**[COVER
      PAGE]**







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




Dear
      Shareholder:





This
      has
      been an exciting and successful year as we continued our efforts to transform
      the company into a growth-oriented, full-service community banking franchise.
      We
      completed the conversion from the mutual holding structure to a full stock
      holding company traded on the NASDAQ. I believe Liberty Bancorp, Inc. and its
      renamed subsidiary, BankLiberty, are well positioned for future success. The
      name change is part of an overall branding effort to change our image, from
      that
      of a traditional thrift, to a progressive full-service community bank.
      BankLiberty better reflects who we are, what we stand for, and what we provide
      the individuals and businesses in our community. I am pleased to report
      consolidated net earnings of $1,463,000, or $.31 per share, for the year ended
      September 30, 2006 compared to $1,505,000, or $.32 per share, for the year
      ended
      September 30, 2005. During the year, we made significant investments in the
      infrastructure and personnel we believe will produce long-term shareholder
      value.




We
          experienced significant growth this year due to the infusion of additional
          capital from the stock offering and achieving growth in loans and deposits.
          Total assets increased 21.04% from $237.6 million as of September 30, 2005,
          to
          $287.6 million as of September 30, 2006. Total deposits increased 9.28%,
          from
          $181.6 million to $198.5 million, with the majority of this growth occurring
          at
          our three newest branches. Our strong financial condition will give us
          the
          foundation to continue to grow in 2007.




We
      opened
      our sixth retail bank facility in January 2006 in the Boardwalk Shopping Center
      in Kansas City, Missouri and are very pleased with its performance to date.
      We
      hope to open additional banking centers in the Kansas City metropolitan area
      over the next few years to generate additional core deposit growth. We also
      plan
      to continue expanding our commercial business, commercial real estate, and
      multi-family loans while maintaining our traditional business of residential
      construction lending and mortgage banking.




We
      are
      pleased with our accomplishments of the past year but are focused on the future.
      The coming year holds challenges including escalating local competition for
      loans and deposits, and a substantially weaker housing market; however, I still
      expect our strategic efforts and outstanding employees to produce continued
      progress towards our goals. Management and the Board are very excited about
      our
      future as Liberty Bancorp, Inc. and we appreciate the continued loyalty of
      our
      stockholders and customers.




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 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 five full-service branch offices - two in Kansas City
      and
      one in Plattsburg, Platte City and Independence, 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, 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**
              **September
                30, 2006****4****th****Quarter**High
            
            $
            10.540Low
            
            
            10.050Dividend
            
            
            .025





As
      of
      September 30, 2006, the Company had approximately 451 holders 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 the Consolidated Financial Statements for
      information regarding the dividend restrictions applicable to the Company and
      the Bank.





We
      did
      not repurchase any of our common stock during the fourth quarter of 2006, and
      at
      September 30, 2006, we had no publicly announced repurchase plans or
      programs.





2


**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
      2002 through 2005 represents the financial position and results of operations
      for BankLiberty (formerly Liberty Savings Bank, F.S.B.). 2006 data represents
      this same information for Liberty Bancorp, Inc. and its subsidiary
      BankLiberty.





**Financial
      Condition Data:**





**At
                September 30,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(Dollars
                in Thousands)**Total
                assets
            
            $
            287,561
            
            $
            237,576
            
            $
            213,482
            
            $
            189,264
            
            $
            182,350Cash
                and cash equivalents, federalfunds
                sold, securities and stock in theFederal
                Home Loan Bank of DesMoines
            
            
            51,239
            
            
            34,465
            
            
            22,477
            
            
            16,877
            
            
            25,760Mortgage-backed
                securities
            
            
            24,217
            
            
            27,189
            
            
            23,107
            
            
            23,961
            
            
            33,932Loans
                receivable, net
            
            
            200,222
            
            
            163,843
            
            
            159,840
            
            
            141,993
            
            
            114,577Deposits
            
            
            198,471
            
            
            181,617
            
            
            152,929
            
            
            136,339
            
            
            125,453Advances
                from the Federal Home LoanBank
                of Des Moines
            
            
            34,064
            
            
            30,497
            
            
            37,130
            
            
            30,314
            
            
            34,647Stockholders’
                equity
            
            
            48,982
            
            
            21,131
            
            
            20,184
            
            
            19,465
            
            
            19,761Full
                service offices open
            
            
            6
            
            
            5
            
            
            4
            
            
            4
            
            
            4





**Operating
      Data:**





**For
                the Years Ended September 30,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(Dollars
                in Thousands)**Interest
                income
            
            $
            16,664
            
            $
            12,816
            
            $
            10,595
            
            $
            10,659
            
            $
            11,791Interest
                expense
            
            
            (7,600
            )
            
            (5,175
            )
            
            (4,031
            )
            
            (5,168
            )
            
            (6,666
            )Net
                interest income
            
            
            9,064
            
            
            7,641
            
            
            6,564
            
            
            5,491
            
            
            5,125Provision
                for loan losses
            
            
            (852
            )
            
            (430
            )
            
            (885
            )
            
            (206
            )
            
            (758
            )Net
                interest income after provisionfor
                loan losses
            
            
            8,212
            
            
            7,211
            
            
            5,679
            
            
            5,285
            
            
            4,367Noninterest
                income
            
            
            1,237
            
            
            1,200
            
            
            1,118
            
            
            1,783
            
            
            1,130Noninterest
                expense
            
            
            (7,203
            )
            
            (6,065
            )
            
            (5,267
            )
            
            (5,972
            )
            
            (4,854
            )Earnings
                before income taxes
            
            
            2,246
            
            
            2,346
            
            
            1,530
            
            
            1,096
            
            
            643Income
                taxes
            
            
            (783
            )
            
            (841
            )
            
            (567
            )
            
            (395
            )
            
            (236
            )Net
                earnings
            
            $
            1,463
            
            $
            1,505
            
            $
            963
            
            $
            701
            
            $
            407**Per
                Share Data:**Basic
                earnings per share (1)
            
            $
            0.32
            
            $
            0.32
            
            $
            0.21
            
            $
            0.15
            
            $
            0.09Diluted
                earnings per share (1)
            
            
            0.31
            
            
            0.32
            
            
            0.21
            
            
            0.15
            
            
            0.09Dividends
                per share (2)
            
            
            0.20
            
            
            0.23
            
            
            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 conversion
                date have been adjusted by the exchange ratio of 3.5004 to calculate
                earnings per share.




(2)
            Dividends
                per share prior to the 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.




3




**At
                or For the Years Ended September 30,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Performance
                Ratios:**Return
                on average assets
            
            
            0.56
            %
            
            0.67
            %
            
            0.47
            %
            
            0.37
            %
            
            0.22
            %Return
                on average equity
            
            
            5.47
            
            
            7.28
            
            
            4.81
            
            
            3.57
            
            
            2.07Interest
                rate spread (1)
            
            
            3.43
            
            
            3.41
            
            
            3.22
            
            
            2.76
            
            
            2.72Net
                interest margin (2)
            
            
            3.66
            
            
            3.54
            
            
            3.37
            
            
            3.03
            
            
            2.96Noninterest
                expense to average assets
            
            
            2.74
            
            
            2.69
            
            
            2.62
            
            
            3.21
            
            
            2.60Efficiency
                ratio (3)
            
            
            69.93
            
            
            68.60
            
            
            68.56
            
            
            82.10
            
            
            77.60Average
                interest-earning assets toaverage
                interest-bearing liabilities
            
            
            107.40
            
            
            105.48
            
            
            106.54
            
            
            109.31
            
            
            106.31Average
                equity to average assets
            
            
            10.16
            
            
            9.16
            
            
            9.74
            
            
            10.56
            
            
            10.49Dividend
                payout ratio (4)
            
            
            29.86
            
            
            28.26
            
            
            43.37
            
            
            59.90
            
            
            100.20**Capital
                Ratios:**Tangible
                capital
            
            
            12.73
            
            
            8.99
            
            
            9.42
            
            
            10.32
            
            
            10.59Core
                capital
            
            
            12.73
            
            
            8.99
            
            
            9.42
            
            
            10.32
            
            
            10.59Tier
                1 risk-based capital
            
            
            17.12
            
            
            12.31
            
            
            12.64
            
            
            14.62
            
            
            16.99Total
                risk-based capital
            
            
            18.14
            
            
            13.32
            
            
            13.89
            
            
            15.59
            
            
            17.94**Asset
                Quality Ratios:**Allowance
                for loan losses as a percentof
                gross loans
            
            
            0.93
            
            
            0.93
            
            
            1.09
            
            
            0.80
            
            
            0.84Allowance
                for loan losses as a percentof
                non-performing loans
            
            
            50.80
            
            
            134.50
            
            
            55.38
            
            
            472.43
            
            
            230.44Net
                charge-offs to average outstandingloans
                during the period
            
            
            0.25
            
            
            0.40
            
            
            0.09
            
            
            (0.02
            )
            
            0.65Non-accrual
                and 90 days or more past dueloans
                as a percent of total loans, net
            
            
            2.11
            
            
            0.55
            
            
            0.45
            
            
            ―
            
            
            0.16Non-performing
                assets as a percent oftotal
                assets
            
            
            2.02
            
            
            1.20
            
            
            1.97
            
            
            0.15
            
            
            0.72







(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.




4




**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 the inability of 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.




***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.




5




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.




6


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, 2006, 2005 and 2004.





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 and the second new branch opened in Kansas City, Missouri
      in January 2006. 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.




7





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 $53.4 million,
      or 23.13% of total loans, at September 30, 2006. In addition, commercial
      business loans have increased from $2.7 million, or 2.04% of total loans, at
      September 30, 2001 to $11.3 million, or 4.89% of total loans, at September
      30,
      2006, and multi-family real estate loans have increased from $3.4 million,
      or
      2.56% of total loans, at September 30, 2001 to $10.4 million, or 4.52% of total
      loans, at September 30, 2006. The percentage of our total loan portfolio
      comprised of residential mortgage loans has decreased in recent years, amounting
      to 42.19%, 36.28%, 28.71%, 20.71%, and 18.48% at September 30, 2002, 2003,
      2004,
      2005 and 2006, respectively.




8





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, 2006, these loans totaled $99.8 million and represented 43.25%
      of
      total loans, compared to $80.0 million, or 42.01% of total loans, at September
      30, 2005. Through the implementation of our strategic plan, the size of our
      real
      estate construction loan portfolio rose $19.8 million over this period due
      primarily to the origination of two loans totaling $8.5 million for two separate
      retail development projects. During the year ended September 30, 2006, 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 $14.1 million, or 126.59%, from $11.1 million at September
      30, 2005 to $25.2 million at September 30, 2006. Development loans decreased
      by
      $716,000, or 2.90%, from $24.7 million at September 30, 2005 to $24.0 million
      at
      September 30, 2006. Single-family - custom construction loans increased by
      $2.3
      million, or 22.92%, from $10.0 million at September 30, 2005 to $12.3 million
      at
      September 30, 2006. Single-family - spec loans increased during the year ended
      September 30, 2006 to $37.8 million from $33.3 million at September 30, 2005.





Single-family
      residential loans totaled $42.6 million and represented 18.48% of total loans
      at
      September 30, 2006, compared to $39.4 million, or 20.71% of total loans, at
      September 30, 2005. The Bank has pursued the strategy of selling substantially
      all new, fixed-rate residential loans originated 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 $15.8 million, or 42.04%, to $53.4 million and
      represented 23.13% of total loans at September 30, 2006, compared to $37.6
      million, or 19.74% of total loans, at September 30, 2005. These increases were
      due to our strategic decision to emphasize lending on income property projects.
      Currently, the Bank offers a variety of commercial real estate products to
      owner
      occupants and investors. Our primary commercial real estate lending focus areas
      are retail, office and industrial uses.





Multi-family
      loans totaled $10.4 million and represented 4.52% of total loans at September
      30, 2006, compared to $15.6 million, or 8.20% of total loans, at September
      30,
      2005. The decrease was due to the maturity of two large loans.




9





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 $13.2 million and represented 5.73% of total loans at
      September 30, 2006, compared to $12.4 million, or 6.51% of total loans, at
      September 30, 2005. The slight increase in consumer loans was due primarily
      to
      an increase in home equity loans.





Commercial
      business loans increased from $5.4 million, or 2.83% of total loans at September
      30, 2005 to $11.3 million, or 4.89% of total loans at September 30, 2006. The
      increase was due primarily to the addition of two loans totaling over $3.2
      million.




10





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




**At
                September 30,****2006**
            
            **2005****Amount**
            
            **%**
            
            **Amount**
            
            **%****(Dollars
                in thousands)**Type
                of Loan:Real
                estate loans:Single-family
                1-4 units
            
            $
            42,623
            
            
            18.48
            %
            $
            39,435
            
            
            20.71
            %Multi-family
                5 or more units
            
            
            10,416
            
            
            4.52
            
            
            15,603
            
            
            8.20Real
                estate construction loans
            
            
            99,759
            
            
            43.25
            
            
            79,979
            
            
            42.01Commercial
                real estate loans
            
            
            53,360
            
            
            23.13
            
            
            37,568
            
            
            19.74Total
                real estate loans
            
            
            206,158
            
            
            89.38
            
            
            172,585
            
            
            90.66Consumer
                loans:Loans
                secured by deposit accounts
            
            
            211
            
            
            0.09
            
            
            128
            
            
            0.07Automobile
                loans
            
            
            608
            
            
            0.26
            
            
            867
            
            
            0.46Home
                equity loans
            
            
            11,662
            
            
            5.06
            
            
            10,266
            
            
            5.39Other
            
            
            738
            
            
            0.32
            
            
            1,129
            
            
            0.59Total
                consumer loans
            
            
            13,219
            
            
            5.73
            
            
            12,390
            
            
            6.51Commercial
                business loans
            
            
            11,270
            
            
            4.89
            
            
            5,397
            
            
            2.83Total
                gross loans
            
            
            230,647
            
            
            100.00
            %
            
            190,372
            
            
            100.00
            %Loans
                in process
            
            
            (27,962
            )
            
            
            
            
            (24,444
            )Deferred
                loan fees, net
            
            
            (314
            )
            
            
            
            
            (316
            )Unearned
                discounts, net
            
            
            (5
            )
            
            
            
            
            (7
            )Allowance
                for loan losses
            
            
            (2,144
            )
            
            
            
            
            (1,762
            )Total
            
            $
            200,222
            
            
            
            
            $
            163,843




**At
                September 30,****2004**
            
            
            **2003**
            
            
            **2002****Amount**
            
            
            **%**
            
            
            **Amount**
            
            
            **%**
            
            
            **Amount**
            
            
            **%****(Dollars
                in thousands)**Type
                of Loan:Real
                estate loans:Single-family
                1-4 units
            
            $
            53,098
            
            
            28.71
            %
            $
            59,123
            
            
            36.28
            %
            $
            53,378
            
            
            42.19
            %Multi-family
                5 or more units
            
            
            12,877
            
            
            6.96
            
            
            11,027
            
            
            6.77
            
            
            7,562
            
            
            5.98Real
                estate construction loans
            
            
            71,875
            
            
            38.86
            
            
            54,423
            
            
            33.40
            
            
            30,080
            
            
            23.78Commercial
                real estate loans
            
            
            30,294
            
            
            16.38
            
            
            23,671
            
            
            14.53
            
            
            22,175
            
            
            17.53Total
                real estate loans
            
            
            168,144
            
            
            90.91
            
            
            148,244
            
            
            90.98
            
            
            113,195
            
            
            89.48Consumer
                loans:Loans
                secured by depositaccounts
            
            
            167
            
            
            0.09
            
            
            166
            
            
            0.10
            
            
            171
            
            
            0.14Automobile
                loans
            
            
            1,097
            
            
            0.59
            
            
            1,316
            
            
            0.81
            
            
            1,642
            
            
            1.30Home
                equity loans
            
            
            9,764
            
            
            5.28
            
            
            8,126
            
            
            4.99
            
            
            6,586
            
            
            5.21Other
            
            
            1,037
            
            
            0.56
            
            
            638
            
            
            0.39
            
            
            859
            
            
            0.67Total
                consumer loans
            
            
            12,065
            
            
            6.52
            
            
            10,246
            
            
            6.29
            
            
            9,258
            
            
            7.32Commercial
                business loans
            
            
            4,754
            
            
            2.57
            
            
            4,457
            
            
            2.73
            
            
            4,049
            
            
            3.20Total
                gross loans
            
            
            184,963
            
            
            100.00
            %
            
            162,947
            
            
            100.00
            %
            
            126,502
            
            
            100.00
            %Loans
                in process
            
            
            (22,549
            )
            
            
            
            
            (19,066
            )
            
            
            
            
            (10,333
            )Deferred
                loan fees, net
            
            
            (368
            )
            
            
            
            
            (389
            )
            
            
            
            
            (327
            )Unearned
                discounts, net
            
            
            (182
            )
            
            
            
            
            (202
            )
            
            
            
            
            (198
            )Allowance
                for loan losses
            
            
            (2,024
            )
            
            
            
            
            (1,297
            )
            
            
            
            
            (1,067
            )Total
            
            $
            159,840
            
            
            
            
            $
            141,993
            
            
            
            
            $
            114,577





11


The
      following table sets forth certain information at September 30, 2006, 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****2007**
            
            **2008**
            
            **2009**
            
            **9/30/06**
            
            **9/30/06**
            
            **9/30/06**
            
            **9/30/06**
            
            **Total****(Dollars
                in thousands)**Single-family
                mortgage loans
            
            $
            1,034
            
            $
            1,117
            
            $
            1,205
            
            $
            2,706
            
            $
            8,885
            
            $
            13,019
            
            $
            14,657
            
            $
            42,623Multi-family
                mortgage loans
            
            
            253
            
            
            273
            
            
            295
            
            
            661
            
            
            2,171
            
            
            3,181
            
            
            3,582
            
            
            10,416Real
                estate construction loans
            
            
            99,759
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            99,759Commercial
                real estate loans
            
            
            1,254
            
            
            1,357
            
            
            1,469
            
            
            3,313
            
            
            10,991
            
            
            16,341
            
            
            18,635
            
            
            53,360Loans
                secured by deposit accounts
            
            
            211
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            211Other
                consumer loans
            
            
            2,888
            
            
            3,118
            
            
            3,367
            
            
            3,635
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            13,008Commercial
                business loans
            
            
            1,039
            
            
            1,128
            
            
            1,224
            
            
            2,770
            
            
            5,109
            
            
            3⁄4
            
            
            3⁄4
            
            
            11,270Total
                gross loans
            
            
            106,438
            
            
            6,993
            
            
            7,560
            
            
            13,085
            
            
            27,156
            
            
            32,541
            
            
            36,874
            
            
            230,647






The
      following table sets forth the dollar amount of all loans at September 30,
      2006,
      that are due after September 30, 2007 which have either fixed interest rates
      or
      adjustable interest rates.




