  
                  
                  $
                  9,872
                  
                  
                  $
                  13,368
                  
                  
                  $
                  10,197
                  
                  
                  $
                  40,727Multi-family
      mortgage loans
                  
                  
                  549
                  
                  
                  
                  584
                  
                  
                  
                  620
                  
                  
                  
                  1,356
                  
                  
                  
                  4,210
                  
                  
                  
                  5,701
                  
                  
                  
                  4,348
                  
                  
                  
                  17,368Real
      estate construction loans
                  
                  
                  71,865
                  
                  
                  
                  18,617
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  90,482Commercial
      real estate loans
                  
                  
                  2,462
                  
                  
                  
                  2,636
                  
                  
                  
                  2,825
                  
                  
                  
                  6,249
                  
                  
                  
                  20,013
                  
                  
                  
                  28,264
                  
                  
                  
                  39,915
                  
                  
                  
                  102,364Loans
      secured by deposit accounts
                  
                  
                  142
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  142Other
      consumer loans
                  
                  
                  2,164
                  
                  
                  
                  2,341
                  
                  
                  
                  2,533
                  
                  
                  
                  2,740
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  9,778Commercial
      business loans
                  
                  
                  3,095
                  
                  
                  
                  3,312
                  
                  
                  
                  3,545
                  
                  
                  
                  7,853
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  17,805Total
      gross loans
                  
                  $
                  81,565
                  
                  
                  $
                  28,858
                  
                  
                  $
                  10,977
                  
                  
                  $
                  21,378
                  
                  
                  $
                  34,095
                  
                  
                  $
                  47,333
                  
                  
                  $
                  54,460
                  
                  
                  $
                  278,666
  The following table sets forth the
dollar amount of all loans at September 30, 2008, that are due after September
30, 2009 which have either fixed interest rates or adjustable interest
rates.
  Fixed Rates
                    
                    
                    Adjustable Rates
                    
                    
                    Total(Dollars
      in thousands)Single-family
      mortgage loans
                    
                    $
                    25,056
                    
                    
                    $
                    14,383
                    
                    
                    $
                    39,439Multi-family
      mortgage loans
                    
                    
                    14,623
                    
                    
                    
                    2,196
                    
                    
                    
                    16,819Real
      estate construction loans
                    
                    
                    8,157
                    
                    
                    
                    10,460
                    
                    
                    
                    18,617Commercial
      real estate loans
                    
                    
                    78,715
                    
                    
                    
                    21,187
                    
                    
                    
                    99,902Loans
      secured by deposit accounts
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      consumer loans
                    
                    
                    1,048
                    
                    
                    
                    6,566
                    
                    
                    
                    7,614Commercial
      business loans
                    
                    
                    7,828
                    
                    
                    
                    6,882
                    
                    
                    
                    14,710Total
      gross loans
                    
                    $
                    135,427
                    
                    
                    $
                    61,674
                    
                    
                    $
                    197,101
  31
  The
following table shows our loan origination, sale and other activity during the
years indicated.
  For theYears Ended September 30,2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Total
      net loans at the beginning of year
                  
                  $
                  232,308
                  
                  
                  $
                  200,222
                  
                  
                  $
                  163,843Loans
      originated for portfolio:Single
      and multi-family mortgage loans
                  
                  
                  22,752
                  
                  
                  
                  25,703
                  
                  
                  
                  17,437Real
      estate construction loans
                  
                  
                  50,600
                  
                  
                  
                  64,541
                  
                  
                  
                  74,792Commercial
      real estate loans
                  
                  
                  47,339
                  
                  
                  
                  27,002
                  
                  
                  
                  33,167Commercial
      business loans
                  
                  
                  4,047
                  
                  
                  
                  16,657
                  
                  
                  
                  9,179Loans
      secured by deposit accounts
                  
                  
                  78
                  
                  
                  
                  212
                  
                  
                  
                  295Home
      equity loans
                  
                  
                  1,452
                  
                  
                  
                  3,460
                  
                  
                  
                  4,277Automobile
      and other consumer loans
                  
                  
                  300
                  
                  
                  
                  1,036
                  
                  
                  
                  1,028Total
      loans originated
                  
                  $
                  126,568
                  
                  
                  $
                  138,611
                  
                  
                  $
                  140,175Deduct:Principal
      loan repayment and other, net
                  
                  
                  99,904
                  
                  
                  
                  106,790
                  
                  
                  
                  103,326Loan
      charge-offs, net of (recoveries)
                  
                  
                  2,259
                  
                  
                  
                  (265
                  )
                  
                  
                  470Total
      net loans at end of year
                  
                  $
                  256,713
                  
                  
                  $
                  232,308
                  
                  
                  $
                  200,222Loans
      originated for sale
                  
                  $
                  24,739
                  
                  
                  $
                  20,354
                  
                  
                  $
                  17,656Loans
      sold in secondary market
                  
                  $
                  24,581
                  
                  
                  $
                  20,094
                  
                  
                  $
                  19,281
 
 Loans Held for
Sale. Loans held for sale increased $158,000 to $877,000 at September 30,
2008.
 
 Securities.
Our securities portfolio consists primarily of government agency securities,
municipal securities and mortgage-backed securities. Although municipal
securities generally have greater credit risk than government agency securities,
they generally have higher yields than government securities of similar
duration. Securities available for sale decreased from $48.0 million at
September 30, 2007 to $26.1 million at September 30, 2008 due to sales,
maturities and calls, partially offset by purchases.  Mortgage-backed
securities available for sale decreased from $19.3 million at September 30, 2007
to $14.0 million at September 30, 2008 due to principal repayments.
 
 The following table sets forth the
Bank’s mortgage-backed securities purchases and sales for the years
indicated.
 
 Year
      Ended September 30,2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Purchased
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  3,452Sold
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
  32


The
following table sets forth the carrying values and fair values of our securities
and mortgage-backed securities portfolio at the dates
indicated.





At September 30,2008
                
                
                2007
                
                
                2006Amortized
                  Cost
                
                
                FairValue
                
                
                Amortized
                  Cost
                
                
                Fair Value
                
                
                Amortized
                  Cost
                
                
                Fair
                  Value(Dollars
      in thousands)Securities
      available for sale:Federal
      agency obligations
                
                $
                13,422
                
                
                $
                13,903
                
                
                $
                34,555
                
                
                $
                34,848
                
                
                $
                29,711
                
                
                $
                29,543State
      and municipal obligations
                
                
                11,715
                
                
                
                11,679
                
                
                
                12,839
                
                
                
                12,741
                
                
                
                6,435
                
                
                
                6,340Mortgage-backed
      securities
                
                
                14,007
                
                
                
                13,989
                
                
                
                19,621
                
                
                
                19,277
                
                
                
                24,863
                
                
                
                24,217Equity
      securities
                
                
                544
                
                
                
                471
                
                
                
                395
                
                
                
                394
                
                
                
                3⁄4
                
                
                
                3⁄4Total
      securities available for sale
                
                $
                39,688
                
                
                $
                40,042
                
                
                $
                67,410
                
                
                $
                67,260
                
                
                $
                61,009
                
                
                $
                60,100Weighted-average
      rate on securities (1)
                
                
                4.69
                %
                
                
                
                
                
                
                4.72
                %
                
                
                
                
                
                
                4.44
                %Weighted-average
      rate on mortgage-backed securities
                
                
                4.33
                %
                
                
                
                
                
                
                4.31
                %
                
                
                
                
                
                
                4.29
                %








(1)
  Weighted-average yields are not presented on a tax-equivalent
basis.





At
September 30, 2008, we had no investments in a single company or entity (other
than U.S. Government- sponsored entity securities) that had an aggregate book
value in excess of 10% of our equity.





The
following table sets forth the maturities and weighted-average yields of debt
securities at September 30, 2008. Weighted-average yields are not presented on a
tax-equivalent basis.





One
      Year or Less
                
                
                More
      than One
                  Year
      to Five Years
                
                
                More
      than Five
                  Years
      to Ten Years
                
                
                More
      than
                  Ten
      Years
                
                
                TotalCarrying
                  Value
                
                
                Weighted
                  -Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  -Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  -Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  -Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  -Average
                  Yield(Dollars
      in thousands)Securities
      available for sale:State
      and municipal obligations
                
                $
                1,602
                
                
                
                4.16
                %
                
                $
                1,920
                
                
                
                4.75
                %
                
                $
                3,586
                
                
                
                4.17
                %
                
                $
                4,571
                
                
                
                5.50
                %
                
                $
                11,679
                
                
                
                4.79
                %Federal
      agency obligations
                
                
                3,035
                
                
                
                4.59
                
                
                
                10,868
                
                
                
                4.84
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                13,903
                
                
                
                4.79Mortgage-backed
      securities
                
                
                1,203
                
                
                
                4.06
                
                
                
                7,192
                
                
                
                4.30
                
                
                
                458
                
                
                
                4.00
                
                
                
                4,816
                
                
                
                4.54
                
                
                
                13,669
                
                
                
                4.35Collateralized
      mortgage obligations
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                320
                
                
                
                3.38
                
                
                
                320
                
                
                
                3.38Total
      securities available for sale
                
                $
                5,840
                
                
                
                4.36
                %
                
                $
                19,980
                
                
                
                4.64
                %
                
                $
                4,044
                
                
                
                4.15
                %
                
                $
                9,707
                
                
                
                4.95
                %
                
                $
                39,571
                
                
                
                4.63
                %





Premises and
Equipment. Premises and equipment, net, increased from $8.7 million at
September 30, 2007 to $9.8 million at September 30, 2008 due primarily to the
purchase and renovation of a commercial building for a future branch, partially
offset by depreciation expense.





Other
Assets.  The increase in bank-owned life insurance represents
the change in cash surrender value of $437,000.  Accrued interest
receivable decreased due to lower securities balances and lower yields on loans,
partially offset by higher loan balances.





Deposits.Our primary source of funds is our deposit accounts, which are comprised
of noninterest-bearing NOW accounts, interest-bearing NOW accounts, money market
accounts, statement accounts and certificates of deposit. These deposits are
provided primarily by individuals within our market areas. Deposits decreased
$32.5 million, or 12.9%, to $219.8 million at September 30, 2008 from $252.3
million at September 30, 2007. The decrease in deposits for the year ended
September 30, 2008 was primarily due to a decrease in certificate of deposit
accounts less than twelve month and to a lesser extent, a decrease in money
market accounts, partially offset by an increase in certificate of deposit
accounts greater than twelve months and noninterest-bearing checking
accounts.  Brokered deposits increased $1.0 million to $15.0 million
at September 30, 2008 from $14.0 million at September 30, 2007.  The
amount of brokered deposits in the future will be contingent upon current market
rates as compared to retail deposits and FHLB advances.




33




The following table sets forth average
balances and average rates of our deposit products for the years indicated. For
purposes of this table, average balances have been calculated using month-end
balances. Management does not believe that the use of month-end balances instead
of daily average balances has caused any material differences in the information
presented.




Years Ended September 30,2008
                
                
                2007
                
                
                2006Average
                  Balance
                
                
                Average Rate
                
                
                Average
                  Balance
                
                
                Average
                  Rate
                
                
                Average
                  Balance
                
                
                Average
                  Rate(Dollars in thousands)Noninterest-bearing
      NOW accounts
                
                $
                14,873
                
                
                
                —
                %
                
                $
                12,458
                
                
                
                —
                %
                
                $
                11,633
                
                
                
                —
                %Interest-bearing
      NOW accounts
                
                
                23,884
                
                
                
                1.28
                
                
                
                24,331
                
                
                
                1.88
                
                
                
                25,224
                
                
                
                1.83Money
      market accounts
                
                
                67,101
                
                
                
                3.31
                
                
                
                38,052
                
                
                
                4.47
                
                
                
                21,290
                
                
                
                2.38Statement
      accounts
                
                
                6,995
                
                
                
                0.30
                
                
                
                7,336
                
                
                
                0.31
                
                
                
                9,059
                
                
                
                0.34Certificates
      of deposit
                
                
                118,759
                
                
                
                4.02
                
                
                
                143,665
                
                
                
                4.80
                
                
                
                126,275
                
                
                
                3.97Total
                
                $
                231,612
                
                
                
                3.16
                
                
                $
                225,842
                
                
                
                4.02
                
                
                $
                193,481
                
                
                
                3.10




The
following table sets forth the balances of our deposit products at the dates
indicated.





At September 30,2008
                
                
                2007
                
                
                2006Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars in thousands)Noninterest-bearing
      NOW accounts
                
                $
                14,869
                
                
                
                6.8
                %
                
                $
                13,617
                
                
                
                5.4
                %
                
                $
                11,896
                
                
                
                6.0
                %Interest-bearing
      NOW accounts
                
                
                21,695
                
                
                
                9.9
                
                
                
                21,368
                
                
                
                8.5
                
                
                
                25,234
                
                
                
                12.7Money
      market accounts
                
                
                61,371
                
                
                
                27.9
                
                
                
                68,482
                
                
                
                27.1
                
                
                
                13,617
                
                
                
                6.9Statement
      accounts
                
                
                7,258
                
                
                
                3.3
                
                
                
                7,200
                
                
                
                2.9
                
                
                
                7,702
                
                
                
                3.9Certificates
      of deposit
                
                
                114,571
                
                
                
                52.1
                
                
                
                141,638
                
                
                
                56.1
                
                
                
                140,022
                
                
                
                70.5Total
                
                $
                219,764
                
                
                
                100.0
                %
                
                $
                252,305
                
                
                
                100.00
                %
                
                $
                198,471
                
                
                
                100.0
                %





The
following table indicates the amount of jumbo certificates of deposit by time
remaining until maturity as of September 30, 2008.  Jumbo certificates
of deposit require minimum deposits of $100,000.





Maturity Period
                  
                  Certificates of
                    Deposits(In thousands)Three
      months or less
                  
                  $
                  25,903Over
      three through six months
                  
                  
                  7,912Over
      six through 12 months
                  
                  
                  5,371Over
      12 months
                  
                  
                  5,018Total
                  
                  $
                  44,204


34


The
following table sets forth time deposits classified by rates at the dates
indicated.




At September 30,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006(In thousands)1.00
      - 1.99%
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      52.00
      - 2.99
                                      
                                      
                                      
                                      60,858
                                      
                                      
                                      
                                      300
                                      
                                      
                                      
                                      2,2543.00
      - 3.99
                                      
                                      
                                      
                                      34,745
                                      
                                      
                                      
                                      9,249
                                      
                                      
                                      
                                      33,3734.00
      - 4.99
                                      
                                      
                                      
                                      15,733
                                      
                                      
                                      
                                      60,152
                                      
                                      
                                      
                                      44,3445.00
      - 5.99
                                      
                                      
                                      
                                      3,235
                                      
                                      
                                      
                                      71,937
                                      
                                      
                                      
                                      60,046$
                                      114,571
                                      
                                      
                                      $
                                      141,638
                                      
                                      
                                      $
                                      140,022




The
following table sets forth the amount and maturities of time deposits at
September 30, 2008.




Amount DueOne Year
                                              or Less
                                            
                                            
                                            1-2 Years
                                            
                                            
                                            2-3 Years
                                            
                                            
                                            3-4 Years
                                            
                                            
                                            4-5 Years
                                            
                                            
                                            Total
                                            
                                            
                                            Percent of
                                              Total Certificate
                                              Accounts(In thousands)2.00
      - 2.99%
                                            
                                            
                                            $
                                            58,727
                                            
                                            
                                            $
                                            2,131
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            60,858
                                            
                                            
                                            
                                            53.1
                                            %3.00
      - 3.99
                                            
                                            
                                            
                                            18,235
                                            
                                            
                                            
                                            9,764
                                            
                                            
                                            
                                            4,246
                                            
                                            
                                            
                                            318
                                            
                                            
                                            
                                            2,182
                                            
                                            
                                            
                                            34,745
                                            
                                            
                                            
                                            30.34.00
      - 4.99
                                            
                                            
                                            
                                            10,616
                                            
                                            
                                            
                                            2,785
                                            
                                            
                                            
                                            880
                                            
                                            
                                            
                                            1,409
                                            
                                            
                                            
                                            43
                                            
                                            
                                            
                                            15,733
                                            
                                            
                                            
                                            13.85.00
      - 5.99
                                            
                                            
                                            
                                            1,997
                                            
                                            
                                            
                                            163
                                            
                                            
                                            
                                            1,067
                                            
                                            
                                            
                                            8
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            3,235
                                            
                                            
                                            
                                            2.8$
                                            89,575
                                            
                                            
                                            $
                                            14,843
                                            
                                            
                                            $
                                            6,193
                                            
                                            
                                            $
                                            1,735
                                            
                                            
                                            $
                                            2,225
                                            
                                            
                                            $
                                            114,571
                                            
                                            
                                            
                                            100.0
                                            %





The
following table sets forth deposit activity for the years
indicated.





Years Ended September 30,2008
                  
                  
                  2007(In
      thousands)Net
      deposits (withdrawals) before interest credited
                  
                  $
                  (39,459
                  )
                  
                  $
                  45,803Interest
      credited
                  
                  
                  6,917
                  
                  
                  
                  8,032Net
      increase (decrease) in deposits
                  
                  $
                  (32,542
                  )
                  
                  $
                  53,835





Borrowings.
We utilize borrowings from the Federal Home Loan Bank of Des Moines and
securities sold under agreement to repurchase to supplement our supply of funds
for loans and investments and to meet deposit withdrawal
requirements.


35


The
following table sets forth certain information regarding short-term borrowings
by the Bank at the end of and during the years indicated:





At September 30,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars in thousands)Outstanding
      advances from Federal Home Loan Bank
                  
                  $
                  48,100
                  
                  
                  $
                  22,056
                  
                  
                  $
                  23,833Weighted-average
      rate paid on advances from Federal Home Loan Bank
                  
                  
                  2.13
                  %
                  
                  
                  4.90
                  %
                  
                  
                  4.19
                  %Outstanding
      securities sold under agreement to repurchase
                  
                  $
                  813
                  
                  
                  $
                  681
                  
                  
                  $
                  3,384Weighted-average
      rate paid on securities sold under agreement to repurchase
                  
                  
                  4.45
                  %
                  
                  
                  3.41
                  %
                  
                  
                  3.44
                  %




Years Ended September 30,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars in thousands)Maximum
      outstanding advances from Federal Home Loan Bank at any month
      end
                  
                  $
                  53,100
                  
                  
                  $
                  26,083
                  
                  
                  $
                  35,633Weighted-average
      rate paid on advances from Federal Home Loan Bank (1)
                  
                  
                  3.08
                  %
                  
                  
                  4.84
                  %
                  
                  
                  3.97
                  %Average
      advances from Federal Home Loan Bank
                  
                  $
                  44,657
                  
                  
                  $
                  19,904
                  
                  
                  $
                  22,167Maximum
      outstanding securities sold under agreement to repurchase at any month
      end
                  
                  $
                  1,683
                  
                  
                  $
                  5,164
                  
                  
                  $
                  4,400Weighted-average
      rate paid on securities sold under agreement to repurchase
    (2)
                  
                  
                  3.96
                  %
                  
                  
                  3.39
                  %
                  
                  
                  3.18
                  %Average
      securities sold under agreement to repurchase
                  
                  $
                  1,427
                  
                  
                  $
                  1,573
                  
                  
                  $
                  2,224








(1)
            The
      weighted-average rate paid is based on the weighted-average balances
      determined on a monthly basis.(2)
            The
      weighted-average rate paid is based on the weighted-average balances
      determined on a daily basis.





Federal
Home Loan Bank of Des Moines borrowings increased $42.8 million, or 162.0%, to
$69.2 million at September 30, 2008 from $26.4 million at September 30, 2007.
The advances outstanding as of September 30, 2008 mature in 2008 through
2012.





Securities sold under agreement to
repurchase decreased $409,000 for the year ended September 30, 2008 due to lower
balances from existing customers, partially offset by one new
customer.  Accrued interest on deposits decreased primarily due to a
lower average balance and rate on money market and certificate
balances.  Other liabilities decreased primarily as a result of lower
accrued bonuses, accrued accounting and retirement plan expense, partially
offset by higher accrued deposit insurance assessments, real estate taxes and
vacation pay.


36


Results
of Operations for the Years Ended September 30, 2008 and 2007





Overview.





Years Ended September 30,
                                              
                                              
                                              % Change
                                              
                                              
                                              % Change2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006
                                              
                                              
                                              
                                              2008/2007
                                              
                                              
                                              
                                              2007/2006(Dollars in thousands)Net
      earnings
                                              
                                              $
                                              1,922
                                              
                                              
                                              $
                                              1,944
                                              
                                              
                                              $
                                              1,463
                                              
                                              
                                              
                                              (1.1
                                              )%
                                              
                                              
                                              32.9
                                              %Return
      on assets (1)
                                              
                                              
                                              0.57
                                              %
                                              
                                              
                                              0.63
                                              %
                                              
                                              
                                              0.56
                                              %
                                              
                                              
                                              (9.5
                                              )
                                              
                                              
                                              12.5Return
      on stockholders’ equity (2)
                                              
                                              
                                              4.18
                                              
                                              
                                              
                                              3.94
                                              
                                              
                                              
                                              5.47
                                              
                                              
                                              
                                              6.1
                                              
                                              
                                              
                                              (28.0
                                              )Stockholders’
      equity-to-assets ratio (3)
                                              
                                              
                                              13.61
                                              
                                              
                                              
                                              16.00
                                              
                                              
                                              
                                              10.16
                                              
                                              
                                              
                                              (14.9
                                              )
                                              
                                              
                                              57.5Dividend
      payout ratio (4)
                                              
                                              
                                              20.97
                                              
                                              
                                              
                                              23.86
                                              
                                              
                                              
                                              29.86
                                              
                                              
                                              
                                              (12.1
                                              )
                                              
                                              
                                              (20.1
                                              )








(1)
            Net
      earnings divided by average assets.(2)
            Net
      earnings divided by average stockholders’ equity.(3)
            Average
      stockholders’ equity divided by average total assets.(4)
            Represents
      dividends paid to shareholders as a percent of net earnings. Does not
      include dividends waived by Liberty Savings Mutual Holding
      Company.




2008 vs.
2007.  Net earnings
decreased $23,000, or 1.18% for the year ended September 30, 2008 compared to
the year ended September 30, 2007.  The decrease in net earnings was
due primarily to a $407,000, or 1.98%, decrease in interest income, a $1.28
million increase in provision for loan losses and a $341,000, or 4.24%, increase
in noninterest expense, partially offset by a $1.1 million, or 10.6%, decrease
in interest expense, a $646,000, or 43.7%, increase in noninterest income and a
$248,000, or 25.9% decrease in income tax expense.  Net interest
income increased primarily as a result of an increase in loans receivable and a
higher interest rate spread.  Noninterest income in 2008 increased
primarily due to an increase in the cash surrender value of life insurance,
gains on sale of securities and higher deposit account service
charges.  Noninterest expense increased primarily due to an increase
in equipment and data processing, FDIC premium expense and other expenses,
partially offset by a decrease in correspondent banking expense.





Net
Earnings.





2008 vs.
2007.  Net earnings
remained substantially the same at $1.9 million for both 2007 and 2008, with
only a slight decrease of $23,000.  The slight decrease was due to a
higher provision for loan losses and higher noninterest expense, partially
offset by higher net interest income, higher noninterest income and lower income
tax expense.





Net
Interest Income.





2008 vs.
2007.  Net interest income increased by $703,000, or 7.0%, from
$10.1 million for 2007 to $10.8 million for 2008 as a result of a higher
interest rate spread, partially offset by a decrease in net interest-earning
assets.  The interest rate spread increased from 2.97% for 2007 to
3.25% for 2008.  The decrease in net interest-earning assets is due to
an increase of $34.5 million, or 13.5%, in average interest-bearing liabilities,
partially offset by an increase of $20.2 million, or 7.0%, in average
interest-earning assets.





Interest
on loans receivable increased as a result of a higher weighted-average balance,
partially offset by a lower average yield.  The weighted average yield
on loans decreased from 7.91% for 2007 to 7.03% for 2008.





Interest on mortgage-backed securities
decreased due to a lower average balance.





Interest on securities decreased as a
result of a lower average balance and, to a lesser extent, a lower average
yield.  Interest on other interest-earning assets also decreased as a
result of a lower average balance and yield.





Interest on deposits decreased as a
result of lower weighted-average rate, partially offset by a higher average
balance.  During 2008, the Bank increased lower cost FHLB advances as
opposed to higher cost deposits.


37


Interest on advances increased due to a
higher average balance, partially offset by a lower average
rate.  During 2008, advances were used to manage liquidity in a
competitive deposit market.





Average Balances
and Yields. The following table presents information regarding average
balances of assets and liabilities, the total dollar amounts of interest income
and dividends from average interest-earnings assets, the total dollar amounts of
interest expense on average interest-bearing liabilities, and the resulting
average yields and costs. The yields and costs for the years indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the years presented. For purposes of this table,
average balances have been calculated using month-end balances and, to a lesser
extent, daily balances, and nonaccrual loans are included in average balances
only. Management does not believe that the use of month-end balances instead of
daily average balances has caused any material differences in the information
presented. No tax equivalent adjustments were made. Nonaccruing loans have been
included in the table as loans carrying a zero yield.





