LIBERTY
        BANCORP, INC.
 2007
        ANNUAL REPORT







**[LIBERTY
      BANCORP, INC. LETTERHEAD]**





Dear
      Shareholder:





I
      am
      pleased to report consolidated net earnings of $1,944,000, or $.42 per share,
      for the year ended September 30, 2007 compared to $1,463,000, or $.31 per share,
      for the year ended September 30, 2006. The performance of the Company was aided
      by a significant loan loss recovery of $506,000 in the fourth quarter of the
      fiscal year. Total assets increased 15.86% from $287.6 million as of September
      30, 2006, to $333.2 million as of September 30, 2007. For the same period,
      total
      deposits increased $53.8 million, from $198.5 million to $252.3 million, and
      total loans increased $32.1 million, from $200.2 million to $232.3
      million.




The
      past
      year was challenging as numerous events and issues resulted in a difficult
      operating environment for financial institutions. Our trade area experienced
      a
      continued downturn in the housing market which has increased delinquencies
      and
      non-performing assets in our residential construction and development loan
      portfolio. Additionally, rising funding costs from increased competition, a
      flat
      yield curve, and volatile credit markets put pressure on our net interest
      margin. Throughout the year, our team of dedicated professionals worked very
      hard to minimize the effect of these arduous conditions and continue to build
      a
      premier community banking franchise.





We
      opened
      our seventh retail bank facility during September, 2007, in Gladstone, Missouri,
      our third new location in the last two years, and plan to open an additional
      banking center in North Kansas City, Missouri, in 2008. Although we expect
      our
      new banking centers to produce core deposit growth, revenue growth, and
      long-term shareholder value, these investments are likely to have a negative
      effect on earnings during the first two to three years of
      operation.





Our
      professional, friendly, and knowledgeable employees are focused on consistently
      delivering a superior experience to our customers. This customer focus, coupled
      with convenient locations and progressive products has produced a growing
      company and improving market share. The next year holds many uncertainties
      and
      may prove to be as challenging as the last, but we plan to make further strides
      building a solid banking franchise that will produce long-term shareholder
      value.





Thank
      you
      to our employees, customers, and stockholders for your continued
      support.





Sincerely,/s/
                Brent M. GilesBrent
                M. GilesPresident
                and Chief Executive OfficerLiberty
                Bancorp, Inc.





**Business
      of the Company**




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 a price of $10.00
      per
      share. In addition, a total of approximately 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 the purchase 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 $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.




**Business
      of the Bank**





The
      Bank
      is a community-oriented financial institution dedicated to serving the financial
      service needs of consumers and businesses within its market area which consists
      of Clay, Clinton, Platte and Jackson Counties in Missouri. 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. We currently operate out of our main office in
      Liberty, Missouri and six full-service branch offices – two in Kansas City,
      Missouri and one in Plattsburg, Platte City, Independence and Gladstone,
      Missouri.





The
      Bank
      is subject to extensive regulation, examination and supervision by the Office
      of
      Thrift Supervision, its primary federal regulator, and the Federal Deposit
      Insurance Corporation, 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.


1


**Common
      Stock**





The
      common stock of Liberty Bancorp, Inc. is traded on the NASDAQ Capital Market
      under the symbol “LBCP.” The Company completed its initial public offering on
      July 21, 2006 and commenced trading on July 24, 2006. The following table sets
      forth the high and low sales prices for the common stock and dividends per
      share
      for the fourth quarter of 2006 and year ended September 30, 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.





For the Year Ended
            
            For the Year EndedSeptember 30, 2006
            
            September 30, 20074th Quarter
            
            1st Quarter
            
            2nd Quarter
            
            3rd Quarter
            
            4th QuarterHigh
            
            
            10.540
            
            
            10.730
            
            
            11.450
            
            
            11.380
            
            
            11.000Low
            
            
            10.050
            
            
            9.960
            
            
            10.500
            
            
            10.730
            
            
            10.080Dividend
            
            
            .025
            
            
            .025
            
            
            .025
            
            
            .025
            
            
            .025





As
      of
      September 30, 2007, the Company had approximately 407 stockholders of record;
      this does not reflect the number of persons whose shares are in nominee or
      “street” name accounts through brokers.




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 Consolidated Financial Statements for information
      regarding the dividend restrictions applicable to the Company and the
      Bank.





On
      August
      6, 2007 the Company announced a stock repurchase program to acquire up to
      476,119 shares, or 10%, of the Company’s outstanding common stock. On December
      20, 2007, the Company announced a second stock repurchase program to acquire
      up
      to 222,048 shares, or 5%, of the Company’s common stock. Subsequent to September
      30, 2007, the Company has repurchased 320,230 shares at an average price of
      $10.57 per share. Repurchased shares will be held in treasury.


2





The
      graph
      and table which follow show the cumulative total return on the Company’s common
      stock during the period from September 30, 2002 through September 30, 2007
      with
      (1) the total cumulative return of all companies whose equity securities are
      traded on the Nasdaq Stock Market, (2) the total cumulative return of thrifts
      and (3) the cumulative return of thrifts having asset sizes between $250 million
      and $500 million. The performance of the Company’s common stock also includes
      the performance of the common stock of the Bank, the predecessor to the Company,
      prior to its reorganization in 2006. The Bank’s common stock was traded on the
      OTC Bulletin Board and the Company’s common stock commenced trading on the
      Nasdaq Capital Market on July 24, 2006. Accordingly, the comparison assumes
      $100
      was invested in the common stock of the Bank on June 30, 2002 in each of the
      foregoing indices and assumes reinvestment of dividends. The stockholder returns
      shown on the performance graph are not necessarily indicative of the future
      performance of the Company’s common stock or of any particular
      index.





Liberty Bancorp




***Index***
              
              **09/30/02**
              
              **09/30/03**
              
              **09/30/04**
              
              **09/30/05**
              
              **09/30/06**
              
              **09/30/07**Liberty
                  Bancorp, Inc.
              
              
              100.00
              
              
              121.21
              
              
              148.43
              
              
              180.12
              
              
              238.37
              
              
              251.87NASDAQ
                  Composite
              
              
              100.00
              
              
              152.46
              
              
              161.84
              
              
              183.58
              
              
              192.69
              
              
              230.49SNL
                  Thrift Index
              
              
              100.00
              
              
              138.64
              
              
              160.15
              
              
              168.09
              
              
              195.66
              
              
              178.57SNL
                  $250 - $500M Thrift Index
              
              
              100.00
              
              
              138.10
              
              
              155.47
              
              
              152.86
              
              
              166.34
              
              
              153.70




3


**Selected
      Financial Highlights**





The
      financial data presented below is qualified in its entirety by the more detailed
      financial data appearing elsewhere in this report. Financial data presented
      for
      2003 through 2005 represents the financial position and results of operations
      for BankLiberty (formerly Liberty Savings Bank, F.S.B.). Financial data
      presented for 2006 and 2007 represents this same information for Liberty
      Bancorp, Inc. and its subsidiary, BankLiberty.





**Financial
      Condition Data:**





**At
                September, 30****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(Dollars
                in Thousands)**Total
                assets
            
            $
            333,186
            
            $
            287,561
            
            $
            237,576
            
            $
            213,482
            
            $
            189,264Cash
                and cash equivalents, federal funds sold, securities and stock in
                the
                Federal Home Loan Bank of Des Moines
            
            
            58,556
            
            
            51,239
            
            
            34,465
            
            
            22,477
            
            
            16,877Mortgage-backed
                securities
            
            
            19,277
            
            
            24,217
            
            
            27,189
            
            
            23,107
            
            
            23,961Loans
                receivable, net
            
            
            232,308
            
            
            200,222
            
            
            163,843
            
            
            159,840
            
            
            141,993Deposits
            
            
            252,305
            
            
            198,471
            
            
            181,617
            
            
            152,929
            
            
            136,339Advances
                from the Federal Home Loan Bank of Des Moines
            
            
            26,430
            
            
            34,064
            
            
            30,497
            
            
            37,130
            
            
            30,314Stockholders’
                equity
            
            
            50,195
            
            
            48,982
            
            
            21,131
            
            
            20,184
            
            
            19,465Full
                service offices open
            
            
            7
            
            
            6
            
            
            5
            
            
            4
            
            
            4





**Operating
      Data:**





**For
                the Years Ended September 30,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(Dollars
                in Thousands)**Interest
                income
            
            $
            20,563
            
            $
            16,664
            
            $
            12,816
            
            $
            10,595
            
            $
            10,659Interest
                expense
            
            
            (10,494
            )
            
            (7,600
            )
            
            (5,175
            )
            
            (4,031
            )
            
            (5,168
            )Net
                interest income
            
            
            10,069
            
            
            9,064
            
            
            7,641
            
            
            6,564
            
            
            5,491Provision
                for loan losses
            
            
            (602
            )
            
            (852
            )
            
            (430
            )
            
            (885
            )
            
            (206
            )Net
                interest income after provision for loan losses
            
            
            9,467
            
            
            8,212
            
            
            7,211
            
            
            5,679
            
            
            5,285Noninterest
                income
            
            
            1,477
            
            
            1,237
            
            
            1,200
            
            
            1,118
            
            
            1,783Noninterest
                expense
            
            
            (8,046
            )
            
            (7,203
            )
            
            (6,065
            )
            
            (5,267
            )
            
            (5,972
            )Earnings
                before income taxes
            
            
            2,898
            
            
            2,246
            
            
            2,346
            
            
            1,530
            
            
            1,096Income
                taxes
            
            
            (954
            )
            
            (783
            )
            
            (841
            )
            
            (567
            )
            
            (395
            )Net
                earnings
            
            $
            1,944
            
            $
            1,463
            
            $
            1,505
            
            $
            963
            
            $
            701**Per
                Share Data:**Basic
                earnings per share (1)
            
            $
            0.42
            
            $
            0.32
            
            $
            0.32
            
            $
            0.21
            
            $
            0.15Diluted
                earnings per share (1)
            
            
            0.42
            
            
            0.31
            
            
            0.32
            
            
            0.21
            
            
            0.15Dividends
                per share (2)
            
            
            0.10
            
            
            0.20
            
            
            0.23
            
            
            0.23
            
            
            0.23





(1)
            Earnings
                per share are based upon the weighted-average shares outstanding.
                Weighted-average shares outstanding for periods prior to the July
                21, 2006
                conversion date have been adjusted by the exchange ratio of 3.5004
                to
                calculate earnings per share.


(2)
            Dividends
                per share prior to the July 21, 2006 conversion date have been adjusted
                by
                the exchange ratio of 3.5004. Dividends on 800,000 shares owned by
                Liberty
                Savings Mutual Holding Company were waived. See note 13 of the notes
                to
                consolidated financial
                statements


4





**At or For the Years Ended September 30,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****Performance
                Ratios:**Return
                on average assets
            
            
            0.63
            %
            
            0.56
            %
            
            0.67
            %
            
            0.47
            %
            
            0.37
            %Return
                on average equity
            
            
            3.94
            
            
            5.47
            
            
            7.28
            
            
            4.81
            
            
            3.57Interest
                rate spread (1)
            
            
            2.97
            
            
            3.43
            
            
            3.41
            
            
            3.22
            
            
            2.76Net
                interest margin (2)
            
            
            3.47
            
            
            3.66
            
            
            3.54
            
            
            3.37
            
            
            3.03Noninterest
                expense to average assets
            
            
            2.61
            
            
            2.74
            
            
            2.69
            
            
            2.62
            
            
            3.21Efficiency
                ratio (3)
            
            
            69.68
            
            
            69.93
            
            
            68.60
            
            
            68.56
            
            
            82.10Average
                interest-earning assets toaverage
                interest-bearing liabilities
            
            
            113.88
            
            
            107.40
            
            
            105.48
            
            
            106.54
            
            
            109.31Average
                equity to average assets
            
            
            16.00
            
            
            10.16
            
            
            9.16
            
            
            9.74
            
            
            10.56Dividend
                payout ratio (4)
            
            
            23.86
            
            
            29.86
            
            
            28.26
            
            
            43.37
            
            
            59.90**Capital
                Ratios: (5)**Tangible
                capital
            
            
            10.84
            
            
            12.73
            
            
            8.99
            
            
            9.42
            
            
            10.32Core
                capital
            
            
            10.84
            
            
            12.73
            
            
            8.99
            
            
            9.42
            
            
            10.32Tier
                1 risk-based capital
            
            
            13.91
            
            
            17.12
            
            
            12.31
            
            
            12.64
            
            
            14.62Total
                risk-based capital
            
            
            15.08
            
            
            18.14
            
            
            13.32
            
            
            13.89
            
            
            15.59**Asset
                Quality Ratios:**Allowance
                for loan losses as a percentof
                gross loans
            
            
            1.13
            
            
            0.93
            
            
            0.93
            
            
            1.09
            
            
            0.80Allowance
                for loan losses as a percentof
                non-performing loans
            
            
            87.98
            
            
            50.80
            
            
            134.50
            
            
            55.38
            
            
            472.43Net
                charge-offs (recoveries) to average outstanding loans during the
                year
            
            
            (0.12
            )
            
            0.25
            
            
            0.40
            
            
            0.09
            
            
            (0.02
            )Non-accrual
                and 90 days or more past dueloans
                as a percent of total loans, net
            
            
            1.47
            
            
            2.11
            
            
            0.55
            
            
            0.45
            
            
            ―Non-performing
                assets as a percent oftotal
                assets
            
            
            1.53
            
            
            2.02
            
            
            1.20
            
            
            1.97
            
            
            0.15







(1)
            Represents
                the difference between the weighted average yield on average
                interest-earning assets and the weighted average cost of interest-bearing
                liabilities. No tax equivalent adjustments were made.


(2)
            Represents
                net interest income as a percent of average interest-earning assets.
                No
                tax equivalent adjustments were
                made.


(3)
            Represents
                noninterest expense divided by the sum of net interest income and
                noninterest income.


(4)
            Represents
                dividends paid to shareholders as a percent of net earnings. Does
                not
                include dividends waived by Liberty Savings Mutual Holding
                Company.


(5)
            Represents
                capital ratios only for the Company’s subsidiary,
                BankLiberty.


5


**Management’s
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations**





**Forward-Looking
      Statements**





*This
      Annual Report contains “forward-looking statements” within the meaning of the
      federal securities laws. These statements are not historical fact; 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” or 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.*





**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.


6


***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.





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.


7


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, 2007, 2006 and 2005.





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.





**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.


8


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.  N ew
      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.





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 $57.2 million,
      or 21.44% of total loans, at September 30, 2007. In addition, commercial
      business loans have increased from $2.7 million, or 2.04% of total loans, at
      September 30, 2001 to $18.0 million, or 6.72% of total loans, at September
      30,
      2007, and multi-family real estate loans have increased from $3.4 million,
      or
      2.56% of total loans, at September 30, 2001 to $12.2 million, or 4.57% of total
      loans, at September 30, 2007. The percentage of our total loan portfolio
      comprised of residential mortgage loans has decreased in recent years, amounting
      to 36.28%, 28.71%, 20.71%, 18.48% and 15.64% at September 30, 2003, 2004, 2005,
      2006 and 2007, respectively.


9


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.





The
      largest segment of our loan portfolio is real estate construction loans. At
      September 30, 2007, these loans totaled $125.8 million and represented 47.12%
      of
      total loans, compared to $99.8 million, or 43.25% of total loans, at September
      30, 2006. Through the implementation of our strategic plan, the size of our
      real
      estate construction loan portfolio rose $26.0 million over this period due
      primarily to increased emphasis on development and commercial construction
      lending which have higher yields as compared to single-family construction
      loans. During the year ended September 30, 2007, the largest growth in our
      construction loan portfolio resulted from increases in commercial real estate
      construction loans. This was the result of our successful efforts to increase
      this type of lending. Commercial real estate construction loans increased by
      $25.8 million, or 102.67%, from $25.2 million at September 30, 2006 to
      $51 . 0
      million
      at September 30, 2007. Development loans increased by $12.4 million, or 51.95%,
      from $24.0 million at September 30, 2006 to $36.4 million at September 30,
      2007.
      Single-family – spec loans decreased by $8.5 million, or 22.33%, from $37.8
      million at September 30, 2006 to $29.3 million at September 30, 2007.
      Single-family – custom construction loans decreased by $5.2 million, or
      42.07%, from $12.3 million at September 30, 2006 to $7.1 million at September
      30, 2007. Decreases in single-family spec and custom construction loans reflect
      loan portfolio adjustments to current market conditions.





Single-family
      residential loans totaled $41.7 million and represented 15.64% of total loans
      at
      September 30, 2007, compared to $42.6 million, or 18.48% of total loans, at
      September 30, 2006. 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 $3.9 million, or 7.27%, to $57.2 million and
      represented 21.44% of total loans at September 30, 2007, compared to $53.3
      million, or 23.13% of total loans, at September 30, 2006. 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.


10


Multi-family
      loans totaled $12.2 million and represented 4.57% of total loans at September
      30, 2007, compared to $10.4 million, or 4.52% of total loans, at September
      30,
      2006.





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 $12.0 million and represented 4.51% of total loans at
      September 30, 2007, compared to $13.2 million, or 5.73% of total loans, at
      September 30, 2006. The decrease in consumer loans was due primarily to a
      decrease in home equity loans.





Commercial
      business loans increased from $11.3 million or 4.89% of total loans at September
      30, 2006 to $18.0 million, or 6.72% of total loans at September 30, 2007. The
      increase was due primarily to the addition of two loans totaling $6.5
      million.


11


Set
      forth
      below is selected data relating to the composition of our loan portfolio at
      the
      dates indicated.