**Fixed
                Rates**
            
            **Adjustable
                Rates**
            
            **Total****(Dollars
                in thousands)**Single-family
                mortgage loans
            
            $
            21,615
            
            $
            19,974
            
            $
            41,589Multi-family
                mortgage loans
            
            
            3,698
            
            
            6,465
            
            
            10,163Real
                estate construction loans
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4Commercial
                real estate loans
            
            
            41,103
            
            
            11,003
            
            
            52,106Loans
                secured by deposit accounts
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4Other
                consumer loans
            
            
            1,199
            
            
            8,921
            
            
            10,120Commercial
                business loans
            
            
            5,248
            
            
            4,983
            
            
            10,231Total
                gross loans
            
            
            72,863
            
            
            51,346
            
            
            124,209





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




**For
                the Years Ended September 30,****2006**
            
            **2005**
            
            **2004****(Dollars
                in thousands)**Total
                net loans at the beginning of year
            
            $
            163,843
            
            $
            159,840
            
            $
            141,993Loans
                originated for portfolio:Single
                and multi-family mortgage loans
            
            
            17,437
            
            
            12,378
            
            
            20,460Real
                estate construction loans
            
            
            74,792
            
            
            68,648
            
            
            71,997Commercial
                real estate loans
            
            
            33,167
            
            
            19,172
            
            
            18,559Commercial
                business loans
            
            
            9,179
            
            
            2,919
            
            
            2,178Loans
                secured by deposit accounts
            
            
            295
            
            
            197
            
            
            223Home
                equity loans
            
            
            4,277
            
            
            2,602
            
            
            6,207Automobile
                and other consumer loans
            
            
            1,028
            
            
            1,984
            
            
            1,641Total
                loans originated
            
            $
            140,175
            
            $
            107,900
            
            $
            121,265Deduct:Principal
                loan repayment and other, net
            
            
            103,326
            
            
            103,205
            
            
            103,261Loan
                charge-offs, net of recoveries
            
            
            470
            
            
            692
            
            
            157Total
                net loans at end of year
            
            $
            200,222
            
            $
            163,843
            
            $
            159,840Loans
                originated for sale
            
            $
            17,656
            
            $
            21,140
            
            $
            17,769Loans
                sold in secondary market
            
            $
            19,281
            
            $
            20,132
            
            $
            16,910




12




***Loans
      Held for Sale.*** Loans
      held for sale decreased $1.6 million to $459,000 at September 30, 2006 due
      to a
      slowdown in the housing industry.





***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 $22.3 million at
      September 30, 2005 to $35.9 million at September 30, 2006 due to purchases
      of
      short-term agencies and municipal securities, partially offset by maturities
      and
      calls. Mortgage-backed securities available for sale decreased from $27.2
      million at September 30, 2005 to $24.2 million at September 30, 2006 due to
      principal repayments, partially offset by additional purchases. During the
      quarter ended March 31, 2005, the Bank transferred all securities and
      mortgage-backed securities from held to maturity to available for sale. The
      decision to transfer is consistent with management’s current practice of
      classifying all investments purchased as available for sale.





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





**Years
                Ended September 30,****2006**
            
            **2005**
            
            **2004****(In
                thousands)**Mortgage-backed
                securities:Purchased
            
            $
            3,452
            
            $
            13,755
            
            $
            14,117Sold
            
            
            3⁄4
            
            
            1,874
            
            
            7,550





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,****2006**
            
            **2005**
            
            **2004****Amortized**
              **Cost**
            
            **Fair
                Value**
            
            **Amortized**
              **Cost**
            
            **Fair
                Value**
            
            **Amortized**
              **Cost**
            
            **Fair
                Value****(Dollars
                in thousands)**Securities
                available for sale:Federal
                agency obligations
            
            $
            29,711
            
            $
            29,543
            
            $
            16,577
            
            $
            16,450
            
            $
            11,162
            
            $
            11,170State
                and municipal obligations
            
            
            6,435
            
            
            6,340
            
            
            5,882
            
            
            5,864
            
            
            1,343
            
            
            1,348Mortgage-backed
                securities
            
            
            24,863
            
            
            24,217
            
            
            27,583
            
            
            27,189
            
            
            22,533
            
            
            22,473Total
                securities available for sale
            
            $
            61,009
            
            $
            60,100
            
            $
            50,042
            
            $
            49,503
            
            $
            35,038
            
            $
            34,991Securities
                held to maturity:Federal
                agency obligations
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            $
            554
            
            $
            561State
                and municipal obligations
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            202
            
            
            219Mortgage-backed
                securities
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            635
            
            
            651Total
                securities held to maturity
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            $
            1,391
            
            $
            1,431Weighted-average
                rate on securities(1)
            
            
            4.44
            %
            
            
            
            
            3.94
            %
            
            
            
            
            4.10
            %Weighted-average
                rate on mortgage-
              backed
                securities
            
            
            4.29
            %
            
            
            
            
            4.16
            %
            
            
            
            
            4.10
            %





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





At
      September 30, 2006, 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.




13




The
      following table sets forth the maturities and weighted-average yields of
      securities at September 30, 2006. 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-AverageYield**
              
              
              **Carrying
                  Value**
              
              **Weighted-AverageYield**
              
              
              **Carrying
                  Value**
              
              **Weighted-**
                **Average**
                **Yield**
              
              
              **Carrying
                  Value**
              
              **Weighted-AverageYield**
              
              
              **Carrying
                  Value**
              
              **Weighted-****Average****Yield****(Dollars
                  in thousands)**Securities
                  available-for sale:State
                  and municipal obligations
              
              $
              3⁄4
              
              
              3⁄4
              %
              
              $
              522
              
              
              3.89
              %
              
              $
              3,446
              
              
              4.33
              %
              
              $
              2,372
              
              
              4.58
              %
              
              $
              6,340
              
              
              4.39
              %Federal
                  agency obligations
              
              
              5,112
              
              
              3.35
              
              
              
              21,439
              
              
              4.54
              
              
              
              2,992
              
              
              5.74
              
              
              
              3⁄4
              
              
              3⁄4
              
              
              
              29,543
              
              
              4.45Mortgage-backed
                  securities
              
              
              251
              
              
              4.50
              
              
              
              11,767
              
              
              4.24
              
              
              
              2,528
              
              
              4.69
              
              
              
              8,738
              
              
              4.31
              
              
              
              23,284
              
              
              4.32Collateralized
                  mortgage obligations
              
              
              3⁄4
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              3⁄4
              
              
              
              933
              
              
              3.44
              
              
              
              933
              
              
              3.44Total
                  securities available for sale
              
              $
              5,363
              
              
              3.40
              
              
              $
              33,728
              
              
              4.42
              
              
              $
              8,966
              
              
              4.90
              
              
              $
              12,043
              
              
              4.30
              
              
              $
              60,100
              
              
              4.38




***Premises
      and Equipment.*** Premises
      and equipment, net, increased from $5.9 million at September 30, 2005 to $6.7
      million at September 30, 2006 due to the opening of a new branch in Kansas
      City,
      Missouri in January 2006.





***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. We have not used
      brokered deposits as a source of funding in recent years. Deposits increased
      $16.9 million, or 9.28%, to $198.5 million at September 30, 2006 from $181.6
      million at September 30, 2005. The increase in deposits for the year ended
      September 30, 2006 consisted of an increase in certificate of deposit accounts
      less than twelve months attracted primarily through special promotions and
      to a
      lesser extent, an increase in interest-bearing checking accounts, partially
      offset by a decrease in money market accounts and certificate of deposit
      accounts greater than twelve months.





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





**Years
                Ended September 30,****2006**
            
            
            **2005**
            
            
            **2004****Average**
              **Balance**
            
            **Average**
              **Rate**
            
            
            **Average**
              **Balance**
            
            **Average**
              **Rate**
            
            
            **Average**
              **Balance**
            
            **Average**
              **Rate****(Dollars
                in thousands)**Noninterest-bearing
                NOW accounts
            
            $
            11,633
            
            
            —
            
            
            $
            9,933
            
            
            —
            
            
            $
            8,823
            
            
            —Interest-bearing
                NOW accounts
            
            
            25,224
            
            
            1.83
            %
            
            
            18,146
            
            
            1.15
            %
            
            
            15,674
            
            
            0.69
            %Money
                market accounts
            
            
            21,290
            
            
            2.38
            
            
            
            25,315
            
            
            1.77
            
            
            
            24,573
            
            
            0.92Statement
                accounts
            
            
            9,059
            
            
            0.34
            
            
            
            9,024
            
            
            0.31
            
            
            
            8,547
            
            
            0.35Certificates
                of deposit
            
            
            126,275
            
            
            3.97
            
            
            
            106,218
            
            
            3.10
            
            
            
            90,219
            
            
            2.84Total
            
            $
            193,481
            
            
            3.10
            %
            
            $
            168,636
            
            
            2.36
            %
            
            $
            147,836
            
            
            1.98
            %




14





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


**At
                  September 30,****2006**
              
              **2005**
              
              **2004****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**Noninterest-bearingNOW
                  accounts
              
              $
              11,896
              
              
              6.0
              %
              $
              11,590
              
              
              6.4
              %
              $
              9,061
              
              
              5.9
              %Interest-bearing
                  NOW accounts
              
              
              25,234
              
              
              12.7
              
              
              22,020
              
              
              12.1
              
              
              14,427
              
              
              9.4Money
                  market accounts
              
              
              13,617
              
              
              6.9
              
              
              26,237
              
              
              14.4
              
              
              23,310
              
              
              15.3Statement
                  accounts
              
              
              7,702
              
              
              3.9
              
              
              8,880
              
              
              4.9
              
              
              8,990
              
              
              5.9Certificates
                  of deposit
              
              
              140,022
              
              
              70.5
              
              
              112,890
              
              
              62.2
              
              
              97,141
              
              
              63.5Total
              
              $
              198,471
              
              
              100.0
              %
              $
              181,617
              
              
              100.0
              %
              $
              152,929
              
              
              100.0
              %








The
      following table indicates the amount of jumbo certificates of deposit by time
      remaining until maturity as of September 30, 2006. Jumbo certificates of deposit
      require minimum deposits of $100,000.





**Maturity
                Period**
            
            **Certificates
                of Deposit****(In
                thousands)**Three
                months or less
            
            $
            17,151Over
                three through six months
            
            
            6,852Over
                six through 12 months
            
            
            9,460Over
                12 months
            
            
            3,788Total
            
            $
            37,251





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





**At
                September 30,****2006**
            
            **2005**
            
            **2004**0.00
                - 0.99%
            
            $
            —
            
            $
            47
            
            $
            781.00
                - 1.99
            
            
            5
            
            
            653
            
            
            31,4312.00
                - 2.99
            
            
            2,254
            
            
            27,956
            
            
            36,7173.00
                - 3.99
            
            
            33,373
            
            
            61,079
            
            
            10,5284.00
                - 4.99
            
            
            44,344
            
            
            20,224
            
            
            10,1865.00
                - 5.99
            
            
            60,046
            
            
            2,542
            
            
            4,0186.00
                - 6.99
            
            
            —
            
            
            389
            
            
            3,2597.00
                - 7.99
            
            
            —
            
            
            —
            
            
            924$
            140,022
            
            $
            112,890
            
            $
            97,141








The
      following table sets forth the amount and maturities of time deposits at
      September 30, 2006.


**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)**1.00
                  - 1.99%
              
              $
              5
              
              $
              3⁄4
              
              $
              3⁄4
              
              $
              3⁄4
              
              $
              3⁄4
              
              $
              5
              
              
              —
              %2.00
                  - 2.99
              
              
              1,940
              
              
              314
              
              
              
              
              
              
              
              
              
              
              
              2,254
              
              
              1.63.00
                  - 3.99
              
              
              24,230
              
              
              5,464
              
              
              2,562
              
              
              1,066
              
              
              51
              
              
              33,373
              
              
              23.84.00
                  - 4.99
              
              
              35,920
              
              
              3,170
              
              
              2,137
              
              
              2,327
              
              
              790
              
              
              44,344
              
              
              31.75.00
                  - 5.99
              
              
              56,111
              
              
              1,779
              
              
              1,127
              
              
              68
              
              
              961
              
              
              60,046
              
              
              42.9$
              118,206
              
              $
              10,727
              
              $
              5,826
              
              $
              3,461
              
              $
              1,802
              
              $
              140,022
              
              
              100.0
              %




15




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





**Years
                Ended September 30,****2006**
            
            **2005**
            
            **2004****(In
                thousands)**Net
                deposits (withdrawals) before interest credited
            
            $
            11,629
            
            $
            25,459
            
            $
            14,192Interest
                credited
            
            
            5,225
            
            
            3,229
            
            
            2,398Net
                increase (decrease) in deposits
            
            $
            16,854
            
            $
            28,688
            
            $
            16,590





***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,****2006**
            
            **2005**
            
            **2004****(Dollars
                in thousands)**Outstanding
                advances from Federal Home Loan Bank
            
            $
            23,833
            
            $
            9,633
            
            $
            9,633Weighted-average
                rate paid on advances from Federal Home Loan Bank
            
            
            4.19
            %
            
            3.17
            %
            
            1.83
            %Outstanding
                securities sold under agreement to repurchase
            
            $
            3,384
            
            $
            1,157
            
            $
            213Weighted-average
                rate paid on securities sold under agreementto
                repurchase
            
            
            3.44
            %
            
            2.05
            %
            
            1.20
            %




**Years
                Ended September 30,****2006**
            
            **2005**
            
            **2004****(Dollars
                in thousands)**Maximum
                outstanding advances from Federal Home Loan Bank atany
                month end
            
            $
            35,633
            
            $
            17,133
            
            $
            13,133Weighted-average
                rate paid on advances from Federal HomeLoan
                Bank (1)
            
            
            3.97
            %
            
            2.44
            %
            
            1.93
            %Average
                advances from Federal Home Loan Bank outstanding
            
            $
            22,167
            
            $
            10,967
            
            $
            8,392Maximum
                outstanding securities sold under agreement torepurchase
                at any month end
            
            $
            4,400
            
            $
            1,798
            
            $
            1,047Weighted-average
                rate paid on securities sold under agreement torepurchase
                (2)
            
            
            3.18
            %
            
            1.76
            %
            
            1.20
            %Average
                securities sold under agreement to repurchase
            
            $
            2,224
            
            $
            1,073
            
            $
            396





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


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





Federal
      Home Loan Bank of Des Moines borrowings increased $3.6 million, or 11.7%, to
      $34.1 million at September 30, 2006 from $30.5 million at September 30, 2005.
      The advances outstanding as of September 30, 2006 mature in 2006 through 2012.