Years Ended September 30,2008
                    
                    
                    2007
                    
                    
                    2006Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      Cost
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      Cost
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
                    
                    $
                    247,024
                    
                    
                    $
                    17,356
                    
                    
                    
                    7.03
                    %
                    
                    $
                    217,841
                    
                    
                    $
                    17,233
                    
                    
                    
                    7.91
                    %
                    
                    $
                    187,818
                    
                    
                    $
                    14,253
                    
                    
                    
                    7.59
                    %Mortgage-backed
      securities
                    
                    
                    16,814
                    
                    
                    
                    705
                    
                    
                    
                    4.19
                    
                    
                    
                    22,229
                    
                    
                    
                    933
                    
                    
                    
                    4.20
                    
                    
                    
                    25,216
                    
                    
                    
                    995
                    
                    
                    
                    3.95Securities
                    
                    
                    41,564
                    
                    
                    
                    1,952
                    
                    
                    
                    4.70
                    
                    
                    
                    43,988
                    
                    
                    
                    2,076
                    
                    
                    
                    4.72
                    
                    
                    
                    29,117
                    
                    
                    
                    1,170
                    
                    
                    
                    4.02Other
      interest-earning assets
                    
                    
                    5,343
                    
                    
                    
                    144
                    
                    
                    
                    2.68
                    
                    
                    
                    6,484
                    
                    
                    
                    321
                    
                    
                    
                    4.95
                    
                    
                    
                    5,768
                    
                    
                    
                    246
                    
                    
                    
                    4.27Total
      interest-earning assets
                    
                    
                    310,745
                    
                    
                    
                    20,157
                    
                    
                    
                    6.49
                    
                    
                    
                    290,542
                    
                    
                    
                    20,563
                    
                    
                    
                    7.08
                    
                    
                    
                    247,919
                    
                    
                    
                    16,664
                    
                    
                    
                    6.72Interest-bearing
      liabilities:Deposits
                    
                    
                    231,612
                    
                    
                    
                    7,321
                    
                    
                    
                    3.16
                    
                    
                    
                    225,842
                    
                    
                    
                    9,084
                    
                    
                    
                    4.02
                    
                    
                    
                    193,481
                    
                    
                    
                    6,007
                    
                    
                    
                    3.10Federal
      Home Loan Bank advances
                    
                    
                    56,607
                    
                    
                    
                    2,005
                    
                    
                    
                    3.54
                    
                    
                    
                    27,189
                    
                    
                    
                    1,333
                    
                    
                    
                    4.90
                    
                    
                    
                    34,807
                    
                    
                    
                    1,497
                    
                    
                    
                    4.30Securities
      sold under agreement to repurchase
                    
                    
                    1,427
                    
                    
                    
                    58
                    
                    
                    
                    4.05
                    
                    
                    
                    2,097
                    
                    
                    
                    77
                    
                    
                    
                    3.69
                    
                    
                    
                    2,224
                    
                    
                    
                    71
                    
                    
                    
                    3.18ESOP
      note payable
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    327
                    
                    
                    
                    25
                    
                    
                    
                    7.66Total
      interest-bearing liabilities
                    
                    $
                    289,646
                    
                    
                    
                    9,384
                    
                    
                    
                    3.24
                    
                    
                    $
                    255,128
                    
                    
                    
                    10,494
                    
                    
                    
                    4.11
                    
                    
                    $
                    230,839
                    
                    
                    
                    7,600
                    
                    
                    
                    3.29Net
      interest income before provision for loan losses
                    
                    
                    
                    
                    
                    $
                    10,773
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    10,069
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    9,064Net
      interest-earning assets
                    
                    $
                    21,099
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    35,414
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    17,080Interest
      rate spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.25
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.97
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.43
                    %Net
      yield on average interest-earning assets
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.47
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.47
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.66
                    %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                    
                    
                    107.28
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    113.88
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    107.40
                    %


38





Rate/Volume
Analysis. The following table sets forth the effects of changing rates
and volumes on our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The rate/volume column shows the effects
attributable to changes in both rate and volume (changes in rate multiplied by
changes in volume). The total column represents the sum of the prior
columns.





Year Ended September 30,
                      2008 vs. 2007
                    
                    
                    Year Ended September 30,
                      2007 vs. 2006Increase (Decrease) due to:
                    
                    
                    Increase (Decrease) due to:Volume
                    
                    
                    Rate
                    
                    
                    Rate/
                      Volume
                    
                    
                    Total
                    
                    
                    Volume
                    
                    
                    Rate
                    
                    
                    Rate/
                      Volume
                    
                    
                    Total(Dollars in thousands)Interest
      income:Loans
      receivable
                    
                    $
                    2,310
                    
                    
                    $
                    (1,929
                    )
                    
                    $
                    (258
                    )
                    
                    $
                    123
                    
                    
                    $
                    2,279
                    
                    
                    $
                    605
                    
                    
                    $
                    96
                    
                    
                    $
                    2,980Mortgage-backed
      securities
                    
                    
                    (226
                    )
                    
                    
                    (2
                    )
                    
                    
                    —
                    
                    
                    
                    (228
                    )
                    
                    
                    (118
                    )
                    
                    
                    63
                    
                    
                    
                    (7
                    )
                    
                    
                    (62
                    )Securities
                    
                    
                    (115
                    )
                    
                    
                    (10
                    )
                    
                    
                    1
                    
                    
                    
                    (124
                    )
                    
                    
                    598
                    
                    
                    
                    204
                    
                    
                    
                    104
                    
                    
                    
                    906Other
      interest-earning assets
                    
                    
                    (57
                    )
                    
                    
                    (147
                    )
                    
                    
                    26
                    
                    
                    
                    (178
                    )
                    
                    
                    31
                    
                    
                    
                    39
                    
                    
                    
                    5
                    
                    
                    
                    75Total
      interest-earning assets
                    
                    $
                    1,912
                    
                    
                    $
                    (2,088
                    )
                    
                    $
                    (231
                    )
                    
                    $
                    (407
                    )
                    
                    $
                    2,790
                    
                    
                    $
                    911
                    
                    
                    $
                    198
                    
                    
                    $
                    3,899Interest
      expense:Deposits
                    
                    
                    232
                    
                    
                    
                    (1,947
                    )
                    
                    
                    (49
                    )
                    
                    
                    (1,764
                    )
                    
                    
                    1,003
                    
                    
                    
                    1,777
                    
                    
                    
                    297
                    
                    
                    
                    3,077Federal
      Home Loan Bank advances
                    
                    
                    1,441
                    
                    
                    
                    (369
                    )
                    
                    
                    (399
                    )
                    
                    
                    673
                    
                    
                    
                    (328
                    )
                    
                    
                    209
                    
                    
                    
                    (45
                    )
                    
                    
                    (164
                    )Securities
      sold under agreement to repurchase
                    
                    
                    (31
                    )
                    
                    
                    26
                    
                    
                    
                    (14
                    )
                    
                    
                    (19
                    )
                    
                    
                    (4
                    )
                    
                    
                    11
                    
                    
                    
                    (1
                    )
                    
                    
                    6ESOP
      note payable
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (25
                    )
                    
                    
                    (25
                    )
                    
                    
                    25
                    
                    
                    
                    (25
                    )Total
      interest-bearing liabilities
                    
                    
                    1,642
                    
                    
                    
                    (2,290
                    )
                    
                    
                    (462
                    )
                    
                    $
                    (1,110
                    )
                    
                    
                    646
                    
                    
                    
                    1,972
                    
                    
                    
                    276
                    
                    
                    
                    2,894Change
      in net interest income
                    
                    $
                    270
                    
                    
                    $
                    202
                    
                    
                    $
                    231
                    
                    
                    $
                    703
                    
                    
                    $
                    2,144
                    
                    
                    $
                    (1,061
                    )
                    
                    $
                    (78
                    )
                    
                    $
                    1,005





Provision
for Loan Losses.





2008 vs.
2007.  Provision for loan losses increased from $602,000 for
2007 to $1.9 million for 2008. At September 30, 2008, the allowance for loan
losses was $2.6 million, or .94% of the gross loan portfolio, compared to $3.0
million or 1.13% of the loan portfolio at September 30, 2007. At September 30,
2008, loans secured by non-construction single-family properties totaled 14.6%
of total loans and 5.4% of the allowance for loan losses was allocated to these
loans. All other loans totaled 85.4% of the portfolio and 94.6% of the allowance
for loan losses.





During
the year ended September 30, 2008, we recorded a provision for loan losses of
$1.9 million, an increase of 212.4% from the provision for loan losses of
$602,000 recorded for the year ended September 30, 2007. The increased provision
is the result of higher charge-offs and an increase in classified assets and, to
a lesser extent, growth of the loan portfolio.





Nonaccrual
loans amounted to $8.2 million and $3.4 million at September 30, 2008 and 2007,
respectively. Net loan charge-offs amounted to $2.3 million during 2008 compared
to net recoveries of $265,000 during 2007. The majority of the net loan
charge-offs in 2008 were due to losses related to real estate construction
loans.


39





Noninterest
Income. 
The following table shows the components of noninterest income and the
percentage changes for the years ended September 30, 2008 and 2007.




Years Ended September 30,
                      
                      
                      % Change2008
                      
                      2007
                      
                      
                      
                      2008/2007(Dollars in thousands)Loan
      service charges
                      
                      $
                      64
                      
                      
                      $
                      90
                      
                      
                      
                      (28.9
                      )%Gain
      on sale of securities available for sale
                      
                      
                      135
                      
                      
                      
                      —
                      
                      
                      NMGain
      on sale of loans
                      
                      
                      319
                      
                      
                      
                      247
                      
                      
                      
                      28.8Change
      in cash surrender value of BOLI
                      
                      
                      437
                      
                      
                      
                      101
                      
                      
                      
                      332.2Deposit
      account service charges
                      
                      
                      1,169
                      
                      
                      
                      1,039
                      
                      
                      
                      12.5Total
                      
                      $
                      2,124
                      
                      
                      $
                      1,477
                      
                      
                      
                      43.7
                      %








NM = Not
meaningful





2008 vs.
2007.  Noninterest income increased from $1.5 million for 2007
to $2.1 million for 2008 due to gains on sale of securities, an increase in the
cash surrender value of bank-owned life insurance, deposit account service
charges and gains on sale of loans, partially offset by a decrease in loan
service charges.





Gains on
sale of securities, an increase in the cash surrender value of bank-owned life
insurance, deposit account service charges and gains on sale of loans, partially
offset by a decrease in loan service charges.





The Bank
recognized gains on sale of loans of $319,000 and $247,000 for the years ended
September 30, 2008 and 2007, respectively.  During 2008 and 2007, we
sold loans to secondary market investors totaling $24.6 million and $20.1
million, respectively.


40


Noninterest
Expense. The following table shows the components of noninterest expense
and the percentage changes for the years ended September 30, 2008 and
2007.
 
 Years Ended September
      30
                                    
                                    
                                    %Change2008
                                    
                                    
                                    2007
                                    
                                    
                                    
                                    2008/2007(Dollars
      in thousands)Compensation
      and benefits
                                    
                                    $
                                    4,446
                                    
                                    
                                    $
                                    4,445
                                    
                                    
                                    
                                    0.02
                                    %Occupancy
      expense
                                    
                                    
                                    673
                                    
                                    
                                    
                                    625
                                    
                                    
                                    
                                    7.8Equipment
      and data processing expense
                                    
                                    
                                    931
                                    
                                    
                                    
                                    798
                                    
                                    
                                    
                                    16.6Operations
      from foreclosed real estate, net
                                    
                                    
                                    362
                                    
                                    
                                    
                                    356
                                    
                                    
                                    
                                    1.6FDIC
      premium expense
                                    
                                    
                                    135
                                    
                                    
                                    
                                    41
                                    
                                    
                                    
                                    228.4Professional
      and regulatory services
                                    
                                    
                                    434
                                    
                                    
                                    
                                    408
                                    
                                    
                                    
                                    6.5Advertising
                                    
                                    
                                    250
                                    
                                    
                                    
                                    255
                                    
                                    
                                    
                                    (1.7
                                    )Correspondent
      banking charges
                                    
                                    
                                    234
                                    
                                    
                                    
                                    260
                                    
                                    
                                    
                                    (10.3
                                    )Supplies
                                    
                                    
                                    136
                                    
                                    
                                    
                                    138
                                    
                                    
                                    
                                    (1.0
                                    )Other
                                    
                                    
                                    786
                                    
                                    
                                    
                                    720
                                    
                                    
                                    
                                    9.2Total
      noninterest expense
                                    
                                    $
                                    8,387
                                    
                                    
                                    $
                                    8,046
                                    
                                    
                                    
                                    4.2
                                    %Efficiency
      ratio (1)
                                    
                                    
                                    65.0
                                    %
                                    
                                    
                                    69.7
                                    %
  
 (1)
  Computed as noninterest expense divided by the sum of net interest income
and noninterest income.
 
 2008 vs.
2007. Noninterest expense increased from $8.0 million for 2007 to $8.4
million for 2008. Compensation and benefit expense stayed virtually the same for
2008 and 2007. Primarily, lower compensation expense in the construction and
commercial loan departments and lower expenses for the ESOP plan, were offset
primarily by the opening of a new branch in Gladstone, Missouri, merit salary
increases and higher stock option expense and restricted stock award
expense.
 
 During
2008, the Company recognized stock option expense and restricted stock award
expense of $75,000 and $247,000, respectively. During 2007, the Company
recognized stock option expense and restricted stock award expense of $68,000
and $163,000, respectively. At September 30, 2008, total unrecognized stock
option expense was approximately $144,000 and is expected to be recognized over
the weighted-average period of 3.02 years. At September 30, 2008, total
unrecognized restricted stock award expense was $843,000 and is expected to be
recognized over the next 3.41 years.
 
 Occupancy expense increased due
primarily to higher building depreciation expense on new branch offices and
utility expense. Equipment and data processing expense increased due primarily
to higher computer and furniture depreciation expense due to the Gladstone
branch, higher data processing expense and higher service agreement expense,
partially offset by lower website and office equipment depreciation expense.
FDIC premium expense increased due to a higher assessment as a result of a
risk-based assessment system which considers the supervisory rating and certain
financial ratios of each financial institution and related expiring credits.
There were also modest increases in operations from foreclosed real estate, net
and professional and regulatory services expense and a small decrease in
advertising and supplies expense. Correspondent banking charges decreased due to
the renegotiation of contracts with vendors. Other expense increased due
primarily to higher liability insurance, telephone and miscellaneous expense,
partially offset primarily by lower consumer loan expenses and stock
administration expense.
  Income
Taxes.
 
 2008 vs.
2007. Income tax expense for the year ended September 30, 2008 was
$706,000 compared to $954,000 for the year ended September 30, 2007. Income
taxes decreased due to lower pre-tax earnings as well as an increase in
non-taxable municipal bond income and an increase in the cash surrender value of
bank-owned life insurance which is also non-taxable.
  41
  Stockholders’ Equity.
 
 2008 vs.
2007. Stockholders’ equity increased by $6.2 million from $50.2 million
at September 30, 2007 to $44.0 million at September 30, 2008 primarily due to
the repurchase of common stock totaling $8.6 million and the payment of
dividends of $403,000, partially offset primarily by net earnings of $1.9
million, the amortization of ESOP and stock-based compensation expenses of
$618,000 and unrealized gains on investments and mortgage-backed securities, net
of taxes of $318,000.
 
 Risk
Management
 
 Overview.
Managing risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk, interest rate
risk and market risk. Credit risk is the risk of not collecting the interest
and/or the principal balance of a loan or investment when it is due. Interest
rate risk is the potential reduction of net interest income as a result of
changes in interest rates. Market risk arises from fluctuations in interest
rates that may result in changes in the values of financial instruments, such as
available for sale securities that are accounted for on a mark-to-market basis.
Other risks that we face are operational risks, liquidity risks and reputation
risk. Operational risks include risks related to fraud, regulatory compliance,
processing errors, technology and disaster recovery. Liquidity risk is the
possible inability to fund obligations to depositors, lenders or borrowers.
Reputation risk is the risk that negative publicity or press, whether true or
not, could cause a decline in our customer base or revenue.
 
 Credit Risk
Management. Our strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria and providing
prompt attention to potential problem loans.
 
 When a borrower fails to make a
required loan payment, we take a number of steps to attempt to have the borrower
cure the delinquency and restore the loan to current status. When the loan
becomes 15 days past due, a 5% penalty is assessed, and a written notification
of the late payment is sent. If payment is not received by the 30th day of
delinquency, the borrower is contacted by telephone, payment is requested and
efforts are made to formulate an affirmative plan to cure the delinquency. After
a loan becomes past due 60 days, we generally provide a final notice that we
will initiate legal proceedings in 30 days, after which foreclosure procedures
commence to obtain the real property securing the loan. Generally, when a loan
becomes 90 days past due, the loan is placed on non-accrual status. We may
consider loan workout arrangements with certain borrowers under certain
circumstances.
 
 Management reports to the Board of
Directors monthly regarding the amount of loans delinquent more than 30 days,
all loans in foreclosure and all foreclosed and repossessed property that we
own.
 
 Real
estate acquired by the Bank as a result of foreclosure is classified as
foreclosed real estate until such time as it is sold. When such property is
acquired, a new appraisal is obtained and it is recorded at the lower of its
unpaid principal or fair value, less estimated selling costs. Any required
write-down of the loan to its fair value upon foreclosure is charged against the
allowance for losses.
 
 Analysis of
Nonperforming and Classified Assets. We consider repossessed assets and
loans that are 90 days or more past due to be non-performing assets. Loans are
generally placed on nonaccrual status when they become 90 days delinquent, at
which time the accrual of interest ceases and the allowance for any
uncollectible accrued interest is established and charged against operations.
Typically, payments received on a nonaccrual loan are applied to the outstanding
principal and interest as determined at the time of collection of the
loan.
 
 Real
estate that we acquire as a result of foreclosure or deed-in-lieu of foreclosure
is classified as foreclosed assets until it is sold. When property is acquired,
it is initially recorded at the lower of its cost, or market, less estimated
selling expenses. Holding costs and declines in fair value after acquisition of
the property result in charges against income.
  42
 
 The
following table sets forth information with respect to our nonperforming assets
at the dates indicated.
 
 At
      September 30,2008
                                                                      
                                                                      
                                                                      2007
                                                                      
                                                                      
                                                                      2006
                                                                      
                                                                      
                                                                      2005
                                                                      
                                                                      
                                                                      2004(Dollars
      in thousands)Loans
      accounted for on a nonaccrual basis: (1)Commercial
      real estate loans
                                                                      
                                                                      $
                                                                      3,233
                                                                      
                                                                      
                                                                      $
                                                                      —
                                                                      
                                                                      
                                                                      $
                                                                      —
                                                                      
                                                                      
                                                                      $
                                                                      —
                                                                      
                                                                      
                                                                      $
                                                                      —Single
      and multi-family loans
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      104
                                                                      
                                                                      
                                                                      
                                                                      828
                                                                      
                                                                      
                                                                      
                                                                      351
                                                                      
                                                                      
                                                                      
                                                                      723Real
      estate construction spec loans
                                                                      
                                                                      
                                                                      3,193
                                                                      
                                                                      
                                                                      
                                                                      1,932
                                                                      
                                                                      
                                                                      
                                                                      304
                                                                      
                                                                      
                                                                      
                                                                      556
                                                                      
                                                                      
                                                                      
                                                                      ―Land
      development loans
                                                                      
                                                                      
                                                                      1,784
                                                                      
                                                                      
                                                                      
                                                                      1,386
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―Consumer
                                                                      
                                                                      
                                                                      9
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      349
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―Total
      nonaccrual loans
                                                                      
                                                                      
                                                                      8,219
                                                                      
                                                                      
                                                                      
                                                                      3,422
                                                                      
                                                                      
                                                                      
                                                                      1,481
                                                                      
                                                                      
                                                                      
                                                                      907
                                                                      
                                                                      
                                                                      
                                                                      723Accruing
      loans which are contractually past due 90 days or more – single-family
      loans (1)
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      58
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―Total
      nonaccrual and 90 days or more past due loans
                                                                      
                                                                      
                                                                      8,219
                                                                      
                                                                      
                                                                      
                                                                      3,422
                                                                      
                                                                      
                                                                      
                                                                      1,539
                                                                      
                                                                      
                                                                      
                                                                      907
                                                                      
                                                                      
                                                                      
                                                                      723Other
      impaired loans - single family 1-4 units, investment
    property
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      403
                                                                      
                                                                      
                                                                      
                                                                      2,933Other
      impaired loans - single family, spec
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      2,682
                                                                      
                                                                      
                                                                      
                                                                      ―
                                                                      
                                                                      
                                                                      
                                                                      ―Foreclosed
      real estate held for sale
                                                                      
                                                                      
                                                                      4,936
                                                                      
                                                                      
                                                                      
                                                                      1,676
                                                                      
                                                                      
                                                                      
                                                                      1,580
                                                                      
                                                                      
                                                                      
                                                                      1,530
                                                                      
                                                                      
                                                                      
                                                                      547Total
      nonperforming assets
                                                                      
                                                                      
                                                                      13,155
                                                                      
                                                                      
                                                                      
                                                                      5,098
                                                                      
                                                                      
                                                                      
                                                                      5,801
                                                                      
                                                                      
                                                                      
                                                                      2,840
                                                                      
                                                                      
                                                                      
                                                                      4,203Allowance
      for losses on impaired loans
                                                                      
                                                                      
                                                                      437
                                                                      
                                                                      
                                                                      
                                                                      370
                                                                      
                                                                      
                                                                      
                                                                      258
                                                                      
                                                                      
                                                                      
                                                                      199
                                                                      
                                                                      
                                                                      
                                                                      655Impaired
      loans with no related allowance for loan losses
                                                                      
                                                                      $
                                                                      ―
                                                                      
                                                                      
                                                                      $
                                                                      ―
                                                                      
                                                                      
                                                                      $
                                                                      58
                                                                      
                                                                      
                                                                      $
                                                                      116
                                                                      
                                                                      
                                                                      $
                                                                      ―Nonaccrual
      and 90 days or more past due loans as a percentage of total loans,
      net
                                                                      
                                                                      
                                                                      3.20
                                                                      %
                                                                      
                                                                      
                                                                      1.47
                                                                      %
                                                                      
                                                                      
                                                                      2.11
                                                                      %
                                                                      
                                                                      
                                                                      0.55
                                                                      %
                                                                      
                                                                      
                                                                      0.45
                                                                      %Nonaccrual
      and 90 days or more past due loans as a percentage of total
      assets
                                                                      
                                                                      
                                                                      2.44
                                                                      %
                                                                      
                                                                      
                                                                      1.03
                                                                      %
                                                                      
                                                                      
                                                                      1.47
                                                                      %
                                                                      
                                                                      
                                                                      0.38
                                                                      %
                                                                      
                                                                      
                                                                      0.34
                                                                      %Nonperforming
      assets as a percentage of total assets
                                                                      
                                                                      
                                                                      3.91
                                                                      %
                                                                      
                                                                      
                                                                      1.53
                                                                      %
                                                                      
                                                                      
                                                                      2.02
                                                                      %
                                                                      
                                                                      
                                                                      1.20
                                                                      %
                                                                      
                                                                      
                                                                      1.97
                                                                      %
  
 (1)
  Interest on delinquent loans is accrued to income to the extent
considered collectible.
 
 Nonperforming
assets totaled $13.2 million, or 3.9% of total assets, at September 30, 2008,
which was an increase of $8.1 million, or 158.8%, from $5.1 million, or 1.53% of
total assets, at September 30, 2007. Non-performing assets at September 30, 2008
consisted of $8.2 million in nonaccrual loans, and $4.9 million in foreclosed
real estate. At September 30, 2008, nonaccrual loans consisted of $3.2 million
in real estate construction loans, $5.0 million in land development loans and
commercial real estate loans and consumer loans totaling $9,000.
 
 Interest
income that would have been recorded for the year ended September 30, 2008 had
nonaccrual loans been current according to their original terms amounted to
$150,281. There was interest income of $8,831 recognized on such loans during
the period the loans were classified as nonaccrual in 2008.
 
 Foreclosed
real estate owned by the Bank at September 30, 2008 totaled $4.9 million
compared to $1.7 million at September 30, 2007. Foreclosed real estate at
September 30, 2008 included twelve 1-4 family properties, seven 1-4 family
construction properties, one land development property, one commercial retail
property, two commercial lots and one residential lot.
  43
  Classified
Assets. Federal regulations require us to review and classify our assets
on a regular basis. In addition, the Office of Thrift Supervision has the
authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. “Substandard assets” must have one or more defined weaknesses
and are characterized by the distinct possibility that we will sustain some loss
if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as “loss” is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. The
regulations also provide for a “special mention” category, described as assets
that do not currently expose us to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving our close attention. When we classify an asset as special mention,
substandard or doubtful we establish an allowance for loan losses. If we
classify an asset as loss, we allocate an amount equal to 100% of the portion of
the asset classified loss.
 