**At
                  September 30,****2007**
              
              **2006****Amount**
              
              **%**
              
              **Amount**
              
              **%****(Dollars
                  in thousands)**Type
                  of Loan:Real
                  estate loans:Single-family
                  1-4 units
              
              $
              41,749
              
              
              15.64
              %
              $
              42,623
              
              
              18.48
              %Multi-family
                  5 or more units
              
              
              12,198
              
              
              4.57
              
              
              10,416
              
              
              4.52Real
                  estate construction loans
              
              
              125,797
              
              
              47.12
              
              
              99,759
              
              
              43.25Commercial
                  real estate loans
              
              
              57,241
              
              
              21.44
              
              
              53,360
              
              
              23.13Total
                  real estate loans
              
              
              236,985
              
              
              88.77
              
              
              206,158
              
              
              89.38Consumer
                  loans:Loans
                  secured by deposit accounts
              
              
              228
              
              
              0.09
              
              
              211
              
              
              0.09Automobile
                  loans
              
              
              477
              
              
              0.18
              
              
              608
              
              
              0.26Home
                  equity loans
              
              
              10,713
              
              
              4.01
              
              
              11,662
              
              
              5.06Other
              
              
              620
              
              
              0.23
              
              
              738
              
              
              0.32Total
                  consumer loans
              
              
              12,038
              
              
              4.51
              
              
              13,219
              
              
              5.73Commercial
                  business loans
              
              
              17,951
              
              
              6.72
              
              
              11,270
              
              
              4.89Total
                  gross loans
              
              
              266,974
              
              
              100.00
              %
              
              230,647
              
              
              100.00
              %Loans
                  in process
              
              
              (31,316
              )
              
              
              
              
              (27,962
              )Deferred
                  loan fees, net
              
              
              (339
              )
              
              
              
              
              (314
              )Unearned
                  discounts, net
              
              
              3⁄4
              
              
              
              
              
              (5
              )Allowance
                  for loan losses
              
              
              (3,011
              )
              
              
              
              
              (2,144
              )Total
              
              $
              232,308
              
              
              
              
              $
              200,222


**At
                  September 30,****2005**
              
              **2004**
              
              **2003****Amount**
              
              **%**
              
              **Amount**
              
              **%**
              
              **Amount**
              
              **%****(Dollars
                  in thousands)**Type
                  of Loan:Real
                  estate loans:Single-family
                  1-4 units
              
              $
              39,435
              
              
              20.71
              %
              $
              53,098
              
              
              28.71
              %
              $
              59,123
              
              
              36.28
              %Multi-family
                  5 or more units
              
              
              15,603
              
              
              8.20
              
              
              12,877
              
              
              6.96
              
              
              11,027
              
              
              6.77Real
                  estate construction loans
              
              
              79,979
              
              
              42.01
              
              
              71,875
              
              
              38.86
              
              
              54,423
              
              
              33.40Commercial
                  real estate loans
              
              
              37,568
              
              
              19.74
              
              
              30,294
              
              
              16.38
              
              
              23,671
              
              
              14.53Total
                  real estate loans
              
              
              172,585
              
              
              90.66
              
              
              168,144
              
              
              90.91
              
              
              148,244
              
              
              90.98Consumer
                  loans:Loans
                  secured by deposit accounts
              
              
              128
              
              
              0.07
              
              
              167
              
              
              0.09
              
              
              166
              
              
              0.10Automobile
                  loans
              
              
              867
              
              
              0.46
              
              
              1,097
              
              
              0.59
              
              
              1,316
              
              
              0.81Home
                  equity loans
              
              
              10,266
              
              
              5.39
              
              
              9,764
              
              
              5.28
              
              
              8,126
              
              
              4.99Other
              
              
              1,129
              
              
              0.59
              
              
              1,037
              
              
              0.56
              
              
              638
              
              
              0.39Total
                  consumer loans
              
              
              12,390
              
              
              6.51
              
              
              12,065
              
              
              6.52
              
              
              10,246
              
              
              6.29Commercial
                  business loans
              
              
              5,397
              
              
              2.83
              
              
              4,754
              
              
              2.57
              
              
              4,457
              
              
              2.73Total
                  gross loans
              
              
              190,372
              
              
              100.00
              %
              
              184,963
              
              
              100.00
              %
              
              162,947
              
              
              100.00
              %Loans
                  in process
              
              
              (24,444
              )
              
              
              
              
              (22,549
              )
              
              
              
              
              (19,066
              )Deferred
                  loan fees, net
              
              
              (316
              )
              
              
              
              
              (368
              )
              
              
              
              
              (389
              )Unearned
                  discounts, net
              
              
              (7
              )
              
              
              
              
              (182
              )
              
              
              
              
              (202
              )Allowance
                  for loan losses
              
              
              (1,762
              )
              
              
              
              
              (2,024
              )
              
              
              
              
              (1,297
              )Total
              
              $
              163,843
              
              
              
              
              $
              159,840
              
              
              
              
              $
              141,993


12


The
      following table sets forth certain information at September 30, 2007, 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 after****2008**
            
            **2009**
            
            **2010**
            
            **9/30/07**
            
            **9/30/07**
            
            **9/30/07**
            
            **9/30/07**
            
            **Total****(Dollars in thousands)**Single-family
                mortgage loans
            
            $
            1,156
            
            $
            1,244
            
            $
            1,339
            
            $
            2,992
            
            $
            9,721
            
            $
            14,037
            
            $
            11,260
            
            $
            41,749Multi-family
                mortgage loans
            
            
            338
            
            
            364
            
            
            391
            
            
            874
            
            
            2,840
            
            
            4,101
            
            
            3,290
            
            
            12,198Real
                estate construction loans
            
            
            99,610
            
            
            26,187
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            125,797Commercial
                real estate loans
            
            
            1,517
            
            
            1,639
            
            
            1,772
            
            
            3,984
            
            
            13,143
            
            
            19,382
            
            
            15,804
            
            
            57,241Loans
                secured by deposit accounts
            
            
            228
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            228Other
                consumer loans
            
            
            2,609
            
            
            2,826
            
            
            3,060
            
            
            3,315
            
            
            —
            
            
            —
            
            
            —
            
            
            11,810Commercial
                business loans
            
            
            2,430
            
            
            2,631
            
            
            2,849
            
            
            6,425
            
            
            3,616
            
            
            —
            
            
            —
            
            
            17,951Total
                gross loans
            
            $
            107,888
            
            $
            34,891
            
            $
            9,411
            
            $
            17,590
            
            $
            29,320
            
            $
            37,520
            
            $
            30,354
            
            $
            266,974




The
      following table sets forth the dollar amount of all loans at September 30,
      2007,
      that are due after September 30, 2008 which have either fixed interest rates
      or
      adjustable interest rates.




**Fixed
                Rates**
            
            **Adjustable Rates**
            
            **Total****(Dollars
                in thousands)**Single-family
                mortgage loans
            
            $
            25,072
            
            $
            15,521
            
            $
            40,593Multi-family
                mortgage loans
            
            
            6,353
            
            
            5,507
            
            
            11,860Real
                estate construction loans
            
            
            7,556
            
            
            18,631
            
            
            26,187Commercial
                real estate loans
            
            
            50,850
            
            
            4,874
            
            
            55,724Loans
                secured by deposit accounts
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4Other
                consumer loans
            
            
            1,096
            
            
            8,105
            
            
            9,201Commercial
                business loans
            
            
            11,892
            
            
            3,629
            
            
            15,521Total
                gross loans
            
            $
            102,819
            
            $
            56,267
            
            $
            159,086





The
      following table shows our loan origination, sale and other activity during
      the
      years indicated.




**For
                the Years Ended September 30,****2007**
            
            **2006**
            
            **2005****(Dollars
                in thousands)**Total
                net loans at the beginning of year
            
            $
            200,222
            
            $
            163,843
            
            $
            159,840Loans
                originated for portfolio:Single
                and multi-family mortgage loans
            
            
            25,703
            
            
            17,437
            
            
            12,378Real
                estate construction loans
            
            
            64,541
            
            
            74,792
            
            
            68,648Commercial
                real estate loans
            
            
            27,002
            
            
            33,167
            
            
            19,172Commercial
                business loans
            
            
            16,657
            
            
            9,179
            
            
            2,919Loans
                secured by deposit accounts
            
            
            212
            
            
            295
            
            
            197Home
                equity loans
            
            
            3,460
            
            
            4,277
            
            
            2,602Automobile
                and other consumer loans
            
            
            1,036
            
            
            1,028
            
            
            1,984Total
                loans originated
            
            $
            138,611
            
            $
            140,175
            
            $
            107,900Deduct:Principal
                loan repayment and other, net
            
            
            106,790
            
            
            103,326
            
            
            103,205Loan
                charge-offs, net of (recoveries)
            
            
            (265
            )
            
            470
            
            
            692Total
                net loans at end of year
            
            $
            232,308
            
            $
            200,222
            
            $
            163,843Loans
                originated for sale
            
            $
            20,354
            
            $
            17,656
            
            $
            21,140Loans
                sold in secondary market
            
            $
            20,094
            
            $
            19,281
            
            $
            20,132


13





***Loans
      Held for Sale.*** Loans
      held for sale increased $260,000 to $719,000 at September 30, 2007.





***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 increased from $35.9 million at
      September 30, 2006 to $48.0 million at September 30, 2007 due to purchases
      of
      intermediate-term agencies and intermediate and long-term municipal securities,
      partially offset by maturities and calls. Mortgage-backed securities available
      for sale decreased from $24.2 million at September 30, 2006 to $19.3 million
      at
      September 30, 2007 due to principal repayments.





The
      following table sets forth the Bank’s mortgage-backed securities purchases and
      sales for the years indicated.





**Years Ended September 30,****2007**
            
            **2006**
            
            **2005****(In
                thousands)**Mortgage-backed
                securities:Purchased
            
            
            3⁄4
            
            $
            3,452
            
            $
            13,755Sold
            
            
            3⁄4
            
            
            3⁄4
            
            
            1,874





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,****2007**
            
            **2006**
            
            **2005****Amortized**
              **Cost**
            
            **Fair
                Value**
            
            **Amortized**
              **Cost**
            
            **Fair
                Value**
            
            **Amortized**
              **Cost**
            
            **Fair
                Value****(Dollars
                in thousands)**Securities
                available for sale:Federal
                agency obligations
            
            $
            34,555
            
            $
            34,848
            
            $
            29,711
            
            $
            29,543
            
            $
            16,577
            
            $
            16,450State
                and municipal obligations
            
            
            12,839
            
            
            12,741
            
            
            6,435
            
            
            6,340
            
            
            5,882
            
            
            5,864Mortgage-backed
                securities
            
            
            19,621
            
            
            19,277
            
            
            24,863
            
            
            24,217
            
            
            27,583
            
            
            27,189Equity
                securities
            
            
            395
            
            
            394
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4Total
                securities available for sale
            
            $
            67,410
            
            $
            67,260
            
            $
            61,009
            
            $
            60,100
            
            $
            50,042
            
            $
            49,503Weighted-average
                rate on securities (1)
            
            
            4.72
            %
            
            
            
            
            4.44
            %
            
            
            
            
            3.94
            %Weighted-average
                rate on mortgage - backed securities
            
            
            4.31
            %
            
            
            
            
            4.29
            %
            
            
            
            
            4.16
            %





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





At
      September 30, 2007, 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.


14


The
      following table sets forth the maturities and weighted-average yields of debt
      securities at September 30, 2007. 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**
              
              **Total****Carrying**
                **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
              
              $
              —
              
              
              —
              %
              $
              2,512
              
              
              4.29
              %
              $
              4,119
              
              
              4.22
              %
              $
              6,110
              
              
              5.26
              %
              $
              12,741
              
              
              4.73
              %Federal
                  agency obligations
              
              
              4,287
              
              
              4.23
              
              
              27,048
              
              
              4.77
              
              
              3,513
              
              
              5.41
              
              
              —
              
              
              —
              
              
              34,848
              
              
              4.77Mortgage-backed
                  securities
              
              
              1,244
              
              
              4.44
              
              
              9,723
              
              
              4.23
              
              
              829
              
              
              5.00
              
              
              6,907
              
              
              4.39
              
              
              18,703
              
              
              4.34Collateralized
                  mortgage obligations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              574
              
              
              3.36
              
              
              574
              
              
              3.36Total
                  securities available for sale
              
              $
              5,531
              
              
              3.99
              
              $
              39,283
              
              
              4.60
              
              $
              8,461
              
              
              4.78
              
              $
              13,591
              
              
              4.74
              
              $
              66,866
              
              
              4.60





***Premises
      and Equipment.*** Premises
      and equipment, net, increased from $6.7 million at September 30, 2006 to $8.7
      million at September 30, 2007 due to the opening of a new branch in Gladstone,
      Missouri in September 2007.





***Other
      Assets.*** Bank-owned
      life insurance represents the purchase of two policies of $3.0 million in June
      2007 and $5.0 million in July 2007, respectively, and change in cash surrender
      value of $101,000. Accrued interest receivable increased due to higher
      securities and loan balances and timing of interest receipts.





***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 increased
      $53.8 million, or 27.1%, to $252.3 million at September 30, 2007 from $198.5
      million at September 30, 2006. The increase in deposits for the year ended
      September 30, 2007 consisted of an increase in money market accounts and
      certificate of deposit accounts less than twelve months, which were attracted
      primarily through special promotions, brokered deposits and to a lesser extent,
      an increase in noninterest-bearing checking accounts, partially offset by a
      decrease in interest bearing checking accounts and certificate of deposit
      accounts greater than twelve months. The amount of brokered deposits in the
      future will be contingent upon current market rates as compared to retail
      deposits and FHLB advances.





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.


15




**Years
                  Ended September 30,****2007**
              
              **2006**
              
              **2005****Average**
                **Balance**
              
              **Average**
                **Rate**
              
              **Average**
                **Balance**
              
              **Average**
                **Rate**
              
              **Average**
                **Balance**
              
              **Average**
                **Rate****(Dollars
                  in thousands)**Noninterest-bearing
                  NOW accounts
              
              $
              12,458
              
              
              —
              
              $
              11,633
              
              
              —
              
              $
              9,933
              
              
              —Interest-bearing
                  NOW accounts
              
              
              24,331
              
              
              1.88
              %
              
              25,224
              
              
              1.83
              %
              
              18,146
              
              
              1.15
              %Money
                  market accounts
              
              
              38,052
              
              
              4.47
              
              
              21,290
              
              
              2.38
              
              
              25,315
              
              
              1.77Statement
                  accounts
              
              
              7,336
              
              
              0.31
              
              
              9,059
              
              
              0.34
              
              
              9,024
              
              
              0.31Certificates
                  of deposit
              
              
              143,665
              
              
              4.80
              
              
              126,275
              
              
              3.97
              
              
              106,218
              
              
              3.10Total
              
              $
              225,842
              
              
              4.02
              
              $
              193,481
              
              
              3.10
              
              $
              168,636
              
              
              2.36
  The
        following table sets forth the balances of our deposit products at the dates
        indicated.
 
 **At
                  September 30,****2007**
              
              **2006**
              
              **2005****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**Noninterest-bearingNOW
                  accounts
              
              $
              13,617
              
              
              5.4
              %
              $
              11,896
              
              
              6.0
              %
              $
              11,590
              
              
              6.4
              %Interest-bearing
                  NOW accounts
              
              
              21,368
              
              
              8.5
              
              
              25,234
              
              
              12.7
              
              
              22,020
              
              
              12.1Money
                  market accounts
              
              
              68,482
              
              
              27.1
              
              
              13,617
              
              
              6.9
              
              
              26,237
              
              
              14.4Statement
                  accounts
              
              
              7,200
              
              
              2.9
              
              
              7,702
              
              
              3.9
              
              
              8,880
              
              
              4.9Certificates
                  of deposit
              
              
              141,638
              
              
              56.1
              
              
              140,022
              
              
              70.5
              
              
              112,890
              
              
              62.2Total
              
              $
              252,305
              
              
              100.0
              %
              $
              198,471
              
              
              100.0
              %
              $
              181,617
              
              
              100.0
              %
  The
        following table indicates the amount of jumbo certificates of deposit by
        time
        remaining until maturity as of September 30, 2007. Jumbo certificates of
        deposit
        require minimum deposits of $100,000.
 
 **Maturity
                  Period**
              
              **Certificates ofDeposit****(In thousands)**Three
                  months or less
              
              $
              29,144Over
                  three through six months
              
              
              10,304Over
                  six through 12 months
              
              
              5,337Over
                  12 months
              
              
              2,948Total
              
              $
              47,733
 
 The
        following table sets forth time deposits classified by rates at the dates
        indicated.
 
 **At
                  September 30,****2007**
              
              **2006**
              
              **2005**0.00
                  - 0.99%
              
              $
              —
              
              $
              —
              
              $
              471.00
                  - 1.99
              
              
              —
              
              
              5
              
              
              6532.00
                  - 2.99
              
              
              300
              
              
              2,254
              
              
              27,9563.00
                  - 3.99
              
              
              9,249
              
              
              33,373
              
              
              61,0794.00
                  - 4.99
              
              
              60,152
              
              
              44,344
              
              
              20,2245.00
                  - 5.99
              
              
              71,937
              
              
              60,046
              
              
              2,5426.00
                  - 6.99
              
              
              —
              
              
              —
              
              
              389$
              141,638
              
              $
              140,022
              
              $
              112,890
  The
        following table sets forth the amount and maturities of time deposits at
        September 30, 2007.
 
 16
  **Amount
                    Due****One 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
                
                $
                300
                
                $
                3⁄4
                
                $
                3⁄4
                
                $
                3⁄4
                
                $
                3⁄4
                
                $
                300
                
                
                .2
                %3.00
                    - 3.99
                
                
                5,770
                
                
                2,305
                
                
                1,051
                
                
                41
                
                
                82
                
                
                9,249
                
                
                6.54.00
                    - 4.99
                
                
                51,415
                
                
                3,580
                
                
                2,693
                
                
                870
                
                
                1,594
                
                
                60,152
                
                
                42.55.00
                    - 5.99
                
                
                69,149
                
                
                1,610
                
                
                170
                
                
                992
                
                
                16
                
                
                71,937
                
                
                50.8$
                126,634
                
                $
                7,495
                
                $
                3,914
                
                $
                1,903
                
                $
                1,692
                
                $
                141,638
                
                
                100.0
                %
 
 The
        following table sets forth deposit activity for the years
        indicated.
 
 **Years
                  Ended September 30,****2007**
              
              **2006**
              
              **2005****(In
                  thousands)**Net
                  deposits (withdrawals) before interest credited
              
              $
              45,803
              
              $
              11,629
              
              $
              25,459Interest
                  credited
              
              
              8,032
              
              
              5,225
              
              
              3,229Net
                  increase (decrease) in deposits
              
              $
              53,835
              
              $
              16,854
              
              $
              28,688
 
 ***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.
 
 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,****2007**
              
              **2006**
              
              **2005****(Dollars
                  in thousands)**Outstanding
                  advances from Federal Home Loan Bank
              
              $
              22,056
              
              $
              23,833
              
              $
              9,633Weighted-average
                  rate paid on advances from Federal Home Loan Bank
              
              
              4.90
              %
              
              4.19
              %
              
              3.17
              %Outstanding
                  securities sold under agreement to repurchase
              
              $
              681
              
              $
              3,384
              
              $
              1,157Weighted-average
                  rate paid on securities sold under agreementto
                  repurchase
              
              
              3.41
              %
              
              3.44
              %
              
              2.05
              %
  **Years
                  Ended September 30,****2007**
              
              **2006**
              
              **2005****(Dollars
                  in thousands)**Maximum
                  outstanding advances from Federal Home Loan Bankat
                  any month end
              
              $
              26,083
              
              $
              35,633
              
              $
              17,133Weighted-average
                  rate paid on advances from Federal HomeLoan
                  Bank (1)
              
              
              4.84
              %
              
              3.97
              %
              
              2.44
              %Average
                  advances from Federal Home Loan Bank outstanding
              
              $
              19,904
              
              $
              22,167
              
              $
              10,967Maximum
                  outstanding securities sold under agreement torepurchase
                  at any month end
              
              $
              5,164
              
              $
              4,400
              
              $
              1,798Weighted-average
                  rate paid on securities sold under agreement torepurchase
                  (2)
              
              
              3.39
              %
              
              3.18
              %
              
              1.76
              %Average
                  securities sold under agreement to repurchase
              
              $
              1,573
              
              $
              2,224
              
              $
              1,073
 
 (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.
  17
  Federal
        Home Loan Bank of Des Moines borrowings decreased $7.7 million, or 22.4%,
        to
        $26.4 million at September 30, 2007 from $34.1 million at September 30, 2006.
        The advances outstanding as of September 30, 2007 mature in 2007 through
        2012.
 