Securities
      sold under agreements to repurchase increased by $1.7 million for the year
      ended
      September 30, 2006 due to higher balances from existing customers. The ESOP
      note
      payable decreased from $379,000 at September 30, 2005 to a zero balance at
      September 30, 2006 due to the refinancing of the ESOP debt by the Company.
      Accrued interest on deposits increased due to higher certificate balance 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.


16


**Results
      of Operations for the Years Ended September 30, 2006, 2005 and
      2004**





***Overview.***


**Years
                  Ended September 30,**
              
              **%
                  Change**
              
              **%
                  Change****2006**
              
              **2005**
              
              **2004**
              
              **2006/2005**
              
              **2005/2004****(Dollars
                  in thousands)**Net
                  earnings
              
              $
              1,463
              
              $
              1,505
              
              $
              963
              
              
              (2.8
              )%
              
              56.2
              %Return
                  on assets (1)
              
              
              0.56
              %
              
              0.67
              %
              
              0.47
              %
              
              (16.4
              )
              
              42.6Return
                  on average stockholders’ equity (2)
              
              
              5.47
              
              
              7.28
              
              
              4.81
              
              
              (24.9
              )
              
              51.3Stockholders’
                  equity-to-assets ratio (3)
              
              
              10.16
              
              
              9.16
              
              
              9.74
              
              
              10.9
              
              
              (6.0
              )Dividend
                  payout ratio (4)
              
              
              29.86
              
              
              28.26
              
              
              43.37
              
              
              5.7
              
              
              (34.8
              )







(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.




*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 the $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.





*2005
      vs. 2004.* Net
      earnings increased $542,000, or 56.2%, for the year ended September 30, 2005
      compared to the year ended September 30, 2004. The increase in net income was
      due primarily to the $2.2 million or 21.0% increase in interest income,
      partially offset by a $1.1 million or 28.4% increase in interest expense, and
      a
      $798,000 or 15.2% increase in noninterest expense. Net interest income increased
      primarily as a result of a higher interest rate spread and an increase in loans
      receivable. Noninterest income in 2005 was positively affected by a higher
      amount of deposit account service charges and loan service charges, partially
      offset by a decrease in gains on sale of loans and gains on sale of
      mortgage-backed securities. Noninterest expense increased as a result of
      increased expenses attributable to new branches.





***Net
      Earnings.***





*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.





*2005
      vs. 2004.* Net
      earnings increased by $542,000 from $963,000 for 2004 to $1.5 million for 2005.
      The increase was due to higher net interest income and noninterest
      income , and
      lower
      provisions for loan losses; which more than offset higher noninterest expense
      and income taxes.




17





***Net
      Interest Income.***





*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.





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 certificate 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.





*2005
      vs. 2004.* Net
      interest income increased by $1.1 million, or 16.4%, from $6.6 million for
      2004
      to $7.7 million for 2005 as a result of a higher interest rate spread and an
      increase in loans receivable. Our interest rate spread increased from 3.22%
      for
      2004 to 3.41% for 2005 as a result of management’s efforts to increase
      noninterest bearing transaction accounts and attracting more construction and
      commercial real estate loans that carry higher rates than traditional
      single-family mortgage loans.





Interest
      on loans receivable increased as a result of a higher average balance and yield.
      The weighted-average yield on loans increased from 6.06% for 2004 to 6.57%
      for
      2005.





Interest
      on mortgage-backed securities increased due to a higher yield, reflecting higher
      market interest rates, partially offset by a lower 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
      balance and substantially greater weighted-average yield.





Interest
      on deposits increased as a result of a higher weighted-average balance and
      rate.
      During 2005, the Bank attracted transaction accounts through increased marketing
      expenditures. Balances on long-term certificate accounts increased through
      the
      offering of certificate account specials.





Interest
      on advances from the Federal Home Loan Bank of Des Moines increased due to
      a
      slightly higher average balance and rate.





18




***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 periods 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. Loan fees are included in interest income on loans and are
      insignificant. No tax equivalent adjustments were made. Nonaccruing loans have
      been included in the table as loans carrying a zero yield.




**Years
                  Ended September 30,****2006**
              
              **2005**
              
              **2004****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
              
              $
              187,818
              
              $
              14,253
              
              
              7.59
              %
              $
              172,869
              
              $
              11,354
              
              
              6.57
              %
              $
              155,604
              
              $
              9,435
              
              
              6.06
              %Mortgage-backed
                  securities
              
              
              25,216
              
              
              995
              
              
              3.95
              
              
              21,656
              
              
              808
              
              
              3.73
              
              
              22,772
              
              
              755
              
              
              3.31Securities
              
              
              29,117
              
              
              1,170
              
              
              4.02
              
              
              14,371
              
              
              463
              
              
              3.22
              
              
              11,926
              
              
              353
              
              
              2.96Other
                  interest-earning assets
              
              
              5,768
              
              
              246
              
              
              4.27
              
              
              6,942
              
              
              191
              
              
              2.75
              
              
              4,393
              
              
              52
              
              
              1.18Total
                  interest-earning assets
              
              
              247,919
              
              
              16,664
              
              
              6.72
              
              
              215,838
              
              
              12,816
              
              
              5.94
              
              
              194,695
              
              
              10,595
              
              
              5.43Interest-bearing
                  liabilities:Deposits
              
              
              193,481
              
              
              6,007
              
              
              3.10
              
              
              168,636
              
              
              3,979
              
              
              2.36
              
              
              147,836
              
              
              2,925
              
              
              1.98Federal
                  Home Loan Bank advances
              
              
              34,807
              
              
              1,497
              
              
              4.30
              
              
              34,525
              
              
              1,142
              
              
              3.31
              
              
              33,612
              
              
              1,065
              
              
              3.17Securities
                  sold under agreementto
                  repurchase
              
              
              2,224
              
              
              71
              
              
              3.18
              
              
              1,058
              
              
              30
              
              
              2.81
              
              
              837
              
              
              22
              
              
              2.57ESOP
                  note payable
              
              
              327
              
              
              25
              
              
              7.66
              
              
              415
              
              
              25
              
              
              5.93
              
              
              466
              
              
              19
              
              
              4.17Total
                  interest-bearing liabilities
              
              $
              230,839
              
              
              7,600
              
              
              3.29
              
              $
              204,634
              
              
              5,176
              
              
              2.53
              
              $
              182,751
              
              
              4,031
              
              
              2.21Net
                  interest income before provision for loanlosses
              
              
              
              
              $
              9,064
              
              
              
              
              
              
              
              $
              7,640
              
              
              
              
              
              
              
              $
              6,564Net
                  earning assets
              
              $
              17,080
              
              
              
              
              
              
              
              $
              11,204
              
              
              
              
              
              
              
              $
              11,944Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.43
              %
              
              
              
              
              
              
              
              3.41
              %
              
              
              
              
              
              
              
              3.22
              %Net
                  yield on average interest-earning assets
              
              
              
              
              
              
              
              
              3.66
              %
              
              
              
              
              
              
              
              3.54
              %
              
              
              
              
              
              
              
              3.37
              %Ratio
                  of average interest-earning assets toaverage
                  interest-bearing liabilities
              
              
              107.40
              %
              
              
              
              
              
              
              
              105.48
              %
              
              
              
              
              
              
              
              106.54
              %






19




***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,**
              **2006
                vs. 2005**
            
            **Year
                Ended September 30,**
              **2005
                vs. 2004****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
            
            $
            982
            
            $
            1,764
            
            $
            153
            
            $
            2,899
            
            $
            1,039
            
            $
            791
            
            $
            89
            
            $
            1,919Mortgage-backed
                securities
            
            
            132
            
            
            47
            
            
            8
            
            
            187
            
            
            (36
            )
            
            94
            
            
            (5
            )
            
            53Securities
            
            
            474
            
            
            115
            
            
            118
            
            
            707
            
            
            73
            
            
            31
            
            
            6
            
            
            110Other
                interest-earning assets
            
            
            (32
            )
            
            105
            
            
            (18
            )
            
            55
            
            
            30
            
            
            69
            
            
            40
            
            
            139Total
                interest-earning assets
            
            $
            1,556
            
            $
            2,031
            
            $
            261
            
            $
            3,848
            
            $
            1,106
            
            $
            985
            
            $
            130
            
            $
            2,221Interest
                expense:Deposits
            
            
            586
            
            
            1,258
            
            
            184
            
            
            2,028
            
            
            412
            
            
            563
            
            
            79
            
            
            1,054Federal
                Home Loan Bank advances
            
            
            9
            
            
            342
            
            
            4
            
            
            355
            
            
            29
            
            
            47
            
            
            1
            
            
            77Securities
                sold under agreement torepurchase
            
            
            33
            
            
            4
            
            
            4
            
            
            41
            
            
            6
            
            
            1
            
            
            1
            
            
            8ESOP
                note payable
            
            
            (5
            )
            
            7
            
            
            (2
            )
            
            —
            
            
            (2
            )
            
            9
            
            
            (1
            )
            
            6Total
                interest-bearing liabilities
            
            
            623
            
            
            1,611
            
            
            190
            
            
            2,424
            
            
            445
            
            
            620
            
            
            80
            
            
            1,145Change
                in net interest income
            
            $
            933
            
            $
            420
            
            $
            71
            
            $
            1,424
            
            $
            661
            
            $
            365
            
            $
            50
            
            $
            1,076





***Provision
      for Loan Losses.***





*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 all
      non-construction single-family properties totaled 18.5% of total loans and
      9.3%
      of the provision for loan losses was allocated to these loans. All other loans
      totaled 81.5% of the portfolio and 90.7% of the provision for loan
      losses.





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.





*2005
      vs. 2004.* Provision
      for loan losses decreased from $885,000 for 2004 to $430,000 for 2005. At
      September 30, 2005, the allowance for loan losses was $1.8 million, or 0.9%
      of
      the gross loan portfolio, compared to $2.0 million or 1.1% of the loan portfolio
      at September 30, 2004. At September 30, 2005, loans secured by all
      non-construction single-family properties totaled 20.7% of total loans and
      15.2%
      of the allowance for loan losses was allocated to these loans. All other loans
      totaled 79.3% of the portfolio and 84.8% of the allowance for loan losses.





20




During
      the year ended September 30, 2004, we recorded a provision for loan losses
      of
      $885,000. Of this amount, $640,000 was related to certain identified loans
      totaling $2.9 million and secured by single-family investment properties. For
      further information regarding these impaired loans, see “ *—Risk
      Management—Analysis of Non-Performing and Classified Assets* .”
During
      the year ended September 30, 2005, our provision for loan losses decreased
      by
      $455,000, or 51.4%, to $430,000.





Non-accrual
      loans amounted to $907,000 and $723,000 at September 30, 2005 and 2004,
      respectively. Net loan charge-offs amounted to $692,000 during 2005 compared
      to
      $157,000 during 2004. Net loan charge-offs were higher during 2005 as a result
      of the write down and liquidation of certain loans secured by single-family
      investment properties.





***Noninterest
      Income.*** ** The
      following table shows the components of noninterest income and the percentage
      changes for the years ended September 30, 2006 and 2005 and for the years ended
      September 30, 2005 and 2004.


**Years
                    Ended September 30,**
              
              **%
                  Change**
              
              **%
                  Change****2006**
              
              **2005**
              
              **2004**
              
              **2006/2005**
              
              **2005/2004****(Dollars
                  in thousands)**Loan
                  service charges
              
              $
              69
              
              $
              53
              
              $
              36
              
              
              29.0
              %
              
              48.0
              %Gain
                  on sale of mortgage-backed securitiesavailable
                  for sale
              
              
              —
              
              
              10
              
              
              40
              
              
              (100.0
              )
              
              (75.7
              )Gain
                  on sale of loans
              
              
              203
              
              
              194
              
              
              217
              
              
              4.7
              
              
              (10.5
              )Deposit
                  account service charges
              
              
              965
              
              
              943
              
              
              825
              
              
              2.4
              
              
              14.3Total
              
              $
              1,237
              
              $
              1,200
              
              $
              1,118
              
              
              3.1
              
              
              7.3
              %





*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. Gains on sales of available-for-sale securities and
      mortgage-backed securities are not stable sources of income and there is no
      assurance that we will generate such gains in the future.





*2005
      vs. 2004.* Noninterest
      income increased by $82,000 from $1.1 million for 2004 to $1.2 million for
      2005
      due to a higher amount of deposit account service charges and loan service
      charges, partially offset by a decrease in gains on sale of loans and gains
      on
      sale of mortgage-backed securities. Deposit account service charges increased
      by
      $118,000 during 2005 due to our strategy to increase checking accounts and
      related fee income generated on checking account overdrafts.





The
      Bank
      recognized gains on sale of loans of $194,000 and $217,000 for the years ended
      September 30, 2005 and 2004, respectively. During 2005 and 2004, we sold loans
      to secondary market investors totaling $20.1 million and $16.9 million,
      respectively.


21


***Noninterest
      Expense.*** The
      following table shows the components of noninterest expense and the percentage
      changes for the years ended September 30, 2006 and 2005 and September 30, 2005
      and 2004.


**Years
                  Ended September 30,**
              
              **%
                  Change**
              
              **%
                  Change****2006**
              
              **2005**
              
              **2004**
              
              **2006/2005**
              
              **2005/2004****(Dollars
                  in thousands)**Compensation
                  and benefits
              
              $
              3,975
              
              $
              3,302
              
              $
              2,945
              
              
              20.4
              %
              
              12.1
              %Occupancy
                  expense
              
              
              508
              
              
              433
              
              
              293
              
              
              17.4
              
              
              47.9Equipment
                  and data processing expense
              
              
              740
              
              
              770
              
              
              749
              
              
              (4.0
              )
              
              2.9Operations
                  from foreclosed real estate, net
              
              
              139
              
              
              (22
              )
              
              (29
              )
              
              736.4
              
              
              (23.5
              )Federal
                  deposit insurance premiums
              
              
              24
              
              
              23
              
              
              21
              
              
              5.6
              
              
              6.1Professional
                  and regulatory services
              
              
              347
              
              
              305
              
              
              331
              
              
              13.6
              
              
              (7.7
              )Advertising
              
              
              414
              
              
              315
              
              
              201
              
              
              31.6
              
              
              56.3Correspondent
                  banking charges
              
              
              260
              
              
              216
              
              
              201
              
              
              20.7
              
              
              7.1Supplies
              
              
              182
              
              
              141
              
              
              102
              
              
              29.7
              
              
              38.3Other
              
              
              614
              
              
              582
              
              
              453
              
              
              5.4
              
              
              28.7Total
                  noninterest expense
              
              $
              7,203
              
              $
              6,065
              
              $
              5,267
              
              
              18.8
              %
              
              15.2
              %Efficiency
                  ratio (1)
              
              
              69.9
              %
              
              68.6
              %
              
              68.6
              %




(1)  Computed
      as noninterest expense divided by the sum of net interest income and noninterest
      income.





*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.





*2005
      vs. 2004.* Noninterest
      expense increased from $5.3 million for 2004 to $6.1 million for 2005.
      Compensation and benefit expense increased due to the hiring of additional
      staff
      for a new branch in Independence, Missouri and salary increases, partially
      offset by a higher deferral of loan origination salary costs. Our occupancy
      expense increased primarily due to the lease of land for a future branch in
      Kansas City, Missouri, and to a lesser extent, the opening of a new branch
      in
      Independence, Missouri. Advertising expense increased due to a greater marketing
      emphasis and the opening of our Independence branch. Supplies increased due
      to
      higher volume of transactions and regulatory changes to disclosure documents.
      Other noninterest expense increased from $453,000 for 2004 to $582,000 for
      2005
      due primarily to higher expenses on telephones, charitable contributions and
      insurance. There was no significant change in equipment and data processing
      expenses, professional and regulatory services and correspondent banking
      expenses.





***Income
      Taxes.***





*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.




22




*2005
      vs. 2004.* Income
      tax expense for the year ended September 30, 2005 was $841,000 compared to
      $567,000 for the year ended September 30, 2004. Income taxes increased due
      to
      higher pre-tax earnings. The effective tax rate for 2005 was 35.9% compared
      to
      37.1% for 2004.





