UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended September 30, 2006.

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File #0-23969

POCAHONTAS BANCORP, INC.

(Exact name of registrant as specified in its charter)


Delaware		71-0806097
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1700 E. Highland, Jonesboro, AR		72401
(Address of Principal Executive Offices)		Zip Code

(870) 802-1700

(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share

(Title of Class)

Name of Each Exchange on which Registered: NASDAQ Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicated by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x.

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨.

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x

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

YES ¨ NO x.

As of December 13, 2006, there were issued and outstanding 4,641,717 shares of the Registrant’s Common Stock. Such shares were listed on the NASDAQ National Market System.

The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the last sale price on March 31, 2006, was $37,086,864. This amount does not include shares held by the Employee Stock Ownership Plan of First Community Bank (the Registrant’s subsidiary), by executive officers and directors, and by the Registrant as treasury stock.

POCAHONTAS BANCORP, INC.

TABLE OF CONTENTS


		Page
PART I.

Item 1.	Business	3

Item 1A.	Risk Factors	19

Item 1B.	Unresolved Staff Comments	20

Item 2.	Properties	21

Item 3.	Legal Proceedings	21

Item 4.	Submission of Matters to a Vote of Security Holders	21

PART II.

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	22

Item 6.	Selected Consolidated Financial and Other Data	23

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	25

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 8.	Financial Statements and Supplementary Data	37

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	60

Item 9A.	Controls and Procedures	60

Item 9B.	Other Information	61

PART III.

Item 10.	Directors and Executive Officers of the Registrant	62

Item 11.	Executive Compensation	63

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	64

Item 13.	Certain Relationships and Related Transactions	65

Item 14.	Principal Accountant Fees and Services	65

PART IV.

Item 15.	Exhibits and Financial Statement Schedules	65

Signatures		68

Exhibits

PART I

ITEM 1

BUSINESS

General

Pocahontas Bancorp, Inc. (the “Registrant” or the “Company”) was organized in March 1998 to be the holding company for First Community Bank (the “Bank”), a federally chartered savings and loan association headquartered in Jonesboro, Arkansas. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) under the Depository Insurance Fund (“DIF”). The Company is registered as a savings and loan holding company with the Office of Thrift Supervision (“OTS”). The Company’s main office is located at 1700 E. Highland Drive, Jonesboro, Arkansas, and the telephone number is 870-802-1700.

The Company was organized in conjunction with the mutual-to-stock conversion of the Bank’s majority stockholder, Pocahontas Bancorp, MHC, a federal mutual holding company, in March 1998. In this “second step” conversion, 3,570,750 shares of the Company’s common stock were sold in a subscription and community offering at $10.00 per share, and the outstanding common stock of the Bank was exchanged for Company common stock at a ratio of 4.0245 to 1.

On May 15, 2001, the Company acquired Walden/Smith Financial Group, Inc. (“Walden”) and its wholly-owned bank subsidiary, First Community Bank (“FCB”). As part of the acquisition, Walden’s stockholders received an aggregate of $27.4 million in cash for all of the issued and outstanding common stock of Walden. In connection with the acquisition, the Company’s savings bank subsidiary, Pocahontas Federal Savings and Loan Association, changed its name to First Community Bank. In addition, the Company moved its corporate headquarters to Jonesboro, Arkansas.

On May 31, 2002, the Company’s subsidiary, First Community Bank acquired Peoples Bank of Imboden, an Arkansas bank subsidiary of Spring Rivers Bancshares, Inc., in a cash merger valued at approximately $8.4 million. Peoples Bank, which had assets of $71.6 million, was headquartered in Imboden, Arkansas, and operated four full-service banking offices.

On June 18, 2002, the Company acquired North Arkansas Bancshares, Inc., the holding company for Newport Federal Savings Bank, for $15.00 per share, or $4.3 million in the aggregate in a stock- for- stock exchange. Newport Federal Savings Bank was a savings bank located in Newport, Arkansas, with $37.0 million in total assets at September 30, 2001.

On October 11, 2002, the Company sold its banking offices in Carlisle and England, Arkansas, to the Bank of England.

On April 30, 2003, the Company acquired Marked Tree Bancshares (“Marked Tree”) and its bank subsidiary, Marked Tree Bank, in a stock transaction valued at approximately $3.2 million. The transaction was structured as a tax-free reorganization whereby Marked Tree stockholders received 103.1004 shares of Company stock for each outstanding share of Marked Tree stock. Marked Tree was headquartered in Marked Tree, Arkansas and operated one full-service banking office. At April 30, 2003, Marked Tree had total assets of $32.6 million.

On August 15, 2003, the Company sold its banking offices in Brinkley, Arkansas, to the Bank of Brinkley.

On March 5, 2004, the Company sold its banking offices in Strawberry, Arkansas, to the Bank of Cave City.

The Bank is a community-oriented federally chartered savings and loan association regulated by the OTS, which operates 21 full-service offices in its market area consisting of Northeast Arkansas and Tulsa County, Oklahoma. The Bank opened three new branch locations during fiscal 2005.

On July 26, 2006, the Company entered into a definitive agreement with IBERIABANK Corporation (“IBERIABANK”) pursuant to which IBERIABANK will acquire the Company (“the merger”). The merger is discussed in more detail in Note 23 to the Consolidated Financial Statements.

The Bank is primarily engaged in the business of originating single-family residential mortgage loans, commercial real estate loans and commercial business loans funded with deposits and Federal Home Loan Bank (“FHLB”) advances.

The Bank’s operations are affected by general economic conditions, the monetary and fiscal policies of the federal government and the regulatory policies of government authorities. Deposit flows and the cost of interest-bearing liabilities (“cost of funds”) to the Bank are affected by interest rates on competing investments and general market interest rates. Similarly, the Bank’s loan volume and yields on loans and investment securities and the level of prepayments on such loans and investment securities are affected by market interest rates, as well as by additional factors affecting the supply of and demand for housing and the availability of funds.

Employees

The Company and its affiliates employed 191 full-time equivalent employees at September 30, 2006, compared to 208 and 200 at September 30, 2005 and 2004, respectively. The decrease during fiscal 2006 was primarily the result of management’s efforts to improve efficiency and stream line operations. The increase in the number of full-time equivalent employees in fiscal 2005 was the result of the opening of three new branch locations during the year. We believe that we have been successful in attracting quality employees, and that our employee relations are good.

Available Information

The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, and all amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act, available as soon as reasonably practicable free of charge on or through its website located at www.fcb-online.com after filing with the United States Securities and Exchange Commission.

Competition

The Bank faces strong competition both in attracting deposits and in originating loans. Competitors for deposits include thrift institutions, commercial banks, credit unions, money market funds, and other investment alternatives, such as mutual funds, full service and discount broker-dealers, brokerage accounts, and savings bonds or other government securities. Primary competitive factors include convenience of locations, variety of deposit or investment options, rates or terms offered, and quality of customer service.

The Bank competes for mortgage loan originations with thrift institutions, banks and mortgage companies, including many large financial institutions, which have greater financial and marketing resources available to them. Primary competitive factors include service quality and speed, relationships with builders and real estate brokers, and rates and fees.

The Bank believes that it has been able to compete effectively in its principal markets, and that competitive pressures have not materially interfered with the Bank’s ongoing operations.

Lending Activities

Loan Portfolio Composition. The Bank’s net loan portfolio including loans held for sale consists primarily of first mortgage loans collateralized by single-family residential real estate, multifamily residential real estate, commercial real estate and agricultural real estate loans. At September 30, 2006, the Bank’s net loan portfolio including loans held for sale totaled $435.2 million, of which $131.2 million, or 30.2% were single-family residential real estate mortgage loans, $9.6 million, or 2.2% were multifamily residential real estate loans, $18.1 million, or 4.1% were agricultural real estate loans, and $130.4 million, or 30.0%, were commercial real estate loans (including land loans). Additionally, the Bank’s loans at September 30, 2006 included commercial business loans (i.e., crop production, equipment and inventory loans), which totaled $78.6 million, or 18.1%, of the Bank’s net loan portfolio as of September 30, 2006. Other loans, including automobile loans and loans collateralized by deposit accounts totaled $76.0 million, or 17.4% of the Bank’s net loan portfolio as of September 30, 2006. The composition of the Bank’s loan portfolio has changed during the last six years due to acquisitions, with a larger percentage of loans in commercial real estate and non-real estate loans. These acquisitions of other depository institutions have increased commercial and non-real estate loans by $145.5 million as of the dates of the acquisitions and provided the basis for subsequent originations of other commercial and non-real estate loans.

Analysis of Loan Portfolio

Set forth below is selected data relating to the composition of the Bank’s loan portfolio, including loans held for sale, by type of loan as of the dates indicated.


	At September 30
	2006				2005				2004				2003				2002
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Real estate loans:
Single-family residential	$	131,238	30.2	%	$	136,496	31.8	%	$	128,072	33.4	%	$	139,365	35.8	%	$	188,113	46.1	%
Multifamily residential		9,623	2.2			8,812	2.0			2,393	0.6			1,384	0.4			1,194	0.3
Agricultural		18,096	4.1			20,190	4.7			17,915	4.7			20,467	5.3			17,342	4.2
Commercial		130,416	30.0			135,811	31.6			135,326	35.2			113,855	29.2			91,298	22.4

Total real estate loans		289,373	66.5			301,309	70.1			283,706	73.9			275,071	70.7			297,947	73.0
Other loans:
Savings account loans		6,670	1.5			6,279	1.5			5,571	1.5			6,538	1.7			6,808	1.7
Commercial business (1)		78,594	18.1			80,695	18.8			57,045	14.9			67,747	17.3			64,524	15.8
Other (2)		69,313	15.9			52,150	12.1			44,409	11.6			47,354	12.2			46,459	11.4

Total other loans		154,577	35.5			139,124	32.4			107,025	28.0			121,639	31.2			117,791	28.9

Total loans receivable		443,950	102.0			440,433	102.5			390,731	101.9			396,710	101.9			415,738	101.9
Less:
Undisbursed loan proceeds		5,797	1.3			7,456	1.7			2,942	0.8			3,413	0.9			4,243	1.0
Unearned discount and net deferred loan fees		147	0.1			172	0.1			214	0.1			227	0.1			209	0.1
Allowance for loan losses		2,994	0.6			3,209	0.7			3,765	1.0			4,068	0.9			3,205	0.8

Total loans receivable, net	$	435,012	100.0	%	$	429,596	100.0	%	$	383,810	100.0	%	$	389,002	100.0	%	$	408,081	100.0	%

(1)	Includes crop-production loans, livestock loans and equipment loans.

(2)	Includes second mortgage loans, unsecured personal lines of credit and automobile loans.

Loan Maturity Schedule. The following table sets forth certain information as of September 30, 2006, regarding the dollar amount of gross loans maturing in the Bank’s portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans are included in the period in which interest rates are next scheduled to adjust rather than in which they mature, and fixed rate loans are included in the period in which the final contractual repayment is due.