 The
following table shows the aggregate amounts of our classified assets at the
dates indicated.
  At
      September 30,2008
                                                          
                                                          
                                                          2007
                                                          
                                                          
                                                          2006(In
      thousands)Special
      mention assets
                                                          
                                                          $
                                                          2,919
                                                          
                                                          
                                                          $
                                                          1,386
                                                          
                                                          
                                                          $
                                                          2,986Substandard
      assets (1)
                                                          
                                                          
                                                          9,276
                                                          
                                                          
                                                          
                                                          5,435
                                                          
                                                          
                                                          
                                                          3,149Doubtful
      assets
                                                          
                                                          
                                                          ―
                                                          
                                                          
                                                          
                                                          105
                                                          
                                                          
                                                          
                                                          196Loss
      assets
                                                          
                                                          
                                                          ―
                                                          
                                                          
                                                          
                                                          ―
                                                          
                                                          
                                                          
                                                          ―Total
      classified assets
                                                          
                                                          $
                                                          12,195
                                                          
                                                          
                                                          $
                                                          6,926
                                                          
                                                          
                                                          $
                                                          6,331
 
 
 (1)
              Includes
      foreclosed real estate of $4,936,355, $1,675,871 and $1,579,848 at
      September 30, 2008, 2007 and 2006,
respectively.
  The
increase in our substandard assets at September 30, 2008 compared to September
30, 2007 was primarily due to the classification of several spec construction
loans, one loan secured by a commercial office building and one land development
loan. Substandard assets increased from $5.4 million at September 30, 2007 to
$9.3 million at September 30, 2008. Our substandard loans at September 30, 2008
consisted primarily of 24 spec 1-4 family properties to primarily three
borrowers totaling $4.5 million, one loan secured by a commercial office
building totaling $3.3 million and one land development property totaling $1.5
million.
 
 Special
mention assets at September 30, 2008 consisted of two loans totaling $2.9
million secured by land for the development of single-family lots and commercial
real estate.
 
 Delinquencies.
The following table provides information about delinquencies in our loan
portfolio at the dates indicated.
  At
      September 30,2008
                                                                                                                          
                                                                                                                          
                                                                                                                          2007
                                                                                                                          
                                                                                                                          
                                                                                                                          200630-59
                                                                                                                            Days
                                                                                                                            Past
                                                                                                                            Due
                                                                                                                          
                                                                                                                          
                                                                                                                          60-89
                                                                                                                            Days
                                                                                                                            Past
                                                                                                                            Due
                                                                                                                          
                                                                                                                          
                                                                                                                          30-59
                                                                                                                            Days
                                                                                                                            Past
                                                                                                                            Due
                                                                                                                          
                                                                                                                          
                                                                                                                          60-89
                                                                                                                            Days
                                                                                                                            Past
                                                                                                                            Due
                                                                                                                          
                                                                                                                          
                                                                                                                          30-59
                                                                                                                            Days
                                                                                                                            Past
                                                                                                                            Due
                                                                                                                          
                                                                                                                          
                                                                                                                          60-89
                                                                                                                            Days
                                                                                                                            Past
                                                                                                                            Due(In
      thousands)Real
      estate – mortgage loans
                                                                                                                          
                                                                                                                          $
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          153
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          155
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          31
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          1,533
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          746Land
      loans
                                                                                                                          
                                                                                                                          
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          59
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          —Construction
      loans
                                                                                                                          
                                                                                                                          
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2,371
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3⁄4
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2,233
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          635
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          323Commercial
      loans
                                                                                                                          
                                                                                                                          
                                                                                                                          27
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          906
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          95
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3⁄4
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3⁄4Consumer
      loans
                                                                                                                          
                                                                                                                          
                                                                                                                          136
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          —
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          97
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          10
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          83
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3⁄4Total
                                                                                                                          
                                                                                                                          $
                                                                                                                          163
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          2,583
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          1,158
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          2,369
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          2,251
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          1,069
  44
  Analysis and
Determination of the Allowance for Loan Losses.  The allowance for loan
losses is a valuation allowance for probable losses inherent in the loan
portfolio. We evaluate the need to establish allowances against losses on loans
on a monthly basis. When additional allowances are necessary, a provision for
loan losses is charged to earnings.
 
 We
establish an allowance on certain identified problem loans based on such factors
as (1) the strength of the customer’s personal or business cash flows; (2) the
availability of other sources of repayment; (3) the amount due or past due; (4)
the type and value of collateral; (5) the strength of our collateral position;
(6) the estimated cost to sell the collateral; and (7) the borrower’s effort to
cure the delinquency.
 
 In
addition, we establish an allowance for loans that are not delinquent to
recognize the losses associated with lending activities. This valuation
allowance is determined by segregating the loans by loan category and assigning
percentages to each category. The percentages are adjusted for significant
factors that, in management’s judgment, affect the collectibility of the
portfolio as of the evaluation date. These significant factors may include
changes in existing general economic and business conditions affecting our
primary lending areas and the national economy, staff lending experience, recent
loss experience in particular segments of the portfolio, classified asset
trends, delinquency trends and risk rating trends. The applied loss factors are
reevaluated quarterly to ensure their relevance in the current economic
environment.
 
 We
identify loans that may need to be charged off as a loss by reviewing all
delinquent loans, classified loans and other loans that management may have
concerns about collectibility. For individually reviewed loans, the borrower’s
inability to make payments under the terms of the loan or a shortfall in
collateral value would result in our allocating a portion of the allowance to
the loan that was impaired.
 
 The
Office of Thrift Supervision, as an integral part of its examination process,
periodically reviews our allowance for loan losses. The Office of Thrift
Supervision may require us to make additional provisions for loan losses based
on judgments different from ours.
 
 At
September 30, 2008, our allowance for loan losses represented .94% of total
gross loans and 32.04% of nonperforming loans. The allowance for loan losses
decreased $378,000 from September 30, 2007 to September 30, 2008 due to a
provision of loan losses of $1.9 million and recoveries totaling $137,000,
partially offset by charge-offs of loans totaling $2.4 million. There was no
material change in the loss factors used to calculate the allowance from
September 30, 2007 to September 30, 2008.
 
 At
September 30, 2007, our allowance for loan losses represented 1.1% of total
gross loans and 87.98% of nonperforming loans. The allowance for loan losses
increased $867,000 from September 30, 2006 to September 30, 2007 due to a
provision for loan losses of $602,000 and recoveries totaling $532,000,
partially offset by charge-offs of loans totaling $267,000. There was no
material change in the loss factors used to calculate the allowance from
September 30, 2006 to September 30, 2007.
  45
  The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated. Management believes that the allowance can
be allocated by category only on an approximate basis. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any
category.
 At
      September 30,2008
                            
                            
                            2007Amount
                            
                            
                            Percent of
                              Loans in Each
                              Category to Total
                              Gross Loans
                            
                            
                            Amount
                            
                            
                            Percent of
                                Loans in Each
                                Category to Total
                                Gross Loans(Dollars
      in thousands)Real
      estate – mortgage:Single-family
      1-4 units
                            
                            $
                            143
                            
                            
                            
                            14.62
                            %
                            
                            $
                            210
                            
                            
                            
                            15.64
                            %Multi-family
      5 or more units
                            
                            
                            84
                            
                            
                            
                            6.23
                            
                            
                            
                            75
                            
                            
                            
                            4.57Real
      estate construction loans
                            
                            
                            1,185
                            
                            
                            
                            32.47
                            
                            
                            
                            1,941
                            
                            
                            
                            47.12Commercial
      real estate loans
                            
                            
                            992
                            
                            
                            
                            36.73
                            
                            
                            
                            562
                            
                            
                            
                            21.44Commercial
      business loans
                            
                            
                            218
                            
                            
                            
                            6.39
                            
                            
                            
                            211
                            
                            
                            
                            6.72Consumer
      loans
                            
                            
                            11
                            
                            
                            
                            3.56
                            
                            
                            
                            12
                            
                            
                            
                            4.51Total
      allowance for loan losses
                            
                            $
                            2,633
                            
                            
                            
                            100.00
                            %
                            
                            $
                            3,011
                            
                            
                            
                            100.00
                            %
 At
      September 30,2006
                                                                  
                                                                  
                                                                  2005
                                                                  
                                                                  
                                                                  2004Amount
                                                                  
                                                                  
                                                                  Percent of
                                                                    Loans in Each
                                                                    Category to Total
                                                                    Gross Loans
                                                                  
                                                                  
                                                                  Amount
                                                                  
                                                                  
                                                                  Percent of
                                                                    Loans in Each
                                                                    Category to Total
                                                                    Gross Loans
                                                                  
                                                                  
                                                                  Amount
                                                                  
                                                                  
                                                                  Percent of
                                                                    Loans in Each
                                                                    Category to Total
                                                                    Gross Loans(Dollars
      in thousands)Real
      estate – mortgage:Single-family
      1-4 units
                                                                  
                                                                  $
                                                                  200
                                                                  
                                                                  
                                                                  
                                                                  18.48
                                                                  %
                                                                  
                                                                  $
                                                                  268
                                                                  
                                                                  
                                                                  
                                                                  20.71
                                                                  %
                                                                  
                                                                  $
                                                                  593
                                                                  
                                                                  
                                                                  
                                                                  28.71
                                                                  %Multi-family
      5 or more units
                                                                  
                                                                  
                                                                  61
                                                                  
                                                                  
                                                                  
                                                                  4.52
                                                                  
                                                                  
                                                                  
                                                                  102
                                                                  
                                                                  
                                                                  
                                                                  8.20
                                                                  
                                                                  
                                                                  
                                                                  277
                                                                  
                                                                  
                                                                  
                                                                  6.96Real
      estate construction loans
                                                                  
                                                                  
                                                                  787
                                                                  
                                                                  
                                                                  
                                                                  43.25
                                                                  
                                                                  
                                                                  
                                                                  565
                                                                  
                                                                  
                                                                  
                                                                  42.01
                                                                  
                                                                  
                                                                  
                                                                  579
                                                                  
                                                                  
                                                                  
                                                                  38.86Commercial
      real estate loans
                                                                  
                                                                  
                                                                  781
                                                                  
                                                                  
                                                                  
                                                                  23.13
                                                                  
                                                                  
                                                                  
                                                                  672
                                                                  
                                                                  
                                                                  
                                                                  19.74
                                                                  
                                                                  
                                                                  
                                                                  423
                                                                  
                                                                  
                                                                  
                                                                  16.38Commercial
      business loans
                                                                  
                                                                  
                                                                  126
                                                                  
                                                                  
                                                                  
                                                                  4.89
                                                                  
                                                                  
                                                                  
                                                                  65
                                                                  
                                                                  
                                                                  
                                                                  2.83
                                                                  
                                                                  
                                                                  
                                                                  54
                                                                  
                                                                  
                                                                  
                                                                  2.57Consumer
      loans
                                                                  
                                                                  
                                                                  189
                                                                  
                                                                  
                                                                  
                                                                  5.73
                                                                  
                                                                  
                                                                  
                                                                  90
                                                                  
                                                                  
                                                                  
                                                                  6.51
                                                                  
                                                                  
                                                                  
                                                                  98
                                                                  
                                                                  
                                                                  
                                                                  6.52Total
      allowance for loan losses
                                                                  
                                                                  $
                                                                  2,144
                                                                  
                                                                  
                                                                  
                                                                  100.00
                                                                  %
                                                                  
                                                                  $
                                                                  1,762
                                                                  
                                                                  
                                                                  
                                                                  100.00
                                                                  %
                                                                  
                                                                  $
                                                                  2,024
                                                                  
                                                                  
                                                                  
                                                                  100.00
                                                                  %
  46
  Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while we believe we have established our allowance
for loan losses in conformity with U.S. generally accepted accounting
principles, there can be no assurance that regulators, in reviewing our loan
portfolio, will not request us to increase our allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect our financial condition and results of operations.
 
 Analysis of Loan
Loss Experience. The following table sets forth an analysis of the Bank’s
allowance for loan losses for the years indicated. Where specific loan loss
allowances have been established, any difference between the loss allowance and
the amount of loss realized has been charged or credited to income.
  Years
      Ended September 30,2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006
                                                  
                                                  
                                                  2005
                                                  
                                                  
                                                  2004(Dollars
      in thousands)Balance
      at beginning of year
                                                  
                                                  $
                                                  3,011
                                                  
                                                  
                                                  $
                                                  2,144
                                                  
                                                  
                                                  $
                                                  1,762
                                                  
                                                  
                                                  $
                                                  2,024
                                                  
                                                  
                                                  $
                                                  1,297Loans
      charged-off:Single-family
      1-4 units
                                                  
                                                  
                                                  (438
                                                  )
                                                  
                                                  
                                                  (82
                                                  )
                                                  
                                                  
                                                  (261
                                                  )
                                                  
                                                  
                                                  (482
                                                  )
                                                  
                                                  
                                                  (132
                                                  )Multi-family
      5 or more units
                                                  
                                                  
                                                  (24
                                                  )
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  (113
                                                  )
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―Real
      estate construction loans
                                                  
                                                  
                                                  (1,365
                                                  )
                                                  
                                                  
                                                  (140
                                                  )
                                                  
                                                  
                                                  (78
                                                  )
                                                  
                                                  
                                                  (197
                                                  )
                                                  
                                                  
                                                  ―Commercial
      real estate
                                                  
                                                  
                                                  (258
                                                  )
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―Commercial
      business loans
                                                  
                                                  
                                                  (307
                                                  )
                                                  
                                                  
                                                  (35
                                                  )
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―Consumer
      loans
                                                  
                                                  
                                                  (4
                                                  )
                                                  
                                                  
                                                  (10
                                                  )
                                                  
                                                  
                                                  (20
                                                  )
                                                  
                                                  
                                                  (16
                                                  )
                                                  
                                                  
                                                  (33
                                                  )Total
      charge-offs
                                                  
                                                  
                                                  (2,396
                                                  )
                                                  
                                                  
                                                  (267
                                                  )
                                                  
                                                  
                                                  (472
                                                  )
                                                  
                                                  
                                                  (695
                                                  )
                                                  
                                                  
                                                  (165
                                                  )Recoveries:Commercial
      business loans
                                                  
                                                  
                                                  12
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Single-family
      1-4 units
                                                  
                                                  
                                                  104
                                                  
                                                  
                                                  
                                                  511
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  1
                                                  
                                                  
                                                  
                                                  6Multi-family
      5 or more units
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  18
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  1Real
      estate construction
                                                  
                                                  
                                                  21
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  1
                                                  
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  ―Consumer
      loans
                                                  
                                                  
                                                  ―
                                                  
                                                  
                                                  
                                                  3
                                                  
                                                  
                                                  
                                                  1
                                                  
                                                  
                                                  
                                                  2
                                                  
                                                  
                                                  
                                                  ―Total
      recoveries
                                                  
                                                  
                                                  137
                                                  
                                                  
                                                  
                                                  532
                                                  
                                                  
                                                  
                                                  2
                                                  
                                                  
                                                  
                                                  3
                                                  
                                                  
                                                  
                                                  7Net
      loans charged-off
                                                  
                                                  $
                                                  (2,259
                                                  )
                                                  
                                                  $
                                                  265
                                                  
                                                  
                                                  $
                                                  (470
                                                  )
                                                  
                                                  $
                                                  (692
                                                  )
                                                  
                                                  $
                                                  (158
                                                  )Provision
      for loan losses
                                                  
                                                  
                                                  1,881
                                                  
                                                  
                                                  
                                                  602
                                                  
                                                  
                                                  
                                                  852
                                                  
                                                  
                                                  
                                                  430
                                                  
                                                  
                                                  
                                                  885Balance
      at end of year
                                                  
                                                  $
                                                  2,633
                                                  
                                                  
                                                  $
                                                  3,011
                                                  
                                                  
                                                  $
                                                  2,144
                                                  
                                                  
                                                  $
                                                  1,762
                                                  
                                                  
                                                  $
                                                  2,024Ratio
      of allowance for losses to gross loansreceivable
                                                  
                                                  
                                                  0.94
                                                  %
                                                  
                                                  
                                                  1.13
                                                  %
                                                  
                                                  
                                                  0.93
                                                  %
                                                  
                                                  
                                                  0.93
                                                  %
                                                  
                                                  
                                                  1.09
                                                  %Ratio
      of net loan charge-offs (recoveries)To
      average loans outstanding during the year
                                                  
                                                  
                                                  0.91
                                                  %
                                                  
                                                  
                                                  (0.12
                                                  )%
                                                  
                                                  
                                                  0.25
                                                  %
                                                  
                                                  
                                                  0.40
                                                  %
                                                  
                                                  
                                                  (0.09
                                                  )%
 
 Interest Rate
Risk Management. We manage the interest rate sensitivity of our
interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest
rates than mortgage loans because of the shorter maturities of deposits. As a
result, sharp increases in interest rates may adversely affect our earnings
while decreases in interest rates may beneficially affect our earnings. To
reduce the potential volatility of our earnings, we have sought to provide a
better match between the interest rate sensitivity of our assets and
liabilities. In particular, the strategies utilized by the Bank are intended to
stabilize net interest income for the long term by protecting its interest rate
spread against increases in interest rates. Such strategies include the
origination for portfolio of one-year, adjustable-rate mortgage loans secured by
one- to four-family residential real estate and the origination of other loans
with greater interest rate sensitivities than long-term, fixed-rate residential
mortgage loans. Asset/liability management in the form of structuring the
maturity or repricing of cash instruments provides greater flexibility to adjust
exposure to interest rates. During periods of high interest rates, management
believes it is prudent to offer competitive rates on short-term deposits and
less competitive rates for long-term liabilities. This posture allows the Bank
to benefit quickly from declines in interest rates. Likewise, offering more
competitive rates on long-term deposits during the low interest rate periods
allows the Bank to extend the repricing and/or maturity of its liabilities thus
reducing its exposure to rising interest rates. We currently do not participate
in hedging programs, interest rate swaps or other activities involving the use
of derivative financial instruments.
 
 47
 
 We have
an Asset/Liability Management (“ALCO”) Committee, which includes members of
management, to communicate, coordinate and control all aspects involving
asset/liability management. The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective of
managing assets and funding sources to provide results that are consistent with
liquidity, growth, risk limits and profitability goals.
 
 Net Portfolio
Value Simulation Analysis. We use an interest rate sensitivity analysis
prepared by the OTS to review our level of interest rate risk. This analysis
measures interest rate risk by computing changes in net portfolio value of our
cash flows from assets, liabilities and off-balance sheet items in the event of
a range of assumed changes in market interest rates. Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained 50 to 300 basis
point increase or 50 to 100 basis point decrease in market interest rates with
no effect given to any steps that we might take to counter the effect of that
interest rate movement. We measure interest rate risk by modeling the changes in
net portfolio value over a variety of interest rate scenarios. The following
table, which is based on information that we provide to the OTS, presents the
change in our net portfolio value at September 30, 2008 that would occur in the
event of an immediate change in interest rates based on OTS assumptions, with no
effect given to any steps that we might take to counteract that
change.
  Change

                                              in
      Interest Rates
                                          
                                          
                                          Estimated
      Net Portfolio Value
                                          
                                          
                                          Net
      Portfolio Value as a
                                            Percentage
      of Portfolio
                                            Value
      of Assets(In
      Basis Points)
                                          
                                          
                                          Amount
                                          
                                          
                                          Change
                                          
                                          
                                          % Change
                                          
                                          
                                          NPV Ratio
                                          
                                          
                                          BP Change(Dollars
      in thousands)+300
                                          
                                          
                                          $
                                          45,433
                                          
                                          
                                          $
                                          (6,775
                                          )
                                          
                                          
                                          (13
                                          )%
                                          
                                          
                                          13.47
                                          %
                                          
                                          
                                          (157
                                          )%+200
                                          
                                          
                                          
                                          47,639
                                          
                                          
                                          
                                          (4,569
                                          )
                                          
                                          
                                          (9
                                          )
                                          
                                          
                                          14.00
                                          
                                          
                                          
                                          (104
                                          )+100
                                          
                                          
                                          
                                          49,920
                                          
                                          
                                          
                                          (2,288
                                          )
                                          
                                          
                                          (4
                                          )
                                          
                                          
                                          14.52
                                          
                                          
                                          
                                          (52
                                          )+50
                                          
                                          
                                          
                                          51,038
                                          
                                          
                                          
                                          (1,170
                                          )
                                          
                                          
                                          (2
                                          )
                                          
                                          
                                          14.78
                                          
                                          
                                          
                                          (26
                                          )0
                                          
                                          
                                          
                                          52,208
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          15.04
                                          
                                          
                                          
                                          —(50)
                                          
                                          
                                          
                                          53,296
                                          
                                          
                                          
                                          1,088
                                          
                                          
                                          
                                          2
                                          
                                          
                                          
                                          15.28
                                          
                                          
                                          
                                          24(100)
                                          
                                          
                                          
                                          54,351
                                          
                                          
                                          
                                          2,143
                                          
                                          
                                          
                                          4
                                          
                                          
                                          
                                          15.51
                                          
                                          
                                          
                                          47
  The OTS uses certain assumptions in
assessing the interest rate risk of savings associations. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among
others. As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the
table.
 
 Liquidity
Management. Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Our primary sources of funds consist of
deposit inflows, loan repayments, maturities and sales of securities and
borrowings from the Federal Home Loan Bank of Des Moines. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition.
  48
  We
regularly adjust our investments in liquid assets based upon our assessment of
expected loan demand, expected deposit flows, yields available on
interest-earning deposits and securities and the objectives of our
asset/liability management policy.
 
 Our most
liquid assets are cash and cash equivalents. The levels of these assets depend
on our operating, financing, lending and investing activities during any given
period. At September 30, 2008, cash and cash equivalents amounted to $8.1
million. Securities classified as available for sale, which provide additional
sources of liquidity, totaled $26.1 million at September 30, 2008. In addition,
at September 30, 2008, we had the ability to borrow an additional amount of
approximately $2.4 million from the Federal Home Loan Bank of Des Moines, in the
form of available overnight lines of credit. On that date, we had no overnight
advances outstanding.
 
 At
September 30, 2008, we had $36.7 million in loan commitments outstanding, which
included $19.0 million in undisbursed loans and $10.8 million in unused lines of
credit. Certificates of deposit due within one year of September 30, 2008
totaled $89.6 million, or 78.2% of certificates of deposit. We believe the large
percentage of certificates of deposit that mature within one year reflects
customers’ hesitancy to invest their funds for long periods in the current
interest rate environment. If these maturing deposits do not remain with us, we
will be required to seek other sources of funds, including other certificates of
deposit and borrowings. Depending on market conditions, we may be required to
pay higher rates on such deposits or other borrowings than we currently pay on
the certificates of deposit due on or before September 30, 2009. We believe,
however, based on past experience that a significant portion of our certificates
of deposit will remain with us. We have the ability to attract and retain
deposits by adjusting the interest rates offered.
 
 The
following table presents certain of our contractual obligations as of September
30, 2008.
 
 Payments
      Due by PeriodLess
      than
                          
                          
                          One
      to Three
                          
                          
                          Three
      to
                          
                          
                          More
      Than 5Total
                          
                          
                          One
      Year
                          
                          
                          Years
                          
                          
                          Five
      Years
                          
                          
                          Years(In
      thousands)Federal
      Home Loan Bank advances
                          
                          $
                          69,241
                          
                          
                          $
                          48,100
                          
                          
                          $
                          20,066
                          
                          
                          $
                          1,075
                          
                          
                          $
                          —Securities
      sold under agreement to repurchase
                          
                          
                          813
                          
                          
                          
                          813
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Operating
      lease obligations
                          
                          
                          1,300
                          
                          
                          
                          92
                          
                          
                          
                          184
                          
                          
                          
                          201
                          
                          
                          
                          823Total
                          
                          $
                          71,354
                          
                          
                          $
                          49,005
                          
                          
                          $
                          20,250
                          
                          
                          $
                          1,276
                          
                          
                          $
                          823
 
 Our primary investing activities are
the origination and purchase of loans and the purchase of securities. Our
primary financing activities consist of activity in deposit accounts and Federal
Home Loan Bank advances. Deposit flows are affected by the overall level of
interest rates, the interest rates and products offered by us and our local
competitors and other factors. We generally manage the pricing of our deposits
to be competitive and to increase core deposit relationships. We offer
promotional rates on certain deposit products to attract deposits.
  The
following table presents our primary investing and financing activities during
the years indicated.
  Years
      Ended September 30,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006Investing
      activities:Net
      change in loans receivable
                                        
                                        $
                                        (32,978
                                        )
                                        
                                        $
                                        (35,402
                                        )
                                        
                                        $
                                        (40,028
                                        )Purchases
      of securities (1)
                                        
                                        
                                        (448
                                        )
                                        
                                        
                                        (16,946
                                        )
                                        
                                        
                                        (22,529
                                        )Proceeds
      from calls, maturities and principal repayments of securities
      (1)
                                        
                                        
                                        10,583
                                        
                                        
                                        
                                        10,579
                                        
                                        
                                        
                                        11,486Proceeds
      from sales of securities
                                        
                                        
                                        17,743
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Financing
      activities:Increase
      (decrease) in deposits
                                        
                                        
                                        (32,542
                                        )
                                        
                                        
                                        53,835
                                        
                                        
                                        
                                        16,854Increase
      (decrease) in Federal Home Loan Bank advances
                                        
                                        
                                        42,810
                                        
                                        
                                        
                                        (7,633
                                        )
                                        
                                        
                                        3,567Repurchase
      of common stock
                                        
                                        
                                        (8,633
                                        )
                                        
                                        
                                        (1,400
                                        )
                                        
                                        
                                        —
  
 (1)
  Includes mortgaged-backed securities.
  49
  Capital
Management.  We are subject to
various regulatory capital requirements administered by the OTS, including a
risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. At September 30, 2008, the Bank exceeded all of its regulatory
capital requirements. The Bank is considered “well capitalized” under regulatory
guidelines
 
 Off-Balance Sheet
Arrangements.  In the normal course
of operations, we engage in a variety of financial transactions that, in
accordance with U.S. generally accepted accounting principles, are not recorded
in our consolidated financial statements. These transactions involve, to varying
degrees, elements of credit, interest rate and liquidity risk. Such transactions
are used primarily to manage customers’ requests for funding and take the form
of loan commitments and lines of credit. For information about our loan
commitments and unused lines of credit, see note 14 of the notes to consolidated
financial statements. We currently have no plans to engage in hedging activities
in the future.
 