***Stockholders’
      Equity.***





*2006
      vs. 2005.* Stockholders’
      equity increased by $27.9 million from $21.2 million at September 30, 2005
      to
      $49.0 million at September 30, 2006. This increase was primarily due to the
      infusion of capital from the proceeds of the stock conversion in July
      2006.





**Risk
      Management**





***Overview.*** Managing
      risk is an essential part of successfully managing a financial institution.
      Our
      most prominent risk exposures are credit risk, interest rate risk and market
      risk. Credit risk is the risk of not collecting the interest and/or the
      principal balance of a loan or investment when it is due. Interest rate risk
      is
      the potential reduction of net interest income as a result of changes in
      interest rates. Market risk arises from fluctuations in interest rates that
      may
      result in changes in the values of financial instruments, such as available
      for
      sale securities, that are accounted for on a mark-to-market basis. Other risks
      that we face are operational risks, liquidity risks and reputation risk.
      Operational risks include risks related to fraud, regulatory compliance,
      processing errors, technology and disaster recovery. Liquidity risk is the
      possible inability to fund obligations to depositors, lenders or borrowers.
      Reputation risk is the risk that negative publicity or press, whether true
      or
      not, could cause a decline in our customer base or revenue.





***Credit
      Risk Management.*** Our
      strategy for credit risk management focuses on having well-defined credit
      policies and uniform underwriting criteria and providing prompt attention to
      potential problem loans.





When
      a
      borrower fails to make a required loan payment, we take a number of steps to
      attempt to have the borrower cure the delinquency and restore the loan to
      current status. When the loan becomes 15 days past due, a 5% penalty is
      assessed, and a written notification of the late payment is sent. If payment
      is
      not received by the 30th day of delinquency, the borrower is contacted by
      telephone, payment is requested and efforts are made to formulate an affirmative
      plan to cure the delinquency. After a loan becomes past due 60 days, we
      generally provide a final notice that we will initiate legal proceedings in
      30
      days, after which foreclosure procedures commence to obtain the real property
      securing the loan. Generally, when a loan becomes 90 days past due, the loan
      is
      placed on non-accrual status. We may consider loan workout arrangements with
      certain borrowers under certain circumstances.





Management
      reports to the Board of Directors monthly regarding the amount of loans
      delinquent more than 30 days, all loans in foreclosure and all foreclosed and
      repossessed property that we own.





Real
      estate acquired by the Bank as a result of foreclosure is classified as
      foreclosed real estate owned 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.




23




***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.





The
      following table sets forth information with respect to our nonperforming assets
      at the dates indicated.





**At
                September 30,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(Dollars
                in thousands)**Loans
                accounted for on a non-accrual basis: (1)Single
                and multi-family loans
            
            $
            828
            
            $
            351
            
            $
            723
            
            $
            ―
            
            $
            22Real
                estate construction loans
            
            
            304
            
            
            556
            
            
            ―
            
            
            ―
            
            
            ―Commercial
                non-real estate
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            141Consumer
            
            
            349
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            19Total
                non-accrual loans
            
            
            1,481
            
            
            907
            
            
            723
            
            
            ―
            
            
            182Accruing
                loans which are contractually pastdue
                90 days or more - single-family loans (1)
            
            
            58
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            ―Total
                non-accrual and 90 days or more pastdue
                loans
            
            
            1,539
            
            
            907
            
            
            723
            
            
            ―
            
            
            182Other
                impaired loans - single family 1-4 units,investment
                property
            
            
            ―
            
            
            403
            
            
            2,933
            
            
            ―
            
            
            ―Other
                impaired loans - single family, spec
            
            
            2,682
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            ―Troubled
                debt restructuring (2)
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            274
            
            
            281Foreclosed
                real estate held for sale
            
            
            1,580
            
            
            1,530
            
            
            547
            
            
            **―**
            
            
            857Total
                nonperforming assets
            
            
            5,801
            
            
            2,840
            
            
            4,203
            
            
            274
            
            $
            1,320Allowance
                for losses on impaired loans
            
            
            258
            
            
            199
            
            $
            655
            
            $
            ―
            
            $
            20Impaired
                loans with no related allowancefor
                loan losses
            
            $
            58
            
            $
            116
            
            $
            ―
            
            $
            ―
            
            $
            3⁄4Non-accrual
                and 90 days or more past due loansas
                a percentage of total loans, net
            
            
            2.11
            %
            
            0.55
            %
            
            0.45
            %
            
            **―**
            **%**
            
            0.16
            %Non-accrual
                and 90 days or more past due loansas
                a percentage of total assets
            
            
            1.47
            %
            
            0.38
            %
            
            0.34
            %
            
            **―**
            **%**
            
            0.10
            %Nonperforming
                assets as a percentage oftotal
                assets
            
            
            2.02
            %
            
            1.20
            %
            
            1.97
            %
            
            0.15
            %
            
            0.72
            %







(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 $5.8 million, or 2.02% of total assets, at September 30, 2006,
      which was an increase of $3.0 million or 9.84%, from $2.8 million, or 1.20%
      of
      total assets, at September 30, 2005. Non-performing assets at September 30,
      2006
      consisted of $1.5 million in non-accrual loans, $2.7 million in other impaired
      loans, $1.6 million in foreclosed real estate and a $58,000 accruing loan past
      due 90 days or more. At September 30, 2006, non-accrual loans consisted of
      $828,000 in single-family and multi-family loans, $304,000 in real estate
      construction loans and $349,000 in consumer loans. Other impaired loans totaling
      $2.7 million at September 30, 2006 were secured by 15 single family spec homes,
      in various states of completion and two lots. In November 2006 after principal
      repayments on these loans, 16 remaining properties totaling $2.3 million were
      foreclosed.





24




During
      the year ended September 30, 2004, $640,000 of our provision for loan losses
      was
      related to certain identified loans totaling $2.9 million and secured by
      single-family investment properties. We discovered irregularities in these
      loans
      that suggested the collateral may not have been sufficient to properly secure
      the amount owed. The loans involved six different borrowers where we loaned
      funds for the purchase of single-family investment properties. Five of the
      borrowers purchased the collateral properties from a common seller. These loans
      were impaired loans at September 30, 2004. In 2005, the Bank received payoffs
      at
      an average discount of 4.9% for $1.1 million of the impaired loans and acquired
      through foreclosure an additional $1.5 million of the original loans totaling
      $2.9 million in loans. Of the $1.5 million in impaired loans foreclosed in
      2005,
      $1.3 million have been sold through September 30, 2006. At September 30, 2006,
      we had $157,000 in foreclosed real estate attributable to these loans.





At
      September 30, 2006, we had loans totaling $545,000 which were not currently
      classified as non-accrual, 90 days past due, restructured or impaired but where
      known information about possible credit problems of borrowers caused management
      to have serious concerns as to the ability of the borrowers to comply with
      present loan repayment terms and would result in disclosure as non-accrual,
      90
      days past due, restructured or impaired. At September 30, 2006, these loans
      consisted of two spec single-family construction loans and one loan secured
      by
      three single-family rental properties.


Interest
        income that would have been recorded for the year ended September 30, 2006
        had
        non-performing loans been current according to their original terms amounted
        to
        $108,139. We recognized interest income of $72,433 on such loans during the
        year
        ended September 30, 2006.


Foreclosed
      real estate owned by the Bank at September 30, 2006 totaled $1.6 million
      compared to $1.5 million at September 30, 2005. Foreclosed real estate at
      September 30, 2006 included six 1-4 family properties, five single-family rental
      properties and two lots.





***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.


25


The
      following table shows the aggregate amounts of our classified assets at the
      dates indicated.





**At
                September 30,****2006**
            
            **2005**
            
            **2004****(In
                thousands)**Special
                mention assets
            
            $
            2,986
            
            $
            1,729
            
            $
            3,855Substandard
                assets (1)
            
            
            3,149
            
            
            2,854
            
            
            3,451Doubtful
                assets
            
            
            196
            
            
            ―
            
            
            ―Loss
                assets
            
            
            ―
            
            
            ―
            
            
            ―Total
                classified assets
            
            $
            6,331
            
            $
            4,583
            
            $
            7,306


(1) Includes
        foreclosed real estate of $1,579,848, $1,529,586 and $547,453 at September
        30,
        2006, 2005 and 2004, respectively.





The
      increase in our substandard assets at September 30, 2006 compared to September
      30, 2005 was due to the classification of several loans with higher principal
      balances. Substandard assets increased from $2.9 million at
      September 30, 2005 to $3.1 million at September 30, 2006. Our
      substandard loans at September 30, 2006 consisted primarily of nine **** loans
      to
      six individuals totaling $1.6 million secured by one-to-four family, spec homes,
      and commercial real estate.





Special
      mention assets at September 30, 2006 consisted of 19 **** loans
      totaling $3.0 million to two borrowers secured by spec homes.





***Delinquencies.*** The
      following table provides information about delinquencies in our loan portfolio
      at the dates indicated.


**At
                  September 30,****2006**
              
              **2005**
              
              **2004****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
              
              $
              1,533
              
              $
              746
              
              $
              ―
              
              $
              559
              
              $
              233
              
              $
              365Construction
                  loans
              
              
              635
              
              
              323
              
              
              ―
              
              
              345
              
              
              ―
              
              
              ―Commercial
                  loans
              
              
              3⁄4
              
              
              3⁄4
              
              
              ―
              
              
              ―
              
              
              152
              
              
              ―Consumer
                  loans
              
              
              83
              
              
              3⁄4
              
              
              69
              
              
              43
              
              
              75
              
              
              ―Total
              
              $
              2,251
              
              $
              1,069
              
              $
              69
              
              $
              947
              
              $
              460
              
              $
              365





***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.





26




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, 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 an
      increase in the 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.





At
      September 30, 2005, our allowance for loan losses represented 0.9% of total
      gross loans and 134.50% of non-performing loans. The allowance for loan losses
      decreased from $2.0 million at September 30, 2004 to $1.8 million at September
      30, 2005 due to an increase in charged off loans. There was no material change
      in the loss factors used to calculate the allowance from September 30, 2004
      to
      September 30, 2005.





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,****2006**
              
              **2005****Amount**
              
              **Percent
                  of**
                **Loans
                  in Each**
                **Category
                  to Total**
                **Gross
                  Loans**
              
              **Amount**
              
              **Percent
                  of**
                **Loans
                  in Each**
                **Category
                  to Total**
                **Gross
                  Loans****(Dollars
                  in thousands)**Real
                  estate - mortgage:Single-family
                  1-4 units
              
              $
              200
              
              
              18.48
              %
              $
              268
              
              
              20.71
              %Multi-family
                  5 or more units
              
              
              61
              
              
              4.52
              
              
              102
              
              
              8.20Real
                  estate construction loans
              
              
              787
              
              
              43.25
              
              
              565
              
              
              42.01Commercial
                  real estate loans
              
              
              781
              
              
              23.13
              
              
              672
              
              
              19.74Commercial
                  business loans
              
              
              126
              
              
              4.89
              
              
              65
              
              
              2.83Consumer
                  loans
              
              
              189
              
              
              5.73
              
              
              90
              
              
              6.51Total
                  allowance for loan losses
              
              $
              2,144
              
              
              100.00
              %
              $
              1,762
              
              
              100.00
              %






27




**At
                September 30,****2004**
            
            **2003**
            
            **2002****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
            
            $
            593
            
            
            28.71
            %
            $
            159
            
            
            36.28
            %
            $
            169
            
            
            42.19
            %Multi-family
                5 or more units
            
            
            277
            
            
            6.96
            
            
            111
            
            
            6.77
            
            
            39
            
            
            5.98Real
                estate construction loans
            
            
            579
            
            
            38.86
            
            
            512
            
            
            33.40
            
            
            369
            
            
            23.78Commercial
                real estate loans
            
            
            423
            
            
            16.38
            
            
            287
            
            
            14.53
            
            
            228
            
            
            17.53Commercial
                business loans
            
            
            54
            
            
            2.57
            
            
            127
            
            
            2.73
            
            
            170
            
            
            3.20Consumer
                loans
            
            
            98
            
            
            6.52
            
            
            101
            
            
            6.29
            
            
            92
            
            
            7.32Total
                allowance for loan losses
            
            $
            2,024
            
            
            100.00
            %
            $
            1,297
            
            
            100.00
            %
            $
            1,067
            
            
            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.


28


***Analysis
      of Loan Loss Experience.*** The
      following table sets forth an analysis of our 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,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(Dollars
                in thousands)**Balance
                at beginning of year
            
            $
            1,762
            
            $
            2,024
            
            $
            1,297
            
            $
            1,067
            
            $
            1,071Loans
                charged-off:Single-family
                1-4 units
            
            
            (261
            )
            
            (482
            )
            
            (132
            )
            
            (2
            )
            
            ―Multi-family
                5 or more units
            
            
            (113
            )
            
            ―
            
            
            ―
            
            
            ―
            
            
            ―Real
                estate construction loans
            
            
            (78
            )
            
            (197
            )
            
            ―
            
            
            ―
            
            
            (427
            )Commercial
                business loans
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            (338
            )Consumer
                loans
            
            
            (20
            )
            
            (16
            )
            
            (33
            )
            
            (14
            )
            
            (1
            )Total
                charge-offs
            
            
            (472
            )
            
            (695
            )
            
            (165
            )
            
            (16
            )
            
            (766
            )Recoveries:Single-family
                1-4 units
            
            
            ―
            
            
            1
            
            
            6
            
            
            ―
            
            
            ―Multi-family
                5 or more units
            
            
            ―
            
            
            ―
            
            
            1
            
            
            ―
            
            
            ―Real
                estate construction
            
            
            1
            
            
            ―
            
            
            ―
            
            
            40
            
            
            2Consumer
                loans
            
            
            1
            
            
            2
            
            
            ―
            
            
            ―
            
            
            2Total
                recoveries
            
            
            2
            
            
            3
            
            
            7
            
            
            40
            
            
            4Net
                loans charged-off
            
            
            (470
            )
            
            (692
            )
            
            (158
            )
            
            24
            
            
            (762
            )Provision
                for loan losses
            
            
            852
            
            
            430
            
            
            885
            
            
            206
            
            
            758Balance
                at end of year
            
            
            2,144
            
            
            1,762
            
            
            2,024
            
            
            1,297
            
            
            1,067Ratio
                of allowance for losses to gross loans receivable
            
            
            0.93
            %
            
            0.93
            %
            
            1.09
            %
            
            0.80
            %
            
            0.84
            %Ratio
                of net loan charge-offs (recoveries) to average loans outstanding
                during
                the year
            
            
            0.25
            %
            
            0.40
            %
            
            0.09
            %
            
            (0.02
            )%
            
            0.65
            %





***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.





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.




29




***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 100 to 300 basis point increase or 100 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, 2006 that would occur in the event of an immediate change in
      interest rates based on OTS assumptions, with no effect given to any steps
      that
      we might take to counteract that change.


**Change**
                **(In
                  Basis Points)**
              
              **Estimated
                  Net Portfolio Value**
              
              **NPV
                  as % of PV**
                **of
                  Assets****in
                  Interest Rates**
              
              **$
                  Amount**
              
              **$
                  Change**
              
              **%
                  Change**
              
              **NPV
                  Ratio**
              
              **BP
                  Change****(Dollars
                  in thousands)**+300
              
              $
              39,892
              
              
              (4,394
              )
              
              (10
              )%
              
              14.01
              %
              
              (118
              )+200
              
              
              41,503
              
              
              (2,783
              )
              
              (6
              )
              
              14.46
              
              
              (73
              )+100
              
              
              43,003
              
              
              (1,283
              )
              
              (3
              )
              
              14.86
              
              
              (33
              )0
              
              
              44,286
              
              
              3⁄4
              
              
              3⁄4
              
              
              15.19
              
              
              3⁄4(100)
              
              
              45,387
              
              
              1,101
              
              
              2
              
              
              15.46
              
              
              27(200)
              
              
              46,551
              
              
              2,265
              
              
              5
              
              
              15.74
              
              
              55





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.





30




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, 2006, cash and cash equivalents amounted to $13.4
      million. Securities classified as available for sale, which provide additional
      sources of liquidity, totaled $35.9 million at September 30, 2006. In addition,
      at September 30, 2006, we had the ability to borrow a total of approximately
      $25.0 million from the Federal Home Loan Bank of Des Moines, in the form of
      available overnight lines of credit. On that date, we had no overnight advances
      outstanding.