	Within 1 Year		1-3 Years		3-5 Years		5-10 Years		10-20 Years		Beyond 20 Years		Total
	(In Thousands)
Fixed rate loans	$	93,682	$	116,915	$	62,279	$	44,572	$	29,631	$	12,370	$	359,449
Variable rate loans	$	6,866	$	8,264	$	16,565	$	5,069	$	15,220	$	32,517	$	84,501

Total	$	100,548	$	125,179	$	78,844	$	49,641	$	44,851	$	44,887	$	443,950

The following table sets forth at September 30, 2006, the dollar amount of all fixed rate and adjustable rate loans due after September 30, 2007.


	Fixed		Adjustable		Total
	(in Thousands)
Single family residential	$	58,412	$	52,680	$	111,092
Multifamily residential		8,673		140	$	8,813
Agricultural		14,480		595	$	15,075
Commercial		99,052		9,225	$	108,277
Commercial Business		20,613		14,901	$	35,514
Other		64,537		94	$	64,631

Total:	$	265,767	$	77,635	$	343,402

Single-Family Residential Real Estate Loans. One of the Bank’s primary lending activities is the origination of single-family, owner-occupied, residential mortgage loans collateralized by properties located in the Bank’s market area. The Bank generally does not originate single-family residential loans collateralized by properties outside of its market area. However, the Bank has been an active purchaser of single-family loans from outside the Bank’s primary market area. At September 30, 2006, the Bank had $131.2 million, or 30.2%, of its total net loan portfolio invested in single-family residential mortgage loans, most of which were collateralized by properties located in the Bank’s market area or in counties contiguous with the Bank’s market area.

The Bank’s single-family, fixed rate, residential real estate loans generally are originated and underwritten according to standards that qualify such loans for resale in the secondary mortgage market. The Bank generally retains the adjustable rate mortgage (“ARM”) loans that it originates. Whether the Bank can or will sell fixed rate loans, however, depends on a number of factors including the yield and the term of the loan, market conditions, and the Bank’s current interest rate risk analysis. At September 30, 2006, loans held for sale were $3.2 million, at September 30, 2005, loans held for sale were $3.1 million, and at September 30, 2004 loans held sale were $1.5 million. During the fiscal years ended September 30, 2006 and 2005, the Bank sold into the secondary market $49.2 million and $54.5 million, respectively, of single-family, fixed rate, residential mortgage loans, generally from current period originations. The Bank retained the servicing rights on $19.5 million of loans sold to Fannie Mae in fiscal years 2005; the servicing rights asset, which was $0.6 million as of September 30, 2005 was included in other assets in the Company’s consolidated financial statements. During the fiscal year ended September 30, 2006, the Bank sold the servicing rights on loans sold to Fannie Mae for a net gain of $159 thousand.

The Bank currently offers single-family residential mortgage loans with terms typically ranging from 10 to 30 years, and with adjustable or fixed interest rates. Single-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option. The average length of time that the Bank’s single-family residential mortgage loans remain outstanding varies significantly depending upon trends in market interest rates and other factors. Accordingly, estimates of the average length of single-family loans that remain outstanding cannot be made with any degree of accuracy.

Originations of fixed-rate mortgage loans versus ARM loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, customer preference, the Bank’s interest rate risk analysis, and loan products offered by the Bank’s competitors. Particularly in a relatively low interest rate environment, borrowers may prefer fixed rate loans to ARM loans. However, management’s strategy is to emphasize ARM loans, and the Bank has been successful in maintaining a level of ARM loan originations acceptable to management.

The Bank’s ARM loans are generally for terms of 30 years, with interest rates that adjust annually. The Bank establishes various annual and life-of-the-loan caps on ARM loan interest rate adjustments. The Bank’s current index on its ARM loans is the one-year constant maturity treasury (“CMT”) rate for one-year ARM loans, a three-year CMT rate for three-year ARM loans, and a five-year CMT rate for five-year ARM loans, plus a range of margin of 200 to 300 basis points, subject to change based on market conditions. The Bank determines whether a borrower qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the time the loan is originated.

The primary purpose of offering ARM loans is to make the Bank’s loan portfolio more interest rate sensitive. ARM loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible, therefore, that during periods of rising interest rates, the risk of default on ARM loans may increase due to the upward adjustment of interest costs to the borrower. Management believes that the Bank’s credit risk associated with its ARM loans is reduced because of the lifetime interest rate adjustment limitations on such loans. However, interest rate caps and the changes in the CMT rate, which is a lagging market index to which the Bank’s ARM loans are indexed, may reduce the Bank’s net earnings in a period of rising market interest rates.

The Bank’s single-family residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving the Bank the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on the Bank’s fixed rate mortgage loan portfolio.

Regulations limit the amount that a savings association may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. Such regulations permit a maximum loan-to-value ratio of 100% for residential property and a lower percentage for other real estate loans, depending on the type of loan. The Bank’s lending policies limit the maximum loan-to-value ratio on both fixed rate and ARM loans without private mortgage insurance to 90% of the lesser of the appraised value or the purchase price of the property to serve as collateral for the loan. The Bank generally requires fire and casualty insurance, as well as title insurance, on all properties securing real estate loans made by the Bank.

Multifamily Residential Real Estate Loans. Although the Bank does not emphasize multifamily residential loans and has not been active recently in this area, the Bank has originated loans collateralized by multifamily residential real estate. Such loans constituted approximately $9.6 million, or 2.2% of the Bank’s total net loan portfolio at September 30, 2006, compared to $8.8 million, or 2.0% of the Bank’s total net loan portfolio at September 30, 2005, $2.4 million, or 0.6% of the Bank’s total net loan portfolio at September 30, 2004, $1.4 million, or 0.4% of the Bank’s total net loan portfolio at September 30, 2003, and $1.2 million, or 0.3% of the Bank’s total net loan portfolio at September 30, 2002. The Bank’s multifamily real estate loans are primarily collateralized by multifamily residences, such as apartment buildings. Multifamily residential real estate loans are offered with fixed and adjustable interest rates and are structured in a number of different ways depending upon the circumstances of the borrower and the type of multifamily project. Fixed interest rate loans generally have five-to-seven-year terms with a balloon payment based on a 15 to 25 year amortization schedule.

Loans collateralized by multifamily real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and carry individually larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans collateralized by multifamily real estate typically depends upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Agricultural Real Estate Loans. In recent years the Bank has increased its originations of agricultural real estate loans for the purchase of farmland in the Bank’s market area. Loans collateralized by farmland constituted $18.1 million, or 4.1% of the Bank’s total net loan portfolio at September 30, 2006, compared to $20.2 million, or 4.7% of the Bank’s total net loan portfolio at September 30, 2005, $17.9 million or 4.7%, $20.5 million, or 5.3%, and $17.3 million, or 4.2% of the Bank’s total net loan portfolio at September 30, 2004, 2003, and 2002, respectively.

Agricultural mortgage loans have various terms up to 5 years with a balloon payment based on amortization schedules up to 20 years. Such loans are originated with fixed rates and generally include personal guarantees. The loan-to-value ratio on agricultural mortgage loans is generally limited to 75%. The Bank earns higher yields on agricultural mortgage loans than on single-family residential mortgage loans. Agricultural related lending, however, involves a greater degree of risk than single-family residential mortgage loans because of the typically larger loan amounts and a somewhat more volatile market. In addition, repayments on agricultural mortgage loans are substantially dependent on the successful operation or management of the farm property collateralizing the loan, which is affected by many factors, such as weather and changing market prices, outside the control of the borrower.

Commercial Real Estate Loans. Loans collateralized by commercial real estate, including land loans, constituted $130.4 million, or 30.0% of the Bank’s total net loan portfolio at September 30, 2006, compared to $135.8 million, or 31.6%, $135.3 million, or 35.2%, $113.9 million, or 29.2%, and $91.3 million, or 22.4% of the Bank’s total net loan portfolio at September 30, 2005, 2004, 2003, and 2002, respectively. The Bank’s commercial real estate loans are collateralized by property such as office buildings, retail buildings, churches and other nonresidential buildings. At September 30, 2006, substantially all of the Bank’s commercial real estate loans were collateralized by properties located within the Bank’s market area.

Commercial real estate loans currently are offered primarily with fixed rates and are structured in a number of different ways depending upon the circumstances of the borrower and the nature of the project. Fixed rate loans generally have five-to-seven year terms with a balloon payment based on a 15 to 25 year amortization schedule.

Loans collateralized by commercial real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the greater difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans collateralized by commercial real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Commercial Business Loans. In recent years, the Bank has emphasized the origination of commercial business loans, which include equipment, inventory and crop production loans. Such loans comprised $78.6 million or 18.1% of the Bank’s total net loan portfolio at September 30, 2006, as compared to $80.7 million, or 18.8%, $57.0 million, or 14.9%, $67.7 million, or 17.3%, and $64.5 million, or 15.8% of the Bank’s total net loan portfolio at September 30, 2005, 2004, 2003, and 2002, respectively. When making commercial business loans, we consider the financial strength of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value and type of the collateral. In addition, we usually require the business principals to execute personal guarantees. Commercial business loans are offered primarily on a fixed rate basis with maturities generally of less than five years.

As with agricultural real estate loans, agricultural operating loans involve a greater degree of risk than residential mortgage loans because the payments on such loans are dependent on the successful operation or management of the farm property for which the operating loan is utilized. See “Agricultural Real Estate Loans” for the various risks associated with agricultural operating loans. Other commercial business loans generally have a greater credit risk than residential mortgage loans as well. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards.

Other Loans. The Bank originates various consumer loans, including automobile, deposit account loans and second mortgage loans, principally in response to customer demand in our primary market area. As of September 30, 2006, such loans totaled $76.0 million, or 17.4% of the Bank’s total net loan portfolio as compared to $58.4 million, or 13.6%, to $50.0 million, or 13.1%, $53.9 million, or 13.9%, and $53.3 million, or 13.1%, of the Bank’s total net loan portfolio as of September 30, 2005, 2004, 2003, and 2002, respectively. Consumer loans are offered primarily on a fixed rate basis with maturities generally of less than ten years.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles, motorcycles, motor homes and boats. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Origination, Purchase and Sale of Loans and Mortgage-Backed Securities. The table below shows the Bank’s originations, purchases and sales of loans, including loans held for sale, and mortgage-backed securities for the periods indicated.