 For the year ended September 30, 2008,
we engaged in no off-balance sheet transactions reasonably likely to have a
material effect on our financial condition, results of operations or cash
flows.
 
 Impact
of Recent Accounting Pronouncements
 
 The
impact of recent accounting pronouncements is discussed in note 1 of the notes
to consolidated financial statements included herewith.
 
 
 Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk
 
 This item is not applicable as the
Company is a smaller reporting company.
 
 Item 8.  
Financial Statements and Supplementary Data
 
 This item is not applicable as the
Company is a smaller reporting company
 
 Item 9.  Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
 
 None.
 
 Item
9A(T).  Controls and Procedures
 
 (a)
              Disclosure
      Controls and Procedures
 
 The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.
 
 50
  (b)
              Internal
      Control Over Financial Reporting
  MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 Management of Liberty Bancorp, Inc.
(the “Company”) is responsible for the preparation, integrity, and fair
presentation of the consolidated financial statements included in this annual
report. The Company’s consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, as such, include some amounts that are based on the best estimates
and judgments of management.
 
 The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting. This internal control system is designed to provide reasonable
assurance to management and the Board of Directors regarding the reliability of
the Company’s financial reporting and the preparation and presentation of
financial statements for external reporting purposes in conformity with
accounting principles generally accepted in the United States of America, as
well as to safeguard assets from unauthorized use or disposition. The system of
internal control over financial reporting is evaluated for effectiveness by
management and tested for reliability through a program of internal audit with
actions taken to correct potential deficiencies as they are identified. Because
of inherent limitations in any internal control system, no matter how well
designed, misstatements due to error or fraud may occur and not be detected,
including the possibility of the circumvention or overriding of controls.
Accordingly, even an effective internal control system can provide only
reasonable assurance with respect to financial statement preparation. Further
because of changes in conditions, internal control effectiveness may vary over
time.
 
 Management assessed the effectiveness
of the Company’s internal control over financial reporting as of September 30,
2008 based upon criteria set forth in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment and on the forgoing criteria, management has
concluded that, as of September 30, 2008, the Company’s internal control over
financial reporting is effective.
 
 This
      annual report does not include an attestation report of the Company’s
      registered public accounting firm regarding internal control over
      financial reporting. Management’s report was not subject to attestation by
      the Company’s registered public accounting firm pursuant to temporary
      rules of the Securities and Exchange Commission that permit the Company to
      provide only management’s report in this annual
  report.
 
 /s/ Brent M. Giles
                            
                            /s/ Marc J. WeishaarBrent
      M. Giles
                            
                            Marc
      J. WeishaarPresident
      and Chief Executive Officer
                            
                            Chief
      Financial
Officer
 
 (c)
              Changes
      to Internal Control Over Financial
Reporting
 
 There
were no changes in the Company’s internal control over financial reporting
during the three months ended September 30, 2008 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.
 
 Item 9B. Other
Information
 
 None.
  51
 
 PART
III
 
 Item 10.Directors, Executive
Officers and Corporate Governance
 
 Directors
  The
information relating to the directors of the Company is incorporated herein by
reference to the section captioned “Proposal I — Election of
Directors” in the Proxy Statement for the Company’s 2009 Annual Meeting
of Stockholders (the “Proxy Statement”).
  Executive
Officers
  The
information regarding the Company’s executive officers is incorporated herein by
reference to Part I, Item 1, “Business — Executive
Officers” of this Annual Report on Form 10-K.
  Corporate
Governance
  Information
regarding the Company’s Audit Committee and Audit Committee financial expert is
incorporated herein by reference to the section captioned “Corporate Governance—Committees of
the Board of Directors” in the Proxy Statement.
  Compliance
with Section 16(a) of the Exchange Act
  Information regarding compliance with
Section 16(a) of the Exchange Act, the cover page to this Annual Report on Form
10-K and the section captioned “Other Information Relating to
Directors and Executive Officers—Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement are incorporated herein by
reference.
 
 Code
of Ethics
 
 The Company has adopted a Code of
Ethics and Business Conduct that is designed to ensure that the Company’s
directors, executive officers and employees meet the highest standards of
ethical conduct. See Exhibit 14.0 to this Annual Report on Form
10-K.
 
 Item
11.  Executive Compensation
 
 The information contained under the
sections captioned “Executive
Compensation” and “Director Compensation” in
the Proxy Statement is incorporated herein by reference.
 
 Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
 
 (a)           Security
Ownership of Certain Beneficial Owners
 
 The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
  (b)           Security
Ownership of Management
 
 The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
 
 52
  (c)           Changes
In Control
 
 Management
of the Company is not aware of any 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 Company.
  (d)           Equity
Compensation Plan Information
 
 The
following table sets forth information as of September 30, 2008 about Company
common stock that may be issued under the Liberty Bancorp, Inc. 2007 Equity
Incentive Plan.
  (a)
                        
                        
                        (b)
                        
                        
                        (c)Plan
      Category
                        
                        Number
      of
                          securities
                          to
      be issued
                          uponthe
                          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 security holders
                        
                        
                        198,550
                        
                        
                        $
                        11.27
                        
                        
                        
                        26,290Equity
      compensation plans
                          not
      approved by security holders
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
                        
                        
                        198,550
                        
                        
                        $
                        11.27
                        
                        
                        
                        26,290
 
 Item
13.Certain
Relationships and Related Transactions, and Director
Independence
 
 Certain
Relationships and Related Transactions
 
 The
information relating to certain relationships and related transactions is
incorporated herein by reference to the section captioned “Other Information Relating to
Directors and Executive Officers—Transactions with Related Persons” in
the Proxy Statement.
  Corporate
Governance
 
 The
information regarding director independence is incorporated herein by reference
to the section captioned “Proposal 1—Election of Directors”in the Proxy Statement.
 
 Item
14.Principal
Accountant Fees and Services
 
 The
information required by this item is incorporated herein by reference to the
section captioned “Independent
Registered Public Accounting Firm—Fees Paid to Independent Registered Public
Accounting Firm” in the Proxy Statement.
  53
  PART
IV
 
 Item
15.Exhibits
and Financial Statement Schedules
 
 (a)(1)
The financial statements filed as a part of this report are as
follows:
 
 ●
                Report
      of Independent Registered Public Accounting
Firm
 ●
                Consolidated
      Balance Sheets as of September 30, 2008 and
2007
 ●
                Consolidated
      Statements of Earnings for the Years Ended September 30, 2008 and
      2007
 ●
                Consolidated
      Statements of Comprehensive Earnings for the Years Ended September 30,
      2008 and 2007
 ●
                Consolidated
      Statements of Stockholders’ Equity for the Years Ended September 30, 2008
      and 2007
 ●
                Consolidated
      Statements of Cash Flows for the Years Ended September 30, 2008 and
      2007
 ●
                Notes
      to Consolidated Financial
Statements
 (2)
                All
      schedules are omitted as the required information either is not applicable
      or is included in the financialstatements
      or related notes.
 
 (3)
                Exhibits   
      Description
 
 
 
 
 3.1
                                                          Articles
      of Incorporation of Liberty Bancorp (1)3.2
                                                          Amended
      and Restated Bylaws of Liberty Bancorp (2)4.0
                                                          Specimen
      Stock Certificate of Liberty Bancorp, Inc. (1)10.1*
                                                          Amended
      and Restated Liberty Savings Bank, F.S.B. Employee Stock Ownership Plan
      (1)10.2*
                                                          Form
      of ESOP Loan Commitment Letter and ESOP Loan Documents
  (1)10.3*
                                                          BankLiberty
      and Liberty Bancorp, Inc. Employment Agreement with Brent M. Giles
      (3)10.4*
                                                          BankLiberty
      Change in Control Agreement with Marc J. Weishaar (3)10.5*
                                                          BankLiberty
      Change in Control Agreement with Mark E. Hecker (3)10.6*
                                                          Liberty
      Savings Bank Directors’ Retirement Plan (1)10.7*
                                                          Liberty
      Bancorp, Inc. 2003 Incentive Equity and Deferred Compensation Plan, as
      Amended and Restated (4)10.8*
                                                          Liberty
      Bancorp, Inc. 2007 Equity Incentive Plan (5)14.0
                                                          Code
      of Ethics (3)21.0
                                                          Subsidiaries23.0
                                                          Consent
      of Michael Trokey & Company, P.C.31.1
                                                          Rule
      13a-14 Certification of Chief Executive Officer31.2
                                                          Rule
      13a-14 Certification of Chief Financial Officer32.0
                                                          Section
      1350 Certifications


*
              Management
      contract or compensatory plan, contract or
  arrangement.
 (1)
              Incorporated
      by reference to Company’s Registration Statement on Form S-1, as amended
      (File No. 333-133849), initially filed with the Securities and Exchange
      Commission on May 5, 2006.
 (2)
              Incorporated
      by reference to the Company’s Form 8-K filed with the Securities and
      Exchange Commission on November 28,
2007.
 (3)
              Incorporated
      by reference to the Company’s 2006 Annual Report on Form 10-K, as amended,
      initially filed with the Securities and Exchange Commission on December
      26, 2006.
 (4)
              Incorporated
      by reference to the Company’s Form S-8 filed on August 14,
      2006.
 (5)
                Incorporated
      by reference to the Company’s Form S-8 filed on February 8,
      2007.
  54
 
 MICHAEL
TROKEY & COMPANY, P.C.
 CERTIFIED
PUBLIC ACCOUNTANTS
 10411
CLAYTON ROAD
 ST.
LOUIS, MISSOURI  63131
 
 Report
of Independent Registered Public Accounting Firm
 
 Audit
Committee, Board of Directors and Stockholders
 Liberty
Bancorp, Inc.
 Liberty,
Missouri
 
 We have
audited the accompanying consolidated balance sheets of Liberty Bancorp, Inc.
and subsidiary (“the Company”) as of September 30, 2008 and 2007 and the related
consolidated statements of earnings, comprehensive earnings, stockholders'
equity, and cash flows for the years then ended.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Liberty Bancorp, Inc. and
subsidiary as of September 30, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
 
 We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting as of September 30, 2008,
included in the accompanying management’s annual report on internal control over
financial reporting and, accordingly, we do not express an opinion
thereon.
 
 
 /s/
Michael Trokey & Company, P.C.
 
 
 St.
Louis, Missouri
 December
22, 2008
  F-1
  LIBERTY
BANCORP, INC.
  Consolidated
Balance Sheets
  September
30, 2008 and 2007
 
 2008
                                                      
                                                      
                                                      2007AssetsCash
      and cash equivalents
                                                      
                                                      $
                                                      5,274,603
                                                      
                                                      
                                                      
                                                      6,502,289Federal
      funds sold
                                                      
                                                      
                                                      2,810,000
                                                      
                                                      
                                                      
                                                      2,540,000Total
      cash and cash equivalents
                                                      
                                                      
                                                      8,084,603
                                                      
                                                      
                                                      
                                                      9,042,289Securities
      available for sale, at market value (amortized costof
      $25,681,057 and $47,789,202, respectively)
                                                      
                                                      
                                                      26,053,420
                                                      
                                                      
                                                      
                                                      47,982,519Stock
      in Federal Home Loan Bank of Des Moines
                                                      
                                                      
                                                      3,576,300
                                                      
                                                      
                                                      
                                                      1,531,200Mortgage-backed
      securities:Available
      for sale, at market value (amortized cost of$14,007,011
      and $19,620,825, respectively)
                                                      
                                                      
                                                      13,989,151
                                                      
                                                      
                                                      
                                                      19,276,996Loans
      receivable, net of allowance for loan lossesof
      $2,633,298 and $3,010,904, respectively
                                                      
                                                      
                                                      256,713,257
                                                      
                                                      
                                                      
                                                      232,307,925Loans
      held for sale
                                                      
                                                      
                                                      877,246
                                                      
                                                      
                                                      
                                                      719,086Premises
      and equipment, net
                                                      
                                                      
                                                      9,790,337
                                                      
                                                      
                                                      
                                                      8,744,846Bank-owned
      life insurance (BOLI)
                                                      
                                                      
                                                      8,538,528
                                                      
                                                      
                                                      
                                                      8,101,192Foreclosed
      real estate, net
                                                      
                                                      
                                                      4,936,355
                                                      
                                                      
                                                      
                                                      1,675,871Accrued
      interest receivable
                                                      
                                                      
                                                      1,640,478
                                                      
                                                      
                                                      
                                                      2,055,814Other
      assets
                                                      
                                                      
                                                      705,649
                                                      
                                                      
                                                      
                                                      214,823Deferred
      tax asset
                                                      
                                                      
                                                      1,279,570
                                                      
                                                      
                                                      
                                                      1,533,426Total
      assets
                                                      
                                                      $
                                                      336,184,894
                                                      
                                                      
                                                      
                                                      333,185,987Liabilities
      and Stockholders' EquityDeposits
                                                      
                                                      $
                                                      219,763,837
                                                      
                                                      
                                                      
                                                      252,305,482Accrued
      interest payable on deposits
                                                      
                                                      
                                                      297,656
                                                      
                                                      
                                                      
                                                      601,285Advances
      from FHLB
                                                      
                                                      
                                                      69,240,870
                                                      
                                                      
                                                      
                                                      26,430,394Securities
      sold under agreement to repurchase
                                                      
                                                      
                                                      812,500
                                                      
                                                      
                                                      
                                                      1,221,184Advances
      from borrowers for taxes and insurance
                                                      
                                                      
                                                      864,268
                                                      
                                                      
                                                      
                                                      905,606Other
      liabilities
                                                      
                                                      
                                                      1,196,659
                                                      
                                                      
                                                      
                                                      1,439,195Accrued
      income taxes
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      88,308Total
      liabilities
                                                      
                                                      
                                                      292,175,790
                                                      
                                                      
                                                      
                                                      282,991,454Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, $0.01 par value;  1,000,000 sharesauthorized;
      shares issued and outstanding - none
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Common
      stock, $0.01 par value; 20,000,000 shares authorized;4,761,712
      and 4,761,187 shares issued
                                                      
                                                      
                                                      47,617
                                                      
                                                      
                                                      
                                                      47,612Treasury
      stock, at cost, 825,002 shares at September 30, 2008
                                                      
                                                      
                                                      (8,632,753
                                                      )
                                                      
                                                      
                                                      -Additional
      paid-in capital
                                                      
                                                      
                                                      32,320,258
                                                      
                                                      
                                                      
                                                      31,923,289Common
      stock acquired by ESOP
                                                      
                                                      
                                                      (474,634
                                                      )
                                                      
                                                      
                                                      (701,309
                                                      )Accumulated
      other comprehensive earnings, net
                                                      
                                                      
                                                      292,484
                                                      
                                                      
                                                      
                                                      (12,619
                                                      )Retained
      earnings - substantially restricted
                                                      
                                                      
                                                      20,456,132
                                                      
                                                      
                                                      
                                                      18,937,560Total
      stockholders' equity
                                                      
                                                      
                                                      44,009,104
                                                      
                                                      
                                                      
                                                      50,194,533Total
      liabilities and stockholders' equity
                                                      
                                                      $
                                                      336,184,894
                                                      
                                                      
                                                      
                                                      333,185,987
  See
      accompanying notes to consolidated financial statements.
  F-2
  LIBERTY
BANCORP, INC.
 
 Consolidated
Statements of Earnings
 
 Years
Ended September 30, 2008 and 2007
 
 2008
                                                        
                                                        
                                                        2007Interest
      income:Loans
      receivable
                                                        
                                                        $
                                                        17,355,934
                                                        
                                                        
                                                        
                                                        17,233,026Mortgage-backed
      securities
                                                        
                                                        
                                                        705,131
                                                        
                                                        
                                                        
                                                        933,469Securities
      - taxable
                                                        
                                                        
                                                        1,416,150
                                                        
                                                        
                                                        
                                                        1,714,706Securities
      - non-taxable
                                                        
                                                        
                                                        536,110
                                                        
                                                        
                                                        
                                                        361,092Other
      interest - earning assets
                                                        
                                                        
                                                        143,261
                                                        
                                                        
                                                        
                                                        320,881Total
      interest income
                                                        
                                                        
                                                        20,156,586
                                                        
                                                        
                                                        
                                                        20,563,174Interest
      expense:Deposits
                                                        
                                                        
                                                        7,321,062
                                                        
                                                        
                                                        
                                                        9,084,278Securities
      sold under agreement to repurchase
                                                        
                                                        
                                                        57,834
                                                        
                                                        
                                                        
                                                        77,323Advances
      from FHLB
                                                        
                                                        
                                                        2,005,534
                                                        
                                                        
                                                        
                                                        1,332,527Total
      interest expense
                                                        
                                                        
                                                        9,384,430
                                                        
                                                        
                                                        
                                                        10,494,128Net
      interest income
                                                        
                                                        
                                                        10,772,156
                                                        
                                                        
                                                        
                                                        10,069,046Provision
      for loan losses
                                                        
                                                        
                                                        1,881,175
                                                        
                                                        
                                                        
                                                        602,089Net
      interest income after provision for loan losses
                                                        
                                                        
                                                        8,890,981
                                                        
                                                        
                                                        
                                                        9,466,957Noninterest
      income:Loan
      service charges
                                                        
                                                        
                                                        63,632
                                                        
                                                        
                                                        
                                                        89,507Gain
      on sale of securities available for sale
                                                        
                                                        
                                                        135,303
                                                        
                                                        
                                                        
                                                        -Gain
      on sale of loans
                                                        
                                                        
                                                        318,634
                                                        
                                                        
                                                        
                                                        247,339Change
      in cash surrender value of BOLI
                                                        
                                                        
                                                        437,336
                                                        
                                                        
                                                        
                                                        101,192Deposit
      account service charges
                                                        
                                                        
                                                        1,168,913
                                                        
                                                        
                                                        
                                                        1,039,412Total
      noninterest income
                                                        
                                                        
                                                        2,123,818
                                                        
                                                        
                                                        
                                                        1,477,450Noninterest
      expense:Compensation
      and benefits
                                                        
                                                        
                                                        4,445,981
                                                        
                                                        
                                                        
                                                        4,445,083Occupancy
      expense
                                                        
                                                        
                                                        673,323
                                                        
                                                        
                                                        
                                                        624,759Equipment
      and data processing expense
                                                        
                                                        
                                                        930,917
                                                        
                                                        
                                                        
                                                        798,133Operations
      from foreclosed real estate, net
                                                        
                                                        
                                                        361,994
                                                        
                                                        
                                                        
                                                        356,348FDIC
      premium expense
                                                        
                                                        
                                                        134,795
                                                        
                                                        
                                                        
                                                        41,048Professional
      and regulatory services
                                                        
                                                        
                                                        434,083
                                                        
                                                        
                                                        
                                                        407,760Advertising
                                                        
                                                        
                                                        250,486
                                                        
                                                        
                                                        
                                                        254,930Correspondent
      banking charges
                                                        
                                                        
                                                        233,664
                                                        
                                                        
                                                        
                                                        260,576Supplies
                                                        
                                                        
                                                        136,320
                                                        
                                                        
                                                        
                                                        137,693Other
                                                        
                                                        
                                                        785,708
                                                        
                                                        
                                                        
                                                        719,683Total
      noninterest expense
                                                        
                                                        
                                                        8,387,271
                                                        
                                                        
                                                        
                                                        8,046,013Earnings
      before income taxes
                                                        
                                                        
                                                        2,627,528
                                                        
                                                        
                                                        
                                                        2,898,394Income
      taxes:Current
                                                        
                                                        
                                                        639,000
                                                        
                                                        
                                                        
                                                        1,338,000Deferred
                                                        
                                                        
                                                        67,000
                                                        
                                                        
                                                        
                                                        (384,000
                                                        )Total
      income taxes
                                                        
                                                        
                                                        706,000
                                                        
                                                        
                                                        
                                                        954,000Net
      earnings
                                                        
                                                        $
                                                        1,921,528
                                                        
                                                        
                                                        
                                                        1,944,394Basic
      earnings per share
                                                        
                                                        $
                                                        0.48
                                                        
                                                        
                                                        
                                                        0.42Diluted
      earnings per share
                                                        
                                                        $
                                                        0.47
                                                        
                                                        
                                                        
                                                        0.42
  See
      accompanying notes to consolidated financial statements.
  F-3
  LIBERTY
BANCORP, INC.
 
 Consolidated
Statements of Comprehensive Earnings
 
 Years
Ended September 30, 2008 and 2007
  2008
                            
                            
                            2007Net
      earnings
                            
                            $
                            1,921,528
                            
                            
                            
                            1,944,394Other
      comprehensive earnings:Unrealized
      gain on securities and MBSs available for sale, net:Reclassification
      adjustment for gains included in earnings,net
      of tax of $47,356 and $0, respectively
                            
                            
                            (87,947
                            )
                            
                            
                            -Unrealized
      gains arising during the year, net of tax of$218,673
      and  $280,911, respectively
                            
                            
                            406,107
                            
                            
                            
                            478,307Adjustment
      to initially apply SFAS Statement No. 158, net of tax of$44,264
                            
                            
                            -
                            
                            
                            
                            82,204Decrease
      in unrealized gain under SFAS Statement No. 158, net of
      taxof
      $7,031
                            
                            
                            (13,057
                            )
                            
                            
                            -Comprehensive
      earnings
                            
                            $
                            2,226,631
                            
                            
                            
                            2,504,905
  See
      accompanying notes to consolidated financial statements.
  F-4
  LIBERTY
BANCORP, INC.
 
 Consolidated
Statements of Stockholders’ Equity
 
 Years
Ended September 30, 2008 and 2007
  CommonCommon
                      
                      
                      Stock
                      
                      
                      
                      
                      
                      AccumulatedAdditional
                      
                      
                      Stock
                      
                      
                      Acquired
      by
                      
                      
                      
                      
                      
                      Other
                      
                      
                      TotalCommon
                        Stock
                      
                      
                      Treasury
                        Stock
                      
                      
                      Paid-In
                        Capital
                      
                      
                      Acquired
                        by
      ESOP
                      
                      
                      Incentive
                        Plan
                      
                      
                      Retained
                        Earnings
                      
                      
                      Comprehensive
                        Earnings,
      Net
                      
                      
                      Stockholders'
                        EquityBalance
      at September 30, 2006
                      
                      $
                      47,601
                      
                      
                      
                      -
                      
                      
                      
                      33,001,965
                      
                      
                      
                      (933,192
                      )
                      
                      
                      (18,676
                      )
                      
                      
                      17,457,008
                      
                      
                      
                      (573,130
                      )
                      
                      
                      48,981,576Shares
      issued under stock- based incentive plan
                      
                      
                      11
                      
                      
                      
                      -
                      
                      
                      
                      8,684
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      8,695Amortization
      of ESOP award
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      100,852
                      
                      
                      
                      231,883
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      332,735Reclass
      to apply SFAS No. 123(R)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (18,676
                      )
                      
                      
                      -
                      
                      
                      
                      18,676
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Amortization
      of stock awards
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      162,519
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      162,519Amortization
      of stock option grants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      67,553
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      67,553Unrealized
      gain on securities available for sale, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      478,307
                      
                      
                      
                      478,307Unrealized
      gain to initially apply SFAS No. 158, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      82,204
                      
                      
                      
                      82,204Repurchase
      of common stock for incentive stock award plan
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,399,608
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,399,608
                      )Cash
      dividends of $.10 per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (463,842
                      )
                      
                      
                      -
                      
                      
                      
                      (463,842
                      )Net
      earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,944,394
                      
                      
                      
                      -
                      
                      
                      
                      1,944,394Balance
      at September 30, 2007
                      
                      $
                      47,612
                      
                      
                      
                      -
                      
                      
                      
                      31,923,289
                      
                      
                      
                      (701,309
                      )
                      
                      
                      -
                      
                      
                      
                      18,937,560
                      
                      
                      
                      (12,619
                      )
                      
                      
                      50,194,533Shares
      issued under stock- based incentive plan
                      
                      
                      5
                      
                      
                      
                      -
                      
                      
                      
                      4,342
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,347Treasury
      stock
                      
                      
                      -
                      
                      
                      
                      (8,632,753
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (8,632,753
                      )Amortization
      of ESOP award
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      69,703
                      
                      
                      
                      226,675
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      296,378Amortization
      of stock awards
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      246,588
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      246,588Amortization
      of stock option grants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      75,347
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      75,347Unrealized
      gain on securities available for sale, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      318,160
                      
                      
                      
                      318,160Decrease
      in unrealized gain under SFAS No. 158, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (13,057
                      )
                      
                      
                      (13,057
                      )Other
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      989
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      989Cash
      dividends of $.10 per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (402,956
                      )
                      
                      
                      -
                      
                      
                      
                      (402,956
                      )Net
      earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,921,528
                      
                      
                      
                      -
                      
                      
                      
                      1,921,528Balance
      at September 30, 2008
                      
                      $
                      47,617
                      
                      
                      
                      (8,632,753
                      )
                      
                      
                      32,320,258
                      
                      
                      
                      (474,634
                      )
                      
                      
                      -
                      
                      
                      
                      20,456,132
                      
                      
                      
                      292,484
                      
                      
                      
                      44,009,104
 
 See
accompanying notes to consolidated financial statements.
  F-5
 
 LIBERTY
BANCORP, INC.
 