At
      September 30, 2006, we had $54.9 million in loan commitments outstanding, which
      included $30.3 million in undisbursed loans and $10.0 million in unused lines
      of
      credit. Certificates of deposit due within one year of September 30, 2006
      totaled $118.2 million, or 84.4% 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, 2007. 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, 2006.





**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
            
            $
            34,064
            
            
            23,833
            
            
            3,956
            
            
            5,200
            
            
            1,075Securities
                sold under agreement torepurchase
            
            
            3,384
            
            
            3,384
            
            
            —
            
            
            —
            
            
            —Operating
                lease obligations
            
            
            1,491
            
            
            92
            
            
            183
            
            
            183
            
            
            1,033Total
            
            
            38,939
            
            
            27,309
            
            
            4,139
            
            
            5,383
            
            
            2,108





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.





31





The
      following table presents our primary investing and financing activities during
      the periods indicated.





**Years
                Ended September 30,****2006**
            
            **2005**
            
            **2004**Investing
                activities:Net
                change in loans receivable
            
            $
            (40,028
            )
            $
            (5,727
            )
            $
            (18,758
            )Purchases
                of securities (1)
            
            
            (22,529
            )
            
            (28,613
            )
            
            (24,504
            )Proceeds
                from calls, maturities and principal repayments of securities
                (1)
            
            
            11,486
            
            
            12,950
            
            
            10,490Proceeds
                from sales of securities (1)
            
            
            —
            
            
            1,884
            
            
            7,590Financing
                activities:Increase
                (decrease) in deposits
            
            
            16,854
            
            
            28,688
            
            
            16,590Increase
                (decrease) in Federal Home Loan Bank borrowings
            
            
            3,567
            
            
            (6,633
            )
            
            6,817





(1)  Includes
      mortgage-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, 2006, 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, 2006, 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.





**Effect
      of Inflation and Changing Prices**




The
      consolidated financial statements and related financial data presented in this
      Annual Report on Form 10-K have been prepared in accordance with U.S. generally
      accepted accounting principles, which require the measurement of financial
      position and operating results in terms of historical dollars without
      considering the change in the relative purchasing power of money over time
      due
      to inflation. The primary impact of inflation on our operations is reflected
      in
      increased operating costs. Unlike most industrial companies, virtually all
      the
      assets and liabilities of a financial institution are monetary in nature. As
      a
      result, interest rates generally have a more significant impact on a financial
      institution’s performance than do general levels of




32


inflation.
      Interest rates do not necessarily move in the same direction or to the same
      extent as the prices of goods and services.




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, 2006 and 2005 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, 2006. 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, 2006 and 2005, and the results of their operations and their
      cash
      flows for each of the three years in the period ended September 30, 2006 in
      conformity with U.S. generally accepted accounting principles.




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


St.
      Louis, Missouri


November
      22, 2006


34


LIBERTY
        BANCORP, INC.
  **Consolidated
        Balance Sheets**





**September
      30, 2006 and 2005**


**2006**
              
              **2005****Assets**Cash
                  and cash equivalents
              
              $
              6,943,701
              
              
              6,481,038Federal
                  funds sold
              
              
              6,460,000
              
              
              3,990,000Total
                  cash and cash equivalents
              
              
              13,403,701
              
              
              10,471,038Securities
                  available for sale, at market value (amortized costof
                  $36,146,235 and $22,459,481, respectively)
              
              
              35,882,630
              
              
              22,314,521Stock
                  in Federal Home Loan Bank of Des Moines
              
              
              1,952,900
              
              
              1,679,200Mortgage-backed
                  securities:Available
                  for sale, at market value (amortized cost of$24,863,446
                  and $27,582,869, respectively)
              
              
              24,217,321
              
              
              27,188,678Loans
                  receivable, net of allowance for loan lossesof
                  $2,144,121 and $1,762,066, respectively
              
              
              200,222,378
              
              
              163,842,810Loans
                  held for sale
              
              
              459,201
              
              
              2,084,730Premises
                  and equipment, net
              
              
              6,700,189
              
              
              5,932,189Foreclosed
                  real estate, net
              
              
              1,579,848
              
              
              1,529,586Accrued
                  interest receivable
              
              
              1,486,355
              
              
              1,087,390Other
                  assets, including prepaid income taxes of $35,041 in 2005
              
              
              182,242
              
              
              251,064Deferred
                  tax asset
              
              
              1,474,600
              
              
              1,194,486Total
                  assets
              
              $
              287,561,365
              
              
              237,575,692**Liabilities
                  and Stockholders' Equity**Deposits
              
              $
              198,470,979
              
              
              181,616,654Accrued
                  interest on deposits
              
              
              316,366
              
              
              222,993Advances
                  from FHLB
              
              
              34,063,738
              
              
              30,497,082Securities
                  sold under agreement to repurchase
              
              
              3,383,997
              
              
              1,654,751ESOP
                  note payable
              
              
              -
              
              
              378,602Advances
                  from borrowers for taxes and insurance
              
              
              843,512
              
              
              873,639Other
                  liabilities
              
              
              1,340,470
              
              
              1,201,275Accrued
                  income taxes
              
              
              160,727
              
              
              -Total
                  liabilities
              
              
              238,579,789
              
              
              216,444,996Commitments
                  and contingenciesStockholders'
                  equity:Preferred
                  stock, $0.01 and $1 par value; 1,000,000 sharesauthorized;
                  shares issued and outstanding - none
              
              
              -
              
              
              -Common
                  stock, $0.01 par value; 20,000,000 shares authorized;4,760,137
                  shares issued and outstanding and $1 par value;5,000,000
                  shares authorized; 1,357,776 shares issued and outstanding
              
              
              47,601
              
              
              1,357,776Additional
                  paid-in capital
              
              
              33,001,965
              
              
              4,106,988Common
                  stock acquired by ESOP
              
              
              (933,192
              )
              
              (378,680
              )Common
                  stock acquired by Incentive Plan
              
              
              (18,676
              )
              
              (46,672
              )Accumulated
                  other comprehensive earnings, net
              
              
              (573,130
              )
              
              (339,665
              )Retained
                  earnings - substantially restricted
              
              
              17,457,008
              
              
              16,430,949Total
                  stockholders' equity
              
              
              48,981,576
              
              
              21,130,696Total
                  liabilities and stockholders' equity
              
              $
              287,561,365
              
              
              237,575,692See
                  accompanying notes to consolidated financial
                  statements.


35


LIBERTY
        BANCORP, INC.


**Consolidated
      Statements of Earnings**





**Years
      Ended September 30, 2006, 2005 and 2004**


**2006**
              
              **2005**
              
              **2004**Interest
                  income:Loans
                  receivable
              
              $
              14,252,869
              
              
              11,354,201
              
              
              9,435,276Mortgage-backed
                  securities
              
              
              995,097
              
              
              808,336
              
              
              754,717Securities
                  - taxable
              
              
              944,316
              
              
              373,563
              
              
              306,187Securities
                  - non-taxable
              
              
              225,101
              
              
              89,103
              
              
              46,913Other
                  interest-earning assets
              
              
              246,458
              
              
              190,615
              
              
              51,793Total
                  interest income
              
              
              16,663,841
              
              
              12,815,818
              
              
              10,594,886Interest
                  expense:Deposits
              
              
              6,006,960
              
              
              3,978,568
              
              
              2,924,452Securities
                  sold under agreement to repurchase
              
              
              70,787
              
              
              29,776
              
              
              21,506ESOP
                  note payable
              
              
              25,068
              
              
              24,612
              
              
              19,419Advances
                  from FHLB
              
              
              1,496,864
              
              
              1,142,249
              
              
              1,065,441Total
                  interest expense
              
              
              7,599,679
              
              
              5,175,205
              
              
              4,030,818Net
                  interest income
              
              
              9,064,162
              
              
              7,640,613
              
              
              6,564,068Provision
                  for loan losses
              
              
              852,000
              
              
              430,000
              
              
              884,550Net
                  interest income after provision for loan losses
              
              
              8,212,162
              
              
              7,210,613
              
              
              5,679,518Noninterest
                  income:Loan
                  service charges
              
              
              68,700
              
              
              53,251
              
              
              35,971Gain
                  on sale of MBSs available for sale
              
              
              -
              
              
              9,711
              
              
              39,956Gain
                  on sale of loans
              
              
              202,992
              
              
              193,812
              
              
              216,563Deposit
                  account service charges
              
              
              965,234
              
              
              942,892
              
              
              825,092Total
                  noninterest income
              
              
              1,236,926
              
              
              1,199,666
              
              
              1,117,582Noninterest
                  expense:Compensation
                  and benefits
              
              
              3,974,833
              
              
              3,302,387
              
              
              2,945,116Occupancy
                  expense
              
              
              508,583
              
              
              433,148
              
              
              292,955Equipment
                  and data processing expense
              
              
              739,676
              
              
              770,155
              
              
              748,444Operations
                  from foreclosed real estate, net
              
              
              138,980
              
              
              (21,837
              )
              
              (28,550
              )Federal
                  deposit insurance premiums
              
              
              23,794
              
              
              22,529
              
              
              21,241Professional
                  and regulatory services
              
              
              346,821
              
              
              305,327
              
              
              330,806Advertising
              
              
              413,923
              
              
              314,449
              
              
              201,209Correspondent
                  banking charges
              
              
              260,175
              
              
              215,562
              
              
              201,336Supplies
              
              
              182,662
              
              
              140,802
              
              
              101,790Other
              
              
              613,706
              
              
              582,095
              
              
              452,352Total
                  noninterest expense
              
              
              7,203,153
              
              
              6,064,617
              
              
              5,266,699Earnings
                  before income taxes
              
              
              2,245,935
              
              
              2,345,662
              
              
              1,530,401Income
                  taxes:Current
              
              
              926,000
              
              
              675,000
              
              
              881,000Deferred
              
              
              (143,000
              )
              
              166,000
              
              
              (314,000
              )Total
                  income taxes
              
              
              783,000
              
              
              841,000
              
              
              567,000Net
                  earnings
              
              $
              1,462,935
              
              
              1,504,662
              
              
              963,401Basic
                  earnings per share
              
              $
              0.32
              
              
              0.32
              
              
              0.21Diluted
                  earnings per share
              
              $
              0.31
              
              
              0.32
              
              
              0.21See
                  accompanying notes to consolidated financial
                  statements.


36


LIBERTY
        BANCORP, INC.


**Consolidated
      Statements of Comprehensive Earnings**





**Years
      Ended September 30, 2006, 2005 and 2004**


**2006**
              
              **2005**
              
              **2004**Net
                  earnings
              
              $
              1,462,935
              
              
              1,504,662
              
              
              963,401Other
                  comprehensive earnings:Unrealized
                  gain (loss) on securities andMBSs
                  available for sale, net:Reclassification
                  adjustment for gainsincluded
                  in earnings, net of tax of $0, $3,399 and$14,384,
                  respectively
              
              
              -
              
              
              (6,312
              )
              
              (25,572
              )Unrealized
                  gains (losses) arising during the year, net of taxof
                  $137,114, $178,222, and $50,381, respectively.
              
              
              (233,465
              )
              
              (303,460
              )
              
              85,290Comprehensive
                  earnings
              
              $
              1,229,470
              
              
              1,194,890
              
              
              1,023,119See
                  accompanying notes to consolidated financial
                  statements.


37


LIBERTY
        BANCORP, INC.





**Consolidated
      Statements of Stockholders’ Equity**




**Years
      Ended September 30, 2006, 2005 and 2004**


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, 2003
              
              $
              1,351,076
              
              
              3,867,613
              
              
              (470,031
              )
              
              -
              
              
              14,805,897
              
              
              (89,611
              )
              
              19,464,944Shares
                  acquired by ESOP
              
              
              -
              
              
              -
              
              
              (9,720
              )
              
              -
              
              
              -
              
              
              -
              
              
              (9,720
              )Shares
                  issued under stock-based
                  incentive plan
              
              
              3,500
              
              
              80,500
              
              
              -
              
              
              (84,000
              )
              
              -
              
              
              -
              
              
              -Amortization
                  of ESOP award
              
              
              -
              
              
              39,041
              
              
              74,873
              
              
              -
              
              
              -
              
              
              -
              
              
              113,914Amortization
                  of stock awards
              
              
              -
              
              
              -
              
              
              -
              
              
              9,332
              
              
              -
              
              
              -
              
              
              9,332Unrealized
                  gain onsecurities
                  available for sale, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              59,718
              
              
              59,718Cash
                  dividends of $.23 per share
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (417,830
              )
              
              -
              
              
              (417,830
              )Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              963,401
              
              
              -
              
              
              963,401Balance
                  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 onsecurities
                  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 onsecurities
                  available for sale, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (233,465
              )
              
              (233,465
              )Issuance
                  and exchange ofcommon
                  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
              )
              
              48,981,576See
                  accompanying notes to consolidated financial
                  statements.




38




LIBERTY
        BANCORP, INC.


**Consolidated
      Statements of Cash Flows**





**Years
      Ended September 30, 2006, 2005 and 2004**


**2006**
              
              **2005**
              
              **2004**Cash
                  flows from operating activities:Net
                  earnings
              
              $
              1,462,935
              
              
              1,504,662
              
              
              963,401Adjustments
                  to reconcile net earnings to netcash
                  provided by (used for) operating activities:Depreciation
                  expense
              
              
              444,591
              
              
              405,246
              
              
              371,008ESOP
                  expense
              
              
              306,947
              
              
              128,804
              
              
              113,914Incentive
                  Plan expense
              
              
              27,996
              
              
              27,996
              
              
              9,332Amortization
                  of premiums on investments, net
              
              
              75,149
              
              
              174,551
              
              
              312,252Amortization
                  of unearned discount on loansand
                  deferred loan fees, net
              
              
              (441,229
              )
              
              (428,290
              )
              
              (520,482
              )Provision
                  for loan losses
              
              
              852,000
              
              
              430,000
              
              
              884,550Loans
                  held for sale - originated
              
              
              (17,655,681
              )
              
              (21,139,599
              )
              
              (17,768,658
              )Loans
                  held for sale - proceeds from sale
              
              
              19,484,202
              
              
              20,325,568
              
              
              17,126,434Gain
                  on sale of loans
              
              
              (202,992
              )
              
              (193,812
              )
              
              (216,563
              )Gain
                  on sale of MBSs available for sale
              
              
              -
              
              
              (9,711
              )
              
              (39,956
              )Gain
                  on foreclosed real estate, net
              
              
              89,170
              
              
              (77,417
              )
              
              (28,550
              )Decrease
                  (increase) in:Accrued
                  interest receivable
              
              
              (398,965
              )
              
              (242,428
              )
              
              (92,462
              )Other
                  assets
              
              
              68,822
              
              
              (84,398
              )
              
              277,002Deferred
                  tax assets
              
              
              (143,000
              )
              
              166,000
              
              
              (314,000
              )Increase
                  (decrease) in:Accrued
                  interest on deposits and other liabilities
              
              
              232,568
              
              
              276,375
              
              
              142,301Accrued
                  income taxes
              
              
              160,727
              
              
              (19,869
              )
              
              19,869Net
                  cash provided by (used for) operating activities
              
              
              4,363,240
              
              
              1,243,678
              
              
              1,239,392Cash
                  flows from investing activities:Net
                  change in loans receivable
              
              
              (40,028,140
              )
              
              (5,726,621
              )
              
              (18,757,770
              )Mortgage-backed
                  securities:Available
                  for sale - purchased
              
              
              (3,451,940
              )
              
              (13,754,551
              )
              
              (14,117,357
              )Available
                  for sale - principal collections
              
              
              6,121,149
              
              
              7,306,606
              
              
              6,792,238Available
                  for sale - proceeds
              
              
              -
              
              
              1,883,700
              
              
              7,589,637Held
                  to maturity - principal collections
              
              
              -
              
              
              68,785
              
              
              522,320Securities
                  available for sale:Purchase
              
              
              (19,076,689
              )
              
              (14,858,794
              )
              
              (10,386,904
              )Proceeds
                  from maturity or call
              
              
              5,365,000
              
              
              5,575,000
              
              
              3,175,000Securities
                  held to maturity:Proceeds
                  from maturity or call
              
              
              -
              
              
              -
              
              
              325,000Purchase
                  of stock in FHLB of Des Moines
              
              
              (1,599,700
              )
              
              (642,000
              )
              
              (664,700
              )Redemption
                  of stock in FHLB of Des Moines
              
              
              1,326,000
              
              
              855,300
              
              
              392,800Proceeds
                  from the sale of foreclosed real estate, net
              
              
              3,098,369
              
              
              817,034
              
              
              28,475Purchase
                  of premises and equipment
              
              
              (1,212,591
              )
              
              (2,094,112
              )
              
              (495,332
              )Net
                  cash provided by (used for) investing activities
              
              $
              (49,458,542
              )
              
              (20,569,653
              )
              
              (25,596,593
              )(Continued)


39




LIBERTY
        BANCORP, INC.