	Year Ended September 30
	2006			2005			2004			2003			2002
	(In Thousands)
Total loans receivable, net at beginning of year	$	429,596		$	383,810		$	389,002		$	408,081		$	349,376
Loans originated:
Real estate:
Single-family residential		79,242			95,206			91,256			87,843			93,072
Multifamily residential		14,792			4,600			1,305			313			—
Commercial		29,462			50,772			60,409			55,255			41,130
Agricultural		2,195			5,396			32,188			39,287			27,100
Other:
Commercial business		62,029			58,929			12,855			19,140			18,324
Savings account loans		5,641			4,246			2,647			5,102			6,310
Other		42,510			37,698			25,856			18,462			22,558

Total loans originated		235,871			256,847			226,516			225,402			208,494
Loans purchased		5,699			5,900			9,721			20,041			76,676
Loans sold		(49,165	)		(54,550	)		(64,604	)		(79,097	)		(28,469	)
Loans transferred to REO		(1,188	)		(2,185	)		(2,707	)		(2,119	)		(2,312	)
Loans to facilitate the sale of REO		(384	)		(852	)		(1,150	)		(1,533	)		(1,471	)
Loan repayments		(185,409	)		(159,838	)		(170,241	)		(182,495	)		(194,449	)
Other loan activity (net) (1)		(8	)		464			(2,727	)		722			236

Total loans receivable, net at end of year	$	435,012		$	429,596		$	383,810		$	389,002		$	408,081

Mortgage-backed securities, net at beginning of year	$	175,189		$	218,467		$	216,072		$	104,835		$	37,090
Purchases		14,700			53,111			105,054			239,594			106,121
Sales		—			(48,615	)		(31,085	)		(88	)		(19,256	)
Fair value adjustment		(490	)		(2,818	)		(1,922	)		(1,024	)		745
Repayments		(36,164	)		(44,675	)		(69,514	)		(127,375	)		(20,183	)
Discount amortization / accretion		(211	)		(281	)		(138	)		130			318

Mortgage-backed and related securities, net at end of year	$	153,024		$	175,189		$	218,467		$	216,072		$	104,835

Total loans receivable, net, and mortage-backed and related securities, net, at end of year	$	588,036		$	604,785		$	602,277		$	605,074		$	512,916

(1)	Includes provisions for loan losses and amortization of deferred loan fees.

Loans to One Borrower. The maximum loans that a savings association may make to one borrower or a related group of borrowers is 15% of the savings association’s unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is collateralized by readily marketable collateral (generally, financial instruments and bullion, but not real estate).

Asset Quality

When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower and seeking the payment. Depending upon the type of loan, late notices are sent and/or personal contacts are made. In most cases, deficiencies are cured promptly. While the Bank generally prefers to work with borrowers to resolve such problems, when a mortgage loan becomes 90 days delinquent, the Bank generally institutes foreclosure or other proceedings, as necessary, to minimize any potential loss. Real estate that the Company obtains as a result of these proceedings is classified as real estate owned (“REO”) until such time as it is sold. REO is initially recorded at its estimated fair value, less estimated selling expenses. Management periodically performs valuations, and any subsequent decline in estimated fair value is charged to operations.

Classification of Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as “substandard,” “doubtful,” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the savings institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets is not warranted. These “loss” assets are charged against the allowance for loan losses in the period management believes the uncollectibility of a loan balance is confirmed. The amount by which loan principal for classified, asset-based loans exceeds the estimated value of the collateral on the loan is also considered by the Company a loss asset and afforded the same accounting treatment as other loss assets. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated “special mention” by management. Loans designated as special mention are generally loans that, while current in required payments, have exhibited some potential weaknesses that, if not corrected, could increase the level of risk in the future.

A savings institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by federal regulators, who can order the establishment of additional loan loss allowances.

The following table sets forth the aggregate amount of the Bank’s classified assets at the dates indicated.


	At September 30
	2006		2005		2004		2003		2002
	(In Thousands)
Substandard assets	$	5,139	$	5,376	$	7,826	$	8,150	$	4,166
Doubtful assets		366		253		600		915		—

Total classified assets	$	5,505	$	5,629	$	8,426	$	9,065	$	4,166

Non-performing Loans, Allowance for Loan Losses and Loan Loss Provisions. The allowance for loan losses is established through a provision for loan losses based on management’s quarterly asset classification review and evaluation of the risk inherent in the Bank’s loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of all loans on which full collection may not be reasonably assured, considers among other matters, the estimated value of collateral, cash flow analysis, historical loan loss experience, and other factors that warrant recognition in providing allowances.

During the fiscal years ended September 30, 2006, 2005, 2004, 2003, and 2002, the Bank added $845,000, $525,000, $3,900,000, $2,595,000, and $900,000, respectively, to its allowance for loan losses. The Bank’s allowance for loan losses totaled $3.0 million, or 0.6% of total loans, $3.2 million, or 0.7% of total loans, $3.8 million, or 1.0% of total loans, $4.1 million, or 1.0% of total loans, and $3.2 million, or 0.8% of total loans, at September 30, 2006, 2005, 2004, 2003, and 2002, respectively. Net charge offs totaled $1.1 million or 0.2% of total loans, $1.1 million or 0.2% of total loans, $4.2 million or 1.1% of total loans, $2.1 million or 0.5% of total loans, and $1.1 million or 0.3% of total loans for the years ended September 30, 2006, 2005, 2004, 2003, and 2002, respectively. Total nonperforming loans decreased $1.8 million to $2.1 million at September 30, 2006 from $3.9 million at September 30, 2005, compared to the decrease of $0.8 million in 2005 from $4.7 million at September 30, 2004. Based on presently available information, management believes that the current allowance for loan losses is adequate. Changing economic and other conditions may require future adjustments to the allowance for loan losses.

During the last six fiscal years, the Company has completed separate acquisitions of four banks. The loans acquired as part of these acquisitions have contributed to the increase in the balance of nonperforming loans in the Company’s portfolio; of the $2.1 million in nonperforming loans as of September 30, 2006, $0.5 million, or 23.8% were loans acquired as part of the bank acquisitions. Nonperforming commercial loans have increased $0.2 million due to the acquisitions. We believe that the increase in non-performing commercial loans was a result of a lower quality of underwriting and collection efforts at the acquired institutions prior to the Company’s acquisition of the institutions compared to the Company’s underwriting and collection efforts. Approximately $2.0 million of loan loss allowance on the loans was transferred with these bank acquisitions. Total charge offs for fiscal years 2001 – 2006 totaled $12.8 million with $6.0 million or 46.9% of charge offs recorded in connection with the loans acquired in these acquisitions.

opinion of management, collection of the remaining balance can be reasonably expected. Non-accrual loans decreased $1.8 million or 46.2% to $2.1 million at September 30, 2006 from $3.9 million at September 30, 2005. The interest income not recognized by the Company on the non-accrual loans was $0.2 million, $0.4 million, $0.5 million, $0.4 million, and $0.3 million, for the years ended September 30, 2006, 2005, 2004, 2003, and 2002, respectively. There was no interest income recognized on non-accrual loans during the periods.

The following table sets forth information regarding non-accrual loans (nonperforming loans) and real estate owned by the Bank at the dates indicated.


	At September 30
	2006			2005			2004			2003			2002
	(Dollars In Thousands)
Nonperforming loans:
Single-family residential real estate	$	1,150		$	2,644		$	1,540		$	2,383		$	1,744
Agriculture real estate		123			386			1,014			66			94
Commercial real estate		482			581			1,726			1,919			452
Commercial non real estate		246			178			233			764			489
Other loans		58			147			153			478			404

Total nonperforming loans		2,059			3,936			4,666			5,610			3,183
Total real estate owned and repossessed assets (1)		63			349			619			802			1,707

Total nonperforming assets	$	2,122		$	4,285		$	5,285		$	6,412		$	4,890

Total nonperforming loans to net loans receivable		0.47	%		0.92	%		1.22	%		1.43	%		0.78	%
Total nonperforming loans to total assets		0.28	%		0.53	%		0.65	%		0.73	%		0.52	%
Total nonperforming assets to total assets		0.29	%		0.58	%		0.73	%		0.84	%		0.79	%

(1)	Net of valuation allowances

The allowance for loan losses is a valuation allowance to provide for incurred but not yet realized losses. The Company reviews its loans for impairment on a quarterly basis. Impairment is determined by assessing the probability that the borrower will not be able to fulfill the contractual terms of the agreement. If a loan is determined to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or by use of the observable market price of the loan or fair value of collateral if the loan is collateral dependent. Throughout the year management estimates the level of probable losses to determine whether the allowance for loan losses is appropriate considering the estimated losses existing in the portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined by management to be appropriate relative to losses. The allowance for loan losses is increased by charges to income (provisions) and decreased by charge-offs, net of recoveries.

Management’s periodic evaluation of the appropriateness of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions.

Homogeneous loans are those that are considered to have common characteristics that provide for evaluation on an aggregate or pool basis. The Company considers the characteristics of (1) one-to-four family residential first mortgage loans; (2) automobile loans and; (3) consumer and home improvement loans to permit consideration of the appropriateness of the allowance for losses of each group of loans on a pool basis. The primary methodology used to determine the appropriateness of the allowance for losses includes segregating certain specific, poorly performing loans based on their performance characteristics from the pools of loans as to type and then applying a loss factor to the remaining pool balance based on several factors including classification of the loans as to grade, past loss experience, inherent risks, economic conditions in the primary market areas and other factors which usually are beyond the control of the Company. Those segregated specific loans are evaluated using the present value of future cash flows, usually determined by estimating the fair value of the loan’s collateral reduced by any cost of selling and discounted at the loan’s effective interest rate if the estimated time to receipt of monies is more than three months.

Non-homogeneous loans are those loans that can be included in a particular loan type, such as commercial loans and multi-family and commercial first mortgage loans, but which differ in other characteristics to the extent that valuation on a pool basis is not valid. After segregating specific, poorly performing loans and applying the methodology as noted in the preceding paragraph for such specific loans, the remaining loans are evaluated based on payment experience, known difficulties in the borrower’s business or geographic area, loss experience, inherent risks and other factors usually beyond the control of the Company. These loans are then graded and a factor, based on experience, is applied to estimate the probable loss.

Estimates of the probability of loan losses involve an exercise of judgment. While it is possible that in the near term the Company may sustain losses, which are substantial in relation to the allowance for loan losses, it is the judgment of management that the allowance for loan losses reflected in the consolidated statements of financial condition is appropriate considering the estimated probable losses in the portfolio.

While loss allowance is charged against earnings, loan loss allowance is added back to capital, subject to a limitation of 1.25% of risk-based assets, in computing risk-based capital under OTS regulations.

Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.


	Year Ended September 30
	2006			2005			2004			2003			2002
	(Dollars In Thousands)
Total loans receivable	$	443,950		$	440,433		$	390,731		$	396,710		$	415,738
Average net loans outstanding		425,944			381,390			388,679			391,588			353,585
Allowance balances (at beginning of year)		3,209			3,765			4,068			3,205			2,542
Provision for losses:		845			525			3,900			2,595			900
Balance transferred at acquisition*		—			—			—			355			836
Charge-offs:
Single Family		(350	)		(374	)		(601	)		(397	)		(239	)
Agriculture		—			(31	)		(87	)		(129	)		—
Commercial real estate		(617	)		(711	)		(858	)		(211	)		(32	)
Commercial business		(308	)		(864	)		(2,418	)		(378	)		(692	)
Other		(247	)		(329	)		(681	)		(1,089	)		(174	)
Recoveries:
Single Family		205			104			6			6			1
Agriculture		—			8			17			—			—
Commercial real estate		39			217			104			27			6
Commercial business		132			769			189			—			5
Other		86			130			126			84			52

Allowance balance (at end of year)	$	2,994		$	3,209		$	3,765		$	4,068		$	3,205

Allowance for loan losses as a percent of total loans receivable at end of year		0.67	%		0.73	%		0.96	%		1.03	%		0.77	%
Loans charged off as a percent of average net loans outstanding		0.36	%		0.61	%		1.20	%		0.56	%		0.32	%
Ratio of allowance for loan losses to total nonperforming loans at end of year		145.41	%		81.53	%		80.69	%		72.51	%		100.69	%
Ratio of allowance for loan losses to total nonperforming assets at end of year		141.09	%		74.89	%		71.24	%		63.44	%		65.54	%

*	Marked Tree Bancshares in 2003, People's Bank and North Arkansas Bancshares in 2002

Allocation of Allowance for Loan Losses. The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated.