 Securities
        sold under agreement to repurchase decreased by  $2.2
        million for the year ended September 30, 2007 due to lower balances from
        existing customers. Accrued interest on deposits increased due to higher
        money
        market and certificate balances, and rate and timing of payments. Other
        liabilities increased as a result of the timing of payroll payments and higher
        accrued bonuses and other accrual items.
 
 **Results
        of Operations for the Years Ended September 30, 2007, 2006 and
        2005**
 
 ***Overview.***
 
 **Years
                  Ended September 30,**
              
              **%
                  Change**
              
              **%
                  Change****2007**
              
              **2006**
              
              **2005**
              
              **2007/2006**
              
              **2006/2005****(Dollars
                  in thousands)**Net
                  earnings
              
              $
              1,944
              
              $
              1,463
              
              $
              1,505
              
              
              32.9
              %
              
              (2.8
              )%Return
                  on assets (1)
              
              
              0.63
              %
              
              0.56
              %
              
              0.67
              %
              
              12.5
              
              
              (16.4
              )Return
                  on stockholders’ equity (2)
              
              
              3.94
              
              
              5.47
              
              
              7.28
              
              
              (28.0
              )
              
              (24.9
              )Stockholders’
                  equity-to-assets ratio (3)
              
              
              16.00
              
              
              10.16
              
              
              9.16
              
              
              57.5
              
              
              10.9Dividend
                  payout ratio (4)
              
              
              23.86
              
              
              29.86
              
              
              28.26
              
              
              (20.1
              )
              
              5.7
 
 (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.
  *2007
        vs. 2006.* Net
        earnings increased $481,000, or 32.9%, for the year ended September 30, 2007
        compared to the year ended September 30, 2006. The increase in net earnings
        was
        due primarily to a $3.9 million or 23.4% increase in interest income, partially
        offset by a $2.9 million or 38.1% increase in interest expense and a $843,000
        or
        11.7% increase in noninterest expense. Net interest income increased primarily
        as a result of an increase in loans receivable, partially offset by a smaller
        interest rate spread. Noninterest income in 2007 increased primarily due
        to an
        increase in the cash surrender value of bank-owned life insurance, deposit
        account service charges and gains on sale of loans. Noninterest expense
        increased primarily due to an increase in compensation, occupancy, net expenses
        from operations from foreclosed real estate and other noninterest expenses,
        partially offset by a decrease in advertising expenses.
 
 *2006
        vs. 2005.* Net
        earnings decreased $42,000, or 2.8%, for the year ended September 30, 2006
        compared to the year ended September 30, 2005. The decrease in net earnings
        was
        due primarily to a $3.8 million or 30.0% increase in interest income, being
        more
        than offset by a $2.4 million or 46.8% increase in interest expense, $422,000
        or
        98.1% increase in provisions for loan losses and a $1.1 million or 18.8%
        increase in noninterest expense. Net interest income increased primarily
        as a
        result of an increase in loans receivable. Noninterest income in 2006 was
        positively affected by a higher amount of deposit account service charges,
        loan
        service charges and gains on sale of loans, partially offset by a decrease
        in
        gains on sale of mortgage-backed securities. Noninterest expense increased
        as a
        result of increased expenses attributable to new branches.
 
 18
  ***Net
        Earnings.***
 
 *2007
        vs. 2006.* Net
        earnings increased by $481,000 from $1.5 million for 2006 to $1.9 million
        for
        2007. The increase was due to higher net interest income and noninterest
        income,
        and lower provisions for loan losses, partially offset by higher noninterest
        expense and income taxes.
 
 *2006
        vs. 2005.* Net
        earnings remained substantially the same at $1.5 million for both 2005 and
        2006,
        with only a slight decrease of $42,000. The slight decrease in net earnings
        was
        due to higher net interest income, being more than offset by higher provisions
        for loan losses and noninterest expense.
 
 ***Net
        Interest Income.***
 
 *2007
        vs. 2006.* Net
        interest income increased by $1.0 million, or 11.1%, from $9.1 million for
        2006
        to $10.1 million for 2007 as a result of an increase in net earning assets,
        partially offset by a lower interest rate spread. The increase in net earning
        assets is due to an increase of $42.6 million, or 17.2%, in interest-earning
        assets, partially offset by an increase of $24.3 million, or 10.5%, in average
        interest-bearing liabilities. The interest rate spread decreased from 3.43%
        for
        2006 to 2.97% for 2007.
 
 Interest
        on loans receivable increased as a result of a higher weighted-average balance
        and, to a lesser extent a higher average yield. The weighted-average yield
        on
        loans **** increased
        from 7.59% for 2006 to 7.91% for 2007.
 
 Interest
        on mortgage-backed securities decreased due to a lower average balance,
        partially offset by a higher average yield.
 
 Interest
        on securities increased as a result of a higher average balance and yield,
        reflecting higher market interest rates. Interest on other interest-earning
        assets also increased as a result of a higher average balance and yield.
 
 Interest
        on deposits increased as a result of a higher weighted-average rate and,
        to a
        lesser extent a higher weighted-average balance. During 2007, the Bank’s
        promotion of attractive money market and short-term certificate of deposit
        rates
        resulted in increased balances. Higher weighted-average rates resulted from
        higher market interest rates.
 
 Interest
        on advances from the Federal Home Loan Bank of Des Moines decreased primarily
        due to a lower average balance, partially offset by a higher average rate.
 
 *2006
        vs. 2005.* Net
        interest income increased by $1.4 million, or 18.6%, from $7.7 million for
        2005
        to $9.1 million for 2006 as a result of higher interest rates on loans, deposits
        and advances and to a lesser extent, higher loan, investment, deposit and
        advance balances.
 
 Interest
        on loans receivable increased as a result of a higher average balance and
        yield.
        The weighted-average yield on loans **** increased
        from 6.57% for 2005 to 7.59% for 2006.
 
 Interest
        on mortgage-backed securities increased due to a higher yield, reflecting
        higher
        market interest rates and a higher weighted-average balance.
 
 Interest
        on securities increased as a result of a higher weighted-average balance
        and
        yield, reflecting higher market interest rates. Interest on other
        interest-earning assets increased as a result of a higher weighted-average
        yield.
  19
  Interest
        on deposits increased as a result of a higher weighted-average balance and,
        to a
        greater extent, a higher weighted-average rate. During 2006, the Bank’s
        promotion of attractive certificates of deposit rates resulted in increased
        balances, particularly in short-term certificates.
 
 Interest
        on advances from the Federal Home Loan Bank of Des Moines increased primarily
        due to a higher average rate.
 
 ***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,****2007**
              
              **2006**
              
              **2005****Average
                  Balance**
              
              **Interest**
              
              **Average
                  Yield/**
                **Cost**
              
              **Average
                  Balance**
              
              **Interest**
              
              **Average
                  Yield/**
                **Cost**
              
              **Average
                  Balance**
              
              **Interest**
              
              **Average
                  Yield/**
                **Cost****(Dollars
                  in thousands)**Interest-earning
                  assets:Loans
                  receivable
              
              $
              217,841
              
              $
              17,233
              
              
              7.91
              %
              $
              187,818
              
              $
              14,253
              
              
              7.59
              %
              $
              172,869
              
              $
              11,354
              
              
              6.57
              %Mortgage-backed
                  securities
              
              
              22,229
              
              
              933
              
              
              4.20
              
              
              25,216
              
              
              995
              
              
              3.95
              
              
              21,656
              
              
              808
              
              
              3.73Securities
              
              
              43,988
              
              
              2,076
              
              
              4.72
              
              
              29,117
              
              
              1,170
              
              
              4.02
              
              
              14,371
              
              
              463
              
              
              3.22Other
                  interest-earning assets
              
              
              6,484
              
              
              321
              
              
              4.95
              
              
              5,768
              
              
              246
              
              
              4.27
              
              
              6,942
              
              
              191
              
              
              2.75Total
                  interest-earning assets
              
              
              290,542
              
              
              20,563
              
              
              7.08
              
              
              247,919
              
              
              16,664
              
              
              6.72
              
              
              215,838
              
              
              12,816
              
              
              5.94Interest-bearing
                  liabilities:Deposits
              
              
              225,842
              
              
              9,084
              
              
              4.02
              
              
              193,481
              
              
              6,007
              
              
              3.10
              
              
              168,636
              
              
              3,979
              
              
              2.36Federal
                  Home Loan Bank advances
              
              
              27,189
              
              
              1,333
              
              
              4.90
              
              
              34,807
              
              
              1,497
              
              
              4.30
              
              
              34,525
              
              
              1,142
              
              
              3.31Securities
                  sold under agreementto
                  repurchase
              
              
              2,097
              
              
              77
              
              
              3.69
              
              
              2,224
              
              
              71
              
              
              3.18
              
              
              1,058
              
              
              30
              
              
              2.81ESOP
                  note payable
              
              
              —
              
              
              —
              
              
              —
              
              
              327
              
              
              25
              
              
              7.66
              
              
              415
              
              
              25
              
              
              5.93Total
                  interest-bearing liabilities
              
              $
              255,128
              
              
              10,494
              
              
              4.11
              
              $
              230,839
              
              
              7,600
              
              
              3.29
              
              $
              204,634
              
              
              5,176
              
              
              2.53Net
                  interest income before provision for loanlosses
              
              
              
              
              $
              10,069
              
              
              
              
              
              
              
              $
              9,064
              
              
              
              
              
              
              
              $
              7,640Net
                  interest-earning assets
              
              $
              35,414
              
              
              
              
              
              
              
              $
              17,080
              
              
              
              
              
              
              
              $
              11,204Interest
                  rate spread
              
              
              
              
              
              
              
              
              2.97
              %
              
              
              
              
              
              
              
              3.43
              %
              
              
              
              
              
              
              
              3.41
              %Net
                  yield on average interest-earning assets
              
              
              
              
              
              
              
              
              3.47
              %
              
              
              
              
              
              
              
              3.66
              %
              
              
              
              
              
              
              
              3.54
              %Ratio
                  of average interest-earning assets toaverage
                  interest-bearing liabilities
              
              
              113.88
              %
              
              
              
              
              
              
              
              107.40
              %
              
              
              
              
              
              
              
              105.48
              %
  20
  ***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,**
                **2007 vs. 2006**
              
              **Year Ended September 30,**
                **2006 vs. 2005****Increase (Decrease) due to:**
              
              **Increase (Decrease) due to:****Volume**
              
              **Rate**
              
              **Rate/**
                **Volume**
              
              **Total**
              
              **Volume**
              
              **Rate**
              
              **Rate/**
                **Volume**
              
              **Total****(Dollars
                  in thousands)**Interest
                  income:Loans
                  receivable
              
              $
              2,279
              
              $
              605
              
              $
              96
              
              $
              2,980
              
              $
              982
              
              $
              1,764
              
              $
              153
              
              $
              2,899Mortgage-backed
                  securities
              
              
              (118
              )
              
              63
              
              
              (7
              )
              
              (62
              )
              
              132
              
              
              47
              
              
              8
              
              
              187Securities
              
              
              598
              
              
              204
              
              
              104
              
              
              906
              
              
              474
              
              
              115
              
              
              118
              
              
              707Other
                  interest-earning assets
              
              
              31
              
              
              39
              
              
              5
              
              
              75
              
              
              (32
              )
              
              105
              
              
              (18
              )
              
              55Total
                  interest-earning assets
              
              $
              2,790
              
              $
              911
              
              $
              198
              
              $
              3,899
              
              $
              1,556
              
              $
              2,031
              
              $
              261
              
              $
              3,848Interest
                  expense:Deposits
              
              
              1,003
              
              
              1,777
              
              
              297
              
              
              3,077
              
              
              586
              
              
              1,258
              
              
              184
              
              
              2,028Federal
                  Home Loan Bank advances
              
              
              (328
              )
              
              209
              
              
              (45
              )
              
              (164
              )
              
              9
              
              
              342
              
              
              4
              
              
              355Securities
                  sold under agreement torepurchase
              
              
              (4
              )
              
              11
              
              
              (1
              )
              
              6
              
              
              33
              
              
              4
              
              
              4
              
              
              41ESOP
                  note payable
              
              
              (25
              )
              
              (25
              )
              
              25
              
              
              (25
              )
              
              (5
              )
              
              7
              
              
              (2
              )
              
              —Total
                  interest-bearing liabilities
              
              
              646
              
              
              1,972
              
              
              276
              
              
              2,894
              
              
              623
              
              
              1,611
              
              
              190
              
              
              2,424Change
                  in net interest income
              
              $
              2,144
              
              $
              (1,061
              )
              $
              (78
              )
              $
              1,005
              
              $
              933
              
              $
              420
              
              $
              71
              
              $
              1,424
 
 ***Provision
        for Loan Losses.***
 
 *2007
        vs. 2006.* Provision
        for loan losses decreased from $852,000 for 2006 to $602,000 for 2007. At
        September 30, 2007, the allowance for loan losses was $3.0 million, or 1.1%
        of
        the gross loan portfolio, compared to $2.1 million or 0.9% of the loan portfolio
        at September 30, 2006. At September 30, 2007, loans secured by non-construction
        single-family properties totaled 15.6% of total loans and 7.0% of the allowance
        for loan losses was allocated to these loans. All other loans totaled 84.4%
        of
        the portfolio and 93.0% of the allowance for loan losses.
 
 During
        the year ended September 30, 2007, we recorded a provision for loan losses
        of
        $602 , 000,
        a
        decrease  of
        29.3%
        from the provision for loan losses of $852,000 recorded for the year ended
        September 30, 2006. The decreased provision is the result of an increase
        in
        recoveries of previously charged off loans.
 
 Non-accrual
        loans amounted to $3.4 million and $1.5 million at September 30, 2007 and
        2006,
        respectively. Other impaired loans, single family specs decreased by $2.7
        million due to the foreclosure of such properties, primarily in November
        2006.
        There were net recoveries of $265,000 during 2007 compared to net charge-offs
        of
        $470,000 during 2006. Recoveries in 2007 included $506,000 which were related
        to
        previously charged-off loans secured by 1-4 family investment
        properties.
 
 *2006
        vs. 2005.* Provision
        for loan losses increased from $430,000 for 2005 to $852,000 for 2006. At
        September 30, 2006, the allowance for loan losses was $2.1 million, or 0.9%
        of
        the gross loan portfolio, compared to $1.8 million or 0.9% of the loan portfolio
        at September 30, 2005. At September 30, 2006, loans secured by non-construction
        single-family properties totaled 18.5% of total loans and 9.3% of the allowance
        for loan losses was allocated to these loans. All other loans totaled 81.5%
        of
        the portfolio and 90.7% of the allowance for loan losses.
  21
  During
        the year ended September 30, 2006, we recorded a provision for loan losses
        of
        $852,000, an increase of 98.1% from the provision for loan losses of $430,000
        recorded for the year ended September 30, 2005. The increased provision is
        the
        result of the growth of the loan portfolio and the increase in classified
        assets.
 
 Non-accrual
        loans amounted to $1.5 million and $907,000 at September 30, 2006 and 2005,
        respectively. Net loan charge-offs amounted to $470,000 during 2006 compared
        to
        $692,000 during 2005. The majority of the net loan charge-offs in 2006 were
        due
        to loans that were identified as classified assets as of September 30,
        2005.
 
 ***Noninterest
        Income.*** ** The
        following table shows the components of noninterest income and the percentage
        changes for the years ended September 30, 2007 and 2006.
  **Years Ended September 30,**
              
              **% Change**
              
              **% Change****2007**
              
              **2006**
              
              **2005**
              
              **2007/2006**
              
              **2006/2005****(Dollars
                  in thousands)**Loan
                  service charges
              
              $
              90
              
              $
              69
              
              $
              53
              
              
              30.3
              %
              
              29.0
              %Gain
                  on sale of mortgage-backed securitiesavailable
                  for sale
              
              
              —
              
              
              —
              
              
              10
              
              
              —
              
              
              (100.0
              )Gain
                  on sale of loans
              
              
              247
              
              
              203
              
              
              194
              
              
              21.8
              
              
              4.7Change
                  in cash surrender value of BOLI
              
              
              101
              
              
              —
              
              
              —
              
              
              100.0
              
              
              —Deposit
                  account service charges
              
              
              1,039
              
              
              965
              
              
              943
              
              
              7.7
              
              
              2.4Total
              
              $
              1,477
              
              $
              1,237
              
              $
              1,200
              
              
              19.4
              
              
              3.1
  *2007
        vs. 2006.* Noninterest
        income increased from $1.2 million for 2006 to $1.5 million for 2007 due
        to an
        increase in the cash surrender value of bank-owned life insurance, deposit
        account service charges, gains on sale of loans and loan service charges.
 
 The
        Bank
        recognized gains on sale of loans of $247,000 and $203,000 for the years
        ended
        September 30, 2007 and 2006, respectively. During 2007 and 2006, we sold
        loans
        to secondary market investors totaling $20.1 million and $19.3 million,
        respectively.
 
 *2006
        vs. 2005.* Noninterest
        income remained substantially the same at $1.2 million for both 2005 and
        2006,
        with only a slight $37,000 increase due to a higher amount of deposit account
        service charges, loan service charges and gains on sale of loans, partially
        offset by a decrease in gains on sale of mortgage-backed securities.
 