 Consolidated
Statements of Cash Flows
 
 Years
Ended September 30, 2008 and 2007
  2008
                                        
                                        
                                        2007Cash
      flows from operating activities:Net
      earnings
                                        
                                        $
                                        1,921,528
                                        
                                        
                                        
                                        1,944,394Adjustments
      to reconcile net earnings to netcash
      provided by (used for) operating activities:Depreciation
      expense
                                        
                                        
                                        570,422
                                        
                                        
                                        
                                        463,259ESOP
      expense
                                        
                                        
                                        296,378
                                        
                                        
                                        
                                        332,735Incentive
      Plan expense
                                        
                                        
                                        321,935
                                        
                                        
                                        
                                        230,072Amortization
      of discounts on investments, net
                                        
                                        
                                        (21,141
                                        )
                                        
                                        
                                        (32,714
                                        )Amortization
      of unearned discount on loansand
      deferred loan fees, net
                                        
                                        
                                        (279,263
                                        )
                                        
                                        
                                        (294,752
                                        )Provision
      for loan losses
                                        
                                        
                                        1,881,175
                                        
                                        
                                        
                                        602,089Loans
      held for sale - originated
                                        
                                        
                                        (24,739,010
                                        )
                                        
                                        
                                        (20,353,682
                                        )Loans
      held for sale - proceeds from sale
                                        
                                        
                                        24,899,484
                                        
                                        
                                        
                                        20,341,136Gain
      on sale of loans
                                        
                                        
                                        (318,634
                                        )
                                        
                                        
                                        (247,339
                                        )Increase
      in cash surrender value of bank-owned lifeinsurance
                                        
                                        
                                        (437,336
                                        )
                                        
                                        
                                        (101,192
                                        )Gain
      on sale of securities available for sale
                                        
                                        
                                        (135,303
                                        )
                                        
                                        
                                        —Loss
      on foreclosed real estate, net
                                        
                                        
                                        310,572
                                        
                                        
                                        
                                        288,045Decrease
      (increase) in:Accrued
      interest receivable
                                        
                                        
                                        415,336
                                        
                                        
                                        
                                        (569,459
                                        )Other
      assets
                                        
                                        
                                        (490,826
                                        )
                                        
                                        
                                        (32,581
                                        )Deferred
      tax assets
                                        
                                        
                                        67,000
                                        
                                        
                                        
                                        (384,000
                                        )Increase
      (decrease) in:Accrued
      interest on deposits and other liabilities
                                        
                                        
                                        (559,222
                                        )
                                        
                                        
                                        510,112Accrued
      income taxes
                                        
                                        
                                        (88,308
                                        )
                                        
                                        
                                        (72,419
                                        )Net
      cash provided by (used for) operating activities
                                        
                                        
                                        3,614,787
                                        
                                        
                                        
                                        2,623,704Cash
      flows from investing activities:Net
      change in loans receivable
                                        
                                        
                                        (32,977,909
                                        )
                                        
                                        
                                        (35,401,657
                                        )Mortgage-backed
      securities:Available
      for sale - principal collections
                                        
                                        
                                        5,606,708
                                        
                                        
                                        
                                        5,228,574Securities
      available for sale:Purchase
                                        
                                        
                                        (448,061
                                        )
                                        
                                        
                                        (16,946,207
                                        )Proceeds
      from maturity or call
                                        
                                        
                                        4,935,000
                                        
                                        
                                        
                                        5,350,000Proceeds
      from sale
                                        
                                        
                                        17,743,207
                                        
                                        
                                        
                                        —Principal
      collections
                                        
                                        
                                        41,550
                                        
                                        
                                        
                                        —Purchase
      of stock in FHLB of Des Moines
                                        
                                        
                                        (2,513,071
                                        )
                                        
                                        
                                        (1,300,100
                                        )Redemption
      of stock in FHLB of Des Moines
                                        
                                        
                                        467,971
                                        
                                        
                                        
                                        1,721,800Proceeds
      from the sale of foreclosed real estate, net
                                        
                                        
                                        3,399,609
                                        
                                        
                                        
                                        2,624,705Purchase
      of premises and equipment
                                        
                                        
                                        (1,615,913
                                        )
                                        
                                        
                                        (2,507,916
                                        )Purchase
      of bank-owned life insurance policy
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (8,000,000
                                        )Net
      cash provided by (used for) investing activities
                                        
                                        $
                                        (5,360,909
                                        )
                                        
                                        
                                        (49,230,801
                                        )
 
 (Continued)
  F-6
 
 LIBERTY
BANCORP, INC.
 
 Consolidated
Statements of Cash Flows
 
 Years
Ended September 30, 2008 and 2007
  (Continued)
  2008
                          
                          
                          2007Cash
      flows from financing activities:Net
      increase (decrease) in deposits
                          
                          $
                          (32,541,645
                          )
                          
                          
                          53,834,503Increase
      (decrease) in advances fromborrowers
      for taxes and insurance
                          
                          
                          (41,338
                          )
                          
                          
                          62,094Proceeds
      from advances from the FHLB
                          
                          
                          1,156,350,000
                          
                          
                          
                          276,100,000Repayment
      of advances from the FHLB
                          
                          
                          (1,113,539,524
                          )
                          
                          
                          (283,733,344
                          )Securities
      sold under agreement to repurchase:Proceeds
                          
                          
                          10,662,300
                          
                          
                          
                          51,974,878Repayments
                          
                          
                          (11,070,984
                          )
                          
                          
                          (54,137,691
                          )Proceeds
      from exercise of stock options
                          
                          
                          4,347
                          
                          
                          
                          8,695Repurchase
      of common stock
                          
                          
                          (8,632,753
                          )
                          
                          
                          (1,399,608
                          )Other
                          
                          
                          989
                          
                          
                          
                          -Cash
      dividends
                          
                          
                          (402,956
                          )
                          
                          
                          (463,842
                          )Net
      cash provided by (used for)financing
      activities
                          
                          
                          788,436
                          
                          
                          
                          42,245,685Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          (957,686
                          )
                          
                          
                          (4,361,412
                          )Cash
      and cash equivalents at beginning of year
                          
                          
                          9,042,289
                          
                          
                          
                          13,403,701Cash
      and cash equivalents at end of year
                          
                          $
                          8,084,603
                          
                          
                          
                          9,042,289Supplemental
      disclosures of cash flow information:Cash
      paid (received) during the year for:Interest
      on deposits
                          
                          $
                          7,624,587
                          
                          
                          
                          8,799,195Interest
      on advances from FHLB of Des Moines
                          
                          
                          2,016,978
                          
                          
                          
                          1,329,586Interest
      on securities sold under agreement to repurchase
                          
                          
                          57,939
                          
                          
                          
                          77,487Income
      taxes
                          
                          
                          920,655
                          
                          
                          
                          1,411,889Real
      estate acquired in settlement of loans
                          
                          
                          6,970,665
                          
                          
                          
                          5,383,483Loans
      originated to finance the sale of foreclosed real estate
                          
                          
                          -
                          
                          
                          
                          2,374,710
  See
      accompanying notes to consolidated financial statements.
  F-7
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  September
30, 2008 and 2007 and
 Years
Ended September 30, 2008 and 2007
 
 (1)              Summary
of Significant Accounting Policies
 
 Liberty
Bancorp, Inc. (the “Company” or “Liberty Bancorp”) was organized as a Missouri
corporation at the direction of BankLiberty, formerly “Liberty Savings Bank,
F.S.B.” (the “Bank” or “BankLiberty”), in February 2006 to become the holding
company for the Bank upon the completion of the “second-step” mutual-to-stock
conversion (the “Conversion”) of Liberty Savings Mutual Holding Company (the
“MHC”).  The Conversion was completed on July 21, 2006.  As
part of the Conversion, the MHC merged into the Bank, thereby ceasing to exist,
and Liberty Savings Bank, F.S.B. changed its name to “BankLiberty.”  A
total of 2,807,383 shares of common stock were sold in the stock offering at the
price of $10.00 per share.  In addition, a total of 1,952,754 shares
of common stock were issued to the minority shareholders of the former Liberty
Savings Bank, F.S.B. representing an exchange ratio of 3.5004 shares of Company
common stock for each share of Liberty Savings Bank, F.S.B. common
stock.  Fractional shares in the aggregate, or 36 shares, were
redeemed for cash.  Total shares outstanding after the stock offering
and the exchange totaled 4,760,137 shares.  Net proceeds of $25.6
million were raised in the stock offering, excluding $1.2 million which was
loaned by the Company to a trust for the Employee Stock Ownership Plan (the
“ESOP”), enabling it to finance 153,263 shares of common stock in the offering
and exchange.  Direct offering costs totaled approximately $1.3
million.  In addition, as part of the Conversion and dissolution of
Liberty Savings Mutual Holding Company, the Bank received approximately $694,000
of cash previously held by the MHC.
 
 The
following comprise the significant accounting policies, which the Company and
Bank follow in preparing and presenting their consolidated financial
statements:
 
 a.
                  The
      consolidated financial statements include the accounts of the Company and
      its wholly-owned subsidiary, BankLiberty. The Company’s principal business
      is the business of the Bank.  All  significant
      intercompany accounts and transactions have been
    eliminated.
 
 b.
                    For
      purposes of reporting cash flows, cash and cash equivalents include cash
      and due from banks and interest-bearing funds in other banks with original
      maturities of three months or less.  The Company maintains cash
      in bank accounts which may exceed federally insured limits.  The
      Company does not believe it is exposed to any significant credit
      risk.  Interest-bearing funds in other banks were $1,129,990 and
      $7,175,110 at September 30, 2008 and 2007, respectively.  A
      restricted cash account of $560,510 related to clearing of checks was held
      in a correspondent bank at September 30, 2008 and
  2007.
 
 c.
                    Securities
      and mortgage-backed securities that the Company has the positive intent
      and ability to hold to maturity are classified as held to maturity
      securities and reported at cost, adjusted for amortization of premiums and
      accretion of discounts over the life of the security using the interest
      method.  Securities and mortgage-backed securities not
      classified as held to maturity securities are classified as available for
      sale securities and are reported at fair value, with unrealized gains and
      losses excluded from net earnings and reported as a separate component of
      stockholders’ equity.  Unreallized gains on securities and
      mortgage-backed securities, net of tax of $131,166, amounted to $223,337
      at September 30, 2008.  Unrealized losses on securities and
      mortgage-backed securities, net of tax of $55,689, amounted to $94,823 at
      September 30, 2007.  The Company does not purchase securities
      and mortgage-backed securities for trading
  purposes.
  F-8
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  The
      cost of securities sold is determined by specific
      identification.  Declines in fair value of securities and
      mortgage-backed securities available for sale that are deemed to be
      other-than-temporary are charged to earnings as a realized
      loss.  In estimating other-than-temporary impairment losses,
      management of the Company considers the length of time and the extent to
      which the fair value has been less than cost, the financial condition and
      near-term prospects of the issuer, and the intent and ability of the
      Company to retain its investment in the issuer for a period of time to
      allow for any anticipated recovery in fair value.  Stock in the
      Federal Home Loan Bank of Des Moines is recorded at cost, which represents
      redemption value.  Dividends received on such stock are reported
      as income.  The Bank is a member of the Federal Home Loan Bank
      system.  The required investment in the common stock is based
      upon a certain percentage of the Bank’s assets and FHLB
      advances.
 
 Collateralized
mortgage obligations (“CMOs”) are mortgage derivatives and the type owned by the
Bank is classified as “low risk” under regulatory guidelines.  CMOs
are subject to the effects of interest rate risk.  The Bank does not
purchase CMOs at any significant premium over par value to limit certain
prepayment risks.
 
 d.
                    Loans
      receivable, net are carried at unpaid principal balances, less loans in
      process, net deferred
      loan fees, unearned discount and allowance for
  losses.
 
 Loans
      originated and held for sale in the secondary market are carried at the
      lower of cost or estimated market value in the aggregate.  Net
      unrealized losses are recognized through a valuation allowance by charges
      to income.  Gain on sale of loans is recognized once title has
      passed to the purchaser, substantially all risks and rewards of ownership
      have irrevocably passed to the purchaser and recourse obligations, if any,
      are minor and can be reasonably estimated.  Loan origination and
      commitment fees and certain direct loan origination costs are deferred and
      amortized to interest income over the contractual life of the loan using
      the interest method.
 
 e.
                  Valuation
      allowances are established for impaired loans for the difference between
      the loan amount and the fair value of collateral less estimated selling
      costs.  The Bank considers a loan to be impaired when, based on
      current information and events, it is probable that the Bank will be
      unable to collect all amounts due according to the contractual terms of
      the loan agreement on a timely basis.  The types of loans for
      which impairment is measured include nonaccrual income property loans
      (excluding those loans included in the homogenous portfolio which are
      collectively reviewed for impairment), large, nonaccrual single-family
      loans and troubled debt restructurings.  Such loans are
      generally placed on nonaccrual status at the point deemed
      uncollectible.  Impairment losses are recognized through an
      increase in the allowance for loan losses.  A loan is considered
      delinquent when a payment has not been made by the contractual due
      date.  See note 5 for information regarding impaired loans at
      September 30, 2008 and 2007.
  F-9
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  f.
                  Allowances
      for losses are available to absorb losses incurred on loans and foreclosed
      real estate held for sale and represent additions charged to expense, less
      net charge-offs.  Loans are charged-off in the period deemed
      uncollectible.  Recoveries of loans previously charged-off are
      recorded when received.  The allowances are evaluated on a
      regular basis by management and are based on management's periodic review
      of the collectibility of loans, in light of historical experience, fair
      value of the underlying collateral, changes in the types and mix of loans
      originated and prevailing economic
conditions.
 
 g.
                  Premises
      and equipment are carried at cost, less accumulated
      depreciation.  Depreciation of premises and equipment is
      computed using the straight-line method based on the estimated useful
      lives of the related assets.  Estimated lives are five to forty
      years for buildings and improvements, and three to ten years for furniture
      and equipment.
 
 h.
                    Foreclosed
      real estate is carried at the lower of cost or fair value less estimated
      selling costs
      based upon an appraisal or internal valuation of the
      property.  Costs related to improvement
      of real estate are capitalized.  Foreclosed assets also include
      properties for which the Bank has taken physical possession, even though
      formal foreclosure proceedings have not taken
  place.
 
 i.
                    Interest
      on securities, mortgage-backed securities and loans receivable is accrued
      as earned.  Interest
      on loans receivable contractually delinquent is excluded from
      income when
      deemed uncollectible.  When a loan is classified as nonaccrual,
      accrued interest is reversed against current income.  Subsequent
      collection of interest on nonaccrual loans is recorded as income when
      received or applied to reduce the loan balance.  Accrual of
      interest is resumed on previously classified nonaccrual loans, when there
      is no longer any reasonable doubt as to the timely collection of
      interest.  Accrued interest receivable as of September 30, 2008
      and 2007 is summarized as
follows:
 
 2008
                            
                            
                            2007Securities
                            
                            $
                            366,688
                            
                            
                            
                            578,482Mortgage-backed
      securities
                            
                            
                            59,462
                            
                            
                            
                            82,152Loans
      receivable
                            
                            
                            1,214,328
                            
                            
                            
                            1,395,180$
                            1,640,478
                            
                            
                            
                            2,055,814
 
 j.
                  Bank
      owned life insurance is carried at the cash surrender
      value.  Changes in the cash surrender value, including interest
      income, increases and decreases in value and policy expenses, are
      recognized as a component of noninterest
income.
 
 k.
                  Deferred
      income tax assets and liabilities are computed for differences between the
      financial statement and tax basis of assets and liabilities which will
      result in taxable or deductible amounts in the future based on enacted tax
      laws and rates applicable to the periods in which the differences are
      expected to affect income.  Valuation allowances are established
      when necessary to reduce deferred tax assets to the amount that will more
      likely than not be realized.  Income tax expense is the tax
      payable or refundable for the period plus or minus the net change in the
      deferred tax assets and
liabilities.
  F-10
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  l.
                  On
      October 1, 2006, the Company adopted Statement of Financial Accounting
      Standards (“SFAS”) No. 123 (revised 2004) (SFAS No. 123 (R)), “Share-Based
      Payment,” using the modified prospective
method.
 
 Under
this method, compensation expense is recognized based on the fair value of
unvested stock awards at the implementation date of SFAS No. 123 (R) and new
awards granted thereafter, which includes restricted stock and stock options, at
the grant date and is recognized on a straight–line basis over the requisite
service period.  The fair value of stock options is estimated at the
date of grant using the Black–Scholes pricing model and related
assumptions.  The risk–free rate is based on the U.S. Treasury
zero–coupon issue with a remaining term equal to the expected term used as an
assumption in the model.  The expected term is based upon the average
of the original contractual term and the vesting term.  Since the
Company is a relatively new, fully public entity, the expected volatility is
based upon the expected volatility of similar fully public
entities.
 
 m.
                  For
      ESOP shares committed to be released, the Bank recognizes compensation
      expense equal to the average fair value of the shares committed to be
      released during the period in accordance with the provisions of Statement
      of Position 93-6.
 
 n.
                    Earnings
      per share are based upon the weighted-average shares
      outstanding.  ESOP shares, which have been committed to be
      released, are considered outstanding and stock options to the extent
      dilutive.
 
 Following
is a summary of basic and diluted earnings per common share for the years ended
September 30, 2008 and 2007:
 
 2008
                        
                        
                        2007Net
      earnings
                        
                        $
                        1,921,528
                        
                        
                        
                        1,944,394Weighted-average
      shares - Basic EPS
                        
                        
                        4,007,591
                        
                        
                        
                        4,618,323Stock
      options - treasury stock method
                        
                        
                        39,468
                        
                        
                        
                        42,980Weighted-average
      shares - Diluted EPS
                        
                        
                        4,047,059
                        
                        
                        
                        4,661,303Basic
      earnings per common share
                        
                        $
                        0.48
                        
                        
                        
                        0.42Diluted
      earnings per common share
                        
                        $
                        0.47
                        
                        
                        
                        0.42Anti-dilutive
      shares
                        
                        
                        94,185
                        
                        
                        
                        51,551
 
 o.
                    The
      following paragraphs summarize the impact of new accounting
      pronouncements:
 
 In
      June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes – an interpretation of FASB No.
      109.”  This Interpretation prescribes a recognition threshold
      and measurement attribute for financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax
      return, and provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure and
      transition.  The Company adopted the provisions of FIN 48,
      effective October 1, 2007.  No adjustments were recognized for
      uncertain tax positions.  The Company is subject to U.S. Federal
      income taxes, as well as Missouri income taxes and special financial
      institution taxes.  Tax years ending September 30, 2006 through
      September 30, 2008 remain open to examination by these
      jurisdictions.  The Company recognizes interest and penalties
      related to tax positions in income tax expense.  At September
      30, 2008, there was no accrual for uncertain tax positions or related
      interest.
  F-11
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” to
      define fair value, establish a framework for measuring fair value and
      expand disclosures about fair values.  The Statement is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal
      years.  SFAS No. 157 was adopted on October 1, 2008 and did not
      have a material impact on the Company’s financial position or results of
      operation.
 
 In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
      Financial Assets and Financial Liabilities.”  SFAS No. 159
      permits entities to choose to measure many financial instruments and
      certain items at fair value.  Entities shall report unrealized
      gains and losses on those items which the fair value option has been
      elected in earnings.  SFAS No. 159 is effective as of the
      beginning of an entity’s first fiscal year that begins after November 15,
      2007.  SFAS No. 159 was adopted on October 1, 2008 and did not
      have a material impact on the Company’s financial position or results of
      operation.
 
 In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements – an amendment of ARB No.
      51.”  SFAS No. 160 improves the relevance, comparability, and
      transparency of the financial information that an entity provides in its
      consolidated financial statements by establishing accounting and reporting
      standards for a noncontrolling interest or minority interest, the portion
      of equity in a subsidiary not attributable, directly or indirectly, to a
      parent.
 
 In
      December 2007, the FASB issued SFAS No. 141 (revised 2007) (R), “Business
      Combinations.”  SFAS No. 141 (R) improves the relevance,
      representational faithfulness, and comparability of the financial
      information that an entity provides in its financial reports regarding
      business combinations and its
effects.
 
 SFAS
      No. 160 and SFAS No. 141 (R) are effective for fiscal years, and interim
      periods within those fiscal years, beginning after December 15,
      2008  The Company is currently reviewing the applications of
      SFAS No. 160 and SFAS No. 141 (R).  At September 30, 2008, the
      Company did not have a noncontrolling
interest.
 
 In
      March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities – an amendment of FASB Statement No.
      133.”  SFAS No. 161 requires enhanced disclosures about an
      entity’s derivative and hedging activities and improves the transparency
      of financial reporting.  SFAS No. 161 is effective for financial
      statements issued for fiscal years and interim periods beginning after
      November 15, 2008, with earlier application encouraged.  The
      Company is currently reviewing the application of SFAS No.
      161.
  F-12
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  In
      May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
      Accepted Accounting Principles.”  SFAS No. 162 identifies the
      sources of accounting principles and the framework for selecting the
      principles to be used in preparation of financial statements that are
      presented in conformity with U.S. generally accepted accounting
      principles.  SFAS No. 162 is effective 60 days following the
      SEC’s approval of the PCAOB amendments to AU Section 411, “The Meaning of
      Present Fairly in Conformity With Generally Accepted Accounting
      Principles.”
 
 In
      October 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157,
      “Determining the Fair Value of a Financial Asset When the Market for That
      Asset is Not Active.”  FSP SFAS No. 157 is effective upon
      issuance.  FSP SFAS No. 157 provides clarification of SFAS No.
      157, “Fair Value Measurements,” in determining the fair value of a
      financial asset when the market for that financial asset is not
      active.  Application issues include consideration of the
      entity’s own assumptions when measuring fair value when relevant
      observable inputs do not exist; available observable inputs in a market
      that is not active should be considered when measuring fair value; and
      market quotes when assessing the relevance of observable and unobservable
      data available to measure fair value.  FSP SFAS No. 157 was
      adopted on October 1, 2008 and did not have a material impact on the
      Company’s financial position or results of
  operation.
 
 (2)
                  Risks
      and Uncertainties
 
 The Bank
is a community oriented financial institution, which provides traditional
financial services within the areas it serves.  The Bank is engaged
primarily in the business of attracting deposits from the general public and
using these funds to originate residential real estate loans, commercial
business, commercial real estate and consumer loans primarily to customers
located in Clay, Clinton, Jackson and Platte Counties of
Missouri.  Senior management of the Bank monitors the level of net
interest income and noninterest income from various products and
services.  Further, operations of the Bank are managed and financial
performance is evaluated on an institution-wide basis.  As a result,
all of the Bank's operations are considered by management to be aggregated in
one reportable operating segment.
 
 The
financial statements have been prepared in conformity with U.S. generally
accepted accounting principles.  In preparing the financial
statements, management is required to make estimates and assumptions, which
affect the reported amounts of assets and liabilities as of the balance sheet
dates and income and expenses for the years covered.  Actual results
could differ significantly from these estimates and assumptions.
 
 The
Bank's operations are affected by interest rate risk, credit risk, market risk
and regulations by the Office of Thrift Supervision (“OTS”).  The Bank
is subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more rapidly, or on a different basis, than its
interest-earning assets.  To better control the impact of changes in
interest rates, the Bank has sought to improve the match between asset and
liability maturities or repricing periods and rates by emphasizing the
origination of adjustable-rate mortgage loans, and maintaining securities and
advances from FHLB portfolio primarily with maturities of less than ten
years.  The Bank is also emphasizing transaction accounts, which are
core deposits and are treated favorably in measurement of interest rate
risk.
  F-13
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  The
Bank uses a net market value methodology provided by the OTS to measure its
interest rate risk exposure.  This exposure is a measure of the
potential decline in the net portfolio value of the Bank based upon the effect
of an assumed increase or decrease in interest rates in primarily 100 basis
point increments.  Net portfolio value is the expected net cash flows
from the institution's assets, liabilities and off-balance sheet
contracts.  Credit risk is the risk of default on the Bank's loan
portfolio that results from the borrowers' inability or unwillingness to make
contractually required payments.  Market risk reflects changes in the
value of collateral underlying loans receivable and the valuation of real estate
held by the Bank.  The Bank is subject to periodic examination by
regulatory agencies, which may require the Bank to record increases in the
allowance based on their evaluation of available information.  There
can be no assurance that the Bank’s regulators will not require further
increases to the allowances.
 