	At September 30
	2006				2005				2004				2003				2002
	Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans
	(Dollars in Thousands)
Balance at end of period applicable to:
Single Family	$	889	28.2	%	$	736	29.3	%	$	601	31.5	%	$	705	33.8	%	$	1,445	45.1	%
Multi Family		—	2.2			—	2.0			34	0.6			20	0.4			10	0.3
Agriculture real estate		103	4.1			188	4.7			493	4.7			395	5.3			135	4.2
Commercial real estate		675	30.0			748	31.6			1,435	35.2			1,606	29.2			718	22.4
Commercial business		1,212	18.1			1,352	18.8			977	14.9			1,108	17.4			506	15.8
Other Loans		115	17.4			185	13.6			225	13.1			234	13.9			391	12.2

Total allowance for loan losses	$	2,994	100.0	%	$	3,209	100.0	%	$	3,765	100.0	%	$	4,068	100.0	%	$	3,205	100.0	%

Investment Activities

Mortgage-Backed Securities. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgagors, through intermediaries that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Mortgage-backed securities typically are issued with stated principal amounts. The securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed-rate mortgages or ARM loans. As a result, the

interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as the prepayment risk, are passed on to the certificate holder. The Bank invests in mortgage-backed securities to supplement local single-family loan originations as well as to reduce interest rate risk exposure, because mortgage-backed securities are more liquid than mortgage loans.

Set forth below is selected data relating to the composition of the Bank’s mortgage-backed securities portfolio as of the dates indicated.


	At September 30
	2006				2005				2004				2003				2002
	$		%		$		%		$		%		$		%		$		%
	(Dollars in Thousands)
Mortgage-backed securities:
Adjustable	$	—	0.0	%	$	—	0.0	%	$	12,180	5.6	%	$	15,179	7.0	%	$	14,075	13.4	%
Fixed		153,024	100.0	%		175,189	100.0	%		206,287	94.4	%		200,893	93.0	%		90,760	86.6	%

Total mortage-backed securities, net	$	153,024	100	%	$	175,189	100	%	$	218,467	100	%	$	216,072	100	%	$	104,835	100	%

At September 30, 2006, mortgage-backed securities aggregated $153.0 million, or 20.7% of the Bank’s total assets. At September 30, 2006, $91.7 million of the Bank’s mortgage-backed securities were classified as available-for-sale, and $61.3 million of the Bank’s mortgage-backed securities were classified as held-to-maturity.

Other Investment Securities. The Bank’s investment portfolio, excluding mortgage-backed securities, FHLB stock, and trading securities, consists of obligations of the United States Government treasuries and agencies thereof, municipal bonds, corporate bonds, mutual funds, interest-earning deposits in other institutions and equity investments. The carrying value of this portion of the Bank’s investment portfolio totaled $73.7 million, $54.2 million, $28.4 million, $82.9 million, and $20.6 million at September 30, 2006, 2005, 2004, 2003, and 2002, respectively. At September 30, 2006, $13.5 million of the Bank’s investment securities, excluding mortgage-backed securities, had a remaining term to maturity of one year or less, and $18.8 million had a remaining term to maturity of five years or less. During the year ended September 30, 2004, the Company analyzed the classification of securities and subsequently transferred $86.1 million of securities from available-for-sale to held-to-maturity.

The following table sets forth the composition of the Bank’s investments as of the dates indicated.


	At September 30
	2006		2005		2004		2003		2002
	(In Thousands)
Investment securities:
Mortgage-backed securities	$	153,024	$	175,189	$	218,467	$	216,072	$	104,835
Corporate bonds		—		—		—		14,269		3,814
U.S. Government treasury obligations		19,921		19,844		—		4,171		—
U.S. Government agency obligations		4,000		4,000		4,442		39,105		3,648
Municipal bonds		47,870		29,403		22,934		24,351		13,167
Preferred Security		108		—		—		—		—
Equity securities (Common Stock)		795		—		—		—		—
Mutual fund		963		976		990		1,005		—

Total investment securities		226,681		229,412		246,833		298,973		125,464
FHLB stock		6,572		7,962		7,926		5,584		2,126

Total investments	$	233,253	$	237,374	$	254,759	$	304,557	$	127,590

The Bank is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments. The Bank generally has maintained a portfolio of liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management’s judgment as to the attractiveness of the available yields in relation to other opportunities, management’s expectation of the level of yield that will be available in the future, as well as management’s projections of short term demand for funds in the Bank’s loan origination and other activities.

Investment Portfolio Maturities The following table sets forth the scheduled maturities, carrying values, market values and average yields for the Bank’s investment securities at September 30, 2006.


	One Year or Less				One to Five Years				Five to Ten Years				Over Ten Years				Total
	Carrying Value		Annualized Weighted Average Yield		Carrying Value		Annualized Weighted Average Yield		Carrying Value		Annualized Weighted Average Yield		Carrying Value		Annualized Weighted Average Yield		Carrying Value		Market Value		Average Life in Years	Annualized Weighted Average Yield
	(Dollars In Thousands)
Investment securities:
U.S. Government Agency Securities	$	—	0.00	%	$	—	0.00	%	$	—	0.00	%	$	4,000	3.88	%	$	4,000	$	3,867	6.72	3.88	%
U.S. Government Treasury Securities		9,988	3.69	%		9,933	3.88	%		—	0.00	%		—	0.00	%		19,921		19,744	0.90	3.78	%
State and municipal obligations (1)		1,656	2.71	%		8,851	3.46	%		9,630	3.87	%		27,733	4.32	%		47,870		48,004	4.65	4.01	%
CMOs (2)		—	0.00	%		—	0.00	%		—	0.00	%		19,508	4.07	%		19,508		18,451	3.74	4.07	%
Mortgage-backed securities		—	0.00	%		—	0.00	%		104,519	4.04	%		28,997	4.35	%		133,516		131,817	3.41	4.11	%
Preferred Security		108	0.00	%		—	0.00	%		—	0.00	%		—	0.00	%		108		108
Equity Securities (Common Stock)		795	0.00	%		—	0.00	%		—	0.00	%		—	0.00	%		795		795
Mutual Fund		963	4.33	%		—	0.00	%		—	0.00	%		—	0.00	%		963		963	4.57	4.33	%

Total investment securities		13,510	3.30	%		18,784	3.46	%		114,149	4.02	%		80,238	4.25	%		226,681		223,749		4.01	%

FHLB stock																		6,572		6,572
Accrued interest on investments																		1,191		1,191

Total investment securities, including accrued interest																	$	234,444	$	231,512

(1)	The yield on these tax-exempt obligations has not been compiled on a tax-equivalent basis.

(2)	The average life in years is based on actual stated maturities; however, management anticipates a shorter life on these securities.

Sources of Funds

General. Deposits are a significant source of the Bank’s funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from FHLB advances, the amortization and prepayment of loans and mortgage-backed securities, the sale or maturity of investment securities, and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer-term basis for general business purposes.

Deposits. Consumer and commercial deposits are received principally from within the Bank’s market area through the offering of a broad selection of deposit instruments including NOW accounts, savings, money market deposit accounts, term certificate accounts and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The maximum rate of interest the Bank may pay is not established by regulatory authority. The Bank regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Bank’s cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate.

Time Deposit Rates. The following table sets forth the certificates of deposit of the Bank classified by rates as of the dates indicated:


	At September 30
	2006		2005		2004		2003		2002
	(In Thousands)
Rate
0.00-1.99%	$	3,220	$	226	$	63,971	$	57,083	$	12,997
2.00-2.99%		4,799		58,234		105,611		35,416		95,895
3.00-3.99%		68,875		126,083		38,744		130,930		126,881
4.00-5.99%		264,289		82,428		28,429		47,239		85,244
6.00-7.99%		—		815		2,482		4,013		11,165
8.00-9.99%		—		—		224		223		225

Total	$	341,183	$	267,786	$	239,461	$	274,904	$	332,407

Time Deposit Maturities. The following table sets forth the amount and maturities of certificates of deposit at September 30, 2006.


	Maturity
	3 months or less		3 to 6 months		6 to 12 months		Over 12 months		Total
	(In Thousands)
Certificate of Deposit less than $100,000	$	64,313	$	33,641	$	54,761	$	35,783	$	188,498
Certificate of Deposit greater than or equal to $100,000		55,389		22,280		40,920		34,096		152,685

Total Certificates of Deposit		119,702		55,921		95,681		69,879		341,183

Borrowings

Deposits of the Bank are a significant source of funds as are short term and long term advances from the FHLB. FHLB advances are collateralized by the Bank’s stock in the FHLB, investment securities and a blanket lien on the Bank’s mortgage portfolio. Such advances are made pursuant to different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the FHLB. The maximum amount of FHLB advances to a member institution generally is reduced by borrowings from any other source. At September 30, 2006, the Bank’s FHLB advances totaled $104.4 million.

The following table sets forth certain information regarding borrowings by the Bank during the years ended September 30:


	Year Ended September 30,
	2006			2005			2004			2003			2002
	(Dollars In Thousands)
Weighted average rate paid on: (1)
FHLB advances		3.97	%		3.41	%		2.56	%		3.13	%		3.70	%
Other borrowings (2)		0.00	%		0.00	%		5.25	%		5.25	%		0.00	%
FHLB advances:
Maximum balance	$	171,078		$	184,950		$	159,337		$	110,184		$	73,316
Average balance	$	136,383		$	154,432		$	123,107		$	33,651		$	36,713
Other borrowings: (2)
Maximum balance	$	—		$	—		$	671		$	284		$	350
Average balance	$	—		$	—		$	336		$	284		$	—

(1)	Calculated using monthly weighted average interest rates.

(2)	Includes securities sold under agreements to repurchase and a loan assumed with the acquisition of Marked Tree Bancshares, Inc. in 2003. Other borrowings are included in accrued expenses and other liabilities in the consolidated statement of financial condition.

Savings associations are authorized to borrow from the Federal Reserve Bank “discount window,” but Federal Reserve Board regulations require savings associations to exhaust other reasonable alternative sources of funds, including FHLB advances, before borrowing from the Federal Reserve Bank. As of September 30, 2006, the Company had no “discount window” borrowings.

Trust Preferred Securities

The Company has issued two series of Trust Preferred Securities totaling $17.5 million. The Trust Preferred Securities are discussed in detail in Note 11 to the Consolidated Financial Statements, contained herein.

Subsidiaries’ Activities

The Bank is the wholly owned subsidiary of the Company. The Bank has three wholly owned subsidiaries, Sun Realty, Inc., P.F. Service, Inc., and Southern Mortgage Corporation. Sun Realty, Inc. and P.F. Services, Inc. are Arkansas corporations and both are substantially inactive. Southern Mortgage Corporation is a Tulsa, Oklahoma based lending company that primarily originates single family loans to sell into the secondary market.

Regulation

The following discussion describes elements of the extensive regulatory framework applicable to savings and loan holding companies and federal savings associations and provides some specific information relevant to us. This regulatory framework is primarily intended for the protection of depositors, federal deposit insurance funds and the banking system as a whole rather than for the protection of shareholders and creditors.