 The
        Bank
        recognized gains on sale of loans of $203,000 and $194,000 for the years
        ended
        September 30, 2006 and 2005, respectively. During 2006 and 2005, we sold
        loans
        to secondary market investors totaling $19.3 million and $20.1 million,
        respectively.
  22
  ***Noninterest
        Expense.*** The
        following table shows the components of noninterest expense and the percentage
        changes for the years ended September 30, 2007 and 2006.
  **Years Ended September 30,**
              
              **% Change**
              
              **% Change****2007**
              
              **2006**
              
              **2005**
              
              **2007/2006**
              
              **2006/2005****(Dollars
                  in thousands)**Compensation
                  and benefits
              
              $
              4,445
              
              $
              3,975
              
              $
              3,302
              
              
              11.8
              %
              
              20.4
              %Occupancy
                  expense
              
              
              625
              
              
              508
              
              
              433
              
              
              22.8
              
              
              17.4Equipment
                  and data processing expense
              
              
              798
              
              
              740
              
              
              770
              
              
              7.9
              
              
              (4.0
              )Operations
                  from foreclosed real estate, net
              
              
              356
              
              
              139
              
              
              (22
              )
              
              156.4
              
              
              736.4Federal
                  deposit insurance premiums
              
              
              41
              
              
              24
              
              
              23
              
              
              72.5
              
              
              5.6Professional
                  and regulatory services
              
              
              408
              
              
              347
              
              
              305
              
              
              17.6
              
              
              13.6Advertising
              
              
              255
              
              
              414
              
              
              315
              
              
              (38.4
              )
              
              31.6Correspondent
                  banking charges
              
              
              260
              
              
              260
              
              
              216
              
              
              0.2
              
              
              20.7Supplies
              
              
              138
              
              
              182
              
              
              141
              
              
              (24.6
              )
              
              29.7Other
              
              
              720
              
              
              614
              
              
              582
              
              
              17.3
              
              
              5.4Total
                  noninterest expense
              
              $
              8,046
              
              $
              7,203
              
              $
              6,065
              
              
              11.7
              %
              
              18.8
              %Efficiency
                  ratio (1)
              
              
              69.7
              %
              
              69.9
              %
              
              68.6
              %
 
 (1)  Computed
        as noninterest expense divided by the sum of net interest income and noninterest
        income.
 
 *2007
        vs. 2006.* Noninterest
        expense increased from $7.2 million for 2006 to $8.0 million for 2007.
        Compensation and benefit expense increased **** due
        to
        the costs associated with the additional staff for the new branches and higher
        ESOP and stock-based compensation plan expenses.
 
 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 of SFAS No. 123(R) and new awards granted thereafter, which
        includes restricted stock and stock awards 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. Prior to October 1, 2006, the Company applied
        the
        intrinsic value method of accounting for stock-based compensation expense
        under
        APB No. 25 and adopted the disclosure requirements. Under the intrinsic value
        method, no compensation expense was recognized in the financial statements
        since
        the exercise price of the Company’s stock was equal to the market price of the
        stock at the grant date.
 
 During
        2007, the Company recognized stock option expense and restricted stock award
        expense of $68,000 and $163,000, respectively. During both 2006 and 2005,
        the
        Company recognized stock option expense and restricted stock award expense
        of $0
        and $28,000, respectively. At September 30, 2007, total unrecognized stock
        option expense was approximately $219,000 and is expected to be recognized
        over
        the weighted-average period of 3.40 years. At September 30, 2007, total
        unrecognized restricted stock award expense was $1.1 million and is expected
        to
        be recognized over the next 4.4 years.
 
 Operations
        for foreclosed real estate, net increased from a loss of $139,000 to $356,000
        for the years ended September 30, 2006 and 2007, respectively. The Bank
        recognized net losses for 2006 and 2007 on sale of foreclosed real estate
        of
        $89,000, and $288,000, respectively. Occupancy expense  increased
        due to the opening of the new branches. There were also modest increases
        in
        professional and regulatory services, equipment and data processing expense
        and
        a small decrease in supplies expense. Advertising expense decreased due to
        lower
        direct mail costs. Other noninterest expense increased from $614,000 for
        2006 to
        $720,000 for 2007 due primarily to higher stock administration and data line
        expense.
  23
  *2006
        vs. 2005.* Noninterest
        expense increased from $6.1 million for 2005 to $7.2 million for 2006.
        Compensation and benefit expense increased **** due
        to
        the costs associated with the additional staff for the new branches and higher
        ESOP expenses. Occupancy, advertising and supplies expense also increased
        because of the new branches. Operations for foreclosed real estate, net
        increased from a gain of $22,000 to a loss of $139,000 for the years ended
        September 30, 2005 and 2006, respectively. In 2005, the Bank recognized net
        gains on sale of foreclosed real estate of $77,000, in contrast to net losses
        on
        sale of foreclosed real estate of $89,000 recognized in 2006. There were
        also
        modest increases in professional and regulatory services, correspondent banking
        charges and a decrease in equipment and data processing expense. Other
        noninterest expense increased from $582,000 for 2005 to $614,000 for 2006
        due
        primarily to costs involving new data lines.
 
 ***Income
        Taxes.***
 
 *2007
        vs. 2006.* Income
        tax expense for the year ended September 30, 2007 was $954,000 compared to
        $783,000 for the year ended September 30, 2006. Income taxes increased due
        to an
        increase in earnings, partially offset by additional purchases of tax-exempt
        municipal securities. The effective tax rate for 2007 was 32.9% compared
        to
        34.9% for 2006.
 
 *2006
        vs. 2005.* Income
        tax expense for the year ended September 30, 2006 was $783,000 compared to
        $841,000 for the year ended September 30, 2005. Income taxes decreased due
        to
        additional purchases of tax-exempt municipal securities. The effective tax
        rate
        for 2006 was 34.9% compared to 35.9% for 2005.
 
 ***Stockholders’
        Equity.***
 
 *2007
        vs. 2006.* Stockholders’
        equity increased by $1.2 million from $49.0 million at September 30, 2006
        to
        $50.2 million at September 30, 2007 primarily due to an increase in net earnings
        of $1.9 million, the amortization of ESOP and stock-based compensation expenses
        of $563,000 and a decrease in unrealized losses on investments and
        mortgage-backed securities, net of taxes of $478,000, partially offset by
        the
        payment of dividends of $464,000 and the purchase of common stock used to
        fund
        restricted stock awards of $1.4 million.
 
 **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.
  24
  ***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 Non-Performing 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.
 
 25
  The
        following table sets forth information with respect to our nonperforming
        assets
        at the dates indicated.
 
 **At
                  September 30,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****(Dollars
                  in thousands)**Loans
                  accounted for on a non-accrual basis: (1)Single
                  and multi-family loans
              
              $
              104
              
              $
              828
              
              $
              351
              
              $
              723
              
              $
              ―Real
                  estate construction spec loans
              
              
              1,932
              
              
              304
              
              
              556
              
              
              ―
              
              
              ―Land
                  development loans
              
              
              1,386
              
              
              ―
              
              
              ―
              
              
              ―
              
              
              ―Consumer
              
              
              ―
              
              
              349
              
              
              ―
              
              
              ―
              
              
              ―Total
                  non-accrual loans
              
              
              3,422
              
              
              1,481
              
              
              907
              
              
              723
              
              
              ―Accruing
                  loans which are contractually pastdue
                  90 days or more –
                  single-family loans (1)
              
              
              ―
              
              
              58
              
              
              ―
              
              
              ―
              
              
              ―Total
                  non-accrual and 90 days or more pastdue
                  loans
              
              
              3,422
              
              
              1,539
              
              
              907
              
              
              723
              
              
              ―Other
                  impaired loans - single family 1-4 units,investment
                  property
              
              
              ―
              
              
              ―
              
              
              403
              
              
              2,933
              
              
              ―Other
                  impaired loans - single family, spec
              
              
              ―
              
              
              2,682
              
              
              ―
              
              
              ―
              
              
              ―Troubled
                  debt restructuring (2)
              
              
              ―
              
              
              ―
              
              
              ―
              
              
              ―
              
              
              274Foreclosed
                  real estate held for sale
              
              
              1,676
              
              
              1,580
              
              
              1,530
              
              
              547
              
              
              **―**Total
                  nonperforming assets
              
              
              5,098
              
              
              5,801
              
              
              2,840
              
              
              4,203
              
              
              274Allowance
                  for losses on impaired loans
              
              
              370
              
              
              258
              
              
              199
              
              
              655
              
              $
              ―Impaired
                  loans with no related allowancefor
                  loan losses
              
              $
              ―
              
              $
              58
              
              $
              116
              
              $
              ―
              
              $
              ―Non-accrual
                  and 90 days or more past due loansas
                  a percentage of total loans, net
              
              
              1.47
              %
              
              2.11
              %
              
              0.55
              %
              
              0.45
              %
              
              **―**
              **%**Non-accrual
                  and 90 days or more past due loansas
                  a percentage of total assets
              
              
              1.03
              %
              
              1.47
              %
              
              0.38
              %
              
              0.34
              %
              
              **―**
              **%**Nonperforming
                  assets as a percentage oftotal
                  assets
              
              
              1.53
              %
              
              2.02
              %
              
              1.20
              %
              
              1.97
              %
              
              0.15
              %
 
 (1)  Interest
        on delinquent loans is accrued to income to the extent considered
        collectible.
 (2)  As
        defined in Statement of Financial Accounting Standards No. 15.
 
 Non-performing
        assets totaled $5.1 million, or 1.53% of total assets, at September 30, 2007,
        which was a decrease of $703,000  or
        12.1%,
        from $5.8 million, or 2.02% of total assets, at September 30, 2006.
        Non-performing assets at September 30, 2007 consisted of $3.4 million in
        non-accrual loans, and $1.7 million in foreclosed real estate. At September
        30,
        2007, non-accrual loans consisted of $1.9 million in real estate construction
        loans, $104,000 in single-family loans and one land development loan totaling
        $1.4 million.
 
 Interest
        income that would have been recorded for the year ended September 30, 2007
        had
        nonaccrual loans been current according to their original terms amounted
        to
        $70,389. There was no interest income recognized on such loans during the
        period
        the loans were classified as nonaccrual in 2007.
 
 Foreclosed
        real estate owned by the Bank at September 30, 2007 totaled $1.7 million
        compared to $1.6 million at September 30, 2006. Foreclosed real estate at
        September 30, 2007 included five 1-4 family properties, five 1-4 family
        construction properties and one lot.
  26
  ***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,****2007**
              
              **2006**
              
              **2005****(In
                  thousands)**Special
                  mention assets
              
              $
              1,386
              
              $
              2,986
              
              $
              1,729Substandard
                  assets (1)
              
              
              5,435
              
              
              3,149
              
              
              2,854Doubtful
                  assets
              
              
              105
              
              
              196
              
              
              ―Loss
                  assets
              
              
              ―
              
              
              ―
              
              
              ―Total
                  classified assets
              
              $
              6,926
              
              $
              6,331
              
              $
              4,583
 
 (1)
              Includes
                  foreclosed real estate of $1,675,871, $1,579,848 and $1,529,586
                  at
                  September 30, 2007, 2006 and 2005, respectively.
 
 The
        increase in our substandard assets at September 30, 2007 compared to September
        30, 2006 was due to classification of several spec construction loans.
        Substandard assets increased from $3.1 million at September 30, 2006
        to $5.4  million
        at September 30, 2007. Our substandard loans at September 30, 2007 consisted
        primarily of eighteen **** loans
        to
        four individuals totaling $3.8 million secured by spec homes and residential
        lots. During November 2007, the Bank foreclosed on five of these properties
        totaling $908,000.
 
 Special
        mention assets at September 30, 2007 consisted of one **** loan
        totaling $1.4 million secured by land for the development of multi-family
        lots.
 
 ***Delinquencies.*** The
        following table provides information about delinquencies in our loan portfolio
        at the dates indicated.
  **At
                    September 30,****2007**
                
                **2006**
                
                **2005****30-59**
                  **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
                
                $
                155
                
                $
                31
                
                $
                1,533
                
                $
                746
                
                $
                ―
                
                $
                559Construction
                    loans
                
                
                3⁄4
                
                
                2,233
                
                
                635
                
                
                323
                
                
                ―
                
                
                345Commercial
                    loans
                
                
                906
                
                
                95
                
                
                3⁄4
                
                
                3⁄4
                
                
                ―
                
                
                ―Consumer
                    loans
                
                
                97
                
                
                10
                
                
                83
                
                
                3⁄4
                
                
                69
                
                
                43Total
                
                $
                1,158
                
                $
                2,369
                
                $
                2,251
                
                $
                1,069
                
                $
                69
                
                $
                947
  27
  ***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, 2007, our allowance for loan losses represented 1.1% of total
        gross loans and 87.98% of non-performing 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.
 
 At
        September 30, 2006, our allowance for loan losses represented 0.9% of total
        gross loans and 50.80% of non-performing loans. The allowance for loan losses
        increased $382,000 from September 30, 2005 to September 30, 2006 due to a
        provision for loan losses of $852,000, partially offset by net charge-offs
        of
        loans totaling $470,000. There was no material change in the loss factors
        used
        to calculate the allowance from September 30, 2005 to September 30,
        2006.
 
 28
  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,****2007**
                
                **2006****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
                
                $
                210
                
                
                15.64
                %
                $
                200
                
                
                18.48
                %Multi-family
                    5 or more units
                
                
                75
                
                
                4.57
                
                
                61
                
                
                4.52Real
                    estate construction loans
                
                
                1,941
                
                
                47.12
                
                
                787
                
                
                43.25Commercial
                    real estate loans
                
                
                562
                
                
                21.44
                
                
                781
                
                
                23.13Commercial
                    business loans
                
                
                211
                
                
                6.72
                
                
                126
                
                
                4.89Consumer
                    loans
                
                
                12
                
                
                4.51
                
                
                189
                
                
                5.73Total
                    allowance for loan losses
                
                $
                3,011
                
                
                100.00
                %
                $
                2,144
                
                
                100.00
                %
  **At
                    September 30,****2005**
                
                **2004**
                
                **2003****Amount**
                
                **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
                
                $
                268
                
                
                20.71
                %
                $
                593
                
                
                28.71
                %
                $
                159
                
                
                36.28
                %Multi-family
                    5 or more units
                
                
                102
                
                
                8.20
                
                
                277
                
                
                6.96
                
                
                111
                
                
                6.77Real
                    estate construction loans
                
                
                565
                
                
                42.01
                
                
                579
                
                
                38.86
                
                
                512
                
                
                33.40Commercial
                    real estate loans
                
                
                672
                
                
                19.74
                
                
                423
                
                
                16.38
                
                
                287
                
                
                14.53Commercial
                    business loans
                
                
                65
                
                
                2.83
                
                
                54
                
                
                2.57
                
                
                127
                
                
                2.73Consumer
                    loans
                
                
                90
                
                
                6.51
                
                
                98
                
                
                6.52
                
                
                101
                
                
                6.29Total
                    allowance for loan losses
                
                $
                1,762
                
                
                100.00
                %
                $
                2,024
                
                
                100.00
                %
                $
                1,297
                
                
                100.00
                %
  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.
 
 29
  ***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,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Balance
                  at beginning of year
              
              $
              2,144
              
              $
              1,762
              
              $
              2,024
              
              $
              1,297
              
              $
              1,067Loans
                  charged-off:Single-family
                  1-4 units
              
              
              (82
              )
              
              (261
              )
              
              (482
              )
              
              (132
              )
              
              (2
              )Multi-family
                  5 or more units
              
              
              ―
              
              
              (113
              )
              
              ―
              
              
              ―
              
              
              ―Real
                  estate construction loans
              
              
              (140
              )
              
              (78
              )
              
              (197
              )
              
              ―
              
              
              ―Commercial
                  business loans
              
              
              (35
              )
              
              ―
              
              
              ―
              
              
              ―
              
              
              ―Consumer
                  loans
              
              
              (10
              )
              
              (20
              )
              
              (16
              )
              
              (33
              )
              
              (14
              )Total
                  charge-offs
              
              
              (267
              )
              
              (472
              )
              
              (695
              )
              
              (165
              )
              
              (16
              )Recoveries:Single-family
                  1-4 units
              
              
              511
              
              
              ―
              
              
              1
              
              
              6
              
              
              ―Multi-family
                  5 or more units
              
              
              18
              
              
              ―
              
              
              ―
              
              
              1
              
              
              ―Real
                  estate construction
              
              
              ―
              
              
              1
              
              
              ―
              
              
              ―
              
              
              40Consumer
                  loans
              
              
              3
              
              
              1
              
              
              2
              
              
              ―
              
              
              ―Total
                  recoveries
              
              
              532
              
              
              2
              
              
              3
              
              
              7
              
              
              40Net
                  loans charged-off
              
              
              265
              
              
              (470
              )
              
              (692
              )
              
              (158
              )
              
              24Provision
                  for loan losses
              
              
              602
              
              
              852
              
              
              430
              
              
              885
              
              
              206Balance
                  at end of year
              
              $
              3,011
              
              $
              2,144
              
              $
              1,762
              
              $
              2,024
              
              $
              1,297Ratio
                  of allowance for losses to gross loans receivable
              
              
              1.13
              %
              
              0.93
              %
              
              0.93
              %
              
              1.09
              %
              
              0.80
              %Ratio
                  of net loan charge-offs (recoveries) to average loans outstanding
                  during
                  the year
              
              
              (0.12
              )%
              
              0.25
              %
              
              0.40
              %
              
              0.09
              %
              
              (0.02
              )%
 
 ***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.
  30
  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 200 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, 2007 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**
              
              **Estimated
                  Net Portfolio Value**
              
              **NPV
                  as % of PV**
                **of
                  Assets****(In
                  Basis Points)**
                **in
                  Interest Rates**
              
              **$
                  Amount**
              
              **$ Change**
              
              **% Change**
              
              **NPV Ratio**
              
              **BP Change****(Dollars
                  in thousands)**+300
              
              $
              39,835
              
              
              (9,198
              )
              
              (19
              )%
              
              11.87
              %
              
              (236
              )+200
              
              
              42,833
              
              
              (6,200
              )
              
              (13
              )
              
              12.66
              
              
              (157
              )+100
              
              
              45,927
              
              
              (3,106
              )
              
              (6
              )
              
              13.45
              
              
              (78
              )+50
              
              
              47,516
              
              
              (1,517
              )
              
              (3
              )
              
              13.85
              
              
              (38
              )0
              
              
              49,033
              
              
              3⁄4
              
              
              3⁄4
              
              
              14.23
              
              
              3⁄4(50)
              
              
              50,244
              
              
              1,211
              
              
              2
              
              
              14.52
              
              
              29(100)
              
              
              51,465
              
              
              2,432
              
              
              5
              
              
              14.82
              
              
              59(200)
              
              
              53,680
              
              
              4,647
              
              
              9
              
              
              15.34
              
              
              111
 
 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.
  31
 
 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, 2007, cash and cash equivalents amounted to $9.0
        million. Securities classified as available for sale, which provide additional
        sources of liquidity, totaled $48.0 million at September 30, 2007. In addition,
        at September 30, 2007, we had the ability to borrow an additional amount
        of
        approximately $37.9 million from the Federal Home Loan Bank of Des Moines,
        in
        the form of available overnight lines of credit. On that date, we had 2.0
        million in overnight advances outstanding.
 