**Consolidated
      Statements of Cash Flows**





**Years
      Ended September 30, 2006, 2005 and 2004**   (Continued)**2006**
              
              **2005**
              
              **2004**Cash
                  flows from financing activities:Net
                  increase (decrease) in deposits
              
              $
              16,854,325
              
              
              28,687,793
              
              
              16,590,164Increase
                  (decrease) in advances fromborrowers
                  for taxes and insurance
              
              
              (30,127
              )
              
              (98,272
              )
              
              (234,819
              )Proceeds
                  from advances from the FHLB
              
              
              377,950,000
              
              
              35,750,000
              
              
              56,300,000Repayment
                  of advances from the FHLB
              
              
              (374,383,344
              )
              
              (42,383,344
              )
              
              (49,483,344
              )Securities
                  sold under agreement to repurchase:Proceeds
              
              
              55,243,591
              
              
              32,101,202
              
              
              1,068,783Repayments
              
              
              (53,514,345
              )
              
              (31,140,405
              )
              
              (838,832
              )Repayment
                  of ESOP note payable
              
              
              -
              
              
              (80,439
              )
              
              (74,624
              )Proceeds
                  from exercise of stock options
              
              
              2,400
              
              
              74,275
              
              
              -Issuance
                  and exchange of common stock
              
              
              26,342,341
              
              
              -
              
              
              -Cash
                  dividends
              
              
              (436,876
              )
              
              (425,181
              )
              
              (417,830
              )Net
                  cash provided by (used for)financing
                  activities
              
              
              48,027,965
              
              
              22,485,629
              
              
              22,909,498Net
                  increase (decrease) in cash and cash equivalents
              
              
              2,932,663
              
              
              3,159,654
              
              
              (1,447,703
              )Cash
                  and cash equivalents at beginning of year
              
              
              10,471,038
              
              
              7,311,384
              
              
              8,759,087Cash
                  and cash equivalents at end of year
              
              $
              13,403,701
              
              
              10,471,038
              
              
              7,311,384Supplemental
                  disclosures of cash flow information:Cash
                  paid (received) during the year for:Interest
                  on deposits
              
              $
              5,913,587
              
              
              3,863,868
              
              
              2,854,225Interest
                  on ESOP note payable
              
              
              25,068
              
              
              24,612
              
              
              19,419Interest
                  on advances from FHLB of Des Moines
              
              
              1,482,973
              
              
              1,142,249
              
              
              1,066,773Interest
                  on securities sold under agreement to repurchase
              
              
              70,517
              
              
              29,776
              
              
              21,506Federal
                  income taxes
              
              
              685,000
              
              
              650,000
              
              
              539,239State
                  income taxes
              
              
              44,631
              
              
              80,511
              
              
              45,821Real
                  estate acquired in settlement of loans
              
              $
              3,237,801
              
              
              1,721,750
              
              
              547,378Transfer
                  of securities and MBSs held to maturity toavailable
                  for sale
              
              $
              -
              
              
              1,308,092
              
              
              -See
                  accompanying notes to consolidated financial
                  statements.


40


LIBERTY
        BANCORP, INC.


**Notes
      to Consolidated Financial Statements**





**September
      30, 2006 and 2005 and**


**Years
      Ended September 30, 2006, 2005 and 2004**





**(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 $11,442,192
        and
        $8,829,679 at September 30, 2006 and 2005, respectively. A restricted cash
        deposit of $560,510 related to clearing of checks was held in a correspondent
        bank at September 30, 2006 and 2005.





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. During 2005 the Bank transferred
      securities of $754,423 and mortgage-backed securities of $553,669 from held
      to
      maturity to available for sale. The unrealized gain at the transfer date was
      $12,014 and $8,913, respectively. The decision to transfer
      is consistent with management’s current practice of classifying all investments
      purchased as available for sale. The Bank will be unable to classify investments
      as held to maturity until a minimum of one year after the transfer. The Bank
      does not purchase securities and mortgage-backed securities for trading
      purposes. 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.


41


LIBERTY
        BANCORP, INC.


**Notes
        to Consolidated Financial Statements**


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, 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, 2006 and 2005 is
                summarized as follows:


**2006**
                
                **2005**Securities
                
                $
                326,186
                
                
                160,192Mortgage-backed
                    securities
                
                
                103,751
                
                
                105,835Loans
                    receivable
                
                
                1,056,418
                
                
                821,363$
                1,486,355
                
                
                1,087,390
  k.
              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.





l.
            The
                Bank has adopted the disclosure requirements under SFAS No. 123,
                but
                recognizes compensation expense for stock-based employee compensation
                plans under APB Opinion No. 25.





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.





m.
            Earnings
                per share are based upon the weighted-average shares outstanding.
                Weighted-average shares outstanding for periods prior to the 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.


43




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


Following
      is a summary of basic and diluted earnings per common share for the years ended
      September 30, 2006, 2005 and 2004.


**2006**
              
              **2005**
              
              **2004**Net
                  earnings
              
              $
              1,462,935
              
              
              1,504,662
              
              
              963,401Weighted-average
                  shares - Basic EPS
              
              
              4,611,910
              
              
              4,659,718
              
              
              4,639,724Stock
                  options - treasury stock method
              
              
              65,280
              
              
              17,437
              
              
              3,896Weighted-average
                  shares - Diluted EPS
              
              
              4,677,190
              
              
              4,677,155
              
              
              4,643,620Basic
                  earnings per common share
              
              $
              0.32
              
              
              0.32
              
              
              0.21Diluted
                  earnings per common share
              
              $
              0.31
              
              
              0.32
              
              
              0.21




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**
              
              **2004**Net
                  earnings
              
              $
              1,462,935
              
              
              1,504,662
              
              
              963,401Total
                  stock-based employee compensationexpense
                  determined under fair value basedmethod
                  for stock options, net of relatedtax
                  effects
              
              
              (94,194
              )
              
              (26,546
              )
              
              (90,343
              )Pro-forma
                  net earnings
              
              $
              1,368,741
              
              
              1,478,116
              
              
              873,058Earnings
                  per share:Basic
                  - as reported
              
              $
              0.32
              
              
              0.32
              
              
              0.21Diluted
                  - as reported
              
              $
              0.31
              
              
              0.32
              
              
              0.21Basic
                  - pro forma
              
              $
              0.30
              
              
              0.32
              
              
              0.19Diluted
                  - pro forma
              
              $
              0.29
              
              
              0.32
              
              
              0.19




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.





n.  The following paragraphs summarize the impact of new accounting
      pronouncements:




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004)
      (SFAS No. 123 (R)), “Share-Based Payment.” SFAS No. 123 (R) requires all
      entities to recognize compensation expense equal to the fair value of
      share-based payments such as stock options granted to employees. The Company
      is
      required to apply SFAS No. 123 (R) using a modified prospective method. Under
      this method, the Company is required to record compensation expense for the
      unvested portion of previously granted awards that are outstanding as of the
      required effective date over the requisite service period. In addition, the
      Company may elect to adopt SFAS No. 123 (R) by restating prior years on a basis
      consistent with the pro forma disclosures required for those years by SFAS
      No.
      123. SFAS No. 123 (R) is effective for the Company at the beginning of the
      fiscal year that begins after December 15, 2005. SFAS No. 123 (R) supersedes
      APB
      Opinion No. 25, “Accounting for Stock Issued to Employees.” Based upon the
      unvested portion of previously granted awards that will be outstanding as the
      required effective date of the Statement, the Bank does not expect SFAS No.
      123(R) to have a material impact on the Bank’s financial position or results of
      operations.


44





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


In
      March
      2005, the Securities and Exchange Commission (“SEC”) issued SEC Staff Accounting
      Bulletin No. 107 (“SAB 107”), which expresses views of the staff regarding the
      interaction between SFAS No. 123 (R) and certain SEC rules and regulations
      and
      provides the staff’s views regarding the valuation of share-based payment
      arrangements for public entities. The Company will consider the guidance
      provided by SAB 107 as part of its adoption of SFAS No. 123 (R).





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
      a replacement of APB Opinion 20 and SFAS No. 3.” SFAS No. 154 requires changes
      in accounting principle to be retrospectively applied to the prior periods
      presented in the financial statements, unless it is impracticable to determine
      either the period specific effects or the cumulative effect of the change.
      SFAS
      No. 154 is effective for accounting changes and error corrections that are
      made
      in fiscal years beginning after December 15, 2005. The Company does not expect
      SFAS No. 154 to have a material impact on the Company’s financial position or
      results of operations.





In
      November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS
      124-1, “The Meaning of Other-Than Temporary Impairment and Its Application to
      Certain Investments.” The FSP addresses determining when an investment is
      considered impaired, whether an impairment is other than temporary, and
      measuring an impairment loss. The FSP also addresses the accounting subsequent
      to the recognition of an other-than-temporary impairment and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The FSP is effective for reporting periods
      beginning after December 15, 2005. The Company does not expect the application
      of the FSP to have a material impact on the Company’s financial position or
      results of operations.





In
      December 2005, the FASB issued FSP SOP 94-6-1, “Terms of Loan Products That May
      Give Rise to a Concentration of Credit Risk.” The FSP expands the reporting
      requirements under SFAS No. 107, “Disclosures about Fair Value of Financial
      Instruments,” for loan products that are determined to represent a concentration
      of credit risk, including contractual features where repayments are less than
      the repayments for fully amortizing loans of an equivalent term and high
      loan-to-value ratios. The guidance in this FSP is generally effective for
      interim and annual periods ending after December 19, 2005. 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.




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and No. 140.”
SFAS No. 155 amends FASB Statements No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155
      resolves issues addressed in Statement No. 133 Implementation Issue No. D1,
      “Application of Statement No. 133 to Beneficial Interests in Securitized
      Financial Assets.” The Statement is effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006. The Company does not expect SFAS No. 155 to
      have a material impact on the Company’s financial position or results of
      operation.


45


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


In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets - an amendment of SFAS No. 140, “Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities,” to simplify the
      accounting for separately recognized servicing assets and servicing liabilities.
      SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year
      that begins after September 15, 2006. The Company does not expect SFAS No.
      156
      to have a material impact on the Company’s financial position or results of
      operation.





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 is currently assessing the impact of the
      Interpretation on its consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” to
      define fair value, establish a framework for measuring fair value and expand
      disclosures about fair values. The Statement is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. The Company does not expect SFAS
      No.
      157 to have a material impact on the Company’s financial position or results of
      operation.





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires an entity
      to recognize the overfunded or underfunded status of a defined benefit pension
      and other postretirement plan (other than a multiemployer plan) as an asset
      or
      liability in its balance sheet and to recognize changes in that funded status
      in
      the year in which the changes occur through comprehensive income. SFAS No.
      158
      also requires an entity to measure the funded status of a plan as of the balance
      sheet date, with limited exceptions. SFAS No. 158 amends SFAS No. 87,
“Employers’ Accounting for Settlements and Curtailments of Defined Benefit
      Pension Plans and for Termination Benefits,” SFAS No. 106 and SFAS No. 132
      (revised 2003), “Employers Disclosures about Pensions and Other Postretirement
      Benefits,” and other accounting literature. An entity will continue to apply
      SFAS No. 87, 88 and 106 for measurement of plan assets and benefit obligations
      as of the balance sheet date and determination of net periodic benefit cost.
      Public entities are required to initially recognize the funded status of a
      defined benefit plan and to provide the required disclosures as of the end
      of
      the fiscal year ending after December 15, 2006. The Company does not expect
      SFAS
      No. 158 to have a material impact on the Company’s financial position or results
      of operation.





The
      Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”)
      was signed into law on December 8, 2003. In accordance with FASB Staff Position
      106-2, neither the accumulated postretirement benefit obligation nor the net
      periodic postretirement benefit cost in the financial statements reflects the
      effects of the Act. The Company does not expect the effects of the Act to have
      a
      material impact on the financial statements.


46




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


**(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 and, to a lesser extent,
      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.





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 favorable 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.


47




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


**(3)
      Securities:**





Securities
      are summarized as follows:


**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
              %




**2005****Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Market****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**Available
                  for sale - debt securities:Federal
                  agency obligations
              
              $
              16,577,666
              
              
              -
              
              
              (127,467
              )
              
              16,450,199State
                  and municipal obligations
              
              
              5,881,815
              
              
              9,556
              
              
              (27,049
              )
              
              5,864,322$
              22,459,481
              
              
              9,556
              
              
              (154,516
              )
              
              22,314,521Weighted-average
                  rate
              
              
              3.94
              %


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, 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
              )September
                  30, 2005Available
                  for sale- debt securities:Federal
                  agency obligations
              
              $
              13,000,355
              
              
              (63,439
              )
              
              3,449,844
              
              
              (64,028
              )
              
              16,450,199
              
              
              (127,467
              )State
                  and municipal obligations
              
              
              4,109,035
              
              
              (25,860
              )
              
              67,242
              
              
              (1,189
              )
              
              4,176,277
              
              
              (27,049
              )$
              17,109,390
              
              
              (89,299
              )
              
              3,517,086
              
              
              (65,217
              )
              
              20,626,476
              
              
              (154,516
              )


48


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 securities at September 30, 2006 are summarized as follows:


**Available
                  for Sale****Amortized**
              
              **Market****Cost**
              
              **Value**Due
                  within one year
              
              $
              5,144,814
              
              
              5,112,020Due
                  after one through five years
              
              
              22,102,139
              
              
              21,960,402Due
                  after five through ten years
              
              
              6,492,557
              
              
              6,438,212Due
                  after ten years
              
              
              2,406,725
              
              
              2,371,996$
              36,146,235
              
              
              35,882,630





At
      September 30, 2006 securities with a carrying value of approximately $16,446,000
      are callable at the discretion of the issuer prior to the maturity date.
      Securities in the amount of $15,655,000 were pledged to secure certain deposits
      at September 30, 2006.





**(4)** **Mortgage-Backed
      Securities:**





**** Mortgage-backed
      securities (“MBSs”) are summarized as follows:




**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
              %






49




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


**2005****Gross**
            
            **Gross****Amortized**
            
            **Unrealized**
            
            **Unrealized**
            
            **Market****Cost**
            
            **Gains**
            
            **Losses**
            
            **Value**Available
                for sale:FHLMC
            
            $
            18,629,696
            
            
            526
            
            
            (233,806
            )
            
            18,396,416FNMA
            
            
            7,457,032
            
            
            2,492
            
            
            (134,132
            )
            
            7,325,392GNMA
            
            
            58,883
            
            
            1,027
            
            
            -
            
            
            59,910GNMA
                - CMO
            
            
            847,160
            
            
            -
            
            
            (22,510
            )
            
            824,650FHLMC
                - CMO
            
            
            355,035
            
            
            -
            
            
            (2,764
            )
            
            352,271FNMA
                - CMO
            
            
            235,063
            
            
            -
            
            
            (5,024
            )
            
            230,039$
            27,582,869
            
            
            4,045
            
            
            (398,236
            )
            
            27,188,678Weighted-average
                rate
            
            
            4.16
            %




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, 2006 and 2005 MBSs included adjustable-rate
      mortgage loans of $8,133,330 and $8,253,586, respectively. MBSs pledged to
      secure certain deposits were $3,317,000 at September 30, 2006.