 (3)
                  Securities
 
 Securities
      are summarized as follows:
 
 2008Gross
                      
                      
                      GrossAmortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      MarketCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueAvailable
      for sale - debt securities:Federal
      agency obligations
                      
                      $
                      13,422,143
                      
                      
                      
                      480,901
                      
                      
                      
                      -
                      
                      
                      
                      13,903,044State
      and municipal obligations
                      
                      
                      11,714,464
                      
                      
                      
                      46,438
                      
                      
                      
                      (82,041
                      )
                      
                      
                      11,678,86125,136,607
                      
                      
                      
                      527,339
                      
                      
                      
                      (82,041
                      )
                      
                      
                      25,581,905Available
      for sale - equity securities
                      
                      
                      544,450
                      
                      
                      
                      -
                      
                      
                      
                      (72,935
                      )
                      
                      
                      471,515$
                      25,681,057
                      
                      
                      
                      527,339
                      
                      
                      
                      (154,976
                      )
                      
                      
                      26,053,420Weighted-average
      rate
                      
                      
                      4.69
                      %
  2007Gross
                                    
                                    
                                    GrossAmortized
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Unrealized
                                    
                                    
                                    MarketCost
                                    
                                    
                                    Gains
                                    
                                    
                                    Losses
                                    
                                    
                                    ValueAvailable
      for sale - debt securities:Federal
      agency obligations
                                    
                                    $
                                    34,555,418
                                    
                                    
                                    
                                    320,918
                                    
                                    
                                    
                                    (28,288
                                    )
                                    
                                    
                                    34,848,048State
      and municipal obligations
                                    
                                    
                                    12,839,161
                                    
                                    
                                    
                                    2,016
                                    
                                    
                                    
                                    (100,590
                                    )
                                    
                                    
                                    12,740,58747,394,579
                                    
                                    
                                    
                                    322,934
                                    
                                    
                                    
                                    (128,878
                                    )
                                    
                                    
                                    47,588,635Available
      for sale - equity securities
                                    
                                    
                                    394,623
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (739
                                    )
                                    
                                    
                                    393,884$
                                    47,789,202
                                    
                                    
                                    
                                    322,934
                                    
                                    
                                    
                                    (129,617
                                    )
                                    
                                    
                                    47,982,519Weighted-average
      rate
                                    
                                    
                                    4.72
                                    %
 
 Weighted-average
      rates are based on the coupon rate at the balance sheet
    date.
  F-14
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  Securities having a continuous
unrealized loss position for less than twelve months or twelve months or longer
are as follows:
  Less than 12 Months
                      
                      
                      12 Months or Longer
                      
                      
                      TotalMarket
                      
                      
                      Unrealized
                      
                      
                      Market
                      
                      
                      Unrealized
                      
                      
                      Market
                      
                      
                      UnrealizedValue
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      LossSeptember
      30, 2008Available
      for sale- debt securities:State
      and municipal obligations
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,773,162
                      
                      
                      
                      (82,041
                      )
                      
                      
                      4,773,162
                      
                      
                      
                      (82,041
                      )Available
      for sale- equity securities
                      
                      
                      130,279
                      
                      
                      
                      (19,548
                      )
                      
                      
                      341,236
                      
                      
                      
                      (53,387
                      )
                      
                      
                      471,515
                      
                      
                      
                      (72,935
                      )$
                      130,279
                      
                      
                      
                      (19,548
                      )
                      
                      
                      5,114,398
                      
                      
                      
                      (135,428
                      )
                      
                      
                      5,244,677
                      
                      
                      
                      (154,976
                      )September
      30, 2007Available
      for sale- debt securities:Federal
      agency obligations
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,993,047
                      
                      
                      
                      (28,288
                      )
                      
                      
                      5,993,047
                      
                      
                      
                      (28,288
                      )State
      and municipal obligations
                      
                      
                      2,777,801
                      
                      
                      
                      (21,951
                      )
                      
                      
                      5,326,202
                      
                      
                      
                      (78,639
                      )
                      
                      
                      8,104,003
                      
                      
                      
                      (100,590
                      )Available
      for sale- equity securities
                      
                      
                      393,884
                      
                      
                      
                      (739
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      393,884
                      
                      
                      
                      (739
                      )$
                      3,171,685
                      
                      
                      
                      (22,690
                      )
                      
                      
                      11,319,249
                      
                      
                      
                      (106,927
                      )
                      
                      
                      14,490,934
                      
                      
                      
                      (129,617
                      )
 
 The Company believes that the decline
in value is related to changes in market interest rates and not credit quality
of the issuers.
 
 Maturities of debt securities at
September 30, 2008 are summarized as follows:
 
 Available for SaleAmortized
                        
                        
                        MarketCost
                        
                        
                        ValueDue
      within one year
                        
                        $
                        4,597,578
                        
                        
                        
                        4,637,025Due
      after one through five years
                        
                        
                        12,332,841
                        
                        
                        
                        12,788,517Due
      after five through ten years
                        
                        
                        3,580,601
                        
                        
                        
                        3,585,363Due
      after ten years
                        
                        
                        4,625,587
                        
                        
                        
                        4,571,000$
                        25,136,607
                        
                        
                        
                        25,581,905
 
 At September 30, 2008, securities with
a carrying value of approximately $6,198,644 are callable at the discretion of
the issuer prior to the maturity date.  Securities in the amount of
$17,059,647 were pledged to secure certain deposits at September 30,
2008.
 
 Gross
proceeds, gross realized gains and gross realized losses from sales of available
for sale securities were $17,743,207, $135,303 and $0, respectively, for the
year ended September 30, 2008.  There were no such sales during
2007.
  F-15
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  (4)           Mortgage-Backed
Securities
 
 Mortgage-backed securities (“MBSs”) are
summarized as follows:
 
 2008Gross
                          
                          
                          GrossAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          MarketCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          ValueAvailable
      for sale:FHLMC
                          
                          $
                          8,910,347
                          
                          
                          
                          25,750
                          
                          
                          
                          (17,813
                          )
                          
                          
                          8,918,284FNMA
                          
                          
                          4,737,407
                          
                          
                          
                          8,921
                          
                          
                          
                          (28,539
                          )
                          
                          
                          4,717,789GNMA
                          
                          
                          32,785
                          
                          
                          
                          439
                          
                          
                          
                          -
                          
                          
                          
                          33,224GNMA   -
      CMO
                          
                          
                          202,623
                          
                          
                          
                          -
                          
                          
                          
                          (1,032
                          )
                          
                          
                          201,591FNMA   -  CMO
                          
                          
                          123,849
                          
                          
                          
                          -
                          
                          
                          
                          (5,586
                          )
                          
                          
                          118,263$
                          14,007,011
                          
                          
                          
                          35,110
                          
                          
                          
                          (52,970
                          )
                          
                          
                          13,989,151Weighted-average
      rate
                          
                          
                          4.33
                          %
 
 2007Gross
                            
                            
                            GrossAmortized
                            
                            
                            Unrealized
                            
                            
                            Unrealized
                            
                            
                            MarketCost
                            
                            
                            Gains
                            
                            
                            Losses
                            
                            
                            ValueAvailable
      for sale:FHLMC
                            
                            $
                            12,779,279
                            
                            
                            
                            6,525
                            
                            
                            
                            (198,673
                            )
                            
                            
                            12,587,131FNMA
                            
                            
                            6,213,053
                            
                            
                            
                            192
                            
                            
                            
                            (135,059
                            )
                            
                            
                            6,078,186GNMA
                            
                            
                            37,454
                            
                            
                            
                            287
                            
                            
                            
                            -
                            
                            
                            
                            37,741GNMA   -
      CMO
                            
                            
                            400,055
                            
                            
                            
                            -
                            
                            
                            
                            (7,989
                            )
                            
                            
                            392,066FHLMC
      - CMO
                            
                            
                            43,780
                            
                            
                            
                            -
                            
                            
                            
                            (98
                            )
                            
                            
                            43,682FNMA   -  CMO
                            
                            
                            147,204
                            
                            
                            
                            -
                            
                            
                            
                            (9,014
                            )
                            
                            
                            138,190$
                            19,620,825
                            
                            
                            
                            7,004
                            
                            
                            
                            (350,833
                            )
                            
                            
                            19,276,996Weighted-average
      rate
                            
                            
                            4.31
                            %
 
 Weighted-average rates are based on the
coupon rate at the balance sheet date.  Actual yield is expected to be
lower and is affected by prepayments and related premium
amortization.  At September 30, 2008 and 2007, MBSs included
adjustable-rate mortgage loans of $4,815,649 and $6,384,358,
respectively.  MBSs pledged to secure certain deposits were $2,503,447
at September 30, 2008.
 
 F-16
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  Mortgage-backed securities having a
continuous unrealized loss position for less than twelve months or twelve months
or longer are summarized as follows:
  Less than 12 Months
                      
                      
                      12 Months or Longer
                      
                      
                      TotalMarket
                      
                      
                      Unrealized
                      
                      
                      Market
                      
                      
                      Unrealized
                      
                      
                      Market
                      
                      
                      UnrealizedValue
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      LossSeptember 30, 2008Available
      for sale:FHLMC
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,103,815
                      
                      
                      
                      (17,813
                      )
                      
                      
                      5,103,815
                      
                      
                      
                      (17,813
                      )FNMA
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,702,044
                      
                      
                      
                      (28,539
                      )
                      
                      
                      3,702,044
                      
                      
                      
                      (28,539
                      )GNMA   -
      CMO
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      201,591
                      
                      
                      
                      (1,032
                      )
                      
                      
                      201,591
                      
                      
                      
                      (1,032
                      )FNMA   -
      CMO
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      118,263
                      
                      
                      
                      (5,586
                      )
                      
                      
                      118,263
                      
                      
                      
                      (5,586
                      )$
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,125,713
                      
                      
                      
                      (52,970
                      )
                      
                      
                      9,125,713
                      
                      
                      
                      (52,970
                      )September
      30, 2007Available
      for sale:FHLMC
                      
                      $
                      828,941
                      
                      
                      
                      (3,036
                      )
                      
                      
                      10,146,180
                      
                      
                      
                      (195,637
                      )
                      
                      
                      10,975,121
                      
                      
                      
                      (198,673
                      )FNMA
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,891,129
                      
                      
                      
                      (135,059
                      )
                      
                      
                      5,891,129
                      
                      
                      
                      (135,059
                      )GNMA   -
      CMO
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      392,066
                      
                      
                      
                      (7,989
                      )
                      
                      
                      392,066
                      
                      
                      
                      (7,989
                      )FHLMC  -
      CMO
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      43,682
                      
                      
                      
                      (98
                      )
                      
                      
                      43,682
                      
                      
                      
                      (98
                      )FNMA   -
      CMO
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      138,190
                      
                      
                      
                      (9,014
                      )
                      
                      
                      138,190
                      
                      
                      
                      (9,014
                      )$
                      828,941
                      
                      
                      
                      (3,036
                      )
                      
                      
                      16,611,247
                      
                      
                      
                      (347,797
                      )
                      
                      
                      17,440,188
                      
                      
                      
                      (350,833
                      )
 
 The Company believes that the decline
in value is related to changes in market interest rates and not credit quality
of the issuers.
 
 (5)           Loans
Receivable, Net
 
 Loans receivable, net are summarized as
follows:
 
 2008
                      
                      
                      2007Real
      estate loans:Single-family,
      1-4 units
                      
                      $
                      40,727,011
                      
                      
                      
                      41,749,549Multi-family,
      5 or more units
                      
                      
                      17,368,034
                      
                      
                      
                      12,197,677Construction
                      
                      
                      90,482,099
                      
                      
                      
                      125,797,037Commercial
                      
                      
                      102,363,966
                      
                      
                      
                      57,240,734Commercial
      business loans
                      
                      
                      17,805,117
                      
                      
                      
                      17,950,717Consumer
      loans
                      
                      
                      9,919,979
                      
                      
                      
                      12,038,005278,666,206
                      
                      
                      
                      266,973,719Allowance
      for losses
                      
                      
                      (2,633,298
                      )
                      
                      
                      (3,010,904
                      )Loans
      in process
                      
                      
                      (19,027,587
                      )
                      
                      
                      (31,315,742
                      )Unearned
      discounts
                      
                      
                      (13,068
                      )
                      
                      
                      -Deferred
      loan fees, net
                      
                      
                      (278,996
                      )
                      
                      
                      (339,148
                      )$
                      256,713,257
                      
                      
                      
                      232,307,925Weighted-average
      rate
                      
                      
                      6.46
                      %
                      
                      
                      7.83
                      %
  F-17
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  Adjustable-rate loans included in the
loan portfolio amounted to $96,031,839 and $111,674,667 at September 30, 2008
and 2007, respectively.  Loans serviced for the benefits of others
amounted to $10,742,912 and $5,550,066 at September 30, 2008 and 2007,
respectively.
 
 Real estate construction loans are
secured by the following:
 
 2008
                      
                      
                      2007Single-family,
      spec
                      
                      $
                      13,247,325
                      
                      
                      
                      29,331,087Single-family,
      custom built
                      
                      
                      6,346,275
                      
                      
                      
                      7,097,700Multi-family,
      5 or more units
                      
                      
                      821,090
                      
                      
                      
                      1,494,997Development
                      
                      
                      36,669,828
                      
                      
                      
                      36,407,723Commercial
                      
                      
                      33,397,581
                      
                      
                      
                      51,020,155Other
                      
                      
                      -
                      
                      
                      
                      445,375$
                      90,482,099
                      
                      
                      
                      125,797,037
 
 Following is a summary of activity in
allowance for loan losses:
 
 2008
                      
                      
                      2007Balance,
      beginning of year
                      
                      $
                      3,010,904
                      
                      
                      
                      2,144,121Loan
      charge-offs
                      
                      
                      (2,395,909
                      )
                      
                      
                      (267,581
                      )Loan
      recoveries
                      
                      
                      137,128
                      
                      
                      
                      532,275Provision
      charged to expense
                      
                      
                      1,881,175
                      
                      
                      
                      602,089Balance,
      end of year
                      
                      $
                      2,633,298
                      
                      
                      
                      3,010,904
 
 A summary of impaired loans
follows:
 
 2008
                      
                      
                      2007Nonaccrual
      loans
                      
                      $
                      8,218,713
                      
                      
                      
                      3,422,257Accruing
      loans past due 90 days or more
                      
                      
                      -
                      
                      
                      
                      -Total
      impaired loans
                      
                      $
                      8,218,713
                      
                      
                      
                      3,422,257Allowance
      for losses on impaired loans
                      
                      $
                      437,523
                      
                      
                      
                      370,116Impaired
      loans with no allowance for loan losses
                      
                      $
                      -
                      
                      
                      
                      -Average
      balance of impaired loans
                      
                      $
                      4,598,203
                      
                      
                      
                      1,331,696Interest
      income that would have been recognized
                      
                      $
                      150,281
                      
                      
                      
                      70,389Interest
      income recognized
                      
                      $
                      8,831
                      
                      
                      
                      -
  F-18
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  The Bank originates single-family loans
with high loan to value ratios exceeding 90 percent.  At September 30,
2008 and 2007 these loans amounted to $6,263,049 and $5,920,947,
respectively.
 
 Following is a summary of loans to
directors, executive officers and associates of such persons in excess of
$60,000 in the aggregate for the year ended September 30, 2008:
 
 Balance,
      beginning of year
                        
                        $
                        615,171Additions
                        
                        
                        -Repayments
                        
                        
                        (39,762
                        )Balance,
      end of year
                        
                        $
                        575,409
 
 These loans were made on substantially
the same terms as those prevailing at the time for comparable transactions with
unaffiliated persons.
 
 (6)           Premises
and Equipment, Net
 
 Premises and equipment, net are
summarized as follows:
 
 2008
                          
                          
                          2007Land
                          
                          $
                          2,430,041
                          
                          
                          
                          2,405,041Land
      for future branch location
                          
                          
                          600,000
                          
                          
                          
                          -Office
      buildings
                          
                          
                          6,665,992
                          
                          
                          
                          6,731,896Furniture
      and equipment
                          
                          
                          3,563,844
                          
                          
                          
                          3,075,123Building-in-progress
                          
                          
                          580,070
                          
                          
                          
                          11,97413,839,947
                          
                          
                          
                          12,224,034Less
      accumulated depreciation
                          
                          
                          4,049,610
                          
                          
                          
                          3,479,188$
                          9,790,337
                          
                          
                          
                          8,744,846
 
 Depreciation expense for 2008 and 2007
was $570,422 and $463,259, respectively.
 
 The Bank leases the land for one branch
office located in Kansas City.  The lease expires in November
2021.  The Bank has four successive options to extend the lease term
for five years each and a fifth option for a three year period.  Rent
expense for both 2008 and 2007 amounted to $91,622.  Future minimum
lease payments are summarized as follows:
 
 October
      1, 2008 to September 30, 2009
                        
                        $
                        91,622October
      1, 2009 to September 30, 2010
                        
                        
                        91,622October
      1, 2010 to September 30, 2011
                        
                        
                        92,386October
      1, 2011 to September 30, 2012
                        
                        
                        100,784October
      1, 2012 to September 30, 2013
                        
                        
                        100,784After
      September 30, 2013
                        
                        
                        823,071$
                        1,300,269
  F-19
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  (7)           Foreclosed
Real Estate, Net
 
 Foreclosed real estate, net is
summarized as follows:
 
 2008
                        
                        
                        2007Foreclosed
      real estate
                        
                        $
                        4,936,355
                        
                        
                        
                        1,675,871Allowance
      for losses
                        
                        
                        -
                        
                        
                        
                        -$
                        4,936,355
                        
                        
                        
                        1,675,871
 
 Foreclosed real estate at September 30,
2008 included 12 one-to-four family properties, seven one-to-four family
construction properties, one land development property, one commercial retail
property, two commercial lots and one residential lot.
 
 Following is a summary of activity in
allowance for loan losses:
 
 2008
                          
                          
                          2007Balance,
      beginning of year
                          
                          $
                          -
                          
                          
                          
                          -Gain
      on sale
                          
                          
                          53,183
                          
                          
                          
                          58,676Charge-offs
                          
                          
                          (363,755
                          )
                          
                          
                          (346,721
                          )Provision
      charged to expense
                          
                          
                          310,572
                          
                          
                          
                          288,045Balance,
      end of year
                          
                          $
                          -
                          
                          
                          
                          -
 
 (8)           Deposits
 
 Deposits are summarized as
follows:
 
 Description
      and interest rate
                                              
                                              2008
                                              
                                              
                                              2007Non-interest
      bearing NOW accounts
                                              
                                              $
                                              14,869,181
                                              
                                              
                                              
                                              13,616,861NOW
      accounts, .85% and 1.71%, respectively
                                              
                                              
                                              21,694,726
                                              
                                              
                                              
                                              21,368,449Statement
      accounts, .30% and .31%, respectively
                                              
                                              
                                              7,257,784
                                              
                                              
                                              
                                              7,200,644Money
      market accounts, 2.72% and 4.59%, respectively
                                              
                                              
                                              61,370,844
                                              
                                              
                                              
                                              68,481,779Total
      transaction accounts
                                              
                                              
                                              105,192,535
                                              
                                              
                                              
                                              110,667,733Certificates:2.00
      - 2.99%
                                              
                                              
                                              60,858,183
                                              
                                              
                                              
                                              300,1793.00
      - 3.99%
                                              
                                              
                                              34,745,328
                                              
                                              
                                              
                                              9,249,2184.00
      - 4.99%
                                              
                                              
                                              15,732,752
                                              
                                              
                                              
                                              60,151,7745.00
      - 5.99%
                                              
                                              
                                              3,235,039
                                              
                                              
                                              
                                              71,936,578Total
      certificates, 3.08% and 4.81%, respectively
                                              
                                              
                                              114,571,302
                                              
                                              
                                              
                                              141,637,749Total
      deposits, 2.47% and 4.10%, respectively
                                              
                                              $
                                              219,763,837
                                              
                                              
                                              
                                              252,305,482
 
 At September 30, 2008 and 2007,
deposits included brokered certificates of $15,000,000 and $14,000,000,
respectively.
  F-20
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  Certificate maturities are summarized
as follows:
 
 2008
                        
                        
                        2007First
      year
                        
                        $
                        89,574,562
                        
                        
                        
                        126,634,196Second
      year
                        
                        
                        14,843,151
                        
                        
                        
                        7,495,054Third
      year
                        
                        
                        6,192,967
                        
                        
                        
                        3,913,756Fourth
      year
                        
                        
                        1,735,327
                        
                        
                        
                        1,903,419Fifth
      year
                        
                        
                        2,225,295
                        
                        
                        
                        1,691,324$
                        114,571,302
                        
                        
                        
                        141,637,749
 
 Transaction accounts and certificates
in denominations of $100,000 or more amounted to $40,069,184 and $44,204,202 at
September 30, 2008, respectively, and $48,643,943 and $47,732,829 at September
30, 2007, respectively.
 
 Interest on deposits is summarized as
follows:
 
 2008
                        
                        
                        2007NOW  accounts
                        
                        $
                        305,856
                        
                        
                        
                        458,246Passbook
      accounts
                        
                        
                        21,198
                        
                        
                        
                        22,544Money
      market accounts
                        
                        
                        2,223,297
                        
                        
                        
                        1,700,437Certificates
                        
                        
                        4,770,711
                        
                        
                        
                        6,903,051$
                        7,321,062
                        
                        
                        
                        9,084,278
 
 Deposits from directors, executive
officers and other affiliates were not material to total deposits at September
30, 2008 and 2007.
 
 (9)           Advances
from Federal Home Loan Bank of Des Moines
 
 Fixed-rate advances from Federal Home
Loan Bank (“FHLB”) of Des Moines are summarized as follows:
 
 Final
                        
                        Average Interest RateMaturity Date
                        
                        at September 30, 2008
                        
                        
                        2008
                        
                        
                        2007Within
      one year
                        
                        
                        2.12%
                        
                        
                        $
                        48,000,000
                        
                        
                        
                        21,955,516After
      one through three years
                        
                        
                        3.35
                        
                        
                        
                        19,866,000
                        
                        
                        
                        -After
      three through five years
                        
                        
                        7.64
                        
                        
                        
                        1,374,870
                        
                        
                        
                        4,474,878$
                        69,240,870
                        
                        
                        
                        26,430,394Weighted-average
      rate
                        
                        
                        
                        
                        
                        
                        2.58
                        %
                        
                        
                        5.08
                        %
  F-21
 LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 Principal maturities at September 30,
2008 are summarized as follows:
 
 October
      1, 2008 to September 30, 2009
                          
                          $
                          48,100,008October
      1, 2009 to September 30, 2010
                          
                          
                          11,966,008October
      1, 2010 to September 30, 2011
                          
                          
                          8,100,008October
      1, 2011 to September 30, 2012
                          
                          
                          1,074,846$
                          69,240,870
 
 At September 30, 2008, advances from
FHLB of Des Moines are secured by securities, FHLB stock and one-to-four family,
home equity, multi-family, commercial real estate and non-real estate loans
amounting to $71,683,166.  The Bank had remaining credit available
under the FHLB advance program of $2.4 million at September 30,
2008.
 
 (10)           Securities
Sold Under Agreement to Repurchase
 
 Securities sold under agreement to
repurchase, which are classified as borrowings, are reflected at the amount of
cash received in connection with transaction, plus interest
credited.  The Bank may be required to provide additional collateral
based on the fair value of the underlying securities.  The securities
sold under agreement to repurchase are under the Bank’s
control.  These agreements to repurchase are summarized as
follows:
 
 Rate atSeptember 30,Maturity Date
                            
                            2008
                            
                            
                            2008
                            
                            
                            2007February
      26, 2009
                            
                            
                            5.21
                            %
                            
                            $
                            569,102
                            
                            
                            
                            540,136Open
      line
                            
                            
                            2.67
                            %
                            
                            
                            243,398
                            
                            
                            
                            681,048Total,
      4.45% and 4.21%
                            
                            
                            
                            
                            
                            $
                            812,500
                            
                            
                            
                            1,221,184Market
      value of securities
                            
                            
                            
                            
                            
                            $
                            3,991,155
                            
                            
                            
                            6,996,954Average
      balance of borrowings
                            
                            
                            
                            
                            
                            $
                            1,426,793
                            
                            
                            
                            2,097,002Maximum
      balance at any month end
                            
                            
                            
                            
                            
                            $
                            2,197,390
                            
                            
                            
                            5,690,307
  F-22
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 (11)           Income
Taxes
 
 The Company and Bank file consolidated
income tax returns.  The Bank is permitted to make additions to the
tax bad debt reserve using the experience method.
 
 The components of the net deferred tax
asset are summarized as follows:
 
 2008
                          
                          
                          2007Deferred
      tax liabilities:FHLB
      stock dividends
                          
                          $
                          (140,625
                          )
                          
                          
                          (140,625
                          )Unrealized
      gain on securities available for sale
                          
                          
                          (131,166
                          )
                          
                          
                          -(271,791
                          )
                          
                          
                          (140,625
                          )Deferred
      tax assets:Accrued
      income and expense and deferred loan fees
                          
                          
                          270,493
                          
                          
                          
                          304,977Allowance
      for losses on loans
                          
                          
                          987,486
                          
                          
                          
                          1,129,089Unrealized
      loss on securities available for sale
                          
                          
                          -
                          
                          
                          
                          55,690Other
                          
                          
                          293,382
                          
                          
                          
                          184,295Total
      deferred tax assets
                          
                          
                          1,551,361
                          
                          
                          
                          1,674,051Net
      deferred tax asset
                          
                          $
                          1,279,570
                          
                          
                          
                          1,533,426
 
 The provisions of SFAS No. 109 require
the Bank to establish a deferred tax liability for the effect of the tax bad
debt reserves over the amounts at September 30, 1988.  The Bank’s tax
bad debt reserves were $3,588,000 at September 30, 1988.  The
estimated deferred tax liability on such amount is approximately $1,220,000,
which has not been recorded in the accompanying financial
statements.  If these tax bad debt reserves are used for other than
loan losses, the amount used will be subject to Federal income taxes at the then
prevailing corporate rate.
 