 At
        September 30, 2007, we had $78.1 million in loan commitments outstanding,
        which
        included $31.3 million in undisbursed loans and $13.2 million in unused lines
        of
        credit. Certificates of deposit due within one year of September 30, 2007
        totaled $126.6 million, or 89.4% 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, 2008. 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, 2007.
 
 **Payments
                  due by period****Total**
              
              **Less
                  than**
                **One Year**
              
              **One to Three**
                **Years**
              
              **Three to**
                **Five Years**
              
              **More Than 5**
                **Years****(In
                  thousands)**Federal
                  Home Loan Bank advances
              
              $
              26,430
              
              $
              22,055
              
              $
              200
              
              $
              4,175
              
              $
              3⁄4Securities
                  sold under agreement torepurchase
              
              
              1,221
              
              
              681
              
              
              540
              
              
              3⁄4
              
              
              3⁄4Operating
                  lease obligations
              
              
              1,392
              
              
              92
              
              
              183
              
              
              193
              
              
              924Total
              
              $
              29,043
              
              $
              22,828
              
              $
              923
              
              $
              4,368
              
              $
              924
 
 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.
  32
  The
        following table presents our primary investing and financing activities during
        the years indicated.
 
 **Years
                  Ended September 30,****2007**
              
              **2006**
              
              **2005**Investing
                  activities:Net
                  change in loans receivable
              
              $
              (35,402
              )
              $
              (40,028
              )
              $
              (5,727
              )Purchases
                  of securities (1)
              
              
              (16,946
              )
              
              (22,529
              )
              
              (28,613
              )Proceeds
                  from calls, maturities and principal repayments of securities
                  (1)
              
              
              10,579
              
              
              11,486
              
              
              12,950Proceeds
                  from sales of securities (1)
              
              
              —
              
              
              —
              
              
              1,884Financing
                  activities:Increase
                  (decrease) in deposits
              
              
              53,835
              
              
              16,854
              
              
              28,688Increase
                  (decrease) in Federal Home Loan Bank borrowings
              
              
              (7,633
              )
              
              3,567
              
              
              (6,633
              )
 
 (1)  Includes
        mortgaged-backed securities.
 
 ***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, 2007, 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, 2007, 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.
 
 33




**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, 2007 and 2006 and the related consolidated statements of earnings,
      comprehensive earnings, stockholders' equity, and cash flows for each of the
      three years in the period ended September 30, 2007. These financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.





We
      conducted our audits in accordance with 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, 2007 and 2006, and the results of their operations and their
      cash
      flows for each of the three years in the period ended September 30, 2007 in
      conformity with U.S. generally accepted accounting principles.




/s/
      Michael Trokey & Company, P.C.


St.
      Louis, Missouri


December
      20, 2007




34


LIBERTY
          BANCORP, INC.
  **Consolidated
          Balance Sheets**
 **September
            30, 2007 and 2006**
 **2007**
              
              **2006****Assets**Cash
                  and cash equivalents
              
              $
              6,502,289
              
              
              6,943,701Federal
                  funds sold
              
              
              2,540,000
              
              
              6,460,000Total
                  cash and cash equivalents
              
              
              9,042,289
              
              
              13,403,701Securities
                  available for sale, at market value (amortized cost of $47,789,202
                  and
                  $36,146,235, respectively)
              
              
              47,982,519
              
              
              35,882,630Stock
                  in Federal Home Loan Bank of Des Moines
              
              
              1,531,200
              
              
              1,952,900Mortgage-backed
                  securities:Available
                  for sale, at market value (amortized cost of $19,620,825 and $24,863,446,
                  respectively)
              
              
              19,276,996
              
              
              24,217,321Loans
                  receivable, net of allowance for loan losses of $3,010,904 and
                  $2,144,121,
                  respectively
              
              
              232,307,925
              
              
              200,222,378Loans
                  held for sale
              
              
              719,086
              
              
              459,201Premises
                  and equipment, net
              
              
              8,744,846
              
              
              6,700,189Bank-owned
                  life insurance (BOLI)
              
              
              8,101,192
              
              
              —Foreclosed
                  real estate, net
              
              
              1,675,871
              
              
              1,579,848Accrued
                  interest receivable
              
              
              2,055,814
              
              
              1,486,355Other
                  assets
              
              
              214,823
              
              
              182,242Deferred
                  tax asset
              
              
              1,533,426
              
              
              1,474,600Total
                  assets
              
              $
              333,185,987
              
              
              287,561,365**Liabilities
                  and Stockholders' Equity**Deposits
              
              $
              252,305,482
              
              
              198,470,979Accrued
                  interest payable on deposits
              
              
              601,285
              
              
              316,366Advances
                  from FHLB
              
              
              26,430,394
              
              
              34,063,738Securities
                  sold under agreement to repurchase
              
              
              1,221,184
              
              
              3,383,997Advances
                  from borrowers for taxes and insurance
              
              
              905,606
              
              
              843,512Other
                  liabilities
              
              
              1,439,195
              
              
              1,340,470Accrued
                  income taxes
              
              
              88,308
              
              
              160,727Total
                  liabilities
              
              
              282,991,454
              
              
              238,579,789Commitments
                  and contingenciesStockholders'
                  equity:Preferred
                  stock, $0.01 par value; 1,000,000 shares authorized; shares issued
                  and
                  outstanding - none
              
              
              —
              
              
              —Common
                  stock, $0.01 par value; 20,000,000 shares authorized; 4,761,187
                  and
                  4,760,137 shares issued and outstanding
              
              
              47,612
              
              
              47,601Additional
                  paid-in capital
              
              
              31,923,289
              
              
              33,001,965Common
                  stock acquired by ESOP
              
              
              (701,309
              )
              
              (933,192
              )Common
                  stock acquired by Incentive Plan
              
              
              —
              
              
              (18,676
              )Accumulated
                  other comprehensive earnings, net
              
              
              (12,619
              )
              
              (573,130
              )Retained
                  earnings - substantially restricted
              
              
              18,937,560
              
              
              17,457,008Total
                  stockholders' equity
              
              
              50,194,533
              
              
              48,981,576Total
                  liabilities and stockholders' equity
              
              $
              333,185,987
              
              
              287,561,365
 
 See
        accompanying notes to consolidated financial statements.
  35
    **Consolidated
          Statements of Earnings**
  **Years
          Ended September 30, 2007, 2006 and 2005**
 **2007**
              
              **2006**
              
              **2005**Interest
                  income:Loans
                  receivable
              
              $
              17,233,026
              
              
              14,252,869
              
              
              11,354,201Mortgage-backed
                  securities
              
              
              933,469
              
              
              995,097
              
              
              808,336Securities
                  - taxable
              
              
              1,714,706
              
              
              944,316
              
              
              373,563Securities
                  - non-taxable
              
              
              361,092
              
              
              225,101
              
              
              89,103Other
                  interest-earning assets
              
              
              320,881
              
              
              246,458
              
              
              190,615Total
                  interest income
              
              
              20,563,174
              
              
              16,663,841
              
              
              12,815,818Interest
                  expense:Deposits
              
              
              9,084,278
              
              
              6,006,960
              
              
              3,978,568Securities
                  sold under agreement to repurchase
              
              
              77,323
              
              
              70,787
              
              
              29,776ESOP
                  note payable
              
              
              —
              
              
              25,068
              
              
              24,612Advances
                  from FHLB
              
              
              1,332,527
              
              
              1,496,864
              
              
              1,142,249Total
                  interest expense
              
              
              10,494,128
              
              
              7,599,679
              
              
              5,175,205Net
                  interest income
              
              
              10,069,046
              
              
              9,064,162
              
              
              7,640,613Provision
                  for loan losses
              
              
              602,089
              
              
              852,000
              
              
              430,000Net
                  interest income after provision for loan losses
              
              
              9,466,957
              
              
              8,212,162
              
              
              7,210,613Noninterest
                  income:Loan
                  service charges
              
              
              89,507
              
              
              68,700
              
              
              53,251Gain
                  on sale of MBSs available for sale
              
              
              —
              
              
              —
              
              
              9,711Gain
                  on sale of loans
              
              
              247,339
              
              
              202,992
              
              
              193,812Change
                  in cash surrender value of BOLI
              
              
              101,192
              
              
              —
              
              
              —Deposit
                  account service charges
              
              
              1,039,412
              
              
              965,234
              
              
              942,892Total
                  noninterest income
              
              
              1,477,450
              
              
              1,236,926
              
              
              1,199,666Noninterest
                  expense:Compensation
                  and benefits
              
              
              4,445,083
              
              
              3,974,833
              
              
              3,302,387Occupancy
                  expense
              
              
              624,759
              
              
              508,583
              
              
              433,148Equipment
                  and data processing expense
              
              
              798,133
              
              
              739,676
              
              
              770,155Operations
                  from foreclosed real estate, net
              
              
              356,348
              
              
              138,980
              
              
              (21,837
              )Federal
                  deposit insurance premiums
              
              
              41,048
              
              
              23,794
              
              
              22,529Professional
                  and regulatory services
              
              
              407,760
              
              
              346,821
              
              
              305,327Advertising
              
              
              254,930
              
              
              413,923
              
              
              314,449Correspondent
                  banking charges
              
              
              260,576
              
              
              260,175
              
              
              215,562Supplies
              
              
              137,693
              
              
              182,662
              
              
              140,802Other
              
              
              719,683
              
              
              613,706
              
              
              582,095Total
                  noninterest expense
              
              
              8,046,013
              
              
              7,203,153
              
              
              6,064,617Earnings
                  before income taxes
              
              
              2,898,394
              
              
              2,245,935
              
              
              2,345,662Income
                  taxes:Current
              
              
              1,338,000
              
              
              926,000
              
              
              675,000Deferred
              
              
              (384,000
              )
              
              (143,000
              )
              
              166,000Total
                  income taxes
              
              
              954,000
              
              
              783,000
              
              
              841,000Net
                  earnings
              
              $
              1,944,394
              
              
              1,462,935
              
              
              1,504,662Basic
                  earnings per share
              
              $
              0.42
              
              
              0.32
              
              
              0.32Diluted
                  earnings per share
              
              $
              0.42
              
              
              0.31
              
              
              0.32
 
 See
        accompanying notes to consolidated financial statements.
  36
    **Consolidated
          Statements of Comprehensive Earnings**
  **Years
          Ended September 30, 2007, 2006 and 2005**
 **2007**
              
              **2006**
              
              **2005**Net
                  earnings
              
              $
              1,944,394
              
              
              1,462,935
              
              
              1,504,662Other
                  comprehensive earnings:Unrealized
                  gain (loss) on securities and MBSs available for sale,
                  net:Reclassification
                  adjustment for gains included in earnings, net of tax of $0, $0
                  and
                  $3,399, respectively
              
              
              -
              
              
              -
              
              
              (6,312
              )Unrealized
                  gains (losses) arising during the year, net of tax of $280,911,
                  $137,114,
                  and $178,222, respectively.
              
              
              478,307
              
              
              (233,465
              )
              
              (303,460
              )Adjustment
                  to initially apply SFAS Statement No. 158, net of tax of
                  $44,264
              
              
              82,204
              
              
              -
              
              
              -Comprehensive
                  earnings
              
              $
              2,504,905
              
              
              1,229,470
              
              
              1,194,890
 
 See
        accompanying notes to consolidated financial statements.
  37
    **Consolidated
          Statements of Stockholders’ Equity**
  **Years
        Ended September 30, 2007, 2006 and 2005**
  Common
              
              Common
              
              
              
              AccumulatedAdditional
              
              Stock
              
              Stock
              
              
              
              Other
              
              TotalCommon
              
              Paid-In
              
              Acquired
              
              Acquired by
              
              Retained
              
              Comprehensive
              
              Stockholders'Stock
              
              Capital
              
              by ESOP
              
              Incentive Plan
              
              Earnings
              
              Earnings, Net
              
              EquityBalance
                  at September 30, 2004
              
              $
              1,354,576
              
              
              3,987,154
              
              
              (404,878
              )
              
              (74,668
              )
              
              15,351,468
              
              
              (29,893
              )
              
              20,183,759Shares
                  acquired by ESOP
              
              
              -
              
              
              -
              
              
              (53,847
              )
              
              -
              
              
              -
              
              
              -
              
              
              (53,847
              )Shares
                  issued under stock-based incentive plan
              
              
              3,200
              
              
              71,075
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              74,275Amortization
                  of ESOP award
              
              
              -
              
              
              48,759
              
              
              80,045
              
              
              -
              
              
              -
              
              
              -
              
              
              128,804Amortization
                  of stock awards
              
              
              -
              
              
              -
              
              
              -
              
              
              27,996
              
              
              -
              
              
              -
              
              
              27,996Unrealized
                  loss on securities available for sale, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (309,772
              )
              
              (309,772
              )Cash
                  dividends of $.23 per share
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (425,181
              )
              
              -
              
              
              (425,181
              )Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,504,662
              
              
              -
              
              
              1,504,662Balance
                  at September 30, 2005
              
              
              1,357,776
              
              
              4,106,988
              
              
              (378,680
              )
              
              (46,672
              )
              
              16,430,949
              
              
              (339,665
              )
              
              21,130,696Refinance
                  of ESOP
              
              
              -
              
              
              -
              
              
              412,316
              
              
              -
              
              
              -
              
              
              -
              
              
              412,316Shares
                  acquired by ESOP
              
              
              -
              
              
              -
              
              
              (33,714
              )
              
              -
              
              
              -
              
              
              -
              
              
              (33,714
              )Shares
                  issued under stock-based incentive plan
              
              
              100
              
              
              2,300
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,400Amortization
                  of ESOP award
              
              
              -
              
              
              72,065
              
              
              234,882
              
              
              -
              
              
              -
              
              
              -
              
              
              306,947Amortization
                  of stock awards
              
              
              -
              
              
              -
              
              
              -
              
              
              27,996
              
              
              -
              
              
              -
              
              
              27,996Unrealized
                  loss on securities available for sale, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (233,465
              )
              
              (233,465
              )Issuance
                  and exchange of common stock
              
              
              (1,310,275
              )
              
              28,820,612
              
              
              (1,167,996
              )
              
              -
              
              
              -
              
              
              -
              
              
              26,342,341Cash
                  dividends of $.20 per share
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (436,876
              )
              
              -
              
              
              (436,876
              )Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,462,935
              
              
              -
              
              
              1,462,935Balance
                  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 initally 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
              )
              
              50,194,533
 
 See
        accompanying notes to consolidated financial statements.
  38
    **Consolidated
        Statements of Cash Flows**
  **Years
          Ended September 30, 2007, 2006 and 2005**
 **2007**
              
              **2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  earnings
              
              $
              1,944,394
              
              
              1,462,935
              
              
              1,504,662Adjustments
                  to reconcile net earnings to net cash provided by (used for) operating
                  activities:Depreciation
                  expense
              
              
              463,259
              
              
              444,591
              
              
              405,246ESOP
                  expense
              
              
              332,735
              
              
              306,947
              
              
              128,804Incentive
                  Plan expense
              
              
              230,072
              
              
              27,996
              
              
              27,996Amortization
                  of premiums on investments, net
              
              
              (32,714
              )
              
              75,149
              
              
              174,551Amortization
                  of unearned discount on loans and deferred loan fees, net
              
              
              (294,752
              )
              
              (441,229
              )
              
              (428,290
              )Provision
                  for loan losses
              
              
              602,089
              
              
              852,000
              
              
              430,000Loans
                  held for sale - originated
              
              
              (20,353,682
              )
              
              (17,655,681
              )
              
              (21,139,599
              )Loans
                  held for sale - proceeds from sale
              
              
              20,341,136
              
              
              19,484,202
              
              
              20,325,568Gain
                  on sale of loans
              
              
              (247,339
              )
              
              (202,992
              )
              
              (193,812
              )Increase
                  in cash surrender value of bank-owned life insurance
              
              
              (101,192
              )
              
              -
              
              
              -Gain
                  on sale of MBSs available for sale
              
              
              -
              
              
              -
              
              
              (9,711
              )Loss
                  (gain) on foreclosed real estate, net
              
              
              288,045
              
              
              89,170
              
              
              (77,417
              )Decrease
                  (increase) in:Accrued
                  interest receivable
              
              
              (569,459
              )
              
              (398,965
              )
              
              (242,428
              )Other
                  assets
              
              
              (32,581
              )
              
              68,822
              
              
              (84,398
              )Deferred
                  tax assets
              
              
              (384,000
              )
              
              (143,000
              )
              
              166,000Increase
                  (decrease) in:Accrued
                  interest on deposits and other liabilities
              
              
              510,112
              
              
              232,568
              
              
              276,375Accrued
                  income taxes
              
              
              (72,419
              )
              
              160,727
              
              
              (19,869
              )Net
                  cash provided by (used for) operating activities
              
              
              2,623,704
              
              
              4,363,240
              
              
              1,243,678Cash
                  flows from investing activities:Net
                  change in loans receivable
              
              
              (35,401,657
              )
              
              (40,028,140
              )
              
              (5,726,621
              )Mortgage-backed
                  securities:Available
                  for sale - purchased
              
              
              -
              
              
              (3,451,940
              )
              
              (13,754,551
              )Available
                  for sale - principal collections
              
              
              5,228,574
              
              
              6,121,149
              
              
              7,306,606Available
                  for sale - proceeds
              
              
              -
              
              
              -
              
              
              1,883,700Held
                  to maturity - principal collections
              
              
              -
              
              
              -
              
              
              68,785Securities
                  available for sale:Purchase
              
              
              (16,946,207
              )
              
              (19,076,689
              )
              
              (14,858,794
              )Proceeds
                  from maturity or call
              
              
              5,350,000
              
              
              5,365,000
              
              
              5,575,000Purchase
                  of stock in FHLB of Des Moines
              
              
              (1,300,100
              )
              
              (1,599,700
              )
              
              (642,000
              )Redemption
                  of stock in FHLB of Des Moines
              
              
              1,721,800
              
              
              1,326,000
              
              
              855,300Proceeds
                  from the sale of foreclosed real estate, net
              
              
              2,624,705
              
              
              3,098,369
              
              
              817,034Purchase
                  of premises and equipment
              
              
              (2,507,916
              )
              
              (1,212,591
              )
              
              (2,094,112
              )Purchase
                  of bank-owned life insurance policy
              
              
              (8,000,000
              )
              
              -
              
              
              -Net
                  cash provided by (used for) investing activities
              
              $
              (49,230,801
              )
              
              (49,458,542
              )
              
              (20,569,653
              )
 
 (Continued)
  39
    **Consolidated
        Statements of Cash Flows**
 
 **Years
        Ended September 30, 2007, 2006 and 2005**
 
 (Continued)
 
 **2007**
              
              **2006**
              
              **2005**Cash
                  flows from financing activities:Net
                  increase (decrease) in deposits
              
              $
              53,834,503
              
              
              16,854,325
              
              
              28,687,793Increase
                  (decrease) in advances from borrowers for taxes and
                  insurance
              