Gross
      proceeds, gross realized gains and gross realized losses from sale of available
      for sale mortgage-backed securities are summarized as follows:


**2006**
              
              **2005**
              
              **2004**Gross
                  proceeds
              
              $
              -
              
              
              1,883,700
              
              
              7,589,637Gross
                  realized gains
              
              $
              -
              
              
              9,711
              
              
              39,956Gross
                  realized losses
              
              
              -
              
              
              -
              
              
              -$
              -
              
              
              9,711
              
              
              39,956


50




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, 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
              )September
                  30, 2005Available
                  for sale:FHLMC
              
              $
              13,006,298
              
              
              (132,524
              )
              
              4,478,317
              
              
              (101,282
              )
              
              17,484,615
              
              
              (233,806
              )FNMA
              
              
              2,763,070
              
              
              (26,914
              )
              
              4,271,833
              
              
              (107,218
              )
              
              7,034,903
              
              
              (134,132
              )GNMA
                  - CMO
              
              
              -
              
              
              -
              
              
              824,650
              
              
              (22,510
              )
              
              824,650
              
              
              (22,510
              )FHLMC
                  - CMO
              
              
              352,271
              
              
              (2,764
              )
              
              -
              
              
              -
              
              
              352,271
              
              
              (2,764
              )FNMA
                  - CMO
              
              
              -
              
              
              -
              
              
              230,039
              
              
              (5,024
              )
              
              230,039
              
              
              (5,024
              )$
              16,121,639
              
              
              (162,202
              )
              
              9,804,839
              
              
              (236,034
              )
              
              25,926,478
              
              
              (398,236
              )





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:


**2006**
              
              **2005**Real
                  estate loans:Single-family,
                  1-4 units
              
              $
              42,623,176
              
              
              39,434,569Multi-family,
                  5 or more units
              
              
              10,415,654
              
              
              15,603,435Construction
              
              
              99,758,557
              
              
              79,979,075Commercial
              
              
              53,360,110
              
              
              37,568,033Commercial
                  business loans
              
              
              11,270,301
              
              
              5,396,777Consumer
                  loans
              
              
              13,219,410
              
              
              12,390,478230,647,208
              
              
              190,372,367Allowance
                  for losses
              
              
              (2,144,121
              )
              
              (1,762,066
              )Loans
                  in process
              
              
              (27,962,170
              )
              
              (24,443,853
              )Unearned
                  discounts
              
              
              (4,451
              )
              
              (6,776
              )Deferred
                  loan fees, net
              
              
              (314,088
              )
              
              (316,862
              )$
              200,222,378
              
              
              163,842,810Weighted-average
                  rate
              
              
              8.06
              %
              
              7.18
              %


51




LIBERTY
      BANCORP, INC.





**Notes
        to Consolidated Financial Statements**


Adjustable-rate
      loans, net included in the loan portfolio amounted to $118,181,541 and
      $139,754,011 at September 30, 2006 and 2005, respectively. Loans serviced for
      the benefits of others amounted to $7,312,931, $9,239,956 and $4,090,000 at
      September 30, 2006, 2005 and 2004, respectively.




Real
      estate construction loans are secured by the following:


**2006**
              
              **2005**Single-family,
                  spec
              
              $
              37,764,930
              
              
              33,258,166Single-family,
                  custom built
              
              
              12,252,030
              
              
              9,967,134Development
              
              
              23,960,853
              
              
              24,677,136Commercial
              
              
              25,173,449
              
              
              11,109,639Other
              
              
              607,295
              
              
              967,000$
              99,758,557
              
              
              79,979,075


Following
      is a summary of activity in allowance for losses:


**2006**
              
              **2005**
              
              **2004**Balance,
                  beginning of year
              
              $
              1,762,066
              
              
              2,024,298
              
              
              1,296,701Loan
                  charge-offs
              
              
              (471,692
              )
              
              (695,226
              )
              
              (164,021
              )Loan
                  recoveries
              
              
              1,747
              
              
              2,994
              
              
              7,068Provision
                  charged to expense
              
              
              852,000
              
              
              430,000
              
              
              884,550Balance,
                  end of year
              
              $
              2,144,121
              
              
              1,762,066
              
              
              2,024,298





A
      summary
      of impaired loans follows:


**2006**
              
              **2005**
              
              **2004**Nonaccrual
                  loans
              
              $
              1,481,222
              
              
              906,934
              
              
              723,010Accruing
                  loans past due 90 days or more
              
              
              58,156
              
              
              -
              
              
              -Other
                  impaired loans
              
              
              2,681,561
              
              
              403,172
              
              
              2,932,464Total
                  impaired loans
              
              $
              4,220,939
              
              
              1,310,106
              
              
              3,655,474Allowance
                  for losses on impaired loans
              
              $
              257,609
              
              
              199,103
              
              
              655,302Impaired
                  loans with no allowance for loan losses
              
              $
              58,156
              
              
              116,414
              
              
              -Average
                  balance of impaired loans
              
              $
              1,350,018
              
              
              2,607,301
              
              
              464,873Interest
                  income that would have been recognized
              
              $
              108,139
              
              
              97,652
              
              
              25,644Interest
                  income recognized
              
              $
              72,433
              
              
              73,439
              
              
              2,459






52




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,
      2006:


Balance,
                    beginning of year
                
                $
                487,093Additions
                
                
                466,150Repayments
                
                
                (240,097
                )Balance,
                    end of year
                
                $
                713,146





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:


**2006**
                
                **2005**Land
                
                $
                1,511,277
                
                
                1,511,277Office
                    buildings
                
                
                5,330,549
                
                
                4,115,937Furniture
                    and equipment
                
                
                2,863,800
                
                
                2,470,356Building-in-progress
                
                
                59,314
                
                
                454,7809,764,940
                
                
                8,552,350Less
                    accumulated depreciation
                
                
                3,064,751
                
                
                2,620,161$
                6,700,189
                
                
                5,932,189





Depreciation
      expense for 2006, 2005 and 2004 was $444,591, $405,246 and $371,008,
      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
      2006 and 2005 amounted to $91,622 and $83,987, respectively. There was no rent
      expense for 2004. Future minimum lease payments are summarized as
      follows:


October
                  1, 2006 to September 30, 2007
              
              $
              91,622October
                  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
              
              
              91,622After
                  September 30, 2011
              
              
              1,033,038$
              1,491,148





53




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





**(7)**  **Foreclosed
      Real Estate, Net**





Foreclosed
      real estate, net is summarized as follows:


**2006**
              
              **2005**Foreclosed
                  real estate
              
              $
              1,579,848
              
              
              1,529,586Allowance
                  for losses
              
              
              -
              
              
              -$
              1,579,848
              
              
              1,529,586


**** Following
      is a summary of activity in allowance for losses:


**2006**
              
              **2005**
              
              **2004**Balance,
                  beginning of year
              
              $
              -
              
              
              -
              
              
              -Gain
                  on sale
              
              
              23,846
              
              
              205,265
              
              
              28,550Charge-offs
              
              
              (113,016
              )
              
              (127,848
              )
              
              -Provision
                  charged to expense
              
              
              89,170
              
              
              (77,417
              )
              
              (28,550
              )Balance,
                  end of year
              
              $
              -
              
              
              -
              
              
              -
  **(8)** **Deposits**
 
 Deposits
        are summarized as follows:


**Description
                  and interest rate**
              
              **2006**
              
              **2005**Non-interest
                  bearing NOW accounts
              
              $
              11,895,575
              
              
              11,589,685NOW
                  accounts, 1.84% and 1.52%, respectively
              
              
              25,234,161
              
              
              22,019,778Statement
                  accounts, .31% and .31%
              
              
              7,701,414
              
              
              8,880,301Money
                  market accounts, 2.66% and 2.33%, respectively
              
              
              13,617,376
              
              
              26,236,481Total
                  transaction accounts
              
              
              58,448,526
              
              
              68,726,245Certificates:0.00
                  - 0.99%
              
              
              -
              
              
              46,7901.00
                  - 1.99%
              
              
              5,175
              
              
              652,6082.00
                  - 2.99%
              
              
              2,254,455
              
              
              27,956,5773.00
                  - 3.99%
              
              
              33,373,048
              
              
              61,079,0544.00
                  - 4.99%
              
              
              44,344,132
              
              
              20,224,0005.00
                  - 5.99%
              
              
              60,045,643
              
              
              2,542,5056.00
                  - 6.99%
              
              
              -
              
              
              388,875Total
                  certificates, 4.52% and 3.43%, respectively
              
              
              140,022,453
              
              
              112,890,409Total
                  deposits, 3.62% and 2.68%, respectively
              
              $
              198,470,979
              
              
              181,616,654






54




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


Certificate
        maturities are summarized as follows:
  **2006**
              
              **2005**First
                  year
              
              $
              118,206,304
              
              
              74,157,711Second
                  year
              
              
              10,727,310
              
              
              22,224,424Third
                  year
              
              
              5,825,725
              
              
              7,359,603Fourth
                  year
              
              
              3,460,833
              
              
              5,641,179Fifth
                  year
              
              
              1,802,281
              
              
              3,507,492$
              140,022,453
              
              
              112,890,409





Transaction
      accounts and certificates in denominations of $100,000 or more amounted to
      $18,070,065 and $37,251,130, at September 30, 2006, respectively, and
      $28,198,436 and $26,205,696 at September 30, 2005, respectively.




Interest
        on deposits is summarized as follows:
  **2006**
              
              **2005**
              
              **2004**NOW
                  accounts
              
              $
              461,254
              
              
              208,753
              
              
              108,620Passbook
                  accounts
              
              
              30,846
              
              
              27,952
              
              
              30,074Money
                  market accounts
              
              
              506,441
              
              
              449,249
              
              
              225,838Certificates
              
              
              5,008,419
              
              
              3,292,614
              
              
              2,559,920$
              6,006,960
              
              
              3,978,568
              
              
              2,924,452





**(9)**  **Advances from Federal Home Loan Bank of Des Moines**





Advances
      from Federal Home Loan Bank (“FHLB”) of Des Moines are summarized as
      follows:


**Average
                  Interest Rate****Final**
                  **Maturity
                    Date**
              
              **at
                  September 30, 2006**
              
              **2006**
              
              **2005**Within
                  one year
              
              
              4.17
              %
              $
              23,700,000
              
              
              9,500,000After
                  one through three years
              
              
              4.37
              %
              
              3,788,852
              
              
              14,322,188After
                  three through five years
              
              
              5.03
              %
              
              5,000,000
              
              
              -After
                  five through ten
              
              
              7.64
              %
              
              1,574,886
              
              
              6,674,894$
              34,063,738
              
              
              30,497,082Weighted-average
                  rate
              
              
              
              
              
              4.48
              %
              
              3.65
              %





Floating-rate
      advances from FHLB amounted to $0 and $3,000,000 at September 30, 2006 and
      2005,
      respectively.




55


LIBERTY
          BANCORP, INC.
 
 **Notes
          to Consolidated Financial Statements**
  Principal
            maturities at September 30, 2006 are summarized as follows:
  October
                      1, 2006 to September 30, 2007
                  
                  $
                  23,833,344October
                      1, 2007 to September 30, 2008
                  
                  
                  3,855,524October
                      1, 2008 to September 30, 2009
                  
                  
                  100,008October
                      1, 2009 to September 30, 2010
                  
                  
                  100,008October
                      1, 2010 to September 30, 2011
                  
                  
                  5,100,008After
                      September 30, 2011
                  
                  
                  1,074,846$
                  34,063,738


At
      September 30, 2006 advances from the FHLB of Des Moines are secured by FHLB
      stock and single-family mortgage loans and commercial real estate loans
      amounting to $59,091,000.





**(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**
              
              **2006**
              
              **2006**
              
              **2005**Feburary
                  25, 2007
              
              
              3.55
              %
              $
              516,173
              
              
              498,178Open
                  line
              
              
              3.43
              %
              
              2,867,824
              
              
              1,156,573Total,
                  3.44% and 2.49%
              
              
              
              
              $
              3,383,997
              
              
              1,654,751Market
                  value of securities
              
              
              
              
              $
              6,618,484
              
              
              3,253,179Average
                  balance of borrowings
              
              
              
              
              $
              2,224,280
              
              
              1,057,868Maximum
                  balance at any month end
              
              
              
              
              $
              4,400,146
              
              
              2,292,192


**(11)** **Income
      Taxes**




The
      Bank
      is permitted to make additions to the tax bad debt reserve using the experience
      method.




56


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


The
        components of the net deferred tax asset are summarized as
        follows:
  **2006**
              
              **2005**Deferred
                  tax liabilities:FHLB
                  stock dividends
              
              $
              (138,750
              )
              
              (138,750
              )Deferred
                  tax assets:Accrued
                  income and expense and deferred loan fees
              
              
              362,039
              
              
              364,498Allowance
                  for losses on loans and foreclosed real estate
              
              
              793,325
              
              
              651,965Unrealized
                  loss on securities available for sale
              
              
              336,600
              
              
              199,486Other
              
              
              121,386
              
              
              117,287Total
                  deferred tax assets
              
              
              1,613,350
              
              
              1,333,236Net
                  deferred tax asset
              
              $
              1,474,600
              
              
              1,194,486





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:


**2006**
              
              **2005**
              
              **2004**Current:Federal
              
              $
              814,000
              
              
              630,000
              
              
              800,000State
              
              
              112,000
              
              
              45,000
              
              
              81,000926,000
              
              
              675,000
              
              
              881,000Deferred:Federal
              
              
              (125,000
              )
              
              145,000
              
              
              (284,000
              )State
              
              
              (18,000
              )
              
              21,000
              
              
              (30,000
              )(143,000
              )
              
              166,000
              
              
              (314,000
              )$
              783,000
              
              
              841,000
              
              
              567,000





57


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****2006**
              
              **2005**
              
              **2004**Federal
                  statutory income tax rate
              
              
              34.0
              %
              
              34.0
              %
              
              34.0
              %Increases
                  (decreases) in tax rate:Tax
                  exempt income
              
              
              (2.9
              )
              
              (1.1
              )
              
              (1.0
              )State
                  taxes, net of Federal tax benefit
              
              
              2.8
              
              
              1.9
              
              
              2.2Average
                  fair value versus cost of ESOP shares
              
              
              1.1
              
              
              0.7
              
              
              0.9Other,
                  net
              
              
              (0.1
              )
              
              0.4
              
              
              1.0Tax
                  rate
              
              
              34.9
              %
              
              35.9
              %
              
              37.1
              %





**(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 $49,439, $34,461 and $37,739 for 2006, 2005
      and 2004, 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.




58


LIBERTY
              BANCORP, INC.
 
 **Notes
              to Consolidated Financial Statements**
 The
                following table sets forth the Plan's funded status and amounts recognized
                in
                the financial statements :
 **2006**
                
                **2005**Accumulated
                    postretirement benefit obligations
                
                $
                (318,823
                )
                
                (369,957
                )Unrecognized
                    transition obligation
                
                
                87,752
                
                
                100,290Unrecognized
                    prior service cost
                
                
                (67,653
                )
                
                (77,318
                )Unrecognized
                    actuarial gain
                
                
                (117,300
                )
                
                (71,570
                )Under
                    (over) accrual
                
                
                11,230
                
                
                (512
                )Accrued
                    postretirement benefit cost
                
                $
                (404,794
                )
                
                (419,067
                )
  A
          reconciliation of the accumulated postretirement benefit obligation is
          summarized as follows:


**2006**
              
              **2005**Balance,
                  beginning of year
              
              $
              (369,957
              )
              
              (380,689
              )Service
                  cost
              
              
              (6,685
              )
              
              (6,685
              )Interest
                  cost
              
              
              (22,105
              )
              
              (23,253
              )Benefits
                  paid
              
              
              29,873
              
              
              40,670Actuarial
                  gain
              
              
              50,051
              
              
              -Balance,
                  end of year
              
              $
              (318,823
              )
              
              (369,957
              )





The
      weighted average annual assumed rate of increase in the per capita cost of
      covered benefits for the medical plan is 10% for 2006 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, 2006, 2005 and 2004 was considered immaterial. The
      weighted-average discount rate used in determining the accumulated
      postretirement benefit obligation was 6.00% and 6.50% at September 30, 2006
      and
      2005, respectively, and 6.50% for 2006, 2005 and 2004.





59


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


The
      components of the net periodic cost for postretirement medical benefits are
      summarized as follows:


**2006**
              
              **2005**
              
              **2004**Service
                  cost
              
              $
              6,685
              
              
              6,685
              
              
              6,685Interest
                  cost
              
              
              22,105
              
              
              23,253
              
              
              32,547Amortization
                  of transition obligation
              
              
              12,538
              
              
              12,538
              
              
              12,538Amortization
                  of prior service cost
              
              
              (9,665
              )
              
              (9,665
              )
              
              -Amortization
                  of actuarial gain
              
              
              (4,321
              )
              
              (6,311
              )
              
              -Over
                  (under) accrual
              
              
              (11,742
              )
              
              500
              
              
              12Net
                  periodic cost
              
              $
              15,600
              
              
              27,000
              
              
              51,782





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, 2006 to September 30, 2007
              
              $
              31,431October
                  1, 2007 to September 30, 2008
              
              
              41,351October
                  1, 2008 to September 30, 2009
              
              
              43,406October
                  1, 2009 to September 30, 2010
              
              
              45,604October
                  1, 2010 to September 30, 2011
              
              
              47,957October
                  1, 2011 to September 30, 2016
              
              
              110,473$
              320,222





**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 2006, 2005 and 2004
      was
      $306,947, $128,804 and $113,914, respectively.