 Income taxes are summarized as
follows:
 
 2008
                          
                          
                          2007Current:Federal
                          
                          $
                          575,000
                          
                          
                          
                          1,160,000State
                          
                          
                          64,000
                          
                          
                          
                          178,000639,000
                          
                          
                          
                          1,338,000Deferred:Federal
                          
                          
                          59,000
                          
                          
                          
                          (335,000
                          )State
                          
                          
                          8,000
                          
                          
                          
                          (49,000
                          )67,000
                          
                          
                          
                          (384,000
                          )$
                          706,000
                          
                          
                          
                          954,000
  F-23
 
 LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 The provision for income taxes differs
from the Federal statutory corporate tax rate as follows:
 
 Percentage of EarningsBefore Income Taxes2008
                          
                          
                          2007Federal
      statutory income tax rate
                          
                          
                          34.0
                          %
                          
                          
                          34.0
                          %Increases
      (decreases) in tax rate:Tax
      exempt income
                          
                          
                          (6.0
                          )
                          
                          
                          (3.5
                          )Change
      in cash surrender value of BOLI
                          
                          
                          (5.7
                          )
                          
                          
                          (1.2
                          )Nondeductible
      stock option expense
                          
                          
                          0.8
                          
                          
                          
                          0.7State
      taxes, net of Federal tax benefit
                          
                          
                          1.8
                          
                          
                          
                          2.9Average
      fair value versus cost of ESOP shares
                          
                          
                          0.9
                          
                          
                          
                          1.2Other,
      net
                          
                          
                          1.3
                          
                          
                          
                          (1.2
                          )Tax
      rate
                          
                          
                          27.1
                          %
                          
                          
                          32.9
                          %
 
 (12)        
Employee Benefits
 
 Defined Contribution Pension Plan (401k
Plan)
 
 The Bank maintains a defined
contribution pension plan, which covers substantially all
employees.  Participants can contribute from 2% to 15% of their salary
of which the Bank will match 50% of the employee contribution, up to a maximum
of 5% of the employee’s salary.  Participants are fully vested after
five years of service.  Pension plan expense was $62,717 and $53,752
for 2008 and 2007, respectively.
 
 Directors’ Postretirement Medical
Benefits
 
 The Bank
provides postretirement medical benefits to directors, elected before 1994, and
their spouses.  The liability for such benefits is
unfunded.  The accumulated postretirement benefit obligation, which
represents the present value of the estimated future benefits payable to plan
participants attributed to service rendered to date, will be recognized on a
delayed basis as a component of net periodic cost for postretirement medical
benefits.
 
 Postretirement
medical benefits for three directors and their spouses have been amended from
the current plan of lifetime health insurance coverage to benefits of $500 per
month for each of the directors and spouses, not to exceed twenty
years.
  F-24
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 The
following table sets forth the Plan's funded status and amounts recognized in
other liabilities in the financial statements:
 
 2008
                          
                          
                          2007Accumulated
      postretirement benefit obligations
                          
                          $
                          (240,160
                          )
                          
                          
                          (257,426
                          )Unrecognized
      transition obligation
                          
                          
                          -
                          
                          
                          
                          -Unrecognized
      prior service cost
                          
                          
                          -
                          
                          
                          
                          -Unrecognized
      actuarial gain
                          
                          
                          -
                          
                          
                          
                          -Under
      (over) accrual
                          
                          
                          10,732
                          
                          
                          
                          11,230Accrued
      postretirement benefit cost
                          
                          $
                          (229,428
                          )
                          
                          
                          (246,196
                          )
 
 A
reconciliation of the accumulated postretirement benefit obligation is
summarized as follows:
 
 2008
                          
                          
                          2007Balance,
      beginning of year
                          
                          $
                          (257,426
                          )
                          
                          
                          (318,823
                          )Service
      cost
                          
                          
                          (6,685
                          )
                          
                          
                          (6,685
                          )Interest
      cost
                          
                          
                          (14,712
                          )
                          
                          
                          (18,306
                          )Benefits
      paid
                          
                          
                          38,163
                          
                          
                          
                          37,538Actuarial
      gain
                          
                          
                          500
                          
                          
                          
                          48,850Balance,
      end of year
                          
                          $
                          (240,160
                          )
                          
                          
                          (257,426
                          )
 
 The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits for the medical plan is 12% for 2008 and
thereafter.  The effect of increasing the assumed health care trend
rates by one percentage point on the accumulated postretirement benefit
obligation and the components of the net periodic cost for postretirement
medical benefits at or for the years ended September 30, 2008 and 2007 was
considered immaterial.  The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 6% at and for
the years ended September 30, 2008 and 2007.
 
 The
components of the net periodic cost for postretirement medical benefits are
summarized as follows:
 
 2008
                                    
                                    
                                    2007Service
      cost
                                    
                                    $
                                    6,685
                                    
                                    
                                    
                                    6,685Interest
      cost
                                    
                                    
                                    14,712
                                    
                                    
                                    
                                    18,306Amortization
      of transition obligation
                                    
                                    
                                    12,538
                                    
                                    
                                    
                                    12,538Amortization
      of prior service cost
                                    
                                    
                                    (9,665
                                    )
                                    
                                    
                                    (9,665
                                    )Amortization
      of actuarial gain
                                    
                                    
                                    (21,368
                                    )
                                    
                                    
                                    (12,203
                                    )Net
      Periodic Cost
                                    
                                    $
                                    2,902
                                    
                                    
                                    
                                    15,661
  F-25
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 Postretirement
medical benefits expected to be paid in each of the next five years and in the
aggregate for the five years thereafter are summarized as follows:
 
 October
      1, 2008 to September 30, 2009
                          
                          $
                          39,069October
      1, 2009 to September 30, 2010
                          
                          
                          42,317October
      1, 2010 to September 30, 2011
                          
                          
                          45,955October
      1, 2011 to September 30, 2012
                          
                          
                          50,030October
      1, 2012 to September 30, 2013
                          
                          
                          12,000October
      1, 2013 to September 30, 2018
                          
                          
                          60,000$
                          249,371
 
 On
September 30, 2007, the Bank adopted the recognition and disclosure provisions
of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans.”  SFAS No. 158 requires the Bank to recognize
the funded status of its defined benefit pension plan and other postretirement
plan as liabilities in its balance sheet, with a corresponding adjustment to
accumulated other comprehensive earnings, net of taxes.  The
adjustment to accumulated other comprehensive earnings at adoption represents
the unrecognized transition obligation, unrecognized prior service cost and net
unrecognized actuarial gains.  These amounts were previously netted
against the funded status of its plans as liabilities.  The amounts
will be subsequently recognized as net periodic costs.  Further,
actuarial gains and losses that arise in subsequent periods will be recognized
as a component of accumulated other comprehensive earnings.  The
incremental effect of applying SFAS No. 158 on other liabilities and
stockholders’ equity was considered immaterial.
 
 Amounts
recognized in accumulated other comprehensive earnings, net are summarized as
follows:
 
 2008
                          
                          
                          2007Unrecognized
      transition obligation
                          
                          $
                          62,676
                          
                          
                          
                          75,214Unrecognized
      prior service cost
                          
                          
                          (48,323
                          )
                          
                          
                          (57,988
                          )Unrecognized
      actuarial gain
                          
                          
                          (122,621
                          )
                          
                          
                          (153,948
                          )(108,268
                          )
                          
                          
                          (136,722
                          )Tax
      effect
                          
                          
                          37,894
                          
                          
                          
                          47,853Unrecognized
      gain, net of taxes
                          
                          $
                          (70,374
                          )
                          
                          
                          (88,869
                          )
 
 The
estimated amounts that will be amortized from accumulated other comprehensive
earnings into net periodic cost for 2009 are as follows:
 
 Unrecognized
      transition obligation
                          
                          $
                          12,538Unrecognized
      prior service cost
                          
                          
                          (9,665
                          )Unrecognized
      actuarial gain
                          
                          
                          (21,813
                          )$
                          (18,940
                          )
  F-26
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 Employee
Stock Ownership Plan (ESOP)
 
 The Bank
has established an ESOP for the benefit of participating
employees.  Participating employees are employees who are normally
scheduled to work at least twenty hours a week.  After participants
complete plan eligibility requirements they become 20% vested after one year of
service, and 20% for each additional year of service until benefits are 100%
vested after 5 years.  The Bank makes annual contributions to the ESOP
equal to the ESOP's debt service less dividends on unallocated ESOP shares used
to repay the ESOP loan.  Dividends on allocated ESOP shares are paid
to participants of the ESOP and charged to retained earnings.  The
ESOP shares are pledged as collateral on the ESOP loan.  As the loan
is repaid, shares are released from collateral and allocated to participating
employees, based on the proportion of loan repaid and compensation of the
participants.  The Plan permits offsetting forfeitures against
employer contributions.  Benefits become payable upon a participant's
retirement, death, disability or separation from service.  ESOP
expense for 2008 and 2007 was $296,378 and $332,735, respectively.
 
 ESOP shares prior to the July 21,
2006 conversion date have been adjusted by the exchange ratio of 3.5004. The
number of ESOP shares allocated, shares released for allocation and unreleased
shares at September 30, 2008 were 153,614, 29,369 and 61,484
respectively.  The number of ESOP shares allocated, shares released
for allocation and unreleased shares at September 30, 2007 were 146,960, 31,134
and 90,853, respectively.
 
 The fair
value of unreleased ESOP shares at September 30, 2008 and 2007 was $553,000 and
$973,000, respectively.  The ESOP loan from the Company is secured
solely by the common stock at an interest rate of 8.25%.
 
 Stock
Options
 
 As
authorized by the 2003 Incentive Equity and Deferred Compensation Plan (the
“2003 Plan”), the Board of Directors granted 78,760 options to non-employee
directors and 96,260 to certain officers and employees during fiscal year
2004.  The Plan authorizes the award of up to 258,063 shares of common
stock, subject to restrictions, to be issued to directors, officers and
employees of the Bank.  The Plan provides for the grant of stock
options, stock appreciation rights, restricted stock and unrestricted
stock.  Options expire ten years from the date of the
grant.  Stock options to directors are fully vested on the grant date
of June 16, 2004.  Options granted to the Bank’s CEO are vested over
three years and three months and options granted to certain other officers and
employees are vested over a five-year period.  On January 27, 2005 the
Board of Directors granted an additional 38,504 options to certain officers and
employees.  Options granted to the CEO are vested over a period of
three years and eight months and options granted to certain officers and
employees are vested over a five-year period.  On November 23, 2005
the Board of Directors granted an additional 42,440 options to directors and
officers.  Options granted to the board, CEO, and certain officers,
were vested over a ten-month period.
 
 In
connection with the completion of the Conversion in July 2006, the Company
assumed the Plan and all outstanding options and shares were adjusted based on
the 3.5004 exchange ratio.  The exercise prices were adjusted to
reflect the proportional change in values that resulted from the
exchange.
  F-27
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 As
authorized by the Liberty Bancorp, Inc. 2007 Equity Incentive Plan (the “2007
Plan”), the Board of Directors granted 25,150 options to non-employee directors
and 65,500 options to certain officers and employees on February 27,
2007.   The 2007 Plan authorizes the award of up to 100,691
options to purchase shares of common stock, subject to restrictions, to be
issued to directors, officers and employees of the Bank.   The
Plan provides for the grant of stock options, stock appreciation rights,
restricted stock and unrestricted stock.   Options expire ten
years from the date of the grant.   All 90,650 options granted
are vested over a five-year period.
 
 The
Company has estimated the fair value of awards granted for the years ended
September 30, 2007 under its stock option plan utilizing the Black-Scholes
pricing model to be $3.00.  There were no awards granted for the year
ended September 30, 2008.  The assumptions used in the Black-Scholes
pricing model were as follows:
 
 2008
                          
                          
                          2007Expected
      dividend yield
                          
                          
                          -
                          
                          
                          
                          2.00
                          %Risk-free
      interest rate
                          
                          
                          -
                          
                          
                          
                          4.53
                          %Expected
      life of options
                          
                          
                          -
                          
                          
                          7.50 yearsExpected
      volatility
                          
                          
                          -
                          
                          
                          
                          21.70
                          %
 
 Stock
option expense is as follows:
 
 2008
                          
                          
                          2007Pretax
                          
                          $
                          75,347
                          
                          
                          
                          67,553After
      tax
                          
                          
                          71,639
                          
                          
                          
                          43,234Basic
      and diluted earnings per share
                          
                          $
                          0.02
                          
                          
                          
                          0.01
 
 At September 30, 2008, the total
unrecognized compensation expense related to nonvested stock options was
$143,792 and is expected to be recognized over the weighted-average period of
3.02 years.
  F-28
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 Stock options, granted, exercised or
forfeited are as follows:
 
 Weighted-Weighted-
                        
                        
                        AverageNumber
                        
                        
                        Average
                        
                        
                        Contractual
                        
                        
                        Aggregateof
                        
                        
                        Exercise
                        
                        
                        Term in
                        
                        
                        IntrinsicShares
                        
                        
                        Price
                        
                        
                        Years
                        
                        
                        ValueOutstanding
      at September 30, 2006
                        
                        
                        234,963
                        
                        
                        $
                        7.31
                        
                        
                        
                        8.07
                        
                        
                        $
                        686,092Granted
                        
                        
                        90,650
                        
                        
                        
                        11.27
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        (1,050
                        )
                        
                        
                        8.28
                        
                        
                        
                        -
                        
                        
                        
                        -Expired
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (1,500
                        )
                        
                        
                        11.27
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at September 30, 2007
                        
                        
                        323,063
                        
                        
                        $
                        8.42
                        
                        
                        
                        7.75
                        
                        
                        $
                        797,568Granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        (525
                        )
                        
                        
                        8.28
                        
                        
                        
                        -
                        
                        
                        
                        -Expired
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (1,050
                        )
                        
                        
                        8.28
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at September 30, 2008
                        
                        
                        321,488
                        
                        
                        $
                        8.40
                        
                        
                        
                        6.72
                        
                        
                        $
                        396,443Exercisable
      at September 30, 2008
                        
                        
                        236,162
                        
                        
                        $
                        7.58
                        
                        
                        
                        6.25
                        
                        
                        $
                        376,843Vested
      and expected to vest atSeptember
      30, 2008
                        
                        
                        236,162
                        
                        
                        $
                        7.58
                        
                        
                        
                        6.25
                        
                        
                        $
                        376,843
 
 A summary of the total value of options
exercised, the amount of cash received from the exercise of stock options and
the fair value of shares vested is as follows for the years
indicated:
 
 2008
                          
                          
                          2007Intrinsic
      value of options exercised
                          
                          $
                          1,076
                          
                          
                          
                          2,909Cash
      received from the exercise of options
                          
                          
                          4,347
                          
                          
                          
                          8,695Fair
      value of shares vested
                          
                          
                          415,793
                          
                          
                          
                          268,769
 
 Shares exercisable and weighted-average
exercise prices were 236,162 and $7.58 at September 30, 2008, respectively and
194,005 and $7.20 at September 30, 2007, respectively.
 
 Restricted Stock Awards
 
 During fiscal year 2004, as authorized
by the 2003 Plan, two directors each received a restricted stock award of 6,125
shares as adjusted by the exchange ratio of 3.5004, which vests over three
years.  On February 27, 2007, as authorized by the 2007 Plan, the
Board of Directors granted 31,400 restricted stock awards to non-employee
directors and 78,000 awards to certain officers and employees.  The
2007 Plan authorizes the award of up to 125,649 shares of common stock, subject
to restrictions, to be issued to directors, officers and employees of the
Bank.  Subsequently, 125,649 shares were repurchased by a trust to
fund the restricted stock awards.  All awards are vested over a
five-year period.  A summary of the Company’s restricted stock
compensation expense is as follows:
  F-29
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  2008
                          
                          
                          2007Pretax
                          
                          $
                          246,588
                          
                          
                          
                          162,519After
      tax
                          
                          $
                          160,282
                          
                          
                          
                          105,637
 
 At September 30, 2008, the total
unrecognized expense was $842,508 and is expected to be recognized over the next
3.41 years.
 
 A summary of the Company’s nonvested
stock award activity for 2008 is as follows:
 
 Weighted-AverageNumber of
                              Nonvested
                            
                            
                            Grant
                              DateShares
                            
                            
                            Fair ValueNonvested
      at October 1, 2007
                            
                            
                            109,400
                            
                            
                            $
                            11.27Granted
                            
                            
                            -Vested
                            
                            
                            (21,880
                            )
                            
                            
                            11.27Forfeited
                            
                            
                            -Nonvested
      at September 30, 2008
                            
                            
                            87,520
                            
                            
                            $
                            11.27
 
 Directors’ Retirement Plan
 
 The Bank
has adopted a retirement plan for directors elected before 1994.  The
plan provides that each non-employee director (participant) shall receive upon
retirement a benefit in equal annual installments over a ten-year
period.  The annual benefit will be based upon the product of the
participant's vesting percentage and $8,000 for currently retired directors and
surviving spouses.  For three directors covered under the plan, the
annual benefit was amended and will be based upon the product of the
participant’s vesting percentage and $15,000.
 
 The
vesting percentage shall be determined based upon the participant's years of
service on the Board, whether before or after the reorganization date, according
to the following schedule:
 
 Full Years of Service
                                
                                Non-Employee Director'son the Board
                                
                                Vested PercentageLess
      than 10
                                
                                
                                0
                                %10
      to 14
                                
                                
                                25
                                %15
      to 19
                                
                                
                                50
                                %20 to 24
                                
                                
                                75
                                %25
      or more
                                
                                
                                100
                                %
 
 If an
active director covered under the plan terminates service of the Board due to
disability, the director's annual benefit for ten years will be
$15,000.  In the event that the participant dies before collecting any
or all of the benefits, the Bank shall pay the participant's surviving
spouse.  No benefits shall be payable to anyone other than the
surviving spouse, and shall terminate on the death of the surviving
spouse.
  F-30
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
  The following table sets forth the
plan’s funded status and amounts recognized in other liabilities in the
financial statements:
 
 2008
                            
                            
                            2007Actuarial
      present value of benefit obligations -vested
      accumulated benefits
                            
                            $
                            (205,310
                            )
                            
                            
                            (222,934
                            )Unrecognized
      prior service cost
                            
                            
                            -
                            
                            
                            
                            -Unrecognized
      actuarial gain
                            
                            
                            -
                            
                            
                            
                            -Overaccrual
                            
                            
                            (7,580
                            )
                            
                            
                            (4,994
                            )Accrued
      directors' retirement plan
                            
                            $
                            (212,890
                            )
                            
                            
                            (227,928
                            )
 
 Areconciliation of
the accumulated benefit obligation is summarized as follows:
 
 2008
                          
                          
                          2007Balance,
      beginning of year
                          
                          $
                          (222,934
                          )
                          
                          
                          (234,288
                          )Service
      cost
                          
                          
                          (2,597
                          )
                          
                          
                          (2,597
                          )Interest
      cost
                          
                          
                          (13,376
                          )
                          
                          
                          (14,057
                          )Benefits
      paid
                          
                          
                          31,000
                          
                          
                          
                          31,000Actuarial
      gain (loss)
                          
                          
                          2,597
                          
                          
                          
                          (2,992
                          )Balance,
      end of year
                          
                          $
                          (205,310
                          )
                          
                          
                          (222,934
                          )
 
 The average discount rate used in
determining the accumulated benefit obligation was 6% at and for the years ended
September 30, 2008 and 2007.
 
 Net pension cost includes the following
components:
 
 2008
                            
                            
                            2007Service
      costs - benefits earned during the year
                            
                            $
                            2,597
                            
                            
                            
                            2,597Interest
      cost on benefit obligation
                            
                            
                            13,376
                            
                            
                            
                            14,057Amortization
      of prior service cost
                            
                            
                            7,526
                            
                            
                            
                            7,526Amortization
      of actuarial gain
                            
                            
                            (2,101
                            )
                            
                            
                            (918
                            )Overaccrual
                            
                            
                            -
                            
                            
                            
                            3,138Net
      pension cost
                            
                            $
                            21,398
                            
                            
                            
                            26,400
  F-31
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 Retirement benefits under the plan
expected to be paid in each of the next five years and in the aggregate for the
five years thereafter are summarized as follows:
 
 October
      1, 2008 to September 30, 2009
                              
                              $
                              31,000October
      1, 2009 to September 30, 2010
                              
                              
                              23,000October
      1, 2010 to September 30, 2011
                              
                              
                              15,000October
      1, 2011 to September 30, 2012
                              
                              
                              15,000October
      1, 2012 to September 30, 2013
                              
                              
                              15,000October
      1, 2013 to September 30, 2018
                              
                              
                              75,000$
                              174,000
 
 Amounts recognized in accumulated other
comprehensive earnings, net are summarized as follows:
 
 2008
                          
                          
                          2007Unrecognized
      prior service cost
                          
                          $
                          37,629
                          
                          
                          
                          45,155Unrecognized
      actuarial gain
                          
                          
                          (35,741
                          )
                          
                          
                          (34,901
                          )1,888
                          
                          
                          
                          10,254Tax
      effect
                          
                          
                          (661
                          )
                          
                          
                          (3,589
                          )Unrecognized
      loss, net of taxes
                          
                          $
                          1,227
                          
                          
                          
                          6,665
 
 The estimated amounts that will be
amortized from accumulated other comprehensive earnings into net periodic cost
for 2009 are as follows:
 
 Unrecognized
      prior service cost
                          
                          $
                          7,526Unrecognized
      gain
                          
                          
                          (2,976
                          )$
                          4,550
 
 (13)
                    Stockholders’
      Equity, Minimum Regulatory Capital Requirements and Subsequent
      Event
 
 On August
23, 1993 the Bank completed its reorganization from a state-chartered mutual
savings bank into a Federal mutual holding company.  The
reorganization was accomplished through a purchase and assumption of assets and
liabilities whereby the Bank (i) incorporated a Missouri-chartered stock savings
bank; (ii) converted the Bank's charter to a Federally-chartered mutual holding
company; (iii) transferred substantially all of the Bank's assets and
liabilities to the newly formed stock savings bank in exchange for 800,000
shares of common stock; and (iv) adopted a new charter issued by the Office of
Thrift Supervision (OTS) changing its form to that of a Federally-chartered
mutual holding company known as Liberty Savings Mutual Holding Company
(MHC).
 
 Concurrent
with the reorganization, 500,000 shares of the Bank's common stock were issued
in an offering to the Bank's ESOP and MRPs established for the benefit of
officers and employees of the Bank, certain members of the Bank and members of
the general public.  Each share of common stock was sold at a price of
$10.00 per share.  The MHC owned 800,000 of the Bank's outstanding
common stock.  Subsequent to the offering an additional 14,276 shares
of the Bank's common stock were issued to the MRPs.
  F-32
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 On July
21, 2006 our organization converted from the partially public mutual holding
company form to the fully public stock holding company structure. In the stock
holding company structure, all of the Bank’s stock is owned by Liberty Bancorp,
Inc., and all of Liberty Bancorp’s stock is owned by the public and our employee
stock ownership plan.  Liberty Savings Mutual Holding Company no
longer exists and the name of the bank, Liberty Savings Bank, F.S.B., was
changed to BankLiberty.  Depositors and borrowers do not have voting
rights in the Bank.  Voting rights were vested exclusively with
stockholders of the Company.  A liquidation account was established at
the time of Conversion in an amount equal to $21.1 million, the capital of the
Bank as of the date of the latest balance sheet contained in the final
prospectus.  Each eligible account holder or supplemental account
holder is entitled to a proportionate share of this account in the event of a
complete liquidation of the Bank, and only in such event.  This share
will be reduced if the account holder’s or supplemental account holder’s deposit
balance falls below the amount on the date of record and will cease to exist if
the account is closed.  The liquidation account will never be
increased despite any increase in the related deposit balance.
 
 As part
of the conversion, we sold 2,807,383 shares of common stock at a price of $10.00
per share representing the majority ownership of Liberty Savings Bank that was
held by Liberty Savings Mutual Holding Company.   At the
conclusion of the conversion, existing public stockholders of Liberty Savings
Bank were issued 3.5004 shares of Liberty Bancorp, Inc. in exchange for each
share of Liberty Savings Bank common stock, or 1,952,754 shares. Fractional
shares in the aggregate, or 36 shares, were redeemed for cash.  Total
shares outstanding after the offering and the exchange totaled 4,760,137
shares.   Net proceeds from the sale of common stock in the
offering were $25,647,944, after deduction of conversion costs of $1,257,890,
and unearned compensation related to shares issued to the ESOP of
$1,167,996.  In addition, as part of the Conversion and dissolution of
Liberty Savings Mutual Holding Company, the Bank received $694,397 of cash
previously held by the MHC.  The Company retained 50% of the net
conversion proceeds less funds to originate a loan to a trust for the ESOP, and
used the balance of the net proceeds to purchase all of the stock in the Bank in
the Conversion.
 