              
              62,094
              
              
              (30,127
              )
              
              (98,272
              )Proceeds
                  from advances from the FHLB
              
              
              276,100,000
              
              
              377,950,000
              
              
              35,750,000Repayment
                  of advances from the FHLB
              
              
              (283,733,344
              )
              
              (374,383,344
              )
              
              (42,383,344
              )Securities
                  sold under agreement to repurchase:Proceeds
              
              
              51,974,878
              
              
              55,243,591
              
              
              32,101,202Repayments
              
              
              (54,137,691
              )
              
              (53,514,345
              )
              
              (31,140,405
              )Repayment
                  of ESOP note payable
              
              
              -
              
              
              -
              
              
              (80,439
              )Proceeds
                  from exercise of stock options
              
              
              8,695
              
              
              2,400
              
              
              74,275Issuance
                  and exchange of common stock
              
              
              -
              
              
              26,342,341
              
              
              -Repurchase
                  of common stock for stock award plan
              
              
              (1,399,608
              )
              
              -
              
              
              -Cash
                  dividends
              
              
              (463,842
              )
              
              (436,876
              )
              
              (425,181
              )Net
                  cash provided by (used for) financing activities
              
              
              42,245,685
              
              
              48,027,965
              
              
              22,485,629Net
                  increase (decrease) in cash and cash equivalents
              
              
              (4,361,412
              )
              
              2,932,663
              
              
              3,159,654Cash
                  and cash equivalents at beginning of year
              
              
              13,403,701
              
              
              10,471,038
              
              
              7,311,384Cash
                  and cash equivalents at end of year
              
              $
              9,042,289
              
              
              13,403,701
              
              
              10,471,038Supplemental
                  disclosures of cash flow information:Cash
                  paid (received) during the year for:Interest
                  on deposits
              
              $
              8,799,195
              
              
              5,913,587
              
              
              3,863,868Interest
                  on ESOP note payable
              
              
              -
              
              
              25,068
              
              
              24,612Interest
                  on advances from FHLB of Des Moines
              
              
              1,329,586
              
              
              1,482,973
              
              
              1,142,249Interest
                  on securities sold under agreement to repurchase
              
              
              77,487
              
              
              70,517
              
              
              29,776Federal
                  income taxes
              
              
              1,285,000
              
              
              685,000
              
              
              650,000State
                  income taxes
              
              
              126,889
              
              
              44,631
              
              
              80,511Real
                  estate acquired in settlement of loans
              
              
              5,383,483
              
              
              3,237,801
              
              
              1,721,750Loans
                  originated to finance the sale of foreclosed real estate
              
              
              2,374,710
              
              
              -
              
              
              -Transfer
                  of securities and MBSs held to maturity to available for
                  sale
              
              
              -
              
              
              -
              
              
              1,308,092
 
 See
        accompanying notes to consolidated financial statements.
 
 40
  LIBERTY
        BANCORP, INC.
  **Notes
        to Consolidated Financial Statements**
 
 **September
        30, 2007 and 2006 and**
 **Years
        Ended September 30, 2007, 2006 and 2005**
 
 **(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. Interest-bearing funds in other
                  banks
                  were $7,175,110 and $11,442,192 at September 30, 2007 and 2006,
                  respectively. A restricted cash deposit of $560,510 related to
                  clearing of
                  checks was held in a correspondent bank at September 30, 2007 and
                  2006.
 
 c.
              Certificates
                  of deposit are carried at cost and have original maturities of
                  more than
                  three months.
 
 d.
              Securities
                  and mortgage-backed securities that the Bank 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.
                  The bank does not purchase securities and mortgage-backed securities
                  for
                  trading purposes.
  41
    **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 Bank
        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 Bank 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.
  e.
              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.
 
 f.
              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, 2007,
                  2006 and 2005.
 
 g.
              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.
 
 h.
              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.
  42
 LIBERTY
          BANCORP, INC.
  **Notes
          to****Consolidated****Financial
          Statements**
  i.
              Foreclosed
                  real estate is carried at the lower of cost or fair value less
                  estimated
                  selling costs based upon an appraisal 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.
  j.
                  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, 2007 and 2006
                      is
                      summarized as follows:
  **2007**
              
              **2006**Securities
              
              $
              578,482
              
              
              326,186Mortgage-backed
                  securities
              
              
              82,152
              
              
              103,751Loans
                  receivable
              
              
              1,395,180
              
              
              1,056,418$
              2,055,814
              
              
              1,486,355
  k.
              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.
 
 l.
              Deferred
                  income tax assets and liabilities are computed for differences
                  between the
                  financial statement and tax bases 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.
 
 m.
              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. Prior periods have not
                  been restated.
 
 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.
 
 Prior
        to
        October 1, 2006, the Company applied the intrinsic value method of accounting
        for stock-based compensation expense under APB 25 and adopted the disclosure
        requirements under SFAS No. 123. Under the intrinsic value method no
        compensation expense was recognized in the financial statements since the
        exercise price of the Company’s stock was equal to the market price of the stock
        at the grant date. See also note 12.
  43
  LIBERTY
          BANCORP, INC.
  **Notes
          to****Consolidated****Financial
          Statements**
  n.
              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.
 
 o.
              Earnings
                  per share are based upon the weighted-average shares outstanding.
                  Weighted-average shares outstanding for periods prior to the July
                  21, 2006
                  conversion date have been adjusted by the exchange ratio of 3.5004
                  to
                  calculate earnings per share. 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, 2007, 2006 and
                  2005.
  **2007**
              
              **2006**
              
              **2005**Net
                  earnings
              
              $
              1,944,394
              
              
              1,462,935
              
              
              1,504,662Weighted-average
                  shares - Basic EPS
              
              
              4,618,323
              
              
              4,611,910
              
              
              4,659,718Stock
                  options - treasury stock method
              
              
              42,980
              
              
              65,280
              
              
              17,437Weighted-average
                  shares - Diluted EPS
              
              
              4,661,303
              
              
              4,677,190
              
              
              4,677,155Basic
                  earnings per common share
              
              $
              0.42
              
              
              0.32
              
              
              0.32Diluted
                  earnings per common share
              
              $
              0.42
              
              
              0.31
              
              
              0.32Anti-dilutive
                  shares
              
              
              51,551
              
              
              —
              
              
              —
  The
        following table illustrates the effect on net earnings and earnings per share
        as
        if the fair value based method had been applied in each year.
 
 **2006**
              
              **2005**Net
                  earnings
              
              $
              1,462,935
              
              
              1,504,662Total
                  stock-based employee compensation expense determined under fair
                  value
                  based method for stock options, net of related tax effects
              
              
              (94,194
              )
              
              (26,546
              )Pro-forma
                  net earnings
              
              $
              1,368,741
              
              
              1,478,116Earnings
                  per share:Basic
                  - as reported
              
              $
              0.32
              
              
              0.32Diluted
                  - as reported
              
              $
              0.31
              
              
              0.32Basic
                  - pro forma
              
              $
              0.30
              
              
              0.32Diluted
                  - pro forma
              
              $
              0.29
              
              
              0.32
  The
        options to purchase 38,504 shares granted in 2005 were not included in the
        computation of diluted earnings per share for the year ended September 30,
        2005,
        since the exercise price was greater than the average market price of the
        common
        stock.
  44
  LIBERTY
          BANCORP, INC.
  **Notes
          to****Consolidated****Financial
          Statements**
  p.
              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. This Interpretation is effective for fiscal years beginning after
        December 15, 2006. The Company does not expect FASB Interpretation No. 48
        to
        have a material impact on the Company’s financial position or results of
        operation.
 
 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. The Company does not expect SFAS
        No.
        157 to 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.
        The Company is currently evaluating the requirements of the Statement and
        impact
        on the Company’s financial position and results of operation.
  In
        November 2007, the Securities and Exchange Commission (“the SEC”) issued Staff
        Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair
        Value Through Earnings.” SAB No. 109 supersedes SAB No. 105, “Application of
        Accounting Principles to Loan Commitments,” and indicates that the expected net
        future cash flows related to the associated servicing of the loan should
        be
        included in the measurement of all written loan commitments that are accounted
        for at fair value through earnings. The guidance in SAB No. 109 is applied
        on a
        prospective basis to derivative loan commitments issued or modified in fiscal
        quarters beginning after December 15, 2007. The Company does not expect SAB
        No.
        109 will 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 periods covered. Actual results could differ
        significantly from these estimates and assumptions.
  45
  LIBERTY
          BANCORP, INC.
  **Notes
            to Consolidated Financial Statements**
  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 a 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.
  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 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.
  46
  LIBERTY
            BANCORP, INC.
  **Notes
              to Consolidated Financial Statements**
 **(3)**  **Securities:**
 
 Securities
        are summarized as follows:
 
 **2007****Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Market****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**Available
                  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
              %
 
 **2006****Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Market****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**Available
                  for sale - debt securities:Federal
                  agency obligations
              
              $
              29,710,739
              
              
              47,251
              
              
              (214,897
              )
              
              29,543,093State
                  and municipal obligations
              
              
              6,435,496
              
              
              2,112
              
              
              (98,071
              )
              
              6,339,537$
              36,146,235
              
              
              49,363
              
              
              (312,968
              )
              
              35,882,630Weighted-average
                  rate
              
              
              4.44
              %
  Weighted-average
        rates are based on the coupon rate at the balance sheet date.
  Securities
        having a continuous unrealized loss position for less than twelve months
        or
        twelve months or longer as follows:
 
 **Less than 12 Months**
              
              **12 Months or Longer**
              
              **Total****Market**
              
              **Unrealized**
              
              **Market**
              
              **Unrealized**
              
              **Market**
              
              **Unrealized****Value**
              
              **Loss**
              
              **Value**
              
              **Loss**
              
              **Value**
              
              **Loss**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
              )September
                  30, 2006Available
                  for sale- debt securities:Federal
                  agency obligations
              
              $
              8,374,951
              
              
              (46,158
              )
              
              11,695,124
              
              
              (168,739
              )
              
              20,070,075
              
              
              (214,897
              )State
                  and municipal obligations
              
              
              2,059,406
              
              
              (29,293
              )
              
              3,440,664
              
              
              (68,778
              )
              
              5,500,070
              
              
              (98,071
              )$
              10,434,357
              
              
              (75,451
              )
              
              15,135,788
              
              
              (237,517
              )
              
              25,570,145
              
              
              (312,968
              )
  47
  LIBERTY
          BANCORP, INC.
  **Notes
            to Consolidated Financial Statements**
 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, 2007 are summarized as follows:
 
 **Available for Sale****Amortized**
              
              **Market****Cost**
              
              **Value**Due
                  within one year
              
              $
              4,294,525
              
              
              4,287,250Due
                  after one through five years
              
              
              29,301,961
              
              
              29,559,122Due
                  after five through ten years
              
              
              7,648,617
              
              
              7,632,427Due
                  after ten years
              
              
              6,149,476
              
              
              6,109,836$
              47,394,579
              
              
              47,588,635
  At
        September 30, 2007 securities with a carrying value of approximately $23,062,000
        are callable at the discretion of the issuer prior to the maturity date.
        Securities in the amount of $20,967,000 were pledged to secure certain deposits
        at September 30, 2007.
 
 **(4)**  **Mortgage-Backed Securities:**
 
 Mortgage-backed
        securities (“MBSs”) are summarized as follows:
  **2007****Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Market****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**Available
                  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
              %
  48
 LIBERTY
            BANCORP, INC.
  **Notes
              to Consolidated Financial Statements**
 **2006****Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Market****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**Available
                  for sale:FHLMC
              
              $
              17,364,792
              
              
              6,636
              
              
              (422,637
              )
              
              16,948,791FNMA
              
              
              6,486,588
              
              
              -
              
              
              (197,399
              )
              
              6,289,189GNMA
              
              
              46,349
              
              
              189
              
              
              -
              
              
              46,538GNMA
                  - CMO
              
              
              620,515
              
              
              -
              
              
              (20,756
              )
              
              599,759FHLMC
                  - CMO
              
              
              166,975
              
              
              -
              
              
              (1,595
              )
              
              165,380FNMA
                  - CMO
              
              
              178,227
              
              
              -
              
              
              (10,563
              )
              
              167,664$
              24,863,446
              
              
              6,825
              
              
              (652,950
              )
              
              24,217,321Weighted-average
                  rate
              
              
              4.29
              %
  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, 2007 and 2006 MBSs included adjustable-rate
        mortgage loans of $6,384,358 and $8,133,330, respectively. MBSs pledged to
        secure certain deposits were $1,996,000 at September 30, 2007.
 
 Gross
        proceeds, gross realized gains and gross realized losses from sale of available
        for sale mortgage-backed securities are summarized as follows:
 
 **2007**
              
              **2006**
              
              **2005**Gross
                  proceeds
              
              $
              -
              
              
              -
              
              
              1,883,700Gross
                  realized gains
              
              $
              -
              
              
              -
              
              
              9,711Gross
                  realized losses
              
              
              -
              
              
              -
              
              
              -$
              -
              
              
              -
              
              
              9,711
  49


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**
              
              **Total****Market**
              
              **Unrealized**
              
              **Market**
              
              **Unrealized**
              
              **Market**
              
              **Unrealized****Value**
              
              **Loss**
              
              **Value**
              
              **Loss**
              
              **Value**
              
              **Loss**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
              )September
                  30, 2006Available
                  for sale:FHLMC
              
              $
              597,299
              
              
              (5,522
              )
              
              13,651,788
              
              
              (417,115
              )
              
              14,249,087
              
              
              (422,637
              )FNMA
              
              
              726,437
              
              
              (15,474
              )
              
              5,562,752
              
              
              (181,925
              )
              
              6,289,189
              
              
              (197,399
              )GNMA
                  - CMO
              
              
              -
              
              
              -
              
              
              599,759
              
              
              (20,756
              )
              
              599,759
              
              
              (20,756
              )FHLMC
                  - CMO
              
              
              165,380
              
              
              (1,595
              )
              
              -
              
              
              -
              
              
              165,380
              
              
              (1,595
              )FNMA
                  - CMO
              
              
              -
              
              
              -
              
              
              167,664
              
              
              (10,563
              )
              
              167,664
              
              
              (10,563
              )$
              1,489,116
              
              
              (22,591
              )
              
              19,981,963
              
              
              (630,359
              )
              
              21,471,079
              
              
              (652,950
              )
 
 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:
 
 **2007**
              
              **2006**Real
                  estate loans:Single-family,
                  1-4 units
              
              $
              41,749,549
              
              
              42,623,176Multi-family,
                  5 or more units
              
              
              12,197,677
              
              
              10,415,654Construction
              
              
              125,797,037
              
              
              99,758,557Commercial
              
              
              57,240,734
              
              
              53,360,110Commercial
                  business loans
              
              
              17,950,717
              
              
              11,270,301Consumer
                  loans
              
              
              12,038,005
              
              
              13,219,410266,973,719
              
              
              230,647,208Allowance
                  for losses
              
              
              (3,010,904
              )
              
              (2,144,121
              )Loans
                  in process
              
              
              (31,315,742
              )
              
              (27,962,170
              )Unearned
                  discounts
              
              
              -
              
              
              (4,451
              )Deferred
                  loan fees, net
              
              
              (339,148
              )
              
              (314,088
              )$
              232,307,925
              
              
              200,222,378Weighted-average
                  rate
              
              
              7.83
              %
              
              8.06
              %
  50
 LIBERTY
          BANCORP, INC.
 
 **Notes
          to Consolidated Financial Statements**
  Adjustable-rate
        loans included in the loan portfolio amounted to $111,674,667 and $118,181,541
        at September 30, 2007 and 2006, respectively. Loans serviced for the benefits
        of
        others amounted to $5,550,066, $7,312,931 and $9,239,956 at September 30,
        2007,
        2006 and 2005, respectively.
  Real
        estate construction loans are secured by the following:
 
 **2007**
              
              **2006**Single-family,
                  spec
              
              $
              29,331,087
              
              
              37,764,930Single-family,
                  custom built
              
              
              7,097,700
              
              
              12,252,030Multi-family,
                  5 or more units
              
              
              1,494,997
              
              
              -Development
              
              
              36,407,723
              
              
              23,960,853Commercial
              
              
              51,020,155
              
              
              25,173,449Other
              
              
              445,375
              
              
              607,295$
              125,797,037
              
              
              99,758,557
  Following
        is a summary of activity in allowance for losses:
 
 **2007**
              
              **2006**
              
              **2005**Balance,
                  beginning of year
              
              $
              2,144,121
              
              
              1,762,066
              
              
              2,024,298Loan
                  charge-offs
              
              
              (267,581
              )
              
              (471,692
              )
              
              (695,226
              )Loan
                  recoveries
              
              
              532,275
              
              
              1,747
              
              
              2,994Provision
                  charged to expense
              
              
              602,089
              
              
              852,000
              
              
              430,000Balance,
                  end of year
              
              $
              3,010,904
              
              
              2,144,121
              
              
              1,762,066
  A
        summary
        of impaired loans follows:
  **2007**
              
              **2006**
              
              **2005**Nonaccrual
                  loans
              
              $
              3,422,257
              
              
              1,481,222
              
              
              906,934Accruing
                  loans past due 90 days or more
              
              
              -
              
              
              58,156
              
              
              -Other
                  impaired loans
              
              
              -
              
              
              2,681,561
              
              
              403,172Total
                  impaired loans
              
              $
              3,422,257
              
              
              4,220,939
              
              
              1,310,106Allowance
                  for losses on impaired loans
              
              $
              370,116
              
              
              257,609
              
              
              199,103Impaired
                  loans with no allowance for loan losses
              
              $
              -
              
              
              58,156
              
              
              116,414Average
                  balance of impaired loans
              
              $
              1,331,696
              
              
              1,350,018
              
              
              2,607,301Interest
                  income that would have been recognized
              
              $
              70,389
              
              
              108,139
              
              
              97,652Interest
                  income recognized
              
              $
              -
              
              
              72,433
              
              
              73,439
  On
        occasion, the Bank originates single-family loans with high loan to value
        ratios
        exceeding 90 percent. The Bank does not consider the level of such loans
        to be a
        significant concentration of credit risk as of the balance sheet dates presented
        within the financial statements.
  51
 LIBERTY
          BANCORP, INC.
 