ESOP
      shares prior to the 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, 2006 were 146,809, 31,275 and 121,987 respectively.
      The
      number of ESOP shares allocated, shares released for allocation and unreleased
      shares at September 30, 2005 was 120,232, 16,116, and 73,694, respectively.




60


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


The
      fair
      value of unreleased ESOP shares at September 30, 2006 and 2005 was $1,248,000
      and $582,000, respectively. The ESOP loan from the Company is secured solely
      by
      the common stock at an interest rate of 8.25%.





**** **Restricted
      Stock Awards**




During
      2004 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 in lieu
      of postretirement medical benefits and retirement benefits.




Directors
      elected to the Board after June 16, 2004 will receive no postretirement medical
      benefits and retirement benefits.





**St** **ock
      Options**





As
      authorized by the Incentive Equity and Deferred Compensation Plan (“Plan”), the
      Board of Directors granted 78,759 options to non-employee directors and 96,261
      to certain officers and employees during 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 42,439 options to directors and
      officers. Options granted to the board and CEO were vested over a ten-month
      period and options granted to certain officers are vested over a five-year
      period. The Board believes these options will promote the success and enhance
      the value of the Company by linking the personal interests of the members of
      the
      Board and the Bank’s officers to those of Company shareholders. The Company
      believes this plan will be beneficial in its ability to motivate, attract,
      and
      retain the services of the members of the Board, officers and employees of
      the
      Bank.





In
      connection with the Conversion, 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.





61


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





Stock
      options granted, exercised or forfeited are as follows:


Weighted
              
              WeightedAverage
              
              AverageShares
              
              Exercise
              
              RemainingOutstanding
              
              Price
              
              Term
                  in YearsAt
                  September 30, 2003
              
              
              700
              
              $
              3.25
              
              
              3.00Awarded
              
              
              175,020
              
              
              6.86Exercised
              
              
              -
              
              
              -Forfeited
              
              
              (1,750
              )
              
              6.86At
                  September 30, 2004
              
              
              173,970
              
              
              6.84
              
              
              9.71Awarded
              
              
              38,504
              
              
              8.28Exercised
              
              
              (11,201
              )
              
              6.63Forfeited
              
              
              (3,500
              )
              
              6.86At
                  September 30, 2005
              
              
              197,773
              
              
              7.13
              
              
              8.86Awarded
              
              
              42,439
              
              
              8.07Exercised
              
              
              (350
              )
              
              6.86Forfeited
              
              
              (4,901
              )
              
              6.86At
                  September 30, 2006
              
              
              234,961
              
              $
              7.31
              
              
              8.07




Shares
      exercisable and weighted average exercise prices were 170,208 and $7.19 at
      September 30, 2006, respectively, 104,662 and $6.86 at September 30, 2005,
      respectively, and 93,461 and $6.83 at September 30, 2004,
      respectively.




The
      Bank
      has estimated the fair value of awards granted during 2006, 2005, and 2004
      under
      its stock option plan utilizing the Black-Scholes pricing model to be $5.96
      ($1.70 adjusted), $6.42 ($1.83 adjusted), and $5.29 ($1.51 adjusted) per share,
      respectively.




The
          assumptions used in the Black-Scholes pricing model were as
          follows:


**2006**
              
              **2005**
              
              **2004**Expected
                  dividend yield
              
              
              3.00
              %
              
              3.00
              %
              
              3.00
              %Risk-free
                  interest rate
              
              
              4.23
              %
              
              3.71
              %
              
              4.28
              %Expected
                  life of options
              
              
              5.00
                  years
              
              
              6.00
                  years
              
              
              5.50
                  yearsExpected
                  volatility
              
              
              25.13
              %
              
              25.93
              %
              
              25.24
              %





**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
      the three active 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.





62


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


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
      the financial statements:


**2006**
              
              **2005**Actuarial
                  present value of benefit obligations -vested
                  accumulated benefits
              
              $
              (234,288
              )
              
              (243,936
              )Unrecognized
                  prior service cost
              
              
              52,681
              
              
              60,207Unrecognized
                  actuarial gain
              
              
              (38,811
              )
              
              (27,635
              )Overaccrual
              
              
              (1,856
              )
              
              (510
              )Accrued
                  directors' retirement plan
              
              $
              (222,274
              )
              
              (211,874
              )





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


**2006**
              
              **2005**Balance,
                  beginning of year
              
              $
              (243,936
              )
              
              (257,633
              )Service
                  cost
              
              
              (2,597
              )
              
              (2,597
              )Interest
                  cost
              
              
              (15,336
              )
              
              (15,706
              )Benefits
                  paid
              
              
              16,000
              
              
              32,000Actuarial
                  gain
              
              
              11,581
              
              
              -Balance,
                  end of year
              
              $
              (234,288
              )
              
              (243,936
              )


The
      average discount rate used in determining the accumulated benefit obligation
      was
      6.00% and 6.50% at September 30, 2006 and 2005, respectively, and 6.50% for
      2006, 2005 and 2004.





63


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


Net
      pension cost includes the following components:


**2006**
              
              **2005**
              
              **2004**Service
                  costs - benefits earned during the year
              
              $
              2,597
              
              
              2,597
              
              
              2,597Interest
                  cost on benefit obligation
              
              
              15,336
              
              
              15,706
              
              
              13,993Amortization
                  of prior service cost
              
              
              7,526
              
              
              9,431
              
              
              -Amortization
                  of actuarial gain
              
              
              (405
              )
              
              (234
              )
              
              -Overaccrual
              
              
              1,346
              
              
              500
              
              
              10Net
                  pension cost
              
              $
              26,400
              
              
              28,000
              
              
              16,600





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, 2006 to September 30, 2007
              
              $
              16,000October
                  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, 2016
              
              
              90,000$
              206,000


**(13)**  **Stockholders’ Equity and Minimum Regulatory Capital
      Requirements**




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 Company owns 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 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.




64


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


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.




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, 2006, the Bank met all capital adequacy
      requirements.





The
      Bank
      is also subject to the regulatory framework for prompt corrective action. At
      September 30, 2006 and 2005, 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.




65


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
              %





The
      Bank's actual and required capital amounts and ratios at September 30, 2005
      are
      as follows:


**Minimum****Required****for
                  Capital**
              
              **to
                  be "Well****Actual**
              
              **Adequacy**
              
              **Capitalized"****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio****(Dollars
                  in Thousands)**Stockholders'
                  equity
              
              $
              21,131Computer
                  software costs
              
              
              (59
              )Unrealized
                  loss on securities AFS, net
              
              
              340Tangible
                  capital
              
              $
              21,412
              
              
              9.0
              %
              $
              3,572
              
              
              1.5
              %General
                  valuation allowance
              
              
              1,762Total
                  capital to risk-weighted assets
              
              $
              23,174
              
              
              13.3
              %
              $
              13,913
              
              
              8.0
              %
              $
              17,392
              
              
              10.0
              %Tier
                  1 capital to risk-weighted assets
              
              $
              21,412
              
              
              12.3
              %
              $
              6,957
              
              
              4.0
              %
              $
              10,435
              
              
              6.0
              %Tier
                  1 capital to total assets
              
              $
              21,412
              
              
              9.0
              %
              $
              9,526
              
              
              4.0
              %
              $
              11,907
              
              
              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, 2006, 2005 and 2004, the Bank paid cash dividends
      of $436,876, $425,181 and $417,830, respectively.




66


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


**(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.




The
      following table sets forth information regarding off-balance sheet financial
      instruments as of September 30, 2006:


**Fixed-Rate**
              
              **Adjustable-Rate**Off-balance
                  sheet financial instruments:Commitments
                  to originate loans
              
              $
              10,913,500
              
              
              3,650,950Commitments
                  for unused lines of credit
              
              $
              10,000
              
              
              9,955,694Commitments
                  for undisbursed loans
              
              $
              3,104,779
              
              
              27,231,270Commitments
                  for letters of credit
              
              $
              41,440
              
              
              -





Interest
      rates on these fixed-rate loans generally ranged from 6.25% to
      9.25%.




At
      September 30, 2006, there was no known pending litigation or other claims that
      management believes will be material to the Company’s financial
      position.





67


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





**(15)**  **** **Fair
      Value of Financial Instruments**





The
      carrying amounts and estimated fair values of the Company's financial
      instruments are summarized as follows:


**2006**
              
              **2005****Carrying**
              
              **Fair**
              
              **Carrying**
              
              **Fair****Amount**
              
              **Value**
              
              **Amount**
              
              **Value**Non-trading
                  instrumentsand
                  nonderivatives:Cash
                  and cash equivalents
              
              $
              13,403,701
              
              
              13,403,701
              
              
              10,471,038
              
              
              10,471,038Securities
                  available for sale
              
              
              35,882,630
              
              
              35,882,630
              
              
              22,314,521
              
              
              22,314,521Stock
                  in FHLB of Des Moines
              
              
              1,952,900
              
              
              1,952,900
              
              
              1,679,200
              
              
              1,679,200Mortgage-backed
                  securities -available
                  for sale
              
              
              24,217,321
              
              
              24,217,321
              
              
              27,188,678
              
              
              27,188,678Loans
                  receivable, net
              
              
              200,222,378
              
              
              200,225,932
              
              
              163,842,810
              
              
              163,465,972Loans
                  held for sale
              
              
              459,201
              
              
              459,201
              
              
              2,084,730
              
              
              2,084,730Accrued
                  interest receivable
              
              
              1,486,355
              
              
              1,486,355
              
              
              1,087,390
              
              
              1,087,390Deposits
              
              
              198,470,979
              
              
              198,212,238
              
              
              181,616,654
              
              
              181,071,152Accrued
                  interest on deposits
              
              
              316,366
              
              
              316,366
              
              
              222,993
              
              
              222,993Advances
                  from FHLB
              
              
              34,063,738
              
              
              34,148,662
              
              
              30,497,082
              
              
              30,451,416Securities
                  sold underagreement
                  to repurchase
              
              
              3,383,997
              
              
              3,424,605
              
              
              1,654,751
              
              
              1,709,027ESOP
                  note payable
              
              $
              -
              
              
              -
              
              
              378,602
              
              
              385,455





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.




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, securities sold under agreement to repurchase and ESOP note payable
      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 those commitments are considered
      immaterial to the Company’s financial condition.




68


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




**(16)  
       Parent Company Only Financial Statements**




The
      following balance sheet 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
        Sheet**
 **September
        30, 2006**
  **Assets**Cash
                  and cash equivalents
              
              $
              8,061,893Investment
                  in subsidiary
              
              
              35,622,895ESOP
                  note receivable
              
              
              917,906Loans
                  receivable, net of allowance for loan losses of $0
              
              
              4,399,902Accrued
                  interest receivable - loans
              
              
              4,583Other
                  assets
              
              
              8,397Total
                  assets
              
              $
              49,015,576**Liabilities
                  and Stockholders' Equity**Accrued
                  income taxes
              
              $
              34,000Total
                  liabilities
              
              
              34,000Stockholders'
                  equity:Common
                  stock
              
              
              47,601Additional
                  paid-in capital
              
              
              33,001,965Common
                  stock acquired by ESOP
              
              
              (933,192
              )Common
                  stock acquired by Incentive Plan
              
              
              (18,676
              )Accumulated
                  other comprehensive earnings, net
              
              
              (573,130
              )Retained
                  earnings - substantially restricted
              
              
              17,457,008Total
                  stockholders' equity
              
              
              48,981,576Total
                  liabilities and stockholders' equity
              
              $
              49,015,576


69


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


**Statement
        of Earnings**
 **July
        21, 2006 through September 30, 2006**
  Interest
                  income:Loans
                  receivable
              
              $
              60,486ESOP
                  note receivable
              
              
              19,148Other
                  interest-earning assets
              
              
              43,078Total
                  interest income
              
              
              122,712Earnings
                  from subsidiary
              
              
              1,405,795Total
                  noninterest income
              
              
              1,405,795Noninterest
                  expense
              
              
              31,572Earnings
                  before income taxes
              
              
              1,496,935Income
                  taxes
              
              
              34,000Net
                  earnings
              
              $
              1,462,935
  **Statement
          of Cash Flows**
 **July
            21, 2006 through September 30, 2006**
 Cash
                  flows from operating activities:Net
                  earnings
              
              $
              1,462,935Adjustments
                  to reconcile net earnings to netcash
                  provided by (used for) operating activities:Equity
                  in undistributed net earnings of BankLiberty
              
              
              (1,405,795
              )ESOP
                  expense
              
              
              306,947Incentive
                  Plan expense
              
              
              27,996Increase
                  in:Accrued
                  interest receivable
              
              
              (4,583
              )Other
                  assets
              
              
              (8,397
              )Increase
                  in accrued income taxes
              
              
              34,000Net
                  cash provided by (used for) operating activities
              
              
              413,103Cash
                  flows from investing activities:Net
                  change in loans receivable
              
              
              (4,399,902
              )Purchase
                  of subsidiary
              
              
              (12,941,266
              )Loan
                  to ESOP to finance shares
              
              
              (1,167,996
              )Repayment
                  of ESOP loan
              
              
              250,089Net
                  cash provided by (used for) investing activities
              
              $
              (18,259,075
              )Cash
                  flows from financing activities:Issuance
                  and exchange of common stock
              
              
              26,342,341Proceeds
                  from exercise of stock options
              
              
              2,400Cash
                  dividends
              
              
              (436,876
              )Net
                  cash provided by (used for) financing activities
              
              
              25,907,865Net
                  increase (decrease) in cash and cash equivalents
              
              
              8,061,893Cash
                  and cash equivalents at beginning of period
              
              
              -Cash
                  and cash equivalents at end of period
              
              $
              8,061,893


70


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





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





The
      results of operations by quarter for the years ended September 30, 2006 and
      2005
      were as follows:


**First**
              
              **Second**
              
              **Third**
              
              **Fourth****Year
                  Ended September 30, 2006**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**Interest
                  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
   **First**
              
              **Second**
              
              **Third**
              
              **Fourth****Year
                  Ended September 30, 2005**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**Interest income
              
              $
              2,985,529
              
              $
              3,172,732
              
              $
              3,314,168
              
              $
              3,343,389Interest
                  expense
              
              
              (1,162,654
              )
              
              (1,246,895
              )
              
              (1,324,786
              )
              
              (1,440,870
              )Net
                  interest income
              
              
              1,822,875
              
              
              1,925,837
              
              
              1,989,382
              
              
              1,902,519Provision
                  for loan losses
              
              
              (150,000
              )
              
              (135,000
              )
              
              -
              
              
              (145,000
              )Net
                  interest income after provision for loan losses
              
              
              1,672,875
              
              
              1,790,837
              
              
              1,989,382
              
              
              1,757,519Noninterest
                  income
              
              
              285,337
              
              
              237,716
              
              
              339,213
              
              
              337,400Noninterest
                  expense
              
              
              (1,394,240
              )
              
              (1,464,357
              )
              
              (1,642,182
              )
              
              (1,563,838
              )Earnings
                  before income taxes
              
              
              563,972
              
              
              564,196
              
              
              686,413
              
              
              531,081Income
                  taxes
              
              
              (209,000
              )
              
              (191,000
              )
              
              (254,000
              )
              
              (187,000
              )Net
                  earnings
              
              $
              354,972
              
              $
              373,196
              
              $
              432,413
              
              $
              344,081Basic
                  and diluted earnings per share
              
              $
              0.08
              
              $
              0.08
              
              $
              0.09
              
              $
              0.07


71




**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
            
            **Marvin
                J. Weishaar**
              Retired
              Certified
                Public Accountant
            
            **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
            
            **Steven
                K. Havens**
              Secretary/Treasurer





**Officers
      of BankLiberty**





**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**Martin
                J. Weishaar**
              Senior
                Vice President and
              General
                Counsel
            
            **Kenneth
                M. Honeck**
              Senior
                Vice President Retail Banking





**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




72


**LIBERTY
      BANCORP, INC.**





**Investor
      Information**





**ANNUAL
      MEETING OF STOCKHOLDERS**





The
      Annual Meeting of Stockholders will be held on Monday, February 5, 2007 at
      5:30
      p.m. 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 FORM 10-K, INCLUDING FINANCIAL STATEMENT SCHEDULES, WILL BE
      FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN
      REQUEST TO THE SECRETARY, LIBERTY BANCORP, INC., 16 W. FRANKLIN, LIBERTY,
      MISSOURI 64068.**





73