To the extent that this section describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. Those statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to the Company, including interpretation or implementation thereof, could have a material effect on the Company’s business.

As a federally chartered, savings association, the Bank is subject to examination, supervision and extensive regulation by the OTS and the FDIC. The Bank is a member of the FHLB system. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The Registrant also is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) governing reserves to be maintained against deposits and certain other matters. The OTS regularly examines the Registrant and the Bank and prepares a report for the consideration of the Bank’s Board of Directors on any deficiencies that it may find in the Bank’s operations. The FDIC also examines the Bank in its role as the administrator of the DIF. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws especially in such matters as the ownership of savings accounts and the form and content of the Bank’s mortgage documents.

Regulatory Capital Requirements. The Company is not currently subject to any regulatory capital requirements, but its subsidiary federal savings association is subject to various capital requirements. Federally insured savings institutions are required to maintain minimum levels of regulatory capital. The OTS has established capital standards applicable to all savings institutions. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

Under the tangible capital requirement, a savings association must maintain tangible capital in an amount equal to at least 1.5% of adjusted total assets. Tangible capital generally includes common stockholders’ equity including retained earnings and certain noncumulative perpetual preferred stock and related earnings. In addition, all intangible assets, other than a limited amount of purchased mortgage-servicing rights, must be deducted from tangible capital for calculating compliance with the requirement. Further, the accumulated unrealized gains or losses on available-for-sale securities determined in accordance with SFAS No. 115 are excluded from the regulatory capital calculation. At September 30, 2006, the Bank had $13.2 million in goodwill and intangible assets and $2.8 million in accumulated unrealized losses on securities, which were excluded from the regulatory capital calculation.

The leverage limit adopted by the OTS requires that savings associations maintain “core capital” in an amount equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including supervisory goodwill (which is phased out over a five-year period) and up to 25% of other intangibles that meet certain separate salability and market valuation tests. As a result of the prompt corrective action provisions described below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio.

Under the risk-based capital requirement, a savings association must maintain total capital equal to at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At September 30, 2006, the Bank had no capital instruments that qualify as supplementary capital and $2.8 million of general loss reserves, which was less than 1.0% of risk-weighted assets.

The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against associations that fail to meet capital requirements. The OTS is generally required to take action to restrict the activities of an “undercapitalized association” (generally defined to be one with less than 4% tier 1 risk-based capital, 3% leverage capital, or 8% total risk-based capital). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions.

The imposition by the OTS or the FDIC of any of these measures on the Bank may have a substantial adverse effect on the Registrant’s operations and profitability and the value of its common stock. If the OTS or the FDIC require an association such as the Bank, to raise additional capital through the issuance of Company common stock or other capital instruments, such issuance may result in the dilution in the percentage of ownership of those persons holding shares of common stock since the Company’s shareholders do not have preemptive rights.

As of September 30, 2006, the Bank met all capital requirements to which it was subject and satisfied the requirements to be treated as well-capitalized.

Qualified Thrift Lender Test. All savings associations, including the Bank, are required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (which consists of total assets less intangibles, properties used to conduct the savings association’s business and liquid assets not exceeding 20% of total assets) in qualifying thrift investments on a monthly average for nine out of every twelve months on a rolling basis. At September 30, 2006, the Bank met the test.

A savings institution that fails to become or maintain a qualified thrift lender must either become a bank (other than a savings bank) or be subject to certain restrictions. A savings institution that converts to a bank must pay applicable regulatory fees involved in converting. A savings institution that fails to meet the QTL test and does not convert to a bank will be: (1) prohibited from making any investment or engaging in activities that would not be permissible for national banks; (2) prohibited from establishing any new branch office where a national bank located in the savings institution’s home state would not be able to establish a branch office; (3) ineligible to obtain new advances from any FHLB; and (4) subject to limitations on the payment of dividends comparable to the statutory and regulatory dividend restrictions applicable to national banks.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Bank was examined for CRA compliance in May 2004 and received a rating of “satisfactory”.

Accounting. An OTS policy statement applicable to all savings associations clarifies and re-emphasizes that the investment activities of a savings association must be in compliance with approved and documented investment policies and strategies, and must be accounted for in accordance with generally accepted accounting principles (“GAAP”). Under the policy statement, management must support its classification of and accounting for loans and securities (i.e., whether held for investment, available for sale or trading) with appropriate documentation. The Bank is in compliance with these policy statements.

The OTS has adopted an amendment to its accounting regulations, which may be made more stringent than GAAP, to require that transactions be reported in a manner that best reflects their underlying economic substance and inherent risk notwithstanding GAAP and that financial reports must incorporate any other accounting regulations or orders prescribed by the OTS.

Insurance of Accounts and Regulation by the FDIC. As insurer of the Bank’s deposit accounts, the FDIC is authorized to conduct examinations of and to require reporting by the Bank. It also may prohibit any insured association from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after first giving the OTS an opportunity to take such action.

The FDIC has adopted a risk-based deposit insurance assessment system. The FDIC assigns an institution to one of three capital categories, based on the institution’s financial information, as of the reporting period ending seven months before the assessment period, and one of three supervisory subcategories within each capital group. The three capital categories are well capitalized, adequately capitalized and undercapitalized. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution’s primary federal regulator and information which the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC is authorized to raise the assessment rates. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If this type of action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank.

Limitations on Dividends and Capital Distributions. The Company is a legal entity separate and distinct from its banking and other subsidiaries. Its principal sources of funds are cash dividends paid by those subsidiaries, investment income, and borrowings. OTS regulations impose limitations on all capital distributions by savings institutions such as the Bank. Capital distributions include cash dividends, payments to repurchase or otherwise acquire the savings association’s shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital.

A savings institution must file an application for OTS approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company, as well as certain other institutions, must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution.

Any additional capital distributions would require prior regulatory approval. In the event the Bank’s capital fell below its required levels or the OTS notified it that it was in need of more than normal supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that the distribution would constitute an unsafe or unsound practice.

Equity Risk Limitations. Certain OTS regulations limit the Company’s investment in “equity risk investments,” which include investments in equity securities, real estate, service corporations and operating subsidiaries, as well as land loans and non-residential construction loans with loan-to-value ratios in excess of 80%. Equity risk investments increase the capital requirements of the Bank. Federal laws and regulations also impose certain limitations on operations, including restrictions on loans-to-one-borrower, transactions with affiliates and affiliated persons and liability growth. They also impose requirements for the retention of housing and thrift-related investments. See “Qualified Thrift Lender Test.”

Mortgage Banking and Mortgage Servicing Rights. The four federal banking agencies have jointly issued expanded examination and supervision guidance relating to mortgage banking and mortgage servicing rights. The guidance on mortgage banking activities and mortgage servicing rights highlights the banking agencies’ concerns about and provides guidance relating to mortgage banking activities, primarily in the valuation and hedging of mortgage servicing rights. The guidance states that institutions with significant exposure to mortgage related assets, especially mortgage servicing rights, should expect greater scrutiny of those assets during examinations, and additional capital may be required for institutions that fail to follow the practices set forth in the guidelines.

Transactions with Affiliates

The Bank’s authority to engage in transactions with related parties or “affiliates” or to make loans to specified insiders is limited by Sections 23A and 23B of the Federal Reserve Act. The term “affiliated” for these purposes generally means any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries. Section 23A limits the aggregate amount of certain “covered” transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of covered transactions with all affiliates to 20% of the savings institution’s capital and surplus. Covered transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates are generally prohibited. Section 23B provides that covered transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Bank’s authority to extend credit to executive officers, directors and 10% stockholders, or entities controlled by these persons, is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and also by Regulation O. Among other things, these regulations generally require these loans to be made on terms substantially the same as those offered to unaffiliated individuals and do not involve more than the normal risk of repayment. However, recent regulations now permit executive officers and directors to receive the same terms through benefit or compensation plans that are widely available to other employees, as long as the director or executive officer is not given preferential treatment compared to other participating employees. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to these person based, in part on the Bank’s capital position, and requires approval procedures to be followed. At September 30, 2006, the Bank was in compliance with these regulations.

The Federal Reserve System

Federal Reserve Board regulations require all depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. At September 30, 2006, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS.

Holding Company Regulation

The Company is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act (“HOLA”), as amended. As such, the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank is required to notify the OTS 30 days before declaring any dividend to the Company.

As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. Upon any non-supervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.

The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring other savings institutions or holding companies thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the company and institution involved the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

Federal Securities Laws

The Company’s common stock is registered with the Securities Exchange Commission (“SEC”) under the Securities Exchange Act of 1934. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company are subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate’s sale to be aggregated with those of certain other persons) is able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances.

Recent Legislation

USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Financial Services Modernization Legislation. In November 1999, the Gramm-Leach-Bliley Act of 1999, “GLB”, was enacted. The GLB repeals provisions of the Glass-Steagall Act which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities, and which restricted officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities.

In addition, the GLB also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit holding company to engage in a full range of financial activities through a new entity known as a “financial holding company.” “Financial activities” is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

The GLB provides that no company may acquire control of an insured savings association unless that company engages, and continues to engage, only in the financial activities permissible for a financial holding company, unless the company is grandfathered as a unitary savings and loan holding company on May 4, 1999 or became a unitary savings and loan holding company pursuant to an application pending on that date.

The GLB also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a financial holding company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation.

To the extent that the GLB permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The GLB is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis and which unitary savings and loan holding companies already possess. Nevertheless, the GLB may have the result of increasing the amount of competition that we face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than we have.

Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, “SOA”. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the Securities and Exchange Commission and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the Securities and Exchange Commission. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

The SOA addresses, among other matters:

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audit committees;

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certification of financial statements by the chief executive officer and the chief financial officer;

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the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

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a prohibition on insider trading during pension plan black out periods;

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disclosure of off-balance sheet transactions;

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a prohibition on personal loans to directors and officers;

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expedited filing requirements for Forms 4;

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disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;

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“real time” filing of periodic reports;

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the formation of a public accounting oversight board;

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auditor independence; and

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various increased criminal penalties for violations of securities laws.

The SOA contains provisions which became effective upon enactment, and provisions which became effective from within 30 days to one year from enactment. The Securities and Exchange Commission has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Securities and Exchange Act.

FEDERAL AND STATE TAXATION

Federal Taxation

Tax Bad Debt Reserves. The Bank is subject to the rules of federal income taxation generally applicable to corporations under the Internal Revenue Code of 1986, as amended (the “Code”). Most corporations are not permitted to make deductible additions to bad debt reserves under the Code. However, savings and loan associations and savings associations such as the Bank, which met certain tests prescribed by the Code were previously granted favorable provisions regarding deductions from taxable income for annual additions to their bad debt reserve. Most of these favorable provisions have been repealed for years beginning after December 31, 1995. As part of the repeal financial institutions were required to recapture the balances of excess tax bad debt reserves. The Bank was required to recapture its applicable reserves over a six year period, i.e. the balances of its reserves for losses on qualifying loans and nonqualifying loans, as of the close of the last tax year beginning before January 1, 1996, over the greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case of a bank which is not a “large” bank, an amount that would have been the balance of such reserves as of the close of the last tax year beginning before January 1, 1996, had the Bank always computed the additions to its reserves using the experience method. Postponement of the recapture was allowed for a two-year period upon the Bank meeting a minimum level of mortgage lending for 1996 and 1997.