 **Notes
          to Consolidated Financial Statements**
  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,
        2007:
 
 Balance,
                  beginning of year
              
              $
              713,146Additions
              
              
              314,971Repayments
              
              
              (412,946
              )Balance,
                  end of year
              
              $
              615,171
  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:
 
 **2007**
              
              **2006**Land
              
              $
              2,405,041
              
              
              1,511,277Office
                  buildings
              
              
              6,731,896
              
              
              5,330,549Furniture
                  and equipment
              
              
              3,075,123
              
              
              2,863,800Building-in-progress
              
              
              11,974
              
              
              59,31412,224,034
              
              
              9,764,940Less
                  accumulated depreciation
              
              
              3,479,188
              
              
              3,064,751$
              8,744,846
              
              
              6,700,189
 
 
 Depreciation
        expense for 2007, 2006 and 2005 was $463,259, $444,591 and $405,246
        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
        2007, 2006 and 2005 amounted to $91,622, $91,622 and $83,987
        respectively . Future
        minimum lease payments are summarized as follows:
 
 October
                  1, 2007 to September 30, 2008
              
              $
              91,622October
                  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
              
              
              100,784After
                  September 30, 2012
              
              
              923,855$
              1,391,891
  52
  LIBERTY
            BANCORP, INC.
  **Notes
            to Consolidated Financial Statements**
  **(7)** **Foreclosed
          Real Estate, Net**
 
 Foreclosed
        real estate, net is summarized as follows:
 
 **2007**
              
              **2006**Foreclosed
                  real estate
              
              $
              1,675,871
              
              
              1,579,848Allowance
                  for losses
              
              
              -
              
              
              -$
              1,675,871
              
              
              1,579,848
  Following
        is a summary of activity in allowance for losses:
 
 **2007**
              
              **2006**
              
              **2005**Balance,
                  beginning of year
              
              $
              -
              
              
              -
              
              
              -Gain
                  on sale
              
              
              58,676
              
              
              23,846
              
              
              205,265Charge-offs
              
              
              (346,721
              )
              
              (113,016
              )
              
              (127,848
              )Provision
                  charged to expense
              
              
              288,045
              
              
              89,170
              
              
              (77,417
              )Balance,
                  end of year
              
              $
              -
              
              
              -
              
              
              -
  **(8)** **Deposits**
 
 Deposits
        are summarized as follows:
 
 **2007**
              
              **2006****Description
                  and interest rate**Non-interest
                  bearing NOW accounts
              
              $
              13,616,861
              
              
              11,895,575NOW
                  accounts, 1.71% and 1.84%, respectively
              
              
              21,368,449
              
              
              25,234,161Statement
                  accounts, .31% and .31%
              
              
              7,200,644
              
              
              7,701,414Money
                  market accounts, 4.59% and 2.66%, respectively
              
              
              68,481,779
              
              
              13,617,376Total
                  transaction accounts
              
              
              110,667,733
              
              
              58,448,526Certificates:1.00
                  - 1.99%
              
              
              -
              
              
              5,1752.00
                  - 2.99%
              
              
              300,179
              
              
              2,254,4553.00
                  - 3.99%
              
              
              9,249,218
              
              
              33,373,0484.00
                  - 4.99%
              
              
              60,151,774
              
              
              44,344,1325.00
                  - 5.99%
              
              
              71,936,578
              
              
              60,045,643Total
                  certificates, 4.81% and 4.52%, respectively
              
              
              141,637,749
              
              
              140,022,453Total
                  deposits, 4.10% and 3.62%, respectively
              
              $
              252,305,482
              
              
              198,470,979
  At
        September 30, 2007 and 2006 deposits included brokered certificates of
        $14,000,000 and $0, respectively.
  53


LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statements**
  Certificate
            maturities are summarized as follows:
 **2007**
              
              **2006**First
                  year
              
              $
              126,634,196
              
              
              118,206,304Second
                  year
              
              
              7,495,054
              
              
              10,727,310Third
                  year
              
              
              3,913,756
              
              
              5,825,725Fourth
                  year
              
              
              1,903,419
              
              
              3,460,833Fifth
                  year
              
              
              1,691,324
              
              
              1,802,281$
              141,637,749
              
              
              140,022,453
  Transaction
        accounts and certificates in denominations of $100,000 or more amounted to
        $48,643,943 and $47,732,829, at September 30, 2007, respectively, and
        $18,070,065 and $37,251,130 at September 30, 2006, respectively.
  Interest
          on deposits is summarized as follows:
  **2007**
                
                **2006**
                
                **2005**NOW
                    accounts
                
                $
                458,246
                
                
                461,254
                
                
                208,753Passbook
                    accounts
                
                
                22,544
                
                
                30,846
                
                
                27,952Money
                    market accounts
                
                
                1,700,437
                
                
                506,441
                
                
                449,249Certificates
                
                
                6,903,051
                
                
                5,008,419
                
                
                3,292,614$
                9,084,278
                
                
                6,006,960
                
                
                3,978,568
 
 **(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 Rate****Maturity
                  Date**
              
              **at September 30, 2007**
              
              **2007**
              
              **2006**Within
                  one year
              
              
              4.89%
              
              $
              21,955,516
              
              
              23,700,000After
                  one through three years
              
              
              -
              
              
              -
              
              
              3,788,852After
                  three through five years
              
              
              6.01%
              
              
              4,474,878
              
              
              5,000,000After
                  five through ten
              
              
              -
              
              
              -
              
              
              1,574,886$
              26,430,394
              
              
              34,063,738Weighted-average
                  rate
              
              
              
              
              
              5.08
              %
              
              4.48
              %
 
 54
  LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statements**
 Principal
                  maturities at September 30, 2007 are summarized as
                  follows:
  October
                  1, 2007 to September 30, 2008
              
              $
              22,055,524October
                  1, 2008 to September 30, 2009
              
              
              100,008October
                  1, 2009 to September 30, 2010
              
              
              100,008October
                  1, 2010 to September 30, 2011
              
              
              3,100,008October
                  1, 2011 to September 30, 2012
              
              
              1,074,846After
                  September 30, 2012
              
              
              -$
              26,430,394
  At
        September 30, 2007 advances from the FHLB of Des Moines are secured by FHLB
        stock and one-to-four family, home equity, multi-family, commercial real
        estate
        and non-real estate loans amounting to $64,356,000.
 
 **(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 the 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
                  at****September
                  30,****Maturity
                  Date**
              
              **2007**
              
              **2007**
              
              **2006**Feburary
                  26, 2009
              
              
              5.21%
              
              $
              540,136
              
              
              516,173Open
                  line
              
              
              3.41%
              
              
              681,048
              
              
              2,867,824Total,
                  4.21% and 3.44%
              
              
              
              
              $
              1,221,184
              
              
              3,383,997Market
                  value of securities
              
              
              
              
              $
              6,996,954
              
              
              6,618,484Average
                  balance of borrowings
              
              
              
              
              $
              2,097,002
              
              
              2,224,280Maximum
                  balance at any month end
              
              
              
              
              $
              5,690,307
              
              
              4,400,146
  55
  LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statements**
 **(11)** **Income
          Taxes**
  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:
 
 **2007**
              
              **2006**Deferred
                  tax liabilities:FHLB
                  stock dividends
              
              $
              (140,625
              )
              
              (138,750
              )Deferred
                  tax assets:Accrued
                  income and expense and deferred loan fees
              
              
              304,977
              
              
              362,039Allowance
                  for losses on loans and foreclosed real estate
              
              
              1,129,089
              
              
              793,325Unrealized
                  loss on securities available for sale
              
              
              55,690
              
              
              336,600Other
              
              
              184,295
              
              
              121,386Total
                  deferred tax assets
              
              
              1,674,051
              
              
              1,613,350Net
                  deferred tax asset
              
              $
              1,533,426
              
              
              1,474,600
  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:
  **2007**
              
              **2006**
              
              **2005**Current:Federal
              
              $
              1,160,000
              
              
              814,000
              
              
              630,000State
              
              
              178,000
              
              
              112,000
              
              
              45,0001,338,000
              
              
              926,000
              
              
              675,000Deferred:Federal
              
              
              (335,000
              )
              
              (125,000
              )
              
              145,000State
              
              
              (49,000
              )
              
              (18,000
              )
              
              21,000(384,000
              )
              
              (143,000
              )
              
              166,000$
              954,000
              
              
              783,000
              
              
              841,000
 
 56
 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 Earnings****Before
                  Income Taxes****2007**
              
              **2006**
              
              **2005**Federal
                  statutory income tax rate
              
              
              34.0
              %
              
              34.0
              %
              
              34.0
              %Increases
                  (decreases) in tax rate:Tax
                  exempt income
              
              
              (3.5
              )
              
              (2.9
              )
              
              (1.1
              )Change
                  in cash surrender value of BOLI
              
              
              (1.2
              )
              
              -
              
              
              -Nondeductible
                  stock option expense
              
              
              0.7
              
              
              -
              
              
              -State
                  taxes, net of Federal tax benefit
              
              
              2.9
              
              
              2.8
              
              
              1.9Average
                  fair value versus cost of ESOP shares
              
              
              1.2
              
              
              1.1
              
              
              0.7Other,
                  net
              
              
              (1.2
              )
              
              (0.1
              )
              
              0.4Tax
                  rate
              
              
              32.9
              %
              
              34.9
              %
              
              35.9
              %
  **(12)** **Employee
          Benefits**
  **Defined
        Contribution Pension Plan (401-K Plan)**
 
 T he
        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 $53,752, $49,439 and $34,461 for 2007,
        2006
        and 2005, 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.
 
 The
        following table sets forth the Plan's funded status and amounts recognized
        in
        other liabilities in the financial statements :
  **2007**
                
                **2006**Accumulated
                    postretirement benefit obligations
                
                $
                (257,426
                )
                
                (318,823
                )Unrecognized
                    transition obligation
                
                
                -
                
                
                87,752Unrecognized
                    prior service cost
                
                
                -
                
                
                (67,653
                )Unrecognized
                    actuarial gain
                
                
                -
                
                
                (117,300
                )Under
                    (over) accrual
                
                
                11,230
                
                
                11,230Accrued
                    postretirement benefit cost
                
                $
                (246,196
                )
                
                (404,794
                )
  57
 LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statements**
 A
        reconciliation of the accumulated postretirement benefit obligation is
        summarized as follows:
 
 **2007**
              
              **2006**Balance,
                  beginning of year
              
              $
              (318,823
              )
              
              (369,957
              )Service
                  cost
              
              
              (6,685
              )
              
              (6,685
              )Interest
                  cost
              
              
              (18,306
              )
              
              (22,105
              )Benefits
                  paid
              
              
              37,538
              
              
              29,873Actuarial
                  gain
              
              
              48,850
              
              
              50,051Balance,
                  end of year
              
              $
              (257,426
              )
              
              (318,823
              )
  The
        weighted average annual assumed rate of increase in the per capita cost of
        covered benefits for the medical plan is 10% for 2007 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, 2007, 2006 and 2005 was considered immaterial. The
        weighted-average discount rate used in determining the accumulated
        postretirement benefit obligation was 6.00% at September 30, 2007 and 2006,
        and
        6.00% for the year ended September 30, 2007 and 6.50% for the years ended
        September 30, 2006 and 2005.
  The
        components of the net periodic cost for postretirement medical benefits are
        summarized as follows:
 
 **2007**
              
              **2006**
              
              **2005**Service
                  cost
              
              $
              6,685
              
              
              6,685
              
              
              6,685Interest
                  cost
              
              
              18,306
              
              
              22,105
              
              
              23,253Amortization
                  of transition obligation
              
              
              12,538
              
              
              12,538
              
              
              12,538Amortization
                  of prior service cost
              
              
              (9,665
              )
              
              (9,665
              )
              
              (9,665
              )Amortization
                  of actuarial gain
              
              
              (12,203
              )
              
              (4,321
              )
              
              (6,311
              )Over
                  (under) accrual
              
              
              -
              
              
              (11,742
              )
              
              500Net
                  periodic cost
              
              $
              15,661
              
              
              15,600
              
              
              27,000
  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, 2007 to September 30, 2008
              
              $
              36,456October
                  1, 2008 to September 30, 2009
              
              
              38,902October
                  1, 2009 to September 30, 2010
              
              
              41,592October
                  1, 2010 to September 30, 2011
              
              
              44,551October
                  1, 2011 to September 30, 2012
              
              
              47,806October
                  1, 2012 to September 30, 2017
              
              
              60,000$
              269,307
 
 58
 LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statements**
 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:
  **2007**
              
              **2006**Unrecognized
                  transition obligation
              
              $
              75,214
              
              
              -Unrecognized
                  prior service cost
              
              
              (57,988
              )
              
              -Unrecognized
                  actuarial gain
              
              
              (153,948
              )
              
              -(136,722
              )
              
              -Tax
                  effect
              
              
              47,853
              
              
              -Unrecognized
                  gain, net of taxes
              
              $
              (88,869
              )
              
              -
  The
        estimated amounts that will be amortized from accumulated other comprehensive
        earnings into net periodic cost for 2008 are as follows:
 
 Unrecognized
                  transition obligation
              
              $
              12,538Unrecognized
                  prior service cost
              
              
              (9,665
              )Unrecognized
                  actuarial gain
              
              
              (21,368
              )$
              (18,495
              )
  **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. Participant benefits become 20% vested after one
        year
        of service, and 20% for each additional year of service until benefits are
        100%
        vested after 5 years for participants hired prior to January 1, 2004. For
        participants hired after January 1, 2004 benefits become 100% vested after
        5
        years of service with no vesting prior to that date. 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 2007, 2006 and 2005
        was
        $332,735, $306,947 and $128,804, respectively.
 
 59
  LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statements**
 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, 2007 were 146,960, 31,134 and 90,853 respectively.
        The
        number of ESOP shares allocated, shares released for allocation and unreleased
        shares at September 30, 2006 was 146,809, 31,275, and 121,987, respectively.
 
 The
        fair
        value of unreleased ESOP shares at September 30, 2007 and 2006 was $973,000
        and
        $1,248,000, 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. At October 1, 2006
        there
        were 57,594 unvested stock options outstanding.
 
 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.
 
 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, 2006 and 2005 under its stock option plan utilizing the
        Black-Scholes pricing model to be $3.00, $1.70, and $1.83, respectively. The
        assumptions used in the Black-Scholes pricing model were as
        follows:
 
 **2007**
              
              **2006**
              
              **2005**Expected
                  dividend yield
              
              
              2.00%
              
              
              3.00%
              
              
              3.00%Risk-free
                  interest rate
              
              
              4.53%
              
              
              4.23%
              
              
              3.71%Expected
                  life of options
              
              
              7.50
                  years
              
              
              5.00
                  years
              
              
              6.00
                  yearsExpected
                  volatility
              
              
              21.70%
              
              
              25.13%
              
              
              25.93%
 
 60
 LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statements**
 Stock
        option compensation expense, as a result of the adoption of SFAS 123R is
        as
        follows :
  **2007**
              
              **2006**
              
              **2005**Pretax
              
              $
              67,553
              
              
              -
              
              
              -After
                  tax
              
              
              43,234
              
              
              -
              
              
              -Basic
                  and diluted earnings per share
              
              $
              0.01
              
              
              -
              
              
              -
  At
        September 30, 2007, the total unrecognized compensation expense related to
        nonvested stock options was approximately $219,000 and is expected to be
        recognized over the weighted-average period of 3.40 years.
  Stock
        options granted, exercised or forfeited are as follows:
  **Weighted
                  -****Weighted-**
              
              **Average****Number**
              
              **Average**
              
              **Contractual**
              
              **Aggregate****of**
              
              **Exercise**
              
              **Term
                  in**
              
              **Intrinsic****Shares**
              
              **Price**
              
              **Years**
              
              **Value**Outstanding
                  at September 30, 2004
              
              
              173,970
              
              $
              6.84
              
              $
              9.71
              
              
              -Granted
              
              
              38,504
              
              
              8.28
              
              
              -
              
              
              -Exercised
              
              
              (11,201
              )
              
              6.63
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              (3,500
              )
              
              6.86
              
              
              -
              
              
              -Outstanding
                  at September 30, 2005
              
              
              197,773
              
              $
              7.13
              
              $
              8.86
              
              
              152,107Granted
              
              
              42,440
              
              
              8.07
              
              
              -
              
              
              -Exercised
              
              
              (350
              )
              
              6.86
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              (4,900
              )
              
              6.86
              
              
              -
              
              
              -Outstanding
                  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
              
              
              797,568Exercisable
                  at September 30, 2007
              
              
              194,005
              
              
              7.20
              
              
              7.10
              
              
              681,567Vested
                  and expected to vest atSeptember
                  30, 2007
              
              
              194,005
              
              $
              7.20
              
              
              7.10
              
              
              681,567
  61




LIBERTY
      BANCORP, INC.





**Notes
      to Consolidated Financial Statements**





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.





**2007**
            
            **2006**
            
            **2005**Intrinsic
                value of options exercised
            
            $
            2,909
            
            
            500
            
            
            15,747Cash
                received from the exercise of options
            
            
            8,695
            
            
            2,400
            
            
            74,275Fair
                value of shares vested
            
            
            268,769
            
            
            636,465
            
            
            163,955




Shares
      exercisable and weighted average exercise prices were 194,005 and $7.20 at
      September 30, 2007, respectively, 170,208 and $7.19 at September 30, 2006,
      respectively, and 104,662 and $6.86 at September 30, 2005,
      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:





**2007**
            
            **2006**
            
            **2005**Restricted
                Compensation Expense
            
            $
            162,519
            
            
            27,996
            
            
            27,996




At
      September 30, 2007, the total unrecognized expense was $1.1 million and is
      expected to be recognized over the next 4.4 years.





A
      summary
      of the Company’s nonvested stock award activity for 2007 is as
      follows:




**Number**
            
            **Weighted-****of**
            
            **Average****Nonvested**
            
            **Grant
                Date****Shares**
            
            **Fair
                Value**Nonvested
                at October 1, 2006
            
            
            4,080
            
            $
            6.86Granted
            
            
            109,400
            
            
            11.27Vested
            
            
            (4,080
            )
            
            6.86Forfeited
            
            
            -
            
            
            -Nonvested
                at September 30, 2007
            
            
            109,400
            
            $
            11.27






62




LIBERTY
        BANCORP, INC.
 
 **Notes
        to Consolidated Financial Statements**




**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.





The
      following table sets forth the plan's funded status and amounts recognized
      in
      other liabilities in the financial statements:





**2007**
            
            **2006**Actuarial
                      present value of benefit obligations - vested accumulated
                      benefits
            
            $
            (222,934
            )
            
            (234,288
            )Unrecognized
                prior service cost
            
            
            -
            
            
            52,681Unrecognized
                actuarial gain
            
            
            -
            
            
            (38,811
            )Overaccrual
            
            
            (4,994
            )
            
            (1,856
            )Accrued
                directors' retirement plan
            
            $
            (227,928
            )
            
            (222,274
            )




A
      reconciliation of the accumulated benefit obligation is summarized as
      follows:





**2007**
            
            **2006**Balance,
                beginning of year
            
            $
            (234,288
            )
            
            (243,936
            )Service
                cost
            
            
            (2,597
            )
            
            (2,597
            )Interest
                cost
            
            
            (14,057
            )
            
            (15,336
            )Benefits
                paid
            
            
            31,000
            
            
            16,000Actuarial
                gain (loss)
            
            
            (2,992
            )
            
            11,581Balance,
                end of year
            
            $
            (222,934
            )
            
            (234,288
            )




The
      average discount rate used in determining the accumulated benefit obligation
      was
      6.00% at September 30, 2007 and 2006, and 6.00% for the year ended September
      30,
      2007 and 6.50% for the years ended September 30, 2006 and 2005.