 On August
6, 2007 the Company announced a stock repurchase program to acquire 476,119
shares, or 10%, of the Company’s outstanding common stock.  On
December 20, 2007, a second stock repurchase program was approved to acquire up
to 222,048 shares or 5%, of the Company’s common stock.  On February
22, 2008, a third stock repurchase program was approved to acquire up to
408,170, or 10%, of the Company’s common stock.  Repurchases will be
conducted through open market purchases or privately negotiated transactions,
from time to time depending on market conditions and other
factors.  There is no guarantee as to the exact number of shares to be
repurchased by the Company.
 
 The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies.  Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators, which, if undertaken, could have a direct
material effect on the Bank's financial statements.  Under capital
adequacy guidelines, the Bank must meet specific guidelines, which involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices.  The Bank's
capital amounts and classifications are also subject to judgments by the
regulators about components, risk-weightings and other factors.  At
September 30, 2008, the Bank met all capital adequacy
requirements.
  F-33
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 The Bank
is also subject to the regulatory framework for prompt corrective action. At
September 30, 2008 and 2007, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized.  To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following
table.  There are no conditions or events since the dates of the
aforementioned notifications which management believes have changed the Bank's
category.
 
 The Bank’s actual and required capital
amounts and ratios at September 30, 2008 are as follows:
 
 Minimum
                        
                        
                        Requiredfor Capital
                        
                        
                        to be "WellActual
                        
                        
                        Adequacy
                        
                        
                        Capitalized"Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio(Dollars in Thousands)Stockholders'
      equity
                        
                        $
                        38,863Computer
      software costs
                        
                        
                        (192
                        )Unrealized
      gain, net - SFAS No. 158
                        
                        
                        (69
                        )Unrealized
      gain on securities AFS, net
                        
                        
                        (269
                        )Tangible
      capital
                        
                        $
                        38,333
                        
                        
                        
                        11.5
                        %
                        
                        $
                        4,983
                        
                        
                        
                        1.5
                        %General
      valuation allowance
                        
                        
                        2,633Total
      capital to risk-weighted assets
                        
                        $
                        40,966
                        
                        
                        
                        14.4
                        %
                        
                        $
                        22,741
                        
                        
                        
                        8.0
                        %
                        
                        $
                        28,426
                        
                        
                        
                        10.0
                        %Tier
      1 capital to risk-weighted assets
                        
                        $
                        38,333
                        
                        
                        
                        13.5
                        %
                        
                        $
                        11,371
                        
                        
                        
                        4.0
                        %
                        
                        $
                        17,056
                        
                        
                        
                        6.0
                        %Tier
      1 capital to total assets
                        
                        $
                        38,333
                        
                        
                        
                        11.5
                        %
                        
                        $
                        13,288
                        
                        
                        
                        4.0
                        %
                        
                        $
                        16,610
                        
                        
                        
                        5.0
                        %
  F-34
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 The Bank’s actual and required capital
amounts and ratios at September 30, 2007 are as follows:
 
 Minimum
                        
                        
                        Requiredfor Capital
                        
                        
                        to be "WellActual
                        
                        
                        Adequacy
                        
                        
                        Capitalized"Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio(Dollars in Thousands)Stockholders'
      equity
                        
                        $
                        35,969Computer
      software costs
                        
                        
                        (39
                        )Unrealized
      gain, net - SFAS No. 158
                        
                        
                        (82
                        )Unrealized
      loss on securities AFS, net
                        
                        
                        94Tangible
      capital
                        
                        $
                        35,942
                        
                        
                        
                        10.8
                        %
                        
                        $
                        4,973
                        
                        
                        
                        1.5
                        %General
      valuation allowance
                        
                        
                        3,011Total
      capital to risk-weighted assets
                        
                        $
                        38,953
                        
                        
                        
                        15.1
                        %
                        
                        $
                        20,669
                        
                        
                        
                        8.0
                        %
                        
                        $
                        25,837
                        
                        
                        
                        10.0
                        %Tier
      1 capital to risk-weighted assets
                        
                        $
                        35,942
                        
                        
                        
                        13.9
                        %
                        
                        $
                        10,335
                        
                        
                        
                        4.0
                        %
                        
                        $
                        15,502
                        
                        
                        
                        6.0
                        %Tier
      1 capital to total assets
                        
                        $
                        35,942
                        
                        
                        
                        10.8
                        %
                        
                        $
                        13,260
                        
                        
                        
                        4.0
                        %
                        
                        $
                        16,576
                        
                        
                        
                        5.0
                        %
 
 An OTS regulation restricts the Bank’s
ability to make capital distributions, including paying
dividends.  The regulations do not permit cash dividend payments if
the Bank’s capital would be reduced below the amount of the minimum capital
requirements or the liquidation account.  The OTS may impose other
restrictions.
 
 During the years ended September 30,
2008 and 2007, the Bank paid cash dividends of $402,956 and $463,842,
respectively.
 
 (14)           Off-Balance
Sheet Risk, Commitments and Contingencies
 
 The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to
originate loans and unused lines of credit.  Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet.  The Company’s maximum
exposure to credit loss in the event of nonperformance by the borrower is
represented by the contractual amount and related accrued interest receivable of
those instruments.  The Company minimizes this risk by evaluating each
borrower's creditworthiness on a case-by-case basis. Collateral held by the
Company generally consists of a first or second mortgage on the borrower's
property.  The amount of collateral obtained is based upon an
appraisal of the property.
 
 Commitments
to originate loans are legally binding agreements to lend to the Company's
customers.  Letters of credit are unconditional commitments issued by
the Company to guarantee the performance of the borrower to a third
party.
  F-35
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 The following table sets forth
information regarding off-balance sheet financial instruments as of September
30, 2008:
 
 Fixed-Rate
                          
                          
                          Adjustable-
                            RateOff-balance
      sheet financial instruments:Commitments
      to originate loans
                          
                          $
                          2,791,493
                          
                          
                          
                          3,724,040Commitments
      for unused lines of credit
                          
                          $
                          210,317
                          
                          
                          
                          10,586,840Commitments
      for undisbursed loans
                          
                          $
                          8,401,440
                          
                          
                          
                          10,626,148Commitments
      for letters of credit
                          
                          $
                          358,136
                          
                          
                          
                          -
 
 Interest rates on these fixed-rate
loans generally ranged from 5.25% to 8.25%.
 
 At September 30, 2008, there was no
known pending litigation or other claims that management believes will be
material to the Company’s financial position.
 
 (15)           Fair
Value of Financial Instruments
 
 The carrying amounts and estimated fair
values of the Company’s financial instruments are summarized as
follows:
 
 2008
                              
                              
                              2007Carrying
                              
                              
                              Fair
                              
                              
                              Carrying
                              
                              
                              FairAmount
                              
                              
                              Value
                              
                              
                              Amount
                              
                              
                              ValueNon-trading
      instrumentsand
      nonderivatives:Cash
      and cash equivalents
                              
                              $
                              8,084,603
                              
                              
                              
                              8,084,603
                              
                              
                              
                              9,042,289
                              
                              
                              
                              9,042,289Securities
      available for sale
                              
                              
                              26,053,420
                              
                              
                              
                              26,053,420
                              
                              
                              
                              47,982,519
                              
                              
                              
                              47,982,519Stock
      in FHLB of Des Moines
                              
                              
                              3,576,300
                              
                              
                              
                              3,576,300
                              
                              
                              
                              1,531,200
                              
                              
                              
                              1,531,200Mortgage-backed
      securities -available
      for sale
                              
                              
                              13,989,151
                              
                              
                              
                              13,989,151
                              
                              
                              
                              19,276,996
                              
                              
                              
                              19,276,996Loans
      receivable, net
                              
                              
                              256,713,257
                              
                              
                              
                              262,427,542
                              
                              
                              
                              232,307,925
                              
                              
                              
                              234,510,039Loans
      held for sale
                              
                              
                              877,246
                              
                              
                              
                              877,246
                              
                              
                              
                              719,086
                              
                              
                              
                              719,086Accrued
      interest receivable
                              
                              
                              1,640,478
                              
                              
                              
                              1,640,478
                              
                              
                              
                              2,055,814
                              
                              
                              
                              2,055,814Deposits
                              
                              
                              219,763,837
                              
                              
                              
                              220,125,700
                              
                              
                              
                              252,305,482
                              
                              
                              
                              252,323,699Accrued
      interest on deposits
                              
                              
                              297,656
                              
                              
                              
                              297,656
                              
                              
                              
                              601,285
                              
                              
                              
                              601,285Advances
      from FHLB
                              
                              
                              69,240,870
                              
                              
                              
                              68,890,734
                              
                              
                              
                              26,430,394
                              
                              
                              
                              26,670,801Securities
      sold underagreement
      to repurchase
                              
                              $
                              812,500
                              
                              
                              
                              806,000
                              
                              
                              
                              1,221,184
                              
                              
                              
                              1,220,451
 
 The following methods and assumptions
were used in estimating the fair values of financial instruments:
 
 Cash and
cash equivalents are valued at their carrying amounts due to the relatively
short period to maturity of the instruments.  Fair values of
securities and mortgage-backed securities are based on quoted market prices or,
if unavailable, quoted market prices of similar securities.
  F-36
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 The
carrying amounts of accrued interest receivable and payable approximate fair
value.  Stock in FHLB of Des Moines is valued at cost, which
represents redemption value and approximates fair value.
 
 Fair
values are computed for each loan category using market spreads to treasury
securities for similar existing loans in the portfolio and management's
estimates of prepayments.
 
 Deposits
with no defined maturities, such as NOW accounts, passbook accounts and money
market deposit accounts, are valued at the amount payable on demand at the
reporting date. The fair value of certificates of deposit, advances from FHLB of
Des Moines and securities sold under agreement to repurchase is computed at
fixed spreads to treasury securities with similar maturities.
 
 Off-balance
sheet assets include commitments to extend credit and unused lines of credit for
which fair values were estimated based on interest rates and fees currently
charged to enter into similar transactions and commitments to sell loans for
which fair values were estimated based on current secondary market prices for
commitments with similar terms.  As a result of the short-term nature
of the outstanding commitments, the fair values of fees on such commitments are
considered immaterial to the Company’s financial condition.
  F-37
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 (16)           Parent
Company Only Financial Statements
 
 The following balance sheets and
statements of earnings and cash flows for Liberty Bancorp, Inc. should be read
in conjunction with the consolidated financial statements and the notes
thereto.
 
 Balance
Sheets
 
 September
30, 2008 and 2007
 
 2008
                          
                          
                          2007AssetsCash
      and cash equivalents
                          
                          $
                          1,084,524
                          
                          
                          
                          11,556,962Investment
      in subsidiary
                          
                          
                          38,863,988
                          
                          
                          
                          35,968,431Securities
      available for sale
                          
                          
                          471,515
                          
                          
                          
                          393,884ESOP
      note receivable
                          
                          
                          490,439
                          
                          
                          
                          706,935Loans
      receivable, net of allowance for loan losses of $0
                          
                          
                          3,085,454
                          
                          
                          
                          1,600,000Accrued
      interest receivable - loans
                          
                          
                          7,420
                          
                          
                          
                          7,700Accrued
      interest receivable - other
                          
                          
                          -
                          
                          
                          
                          2,240Other
      assets
                          
                          
                          41,710
                          
                          
                          
                          12,039Total
      assets
                          
                          $
                          44,045,050
                          
                          
                          
                          50,248,191Liabilities
      and Stockholders' EquityOther
      liabilities
                          
                          $
                          28,307
                          
                          
                          
                          13,500Accrued
      income taxes
                          
                          
                          7,639
                          
                          
                          
                          40,158Total
      liabilities
                          
                          
                          35,946
                          
                          
                          
                          53,658Stockholders'
      equity:Common
      stock
                          
                          
                          47,617
                          
                          
                          
                          47,612Treasury
      stock, at cost
                          
                          
                          (8,632,753
                          )
                          
                          
                          -Additional
      paid-in capital
                          
                          
                          32,320,258
                          
                          
                          
                          31,923,289Common
      stock acquired by ESOP
                          
                          
                          (474,634
                          )
                          
                          
                          (701,309
                          )Accumulated
      other comprehensive earnings, net
                          
                          
                          292,484
                          
                          
                          
                          (12,619
                          )Retained
      earnings - substantially restricted
                          
                          
                          20,456,132
                          
                          
                          
                          18,937,560Total
      stockholders' equity
                          
                          
                          44,009,104
                          
                          
                          
                          50,194,533Total
      liabilities and stockholders' equity
                          
                          $
                          44,045,050
                          
                          
                          
                          50,248,191
  F-38
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 Statements
of Earnings
 
 Years
Ended September 30, 2008 and 2007
 
 Interest
      income and dividend income:
                                    
                                    2008
                                    
                                    
                                    2007Loans
      receivable
                                    
                                    $
                                    103,301
                                    
                                    
                                    
                                    78,390ESOP
      note receivable
                                    
                                    
                                    58,322
                                    
                                    
                                    
                                    75,727Other
      interest-earning assets
                                    
                                    
                                    135,327
                                    
                                    
                                    
                                    498,003Total
      interest income
                                    
                                    
                                    296,950
                                    
                                    
                                    
                                    652,120Dividend
      income - BankLiberty
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,500,000Total
      interest and dividend income
                                    
                                    
                                    296,950
                                    
                                    
                                    
                                    3,152,120Noninterest
      expense
                                    
                                    
                                    305,080
                                    
                                    
                                    
                                    298,477Earnings
      (loss) before income taxes and equity inundistributed
      earnings of the Bank
                                    
                                    
                                    (8,130
                                    )
                                    
                                    
                                    2,853,643Income
      taxes
                                    
                                    
                                    (3,000
                                    )
                                    
                                    
                                    131,000Net
      earnings (loss) before equity in earnings of Bank
                                    
                                    
                                    (5,130
                                    )
                                    
                                    
                                    2,722,643Equity
      in undistributed earnings of subsidiary (dividendsreceived
      in excess of earnings of subsidiary)
                                    
                                    
                                    1,926,658
                                    
                                    
                                    
                                    (778,249
                                    )Net
      earnings
                                    
                                    $
                                    1,921,528
                                    
                                    
                                    
                                    1,944,394
  F-39
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 Statements
of Cash Flows
 
 Years
Ended September 30, 2008 and 2007
 
 2008
                            
                            
                            2007Cash
      flows from operating activities:Net
      earnings
                            
                            $
                            1,921,528
                            
                            
                            
                            1,944,394Adjustments
      to reconcile net earnings to netcash
      provided by (used for) operating activities:Equity
      in undistributed net earnings of BankLiberty
                            
                            
                            (1,926,658
                            )
                            
                            
                            (1,721,751
                            )ESOP
      expense
                            
                            
                            296,378
                            
                            
                            
                            332,735Incentive
      Plan expense
                            
                            
                            321,935
                            
                            
                            
                            230,072Decrease
      (increase) in:Accrued
      interest receivable
                            
                            
                            2,520
                            
                            
                            
                            (5,357
                            )Other
      assets
                            
                            
                            (2,959
                            )
                            
                            
                            (3,368
                            )Increase
      (decrease) in;Other
      liabilities
                            
                            
                            14,807
                            
                            
                            
                            13,500Accrued
      income taxes
                            
                            
                            (32,519
                            )
                            
                            
                            6,158Net
      cash provided by (used for) operating activities
                            
                            
                            595,032
                            
                            
                            
                            796,383Cash
      flows from investing activities:Net
      change in loans receivable
                            
                            
                            (1,485,454
                            )
                            
                            
                            2,799,902Purchase
      of subsidiary
                            
                            
                            (618,313
                            )
                            
                            
                            (562,809
                            )Dividend
      from subsidiary
                            
                            
                            -
                            
                            
                            
                            2,500,000Purchase
      of securities
                            
                            
                            (149,826
                            )
                            
                            
                            (394,623
                            )Repayment
      of ESOP loan
                            
                            
                            216,496
                            
                            
                            
                            210,971Net
      cash provided by (used for) investing activities
                            
                            
                            (2,037,097
                            )
                            
                            
                            4,553,441Cash
      flows from financing activities:Proceeds
      from exercise of stock options
                            
                            
                            4,347
                            
                            
                            
                            8,695Cash
      dividends
                            
                            
                            (402,956
                            )
                            
                            
                            (463,842
                            )Repurchase
      of common stock
                            
                            
                            (8,632,753
                            )
                            
                            
                            (1,399,608
                            )Other
                            
                            
                            989
                            
                            
                            
                            -Net
      cash provided by (used for) financing activities
                            
                            
                            (9,030,373
                            )
                            
                            
                            (1,854,755
                            )Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            (10,472,438
                            )
                            
                            
                            3,495,069Cash
      and cash equivalents at beginning of year
                            
                            
                            11,556,962
                            
                            
                            
                            8,061,893Cash
      and cash equivalents at end of year
                            
                            $
                            1,084,524
                            
                            
                            
                            11,556,962
  F-40
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 (17)           Selected
Quarterly Financial Data (Unaudited)
 
 The results of operations by quarter
for the years ended September 30, 2008 and 2007 were as follows:
 
 First
                                
                                
                                Second
                                
                                
                                Third
                                
                                
                                FourthYear Ended September 30, 2008
                                
                                Quarter
                                
                                
                                Quarter
                                
                                
                                Quarter
                                
                                
                                QuarterIncome
      income
                                
                                $
                                5,473,948
                                
                                
                                $
                                5,059,831
                                
                                
                                $
                                4,948,300
                                
                                
                                $
                                4,674,507Interest
      expense
                                
                                
                                (2,942,319
                                )
                                
                                
                                (2,482,307
                                )
                                
                                
                                (2,023,499
                                )
                                
                                
                                (1,936,305
                                )Net
      interest income
                                
                                
                                2,531,629
                                
                                
                                
                                2,577,524
                                
                                
                                
                                2,924,801
                                
                                
                                
                                2,738,202Provision
      for loan losses
                                
                                
                                (180,000
                                )
                                
                                
                                (270,175
                                )
                                
                                
                                (1,173,000
                                )
                                
                                
                                (258,000
                                )Net
      interest income after provision for loan losses
                                
                                
                                2,351,629
                                
                                
                                
                                2,307,349
                                
                                
                                
                                1,751,801
                                
                                
                                
                                2,480,202Noninterest
      income
                                
                                
                                478,144
                                
                                
                                
                                512,728
                                
                                
                                
                                540,161
                                
                                
                                
                                592,785Noninterest
      expense
                                
                                
                                (2,072,100
                                )
                                
                                
                                (2,215,317
                                )
                                
                                
                                (1,886,173
                                )
                                
                                
                                (2,213,681
                                )Earnings
      before income taxes
                                
                                
                                757,673
                                
                                
                                
                                604,760
                                
                                
                                
                                405,789
                                
                                
                                
                                859,306Income
      taxes
                                
                                
                                (226,000
                                )
                                
                                
                                (152,000
                                )
                                
                                
                                (82,000
                                )
                                
                                
                                (246,000
                                )Net
      earnings
                                
                                $
                                531,673
                                
                                
                                $
                                452,760
                                
                                
                                $
                                323,789
                                
                                
                                $
                                613,306Basic
      earnings per share
                                
                                $
                                0.12
                                
                                
                                $
                                0.12
                                
                                
                                $
                                0.09
                                
                                
                                $
                                0.15Diluted
      earnings per share
                                
                                $
                                0.12
                                
                                
                                $
                                0.12
                                
                                
                                $
                                0.09
                                
                                
                                $
                                0.14
 
 First
                          
                          
                          Second
                          
                          
                          Third
                          
                          
                          FourthYear Ended September 30, 2007
                          
                          Quarter
                          
                          
                          Quarter
                          
                          
                          Quarter
                          
                          
                          QuarterIncome
      income
                          
                          $
                          4,875,692
                          
                          
                          $
                          4,910,595
                          
                          
                          $
                          5,243,653
                          
                          
                          $
                          5,533,234Interest
      expense
                          
                          
                          (2,332,378
                          )
                          
                          
                          (2,436,057
                          )
                          
                          
                          (2,692,641
                          )
                          
                          
                          (3,033,052
                          )Net
      interest income
                          
                          
                          2,543,314
                          
                          
                          
                          2,474,538
                          
                          
                          
                          2,551,012
                          
                          
                          
                          2,500,182Provision
      for loan losses
                          
                          
                          (32,000
                          )
                          
                          
                          (166,202
                          )
                          
                          
                          (267,105
                          )
                          
                          
                          (136,782
                          )Net
      interest income after provision for loan losses
                          
                          
                          2,511,314
                          
                          
                          
                          2,308,336
                          
                          
                          
                          2,283,907
                          
                          
                          
                          2,363,400Noninterest
      income
                          
                          
                          329,870
                          
                          
                          
                          310,189
                          
                          
                          
                          363,227
                          
                          
                          
                          474,164Noninterest
      expense
                          
                          
                          (1,966,408
                          )
                          
                          
                          (2,055,220
                          )
                          
                          
                          (2,033,136
                          )
                          
                          
                          (1,991,249
                          )Earnings
      before income taxes
                          
                          
                          874,776
                          
                          
                          
                          563,305
                          
                          
                          
                          613,998
                          
                          
                          
                          846,315Income
      taxes
                          
                          
                          (315,000
                          )
                          
                          
                          (190,000
                          )
                          
                          
                          (208,000
                          )
                          
                          
                          (241,000
                          )Net
      earnings
                          
                          $
                          559,776
                          
                          
                          $
                          373,305
                          
                          
                          $
                          405,998
                          
                          
                          $
                          605,315Basic
      and diluted earnings per share
                          
                          $
                          0.12
                          
                          
                          $
                          0.08
                          
                          
                          $
                          0.09
                          
                          
                          $
                          0.13
  F-41
  LIBERTY
BANCORP, INC.
 
 Notes
to Consolidated Financial Statements
 
 (18)           Subsequent
Event – Business Combination
 
 On
November 7, 2008, the Company acquired KLT Bancshares, Inc., the parent company
of Farley State Bank.  Shareholders of Farley State Bank received
total merger consideration of $4.5 million, consisting of entirely
cash.  The Company incurred acquisition costs of approximately
$240,000.  The acquisition was accounted for using the purchase method
under Statement of Financial Accounting Standards (SFAS) No. 141, “Business
Combinations.”  Fair value adjustments on the assets acquired and
liabilities assumed will be depreciated or amortized as applicable, over the
estimated useful lives of the related assets and liabilities.  The
core deposit intangible of $1.1 million will be amortized over 10.2 years using
the double declining balance method.  The Company recorded fair value
accounting adjustments of $409,000, net of income taxes of $239,000 and core
deposit intangibles of $665,000, net of income taxes of
$391,000.  Based upon Farley State Bank’s stockholders’ equity of $2.5
million, goodwill amounted to approximately $1.1 million at November 7,
2008.  The excess purchase price has been allocated to goodwill and
identifiable intangible assets in accordance with current accounting
literature.  Such amounts are subject to minor adjustments in the near
future as additional analysis is performed or obtained from third
parties.  As a result of the acquisition, the Bank will operate two
additional full-service offices and expand its market area.
 
 The
following table summarizes the assets acquired and liabilities assumed at
November 7, 2008, the date of acquisition:
 
 Cash
      and due from banks
                                    
                                    $
                                    1,373,913Federal
      funds sold
                                    
                                    
                                    2,234,000Securities
      available for sale
                                    
                                    
                                    9,658,286Federal
      Home Loan Bank stock and MIB stock
                                    
                                    
                                    107,300Loans,
      net
                                    
                                    
                                    20,743,173Property
      and equipment, net
                                    
                                    
                                    2,780,368Accrued
      interest receivable
                                    
                                    
                                    209,992Goodwill
                                    
                                    
                                    1,155,888Core
      deposit intangible
                                    
                                    
                                    1,056,000Other
      assets
                                    
                                    
                                    365,798Total
      assets acquired
                                    
                                    
                                    39,684,718Deposits
                                    
                                    
                                    33,963,890Accrued
      interest payable
                                    
                                    
                                    215,834Advances
      from borrowers for taxes and insurance
                                    
                                    
                                    69,896Other
      liabilities
                                    
                                    
                                    64,763Deferred
      tax liability
                                    
                                    
                                    630,335Total
      liabilities assumed
                                    
                                    
                                    34,944,718Purchase
      price, including acquisition costs
                                    
                                    $
                                    4,740,000
  F-42
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  LIBERTY
      BANCORP, INC.Date:
      December 29, 2008
                    
                    By:
                    ./s/ Brent M. GilesBrent
      M. GilesChief
      Executive Officer(Duly
      Authorized
Representative)
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  By:
      /s/ Brent M. Giles
                                
                                Date:
      December 29, 2008Brent
      M. GilesChief
      Executive Officer and Director(Principal
      Executive Officer)By:
      /s/ Marc J. Weishaar
                                
                                Date:
      December 29, 2008Marc
      J. WeishaarChief
      Financial Officer(Principal
      Financial and Accounting Officer)By:
      /s/ Daniel G. O’Dell
                                
                                Date:
      December 29, 2008Daniel
      G. O’DellChairman
      of the BoardBy:
      /s/ Ralph W. Brant,
    Jr.
                                
                                Date:
      December 29, 2008Ralph
      W. Brant, Jr.DirectorBy:
      /s/ Robert T. Sevier
                                
                                Date:
      December 29, 2008Robert
      T. SevierDirectorBy:
      /s/ Steven K. Havens
                                
                                Date:
      December 29, 2008Steven
      K. HavensDirector
  55