If an association ceases to qualify as a “bank” (as defined in Code Section 581) or converts to a credit union, the pre-1988 reserves and the supplemental reserve are restored to income ratably over a six-year period, beginning in the tax year the association no longer qualifies as a bank. The balance of the pre-1988 reserves are also subject to recapture in the case of certain excess distributions to (including distributions on liquidation and dissolution), or redemptions of, shareholders.

Banks and other financial institutions are still allowed to use the experience method for deducting bad debts under Code Section 585. However, “large” financial institutions may no longer be entitled to use the experience method of computing additions to their bad debt reserve. The definition of a large bank is one of which the quarterly average of the institution's total assets, or the consolidated group of which it is a member, exceeds $500 million for the year. A large institution must use the direct write-off method for deducting bad debts, under which charge-offs are deducted and recoveries are taken into taxable income as incurred. Since the Bank is a large institution, it is required to use the direct write-off method.

Distributions. To the extent that (i) the Bank’s tax bad debt reserve for losses on qualifying real property loans exceeds the amount that would have been allowed under an experience method and (ii) the Bank makes “non-dividend distributions” to stockholders that are considered to result in distributions from the excess tax bad debt reserve or the reserve for losses on loans (“Excess Distributions”), then an amount based on the amount distributed will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or

complete liquidation. However, dividends paid out of the Bank’s current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank’s tax bad debt reserves. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank’s tax bad debt reserves and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that when reduced by the tax attributable to the income is equal to the amount of the distribution. Thus, if certain portions of the Bank’s accumulated tax bad debt reserve are used for any purpose other than to absorb qualified tax bad debt losses, such as for the payment of dividends or other distributions with respect to the Bank’s capital stock (including distributions upon redemption or liquidation), approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state taxes). See “Regulation - Limitations on Dividends and Capital Distributions” for limits on the payment of dividends of the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserves.

Corporate Alternative Minimum Tax. The Bank is subject to the corporate alternative minimum tax which is imposed to the extent it exceeds the Bank’s regular income tax for the year. The alternative minimum tax will be imposed at the rate of 20% of a specially computed tax base. Included in this base will be a number of preference items, including the interest on certain tax-exempt bonds issued after August 7, 1986. Also included is an addition of 75% of the adjusted current earnings (“ACE”). Computations of ACE include a recalculation of tax depreciation, additions for all tax-exempt income, and a reversal of the deduction for dividends paid to an ESOP. In addition, for purposes of the alternative minimum tax, the amount of alternative minimum taxable income that may be offset by net operating losses is limited to 90% of alternative minimum taxable income. The Company is subject to paying the alternative minimum tax for the year ended September 30, 2006, which is estimated to be approximately $270,000.

The Bank has not had its income tax returns examined by the IRS or the State of Arkansas within the last three years. The Bank has not been audited by the IRS or the Arkansas State Revenue Department in recent years.

State Taxation

Arkansas and Oklahoma generally impose income taxes on thrift institutions computed at a rate of 6.5% and 6.0%, respectively, of net earnings. For purposes of the state income tax, net earnings are defined as the net income of the thrift institution computed in the manner prescribed for computing the net taxable income for federal corporate income tax purposes, less (i) interest income from obligations of the United States, of any county, municipal or public corporation authority, special district or political subdivision, plus (ii) any deduction for state income taxes.

ITEM 1A

RISK FACTORS

In analyzing whether to make or to continue an investment in our securities, investors should consider, among other factors, the following risk factors.

Our results of operations are significantly dependent on economic conditions and related uncertainties.

Community banking operations are affected, directly and indirectly, by domestic and international economic and political conditions and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, real estate values, government monetary policy, international conflicts, the actions of terrorists and other factors beyond our control may adversely affect our results of operations. Changes in interest rates, in particular, could adversely affect our net interest income and have a number of other adverse effects on our operations, as discussed in the immediately succeeding risk factor. Adverse economic conditions also could result in an increase in loan delinquencies, foreclosures and nonperforming assets and a decrease in the value of the property or other collateral which secures our loans, all of which could adversely affect our results of operations. We are particularly sensitive to changes in economic conditions and related uncertainties in Northeast Arkansas because we derive substantially all of our loans, deposits and other business from this area. Accordingly, we remain subject to the risks associated with prolonged declines in national or local economies.

Changes in interest rates could have a material adverse effect on our operations.

The operations of financial institutions such as the Bank are dependent to a large extent on net interest income, which is the difference between the interest income earned on interest earning assets such as loans and investment securities and the interest expense paid on interest bearing liabilities such as deposits and borrowings. Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted average yield earned on our interest earning assets and the weighted average rate paid on our interest bearing liabilities, or interest rate spread, and the average life of our interest earning assets and interest bearing liabilities. Changes in interest rates also can affect our ability to originate loans; the value of our interest earning assets; our ability to obtain and retain deposits in competition with other available investment alternatives; and the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we believe that the estimated maturities of our interest earning assets currently are well balanced in relation to the estimated maturities of our interest bearing liabilities (which involves various estimates as to how changes in the general level of interest rates will impact these assets and liabilities), there can be no assurance that our profitability would not be adversely affected during any period of changes in interest rates.

There are increased risks involved with commercial real estate, and commercial business lending activities.

In recent years, the Bank has emphasized the origination of commercial real estate and commercial business loans, which include equipment, inventory and crop production loans. Loans collateralized by commercial real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the greater difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans collateralized

by commercial real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. Other commercial business loans generally have a greater credit risk than residential mortgage loans as well. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards.

Our allowance for losses on loans may not be adequate to cover probable losses.

We have established an allowance for loan losses which we believe is adequate to offset probable losses on our existing loans. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan losses, which would adversely affect our results of operations.

We are subject to extensive regulation which could adversely affect our business and operations.

We are subject to extensive federal supervision and regulation, which are intended primarily for the protection of depositors. In addition, we are subject to changes in federal laws, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted but could adversely affect our business and operations and that of our subsidiaries in the future.

We face strong competition which may adversely affect our profitability.

We are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. We also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers. Certain of our competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services. Competition from both bank and non-bank organizations will continue.

Our ability to successfully compete may be reduced if we are unable to make technological advances.

The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. As a result, our future success will depend in part on our ability to address our customers’ needs by using technology. We cannot assure that we will be able to effectively develop new technology-driven products and services or be successful in marketing these products to our customers. Many of our competitors have far greater resources than we have to invest in technology.

ITEM 1B

UNRESOLVED STAFF COMMENTS

None

ITEM 2

PROPERTIES

The Bank conducts its business through its main office and 20 full-service branch offices located in nine counties in Northeast Arkansas and Tulsa County, Oklahoma. Each office is owned or leased by the Bank. The Company and the Bank believe that their facilities are adequate to meet their current and immediately foreseeable needs.

The following table sets forth certain information concerning the main office and each branch office of the Bank at September 30, 2006. The aggregate net book value of the Bank’s premises and equipment was $15.9 million at September 30, 2006.

Main Office:

1700 E. Highland

Jonesboro, Arkansas

(Opened 2001)

Branch Offices:

Pocahontas Branch

203 W. Broadway

Pocahontas, Arkansas

(Opened 1935)

Corning Branch

309 Missouri Drive

Corning, Arkansas

(Opened 1983)

Hardy Branch

101 W. Main Street

Hardy, Arkansas

(Opened 1998)

Paragould Wal-Mart Branch

2802 W. Kingshighway

Paragould, Arkansas

(Opened 1999)

Swifton Branch

101 Main Street

Swifton, Arkansas

(Opened 2001)

Hoxie Branch

126 SW Texas

Hoxie, Arkansas

(Opened 2002)

Paragould Branch

3104 West Kingshighway

Paragould, Arkansas

(Opened 2005)

Walnut Ridge Branch

120 W. Main Street

Walnut Ridge, Arkansas

(Opened 1968)

Highland Branch

1566 Highway 62

Hardy, Arkansas

(Opened 1983)

Pocahontas Branch

205 Rice Street

Pocahontas, Arkansas

(Opened 2001)

Jonesboro Branch

209 W. Washington

Jonesboro, Arkansas

(Opened 2001)

Newport Branch

200 Olivia Drive

Newport, Arkansas

(Opened 2002)

Marked Tree Branch

210 Frisco Street

Marked Tree, Arkansas

(Opened 2003)

Broken Arrow Branch

3101 W Kenosha

Tulsa, Oklahoma

(Opened 2005)

Jonesboro Branch

625 S.W. Drive

Jonesboro, Arkansas

(Opened 1976)

Lake City Branch

100 Cobean Blvd

Lake City, Arkansas

(Opened 1998)

Pocahontas Wal-Mart Branch

1415 Hwy 67 South

Pocahontas, Arkansas

(Opened 1998)

Tuckerman Branch

106 E. Main Street

Tuckerman, Arkansas

(Opened 2001)

Imboden Branch

201 E 3^rd Street

Imboden, Arkansas

(Opened 2002)

Jonesboro Branch

3513 E Johnson Ave.

Jonesboro, Arkansas

(Opened 2005)

ITEM 3

LEGAL PROCEEDINGS

The Company currently is not involved in any material legal proceedings. There are various claims and lawsuits in which the Bank is periodically involved incident to the Bank’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of fiscal 2006 to a vote of security holders.

PART II

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

Trading in Common Stock and Related Matters

The Company’s common stock is traded on the NASDAQ National Market System using the symbol “PFSL.”

The following table shows the quarterly range of bid prices for the Company’s common stock during fiscal 2006 and 2005. This information has been obtained from monthly statistical stock summaries provided by the NASDAQ Stock Market. As of December 13, 2006, there were 4,641,717 shares of common stock issued and outstanding and 632 stockholders of record.


Quarter Ended	High Bid		Low Bid
December 31, 2005	$	13.00	$	11.90
March 31, 2006	$	13.36	$	12.53
June 30, 2006	$	14.19	$	12.00
September 30, 2006	$	17.53	$	12.05


Quarter Ended	High Bid		Low Bid
December 31, 2004	$	16.50	$	14.75
March 31, 2005	$	16.25	$	15.00
June 30, 2005	$	16.00	$	13.80
September 30, 2005	$	15.00	$	12.40

Cash Dividends Declared in Fiscal 2006:


Record Date	Payment Date	Dividend Per Share
December 15, 2005	January 3, 2006	$	0.08
March 15, 2006	April 3, 2006	$	0.08
June 15, 2006	July 3, 2006	$	0.08
September 15, 2006	October 4, 2006	$	0.08

Cash Dividends Declared in Fiscal 2005:


Record Date	Payment Date	Dividend Per Share
December 15, 2004	January 3, 2005	$	0.08
March 15, 2005	April 4, 2005	$	0.08
June 15, 2005	July 4, 2005	$	0.08
September 15, 2005	October 4, 2005	$	0.08

The Company’s Board of Directors intends to review the payment of dividends quarterly and plans to continue to maintain a regular quarterly dividend in the future, subject to financial condition, results of operations, tax considerations, industry standards, economic conditions, regulatory restrictions that affect the payment of dividends by subsidiaries to the Company and other relevant factors.