63




LIBERTY
        BANCORP, INC.
 
 **Notes
        to Consolidated Financial Statements**




Net
      pension cost includes the following components:





**2007**
            
            **2006**
            
            **2005**Service
                costs - benefits earned during the year
            
            $
            2,597
            
            
            2,597
            
            
            2,597Interest
                cost on benefit obligation
            
            
            14,057
            
            
            15,336
            
            
            15,706Amortization
                of prior service cost
            
            
            7,526
            
            
            7,526
            
            
            9,431Amortization
                of actuarial gain
            
            
            (918
            )
            
            (405
            )
            
            (234
            )Overaccrual
            
            
            3,138
            
            
            1,346
            
            
            500Net
                pension cost
            
            $
            26,400
            
            
            26,400
            
            
            28,000




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, 2007 to September 30, 2008
            
            $
            31,000October
                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, 2017
            
            
            75,000$
            190,000




Amounts
      recognized in accumulated other comprehensive earnings, net are summarized
      as
      follows:





**2007**
            
            **2006**Unrecognized
                prior service cost
            
            $
            45,155
            
            
            -Unrecognized
                actuarial gain
            
            
            (34,901
            )
            
            -10,254
            
            
            -Tax
                effect
            
            
            (3,589
            )
            
            -Unrecognized
                loss, net of taxes
            
            $
            6,665
            
            
            -





The
      estimated amounts that will be amortized from accumulated other comprehensive
      earnings into net periodic cost for 2008 are as follows:





Unrecognized
                prior service cost
            
            $
            7,526Unrecognized
                gain
            
            
            (2,101
            )$
            5,425




64




LIBERTY
        BANCORP, INC.
 
 **Notes
        to Consolidated Financial Statements**




**(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.





Effective
      February 8, 1995 the Bank converted from a state-chartered stock savings bank
      into a federally-chartered stock savings bank.





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. No repurchased shares
      were held in treasury at September 30, 2007.




65




LIBERTY
        BANCORP, INC.
 
 **Notes
        to Consolidated Financial Statements**


On
      December 20, 2007, the Company announced a second stock repurchase program
      to
      acquire up to 222,048 shares or 5%, of the Company’s common stock. Subsequent to
      September 30, 2007, the Company has repurchased 320,230 shares at an average
      price of $10.57 per share. 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, 2007, the Bank met all capital adequacy
      requirements.





The
      Bank
      is also subject to the regulatory framework for prompt corrective action. At
      September 30, 2007 and 2006, 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, 2007
      are
      as follows:




**Minimum****Required****for
                    Capital**
                
                **to
                    be "Well****Actual**
                
                **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
                %




66




LIBERTY
          BANCORP, INC.
 
 **Notes
          to Consolidated Financial Statements**


The
      Bank's actual and required capital amounts and ratios at September 30, 2006
      are
      as follows:




**Minimum****Required****for
                  Capital**
              
              **to
                  be "Well****Actual**
              
              **Adequacy**
              
              **Capitalized"****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio****(Dollars
                  in Thousands)**Stockholders'
                  equity
              
              $
              35,623Computer
                  software costs
              
              
              (79
              )Unrealized
                  loss on securities AFS, net
              
              
              573Tangible
                  capital
              
              $
              36,117
              
              
              12.7
              %
              $
              4,257
              
              
              1.5
              %General
                  valuation allowance
              
              
              2,144Total
                  capital to risk-weighted assets
              
              $
              38,261
              
              
              18.1
              %
              $
              16,874
              
              
              8.0
              %
              $
              21,093
              
              
              10.0
              %Tier
                  1 capital to risk-weighted assets
              
              $
              36,117
              
              
              17.1
              %
              $
              8,437
              
              
              4.0
              %
              $
              12,656
              
              
              6.0
              %Tier
                  1 capital to total assets
              
              $
              36,117
              
              
              12.7
              %
              $
              11,351
              
              
              4.0
              %
              $
              14,189
              
              
              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, 2007, 2006 and 2005, the Bank paid cash dividends
      of $463,842, $436,876 and $425,181, 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.




67




LIBERTY
      BANCORP, INC.




**Notes
      to Consolidated Financial Statement**




The
      following table sets forth information regarding off-balance sheet financial
      instruments as of September 30, 2007:





**Fixed-Rate**
            
            **Adjustable-Rate**Off-balance
                sheet financial instruments:Commitments
                to originate loans
            
            $
            21,678,960
            
            
            11,558,145Commitments
                for unused lines of credit
            
            $
            568,156
            
            
            12,660,525Commitments
                for undisbursed loans
            
            $
            10,687,728
            
            
            20,628,014Commitments
                for letters of credit
            
            $
            356,840
            
            
            -





Interest
      rates on these fixed-rate loans generally ranged from 6.38% to
      9.25%.




At
      September 30, 2007, 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:





**2007**
            
            **2006****Carrying**
            
            **Fair**
            
            **Carrying**
            
            **Fair****Amount**
            
            **Value**
            
            **Amount**
            
            **Value**Non-trading
                          instruments and
                          nonderivatives:Cash
                and cash equivalents
            
            $
            9,042,289
            
            
            9,042,289
            
            
            13,403,701
            
            
            13,403,701Securities
                available for sale
            
            
            47,982,519
            
            
            47,982,519
            
            
            35,882,630
            
            
            35,882,630Stock
                in FHLB of Des Moines
            
            
            1,531,200
            
            
            1,531,200
            
            
            1,952,900
            
            
            1,952,900Mortgage-backed
                  securities -available
                  for sale
            
            
            19,276,996
            
            
            19,276,996
            
            
            24,217,321
            
            
            24,217,321Loans
                receivable, net
            
            
            232,307,925
            
            
            234,510,039
            
            
            200,222,378
            
            
            200,225,932Loans
                held for sale
            
            
            719,086
            
            
            719,086
            
            
            459,201
            
            
            459,201Accrued
                interest receivable
            
            
            2,055,814
            
            
            2,055,814
            
            
            1,486,355
            
            
            1,486,355Deposits
            
            
            252,305,482
            
            
            252,323,699
            
            
            198,470,979
            
            
            198,212,238Accrued
                interest on deposits
            
            
            601,285
            
            
            601,285
            
            
            316,366
            
            
            316,366Advances
                from FHLB
            
            
            26,430,394
            
            
            26,670,801
            
            
            34,063,738
            
            
            34,148,662Securities
                      sold under agreement to repurchase
            
            $
            1,221,184
            
            
            1,220,451
            
            
            3,383,997
            
            
            3,424,605




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.




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.




68


LIBERTY
        BANCORP, INC.
  **Notes
        to Consolidated Financial Statement**




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.




**(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, 2007 and 2006**


**2007**
            
            **2006****Assets**Cash
                and cash equivalents
            
            $
            11,556,962
            
            
            8,061,893Investment
                in subsidiary
            
            
            35,968,431
            
            
            35,622,895Securities
                available for sale
            
            
            393,884
            
            
            -ESOP
                note receivable
            
            
            706,935
            
            
            917,906Loans
                receivable, net of allowance for loan losses of $0
            
            
            1,600,000
            
            
            4,399,902Accrued
                interest receivable - loans
            
            
            7,700
            
            
            4,583Accrued
                interest receivable - other
            
            
            2,240
            
            
            -Other
                assets
            
            
            12,039
            
            
            8,397Total
                assets
            
            $
            50,248,191
            
            
            49,015,576**Liabilities
                and Stockholders' Equity**Other
                liabilities
            
            $
            13,500
            
            
            -Accrued
                income taxes
            
            
            40,158
            
            
            34,000Total
                liabilities
            
            
            53,658
            
            
            34,000Stockholders'
                equity:Common
                stock
            
            
            47,612
            
            
            47,601Additional
                paid-in capital
            
            
            31,923,288
            
            
            33,001,965Common
                stock acquired by ESOP
            
            
            (701,308
            )
            
            (933,192
            )Common
                stock acquired by Incentive Plan
            
            
            -
            
            
            (18,676
            )Accumulated
                other comprehensive earnings, net
            
            
            (12,619
            )
            
            (573,130
            )Retained
                earnings - substantially restricted
            
            
            18,937,560
            
            
            17,457,008Total
                stockholders' equity
            
            
            50,194,533
            
            
            48,981,576Total
                liabilities and stockholders' equity
            
            $
            50,248,191
            
            
            49,015,576




69


LIBERTY
        BANCORP, INC.
  **Notes
        to Consolidated Financial Statement**




**Statements
          of Earnings** **Years
          Ended September 30, 2007 and 2006**
 **2007**
                  
                  **2006**Interest
                      income and dividend incomeLoans
                      receivable
                  
                  $
                  78,390
                  
                  
                  60,486ESOP
                      note receivable
                  
                  
                  75,727
                  
                  
                  19,148Other
                      interest-earning assets
                  
                  
                  498,003
                  
                  
                  43,078Total
                      interest income
                  
                  
                  652,120
                  
                  
                  122,712Dividend
                      income - BankLiberty
                  
                  
                  2,500,000
                  
                  
                  -Total
                      interest and dividend income
                  
                  
                  3,152,120
                  
                  
                  -Noninterest
                      expense
                  
                  
                  298,477
                  
                  
                  31,572Earnings
                            before income taxes and equity in undistributed earnings of the
                            Bank
                  
                  
                  2,853,643
                  
                  
                  91,140Income
                      taxes
                  
                  
                  131,000
                  
                  
                  34,000Net
                      earnings before equity in earnings of Bank
                  
                  
                  2,722,643
                  
                  
                  57,140
                  (1)Equity
                      in undistributed earnings of subsidiary (dividends received in excess
                      of earnings of subsidiary)
                  
                  
                  (778,249
                  )
                  
                  1,405,795Net
                      earnings
                  
                  $
                  1,944,394
                  
                  
                  1,462,935


(1)
        Includes operations of the stand-alone Company for the time period July 21,2006
        through September
        30, 2006.
  70
 LIBERTY
          BANCORP, INC.
  **Notes
          to Consolidated Financial Statement**
 **Statements
            of Cash Flows**
 **Years
            Ended September 30, 2007 and 2006**
 **2007**
                
                **2006
                    (1)**Cash
                    flows from operating activities:Net
                    earnings
                
                $
                1,944,394
                
                
                1,462,935Adjustments
                          to reconcile net earnings to net cash provided by (used for)
                          operating activities:Equity
                    in undistributed net earnings of BankLiberty
                
                
                (1,721,751
                )
                
                (1,405,795
                )ESOP
                    expense
                
                
                332,735
                
                
                306,947Incentive
                    Plan expense
                
                
                230,072
                
                
                27,996Decrease
                    (increase) in:Accrued
                    interest receivable
                
                
                (5,357
                )
                
                (4,583
                )Other
                    assets
                
                
                (3,368
                )
                
                (8,397
                )Increase
                    (decrease) in;Other
                    liabilities
                
                
                13,500
                
                
                -Accrued
                    income taxes
                
                
                6,158
                
                
                34,000Net
                    cash provided by (used for) operating activities
                
                
                796,383
                
                
                413,103Cash
                    flows from investing activities:Net
                    change in loans receivable
                
                
                2,799,902
                
                
                (4,399,902
                )Purchase
                    of subsidiary
                
                
                (562,809
                )
                
                (12,941,266
                )Dividend
                    from subsidiary
                
                
                2,500,000
                
                
                -Purchase
                    of securities
                
                
                (394,623
                )
                
                -Loan
                    to ESOP to finance shares
                
                
                -
                
                
                (1,167,996
                )Repayment
                    of ESOP loan
                
                
                210,971
                
                
                250,089Net
                    cash provided by (used for) investing activities
                
                
                4,553,441
                
                
                (18,259,075
                )Cash
                    flows from financing activities:Issuance
                    and exchange of common stock
                
                
                -
                
                
                26,342,341Proceeds
                    from exercise of stock options
                
                
                8,695
                
                
                2,400Cash
                    dividends
                
                
                (463,842
                )
                
                (436,876
                )Repurchase
                    of common stock for stock award plan
                
                
                (1,399,608
                )
                
                -Net
                    cash provided by (used for) financing activities
                
                
                (1,854,755
                )
                
                25,907,865Net
                    increase (decrease) in cash and cash equivalents
                
                
                3,495,069
                
                
                8,061,893Cash
                    and cash equivalents at beginning of period
                
                
                8,061,893
                
                
                -Cash
                    and cash equivalents at end of period
                
                $
                11,556,962
                
                
                8,061,893




(1)
      Includes operations of the stand-alone company for the time period July 21,
      2006
      through September 30, 2006.




71


LIBERTY
        BANCORP, INC.
  **Notes
        to Consolidated Financial Statement**


**(17)
      Selected Quarterly Financial Data (Unaudited)**




The
      results of operations by quarter for the years ended September 30, 2007 and
      2006
      were as follows:


**First**
              
              **Second**
              
              **Third**
              
              **Fourth****Year
                  Ended September 30, 2007**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**Income
                  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
  **First**
              
              **Second**
              
              **Third**
              
              **Fourth****Year
                  Ended September 30, 2006**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**Income
                  income
              
              $
              3,577,313
              
              $
              3,908,588
              
              $
              4,416,814
              
              $
              4,761,126Interest
                  expense
              
              
              (1,602,744
              )
              
              (1,819,463
              )
              
              (2,098,179
              )
              
              (2,079,293
              )Net
                  interest income
              
              
              1,974,569
              
              
              2,089,125
              
              
              2,318,635
              
              
              2,681,833Provision
                  for loan losses
              
              
              (220,000
              )
              
              (250,000
              )
              
              (215,000
              )
              
              (167,000
              )Net
                  interest income after provision for loan losses
              
              
              1,754,569
              
              
              1,839,125
              
              
              2,103,635
              
              
              2,514,833Noninterest
                  income
              
              
              302,513
              
              
              273,879
              
              
              332,538
              
              
              327,996Noninterest
                  expense
              
              
              (1,564,486
              )
              
              (1,690,158
              )
              
              (1,832,800
              )
              
              (2,115,709
              )Earnings
                  before income taxes
              
              
              492,596
              
              
              422,846
              
              
              603,373
              
              
              727,120Income
                  taxes
              
              
              (168,000
              )
              
              (143,000
              )
              
              (213,000
              )
              
              (259,000
              )Net
                  earnings
              
              $
              324,596
              
              $
              279,846
              
              $
              390,373
              
              $
              468,120Basic
                  and diluted earnings per share
              
              $
              0.07
              
              $
              0.06
              
              $
              0.08
              
              $
              0.10




72




LIBERTY
      BANCORP, INC.




**Board
      of Directors of Liberty Bancorp, Inc. and BankLiberty**





**Daniel
                G. O’Dell**
              Chairman
                of the Board
              President
              O’Dell
                Publishing, Inc.
            
            **Steven
                K. Havens**
              Secretary/Treasurer
              President
              Havens
                Construction Company, Inc.
            
            **Ralph
                W. Brant, Jr.**
              President
              Brant’s
                Clothing**Robert
                T. Sevier**
              Recorder
                of Deeds
              Clay
                County
            
            **Brent
                M. Giles**
              President
                & Chief Executive Officer
              Liberty
                Bancorp, Inc. and
              BankLiberty





**Officers
      of Liberty Bancorp, Inc.**





**Brent
                M. Giles**
              President
                and
              Chief
                Executive Officer
            
            **Marc
                J. Weishaar**
              Senior
                Vice President
              and
                Chief Financial Officer
            
            **Mark
                E. Hecker**
              Senior
                Vice President and
              Chief
                Lending Officer**Cathy
                Trusler**
              Secretary





**Officers
      of BankLiberty**





**Brent
                M. Giles**
              President
                and
              Chief
                Executive Officer
            
            **Marc
                J. Weishaar**
              Senior
                Vice President andChief Financial Officer
            
            **Mark
                E. Hecker**
              Senior
                Vice President and
              Chief
                Lending Officer**Martin
                J. Weishaar**
              Senior
                Vice
              President
                and
              General
                Counsel
            
            **Kenneth
                M. Honeck**
              Senior
                Vice President
              Retail
                Banking





73




LIBERTY
      BANCORP, INC.




**Branch
      Offices**





**Headquarters**
              16
                W. Franklin
              Liberty,
                MO 64068-1637
              (816)
                781-4822
            
            **Platte
                City Branch**
              92
                Highway & Bellmondo Drive
              Platte
                City, MO 64079
              (816)
                858-5200
            
            **Plattsburg
                Branch**
              1206
                Clay
              Plattsburg,
                MO 64477
              (816)
                930-2513**Shoal
                Creek Branch**
              9200
                N.E. Barry Road
              Kansas
                City, MO 64157
              (816)
                407-9200
            
            **Independence
                Branch**
              4315
                South Noland Road
              Independence,
                MO 64055
              (816)
                350-4477
            
            **Boardwalk
                Branch**
              8740
                N. Ambassador Drive
              Kansas
                City, MO 64154
              (816)
                741-7979**Gladstone
                Branch**
              6410
                N. Prospect
              Gladstone,
                MO 64119
              (816)
                452-7300





74




LIBERTY
      BANCORP, INC.




**Investor
      Information**




**ANNUAL
      MEETING OF STOCKHOLDERS**




The
      Annual Meeting of Stockholders will be held on Wednesday ,
      February 6, 2008 at 5:30 p.m., local time, at 9200  N.E.
      Barry Road, Kansas City, Missouri.




**LEGAL
      COUNSEL**




Muldoon
      Murphy & Aguggia LLP


5101
      Wisconsin Avenue, N.W.


Washington,
      DC 20016




**STOCK
      TRANSFER AGENT AND REGISTRAR**




Registrar
      and Transfer Company


10
      Commerce Drive


Cranford,
      New Jersey 07016




**AUDITORS**




Michael
      Trokey & Company, P.C.


Certified
      Public Accountants


10411
      Clayton Road


St.
      Louis, Missouri 63131




**Form
      10-K**




**A
      COPY OF THE COMPANY’S FORM 10-K, INCLUDING FINANCIAL STATEMENT SCHEDULES, WILL
      BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE ANNUAL MEETING RECORD
      DATE
      UPON WRITTEN REQUEST TO THE SECRETARY, LIBERTY BANCORP, INC., 16 W. FRANKLIN,
      LIBERTY, MISSOURI 64068.**