The Company is subject to requirements of Delaware law that generally limits dividends to an amount equal to the difference between the amount by which total assets exceed total liabilities and the amount equal to the aggregate par value of the outstanding shares of capital stock. If there is no difference between these amounts, dividends are limited to net income for the current and/or immediately preceding year. As of September 30, 2006 and 2005, the Company was in compliance with these requirements.

During the quarter ended September 30, 2006 no shares were purchased by or on behalf of the Company. The Company currently has no repurchase plans or programs outstanding.

ITEM 6

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Set forth below are selected consolidated financial and other data of the Company. This information is derived in part from and should be read in conjunction with the Consolidated Financial Statements of the Company and its subsidiaries and the notes thereto presented elsewhere herein.

Selected Financial Condition Data


	At September 30
	2006		2005		2004		2003		2002
	(in Thousands)
Total assets	$	738,454	$	741,264	$	719,908	$	763,488	$	617,016
Cash and cash equivalents		23,825		23,411		35,218		22,020		34,307
Cash surrender value of life insurance		8,392		8,019		7,684		7,341		6,883
Investment securities		226,681		229,412		246,834		298,973		125,465
Loans receivable		435,012		429,596		383,810		389,002		408,081
Federal Home Loan Bank Stock		6,572		7,962		7,926		5,584		2,126
Deposits		557,788		514,044		491,079		586,092		520,032
FHLB advances		104,398		148,645		153,897		100,694		22,137
Stockholders’ equity		52,956		52,368		52,501		52,997		47,493

Summary of Operations


	Years Ended September 30
	2006			2005		2004		2003		2002
	(in Thousands)
Interest income	$	39,182		$	35,632	$	36,080	$	37,044	$	34,107
Interest expense		24,131			18,942		16,658		19,241		17,200

Net interest income before provision for loan losses		15,051			16,690		19,422		17,803		16,907
Provision for loan losses		845			525		3,900		2,595		900

Net interest income after provision for loan losses		14,206			16,165		15,522		15,208		16,007
Noninterest income		5,022			5,676		5,672		10,552		5,196
Noninterest expense:
Compensation and benefits		9,350			9,342		9,540		10,444		8,201
Occupancy and equipment		2,942			2,780		2,723		2,654		2,419
Other		4,812			5,383		4,011		4,981		4,160

Total noninterest expense		17,104			17,505		16,274		18,079		14,780

Income before income taxes		2,124			4,336		4,920		7,681		6,423
Income tax expense (benefit)		(90	)		1,097		1,463		2,387		2,188

Net income	$	2,214		$	3,239	$	3,457	$	5,294	$	4,235

Key Financial Ratios and Other Data (1):


	At or for the Year Ended September 30
	2006			2005			2004			2003			2002
Performance Ratios:
Return on average equity		4.24	%		6.16	%		6.63	%		10.72	%		9.15	%
Return on average assets		0.30			0.44			0.47			0.77			0.80
Interest rate spread (2)		2.28			2.64			2.97			2.98			3.59
Net interest margin (2)		2.23			2.55			2.93			2.91			3.56
Noninterest expense to average assets		2.31			2.38			2.22			2.64			2.79
Net interest income after provision for loan losses to noninterest expense		83.05			92.34			95.38			84.12			107.56
Efficiency (5)		88.96			80.15			76.79			70.18			69.86
Asset Quality Ratios:
Average interest-earning assets to average interest-bearing liabilities		98.72			96.80			98.24			97.74			99.27
Nonperforming loans to net loans (3) (4)		0.47			0.92			1.22			1.44			0.78
Nonperforming assets to total assets (3) (4)		0.29			0.58			0.74			0.85			0.80
Allowance for loan losses to nonperforming loans (3) (4)		145.41			81.53			80.69			72.51			100.69
Allowance for loan losses to nonperforming assets (3) (4)		141.09			74.89			71.24			63.44			65.54
Allowance for loan losses to total loans (3)		0.67			0.73			0.96			1.03			0.77
Capital, Equity and Dividend Ratios:
Tangible capital (3) (9)		7.51			6.80			6.88			6.40			6.40
Core capital (3) (9)		7.51			6.80			6.88			6.40			6.40
Risk-based capital (3) (9)		12.39			11.50			12.59			11.85			10.74
Average equity to average assets ratio		7.06			7.15			7.11			7.20			8.66
Dividend payout ratio		67.10			44.41			41.74			26.43			29.95
Per Share Data:
Dividends per share	$	0.32		$	0.32		$	0.32		$	0.32		$	0.29
Book value per share (6)	$	11.41		$	11.28		$	11.31		$	11.65		$	10.85
Basic earnings per share (7)	$	0.49		$	0.72		$	0.77		$	1.22		$	0.96
Diluted earnings per share (8)	$	0.48		$	0.71		$	0.75		$	1.20		$	0.96
Number of full service offices		21			21			18			20			23

(1)	With the exception of period end ratios, ratios are based on average monthly balances.

(2)	Interest rate spread represents the difference between the weighted average yield on average interest earning assets and the weighted average cost of average interest bearing liabilities, and net interest margin represents net interest income as a percent of average interest earning assets.

(3)	End of period ratio.

(4)	Nonperforming assets consist of nonperforming loans and real estate owned. Nonperforming loans consist of non-accrual loans while REO consists of real estate acquired in settlement of loans.

(5)	The efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.

(6)	This calculation is based on 4,641,717, 4,641,717, 4,641,717, 4,549,791, and 4,376,295 shares outstanding at September 30, 2006, 2005, 2004, 2003, and 2002, respectively.

(7)	This calculation is based on weighted average shares outstanding of 4,508,501, 4,492,462, 4,470,913, 4,345,113, and 4,400,027 for the fiscal years ended September 30, 2006, 2005, 2004, 2003 and 2002, respectively.

(8)	This calculation is based on weighted average shares outstanding of 4,577,265, 4,571,234, 4,597,097, 4,414,843, and 4,428,924 for the fiscal years ended September 30, 2006, 2005, 2004, 2003 and 2002, respectively.

(9)	This calculation is the Bank only ratio as reported to the Office of Thrift Supervision

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward- Looking Statements

When used in this Annual Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the market area of Pocahontas Bancorp, Inc. (the “Company”), changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview - The Company is a savings and loan holding company headquartered in Jonesboro, Arkansas. The Company has no substantial operations other than serving as the holding company of its wholly owned subsidiary, First Community Bank (the “Bank”).

The Bank is a community-oriented federally chartered savings and loan association regulated by the Office of Thrift Supervision (OTS). The Bank has a total of 21 locations: 20 locations are concentrated in the Northeast Arkansas counties of Craighead, Clay, Greene, Jackson, Lawrence, Poinsett, Randolph and Sharp, and the 21^st location is in Tulsa County Oklahoma. Southern Mortgage Corporation, a mortgage company located in Tulsa, Oklahoma, is a wholly owned subsidiary of the Bank.

Our primary business consists of acting as a financial intermediary by attracting deposits from the general public and using such funds, together with borrowings and other funds, to originate loans and invest in securities. Mortgage loans consist primarily of single family residential and commercial real estate located in the Company’s primary market areas. In addition to mortgage loans, the Company uses funds to originate construction, consumer and commercial business loans and to purchase investment securities.

During 2001, 2002 and 2003, the Company acquired four financial institutions which have added significantly to growth. During 2004, the Company turned its attention to integrating and streamlining operations, cutting costs and organic growth. During 2005, the Company purchased a building in Broken Arrow, Oklahoma which allowed us to open a full service branch to better serve our customers in this area. We also constructed two new branch locations in northeast Arkansas (one in Jonesboro and the other in Paragould). During 2006, the Company again focused its attention to organic growth.

The Company’s net income is primarily affected by its net interest income, which is the difference between interest income earned on its loan, mortgage-backed securities, and investment portfolios, and its cost of funds consisting of interest paid on deposits and borrowed funds, including FHLB advances. The Company’s net income also is affected by its provisions for losses on loans and investments in real estate, as well as the amount of noninterest income (including fees and service charges and gains or losses on sales of loans) and noninterest expense (including compensation and benefits, occupancy and equipment expense, data processing expense, and income taxes). Net income of the Company also is affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies, and actions of regulatory authorities.

2006 Highlights - Net income for the year ended September 30, 2006 was $2.2 million, compared to $3.2 million for the year ended September 30, 2005. Basic earnings per share was $0.49 and diluted earnings per share was $0.48 for the year ended September 30, 2006 compared to basic earnings per share of $0.72 and diluted earnings per share of $0.71 for the year ended September 30, 2005.

The decrease in net income for the year ended September 30, 2006 was primarily due to the decrease in net interest income, partially offset by a decrease in income tax expense for the twelve months ended September 30, 2006 compared to the twelve months ended September 30, 2005. Net interest income before provision for loan loss for the twelve months ended September 30, 2006 decreased 9.8% to $15.1 million from $16.7 million for the twelve months ended September 30, 2005. The Federal Reserve raised interest rates 150 basis points during the twelve month period ended September 30, 2006; the period of increasing interest rates have lowered our net interest rate spread by 36 basis points to 2.28% for the year ended September 30, 2006 from 2.64% for the year ended September 30, 2005. The yield on average interest-earning assets increased 38 basis points and the cost on average interest-bearing liabilities increased 74 basis points for the twelve months ended September 30, 2006 when compared to the rates for the same period last year, resulting in the decreased interest rate spread and net interest income for the twelve months.

The Company’s effective tax rate for the twelve months ended September 30, 2006 was (4.3)% compared to 25.3% for the year ended September 30, 2005. The decrease in the effective tax rate was due to the increased investment in non-taxable securities, most of which occurred during the last quarter of the year ended September 30, 2005 and the first quarter of fiscal 2006.

Critical Accounting Policies - In preparing financial information, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods shown. The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States and general banking practices. Estimates and assumptions most significant to the Company are related primarily to allowance for loan losses and goodwill and are summarized in the following discussion and the notes to the Consolidated Financial Statements.

The Company has established a systematic method of reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for losses on loans. The allowance for losses on loans is based on management’s current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s knowledge of inherent risks in the portfolio that are probable and reasonably estimable, and other factors that warrant recognition in providing an appropriate loan loss allowance. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, different assumptions used in evaluating the adequacy of the allowance could result in material changes in the Company’s consolidated financial condition and results of operations. The Company’s policies and methodology for determining the allowance involve a high degree of estimation and complexity and require subjective judgments about uncertain matters.

The Company’s goodwill (the amount paid in excess of fair value of acquired net assets) is reviewed at least annually to ensure that there have been no events or circumstances resulting in an impairment of the recorded amount of excess purchase price. Adverse changes in the economic environment, operations of acquired business units, or other factors could result in a decline in projected fair values. If the estimated fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount to fair value.

Management has discussed the development, selection and application of these critical accounting policies with the Audit Committee of the Board of Directors.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company, in the normal course of business, makes commitments to buy or sell assets or to incur or fund liabilities. Commitments include, but are not limited, to the origination, purchase, or sale of loans, the purchase of investment securities, fulfillment of commitments under letters-of-credit, extensions of credit on home equity lines of credit and construction loans, and the commitment to fund withdrawals of savings accounts at maturity. A discussion of significant commitments under which the Company may be held contingently liable, including guarantee arrangements, is included in Note 19 – “Off-Balance Sheet Arrangements and Commitments” to the Consolidated Financial Statements.

The Company may also have liabilities under certain contractual agreements contingent upon occurrence of certain events. The following table presents, as of September 30, 2006, the future payments on our significant contractual obligations.


	Payments Due by Period (in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
Loan rate lock agreements	$	3,696	$	3,696	$	—	$	—	$	—
Operating lease obligations		373		126		187		60		—
Certificates of deposit maturities (1)		341,183		271,304		57,350		12,529		—
FHLB advances maturities		104,398		75,784		15,247		11,136		2,231

Total contractual obligations	$	449,650	$	350,910	$	72,784	$	23,725	$	2,231

(1)	Net of $131 thousand in unamortized discounts

Balance Sheet Analysis and Comparison of Results of Operations for the Years Ended September 30, 2006 and 2005

The following table shows the variance in dollars and percent change between the Consolidated Statements of Financial Condition at September 30, 2006 and September 30, 2005:


	September 30,
	2006			2005			Variance			% Change
	(Amounts in Thousands)
ASSETS
Cash	$	23,825		$	23,411		$	414		1.77	%
Cash surrender value of life insurance		8,392			8,019			373		4.65	%
Securities held-to-maturity, at amortized cost		133,120			129,952			3,168		2.44	%
Securities available-for-sale, at fair value		93,561			99,460			(5,899	)	-5.93	%
Trading securities, at fair value		—			3,126			(3,126	)	-100.00	%
Loans receivable, net		431,768			426,538			5,230		1.23	%
Loans receivable held for sale		3,244			3,058			186		6.08	%
Accrued interest receivable		5,038			4,488			550		12.25	%
Premises and equipment, net		15,876			16,717			(841	)	-5.03	%
Federal Home Loan Bank Stock, at cost		6,572			7,962			(1,390	)	-17.46	%
Goodwill		8,848			8,848			—		0.00	%
Core deposit premiums, net		4,350			5,323			(973	)	-18.28	%
Other assets		3,860			4,362			(502	)	-11.51	%

TOTAL ASSETS	$	738,454		$	741,264		$	(2,810	)	-0.38	%

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	557,788		$	514,044		$	43,744		8.51	%
Federal Home Loan Bank advances		104,398			148,645			(44,247	)	-29.77	%
Deferred compensation		1,789			2,177			(388	)	-17.82	%
Accrued interest payable		1,244			1,290			(46	)	-3.57	%
Accrued expenses and other liabilties		3,296			5,777			(2,481	)	-42.95	%
Trust preferred securities		16,983			16,963			20		0.12	%

Total liabilities	$	685,498		$	688,896		$	(3,398	)	-0.49	%
STOCKHOLDERS’ EQUITY:
Common stock	$	76		$	76		$	—		0.00	%
Additional paid-in capital		57,135			57,275			(140	)	-0.24	%
Unearned ESOP Shares		(1,799	)		(2,077	)		278		-13.38	%
Accumulated other comprehensive loss		(2,837	)		(2,517	)		(320	)	12.71	%
Retained earnings		24,784			24,014			770		3.21	%

		77,359			76,771			588		0.77	%

Less treasury stock, at cost		(24,403	)		(24,403	)		—		0.00	%
Total stockholders’ equity		52,956			52,368			588		1.12	%

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	738,454		$	741,264		$	(2,810	)	-0.38	%

Investment Activities - The Company’s investment portfolio, including FHLB stock, and trading securities, consists of mortgage-backed securities, obligations of the United States Government and agencies thereof, municipal bonds, corporate bonds, interest-earning deposits in other institutions and equity investments. Over 65% of the Company’s investment portfolio is held in mortgage-backed securities; these securities are backed by pools of mortgages that can be composed of either fixed-rate mortgages or ARM loans. We invest in mortgage-backed securities to supplement local single-family loan originations as well as to reduce interest rate risk exposure, because mortgage-backed securities are more liquid than mortgage loans. In the current, ongoing, low interest rate environment, mortgages with higher interest rates are continuing to prepay resulting in large monthly principal payments on the Company’s mortgage-backed securities. Investment balances have decreased $2.7 million during the year ended September 30, 2006 due primarily to $37.0 million in principal paydowns and maturities and the sale and call of $3.4 million in securities, which was partly offset by $36.9 million in securities purchased. As interest rates have begun to rise, and higher-yielding products have become available, the Company’s relatively lower-yielding investment portfolio has declined in market value, resulting in accumulated other comprehensive loss of $2.8 million at September 30, 2006 compared to a comprehensive loss of $2.5 million at September 30, 2005. Accumulated other comprehensive loss is reported in the equity section of our Consolidated Financial Statements and is considered a temporary impairment due to interest rate changes; the Company has the intent and ability to hold its investments until the fair market value of the portfolio recovers.

Loans receivable, net - The Company’s net loan portfolio including loans held for sale, consists mainly of first mortgage loans collateralized by single-family residential real estate, multifamily residential real estate, commercial real estate and agricultural real estate located in the Company’s primary market area or in counties contiguous with the Company’s market area.

To reduce interest rate risk exposure, and satisfy consumer demand for fixed-rate mortgage loans during the period of low interest rates, the Company has been focusing more on originating fixed-rate loans to sell individually into the secondary market. As interest rates on loans have increased, the Company has experienced a reduction in the demand for fixed-rate mortgages during the year ended September 30, 2006, compared to the year ended September 30, 2005. During the year ended September 30, 2006, the Company recognized a $0.8 million gain on the sale of $49.2 million of loans held for sale, compared to a $1.1 million gain on the sale of $54.5 million of loans held for sale during the year ended September 30, 2005.

The Company’s net loan portfolio also includes commercial business loans (i.e., crop production, equipment and inventory loans), and other consumer loans, including loans secured by automobiles and deposit accounts. The composition of the Company’s loan portfolio began to change in 2001, due to acquisitions of other banking institutions, to include a larger percentage of commercial loans; the Company intends to continue to increase the commercial loan portfolio through originations.

Nonperforming Loans and Loan Loss Provisions - The allowance for loan losses is established through a provision for loan losses based on management’s quarterly asset classification review and evaluation of the risk inherent in the Company’s loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of loans on which full collection may not be reasonably assured, considers among other matters, the estimated value of collateral, cash flow analysis, historical loan loss experience, and other factors that warrant recognition in providing allowances.

A provision of $0.8 million was made during the year ended September 30, 2006. The Company’s allowance for loan losses totaled $3.0 million, or 0.67% of total loans at September 30, 2006 compared to $3.2 million, or 0.73% of total loans, at September 30, 2005, a decrease of $0.4 million. Charge offs, net of recoveries totaled $1.1 million or 0.24% of total loans, for the year ended September 30, 2006. Total nonperforming loans decreased to $2.1 million at September 30, 2006 from $3.9 million at September 30, 2005, a decrease of $1.8 million. Based on presently available information, management believes that the allowance for loan losses at September 30, 2006 was appropriate. Changing economic and other conditions, as well as increased emphasis on commercial loan origination, may require future adjustments and increases to the allowance for loan losses.

During the last six fiscal years, the Company has completed separate acquisitions of four banks. The loans acquired as part of these acquisitions have contributed to the increase in the balance of nonperforming loans in the Company’s portfolio; of the $2.1 million in nonperforming loans as of September 30, 2006, $0.5 million, or 23.8% were loans acquired as part of the bank acquisitions. Nonperforming commercial loans have increased $0.2 million from portfolios acquired in bank acquisitions. We believe that the increase in nonperforming commercial loans is a result of a lower quality of underwriting and collection efforts at the acquired institutions prior to the Company’s acquisition of the institutions compared to the Company’s underwriting and collection efforts. At the acquisition dates, approximately $2.0 million of allowance was transferred. Since the acquisition dates, approximately $6.0 million in charge offs have been recorded relative to loans acquired in these acquisitions.

Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income and a corresponding specific interest reserve is established. The Bank generally does not accrue interest on loans past due 90 days or more. Loans may be reinstated to accrual status when payments are made to bring the loan less than 90 days past due and, in the opinion of management, collection of the remaining balance can be reasonably expected. Delinquent loans 90 days or more past due decreased $1.8 million or 46.2% to $2.1 million at September 30, 2006 from $3.9 million at September 30, 2005. The balance of interest income not recognized by the Company on the non-accrual loans was $0.2 million at September 30, 2006 compared to $0.4 million at September 30, 2005. There was no interest income recognized on non-accrual loans during the periods.

Deposits and FHLB Advances - Deposits are a significant source of the Company’s funds for lending and other investment purposes. In addition to deposits, the Company derives funds from FHLB advances, the amortization and prepayment of loans and mortgage-backed securities, the sale or maturity of investment securities, and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer-term basis to help manage interest rate risk and for general business purposes.

Historically, deposits have provided the Company with a stable source of relatively low cost funding. The market for deposits is competitive, which had caused the Company to utilize primarily certificate accounts that are more responsive to market interest rates rather than checking and savings accounts. The Company offers a traditional line of deposit products that currently includes checking, interest-bearing checking, savings, certificates of deposit, commercial checking and money market accounts. Total deposit balances by category were as follows:


	At September 30
	2006		2005		Change			% Change
	(Amounts in Thousands)
Checking Accounts	$	181,900	$	200,411	$	(18,511	)	-9.24	%
Savings Accounts		34,705		45,847		(11,142	)	-24.30	%
Certificate Accounts (net)		341,183		267,786		73,397		27.41	%

	$	557,788	$	514,044	$	43,744		8.51	%

Total deposits increased $43.7 million or 8.51% during the year ended September 30, 2006. The increase was mainly due to the Company refocusing its efforts on attracting certificate accounts by offering more competitive interest rates and terms on those accounts. The cost on average certificate accounts for the year ended September 30, 2006 was 4.14%, up 114 basis points from 3.00% for the year ended September 30, 2005.

FHLB advances are collateralized by the Bank’s stock in the FHLB, investment securities and a blanket lien on the Bank’s mortgage portfolio. Such advances are made pursuant to different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the FHLB. The maximum amount of FHLB advances to a member institution generally is reduced by borrowings from any other source. The Company also relies upon FHLB advances as a source to fund assets. At September 30, 2006, FHLB advances totaled $104.4 million, with an average cost of 3.97% compared to $148.6 million, with an average cost of 3.41% at September 30, 2005. Based on the current level of advances, asset size and available collateral under the FHLB programs, the Bank estimates that an additional $96.6 million of funding was available from FHLB advances at September 30, 2006.

Accrued expenses and other liabilities - Accrued expenses and other liabilities includes items such as the Company’s accrual for income taxes, accounts payable, escrowed taxes and insurance and other miscellaneous obligations that may occur during the normal course of business. Accrued expenses and other liabilities decreased $2.5 million or 35.76% during the year ended September 30, 2006, to $4.5 million from $7.0 million at September 30, 2005. The decrease was mainly due to a payable associated with the purchase of $2.4 million in investment securities that were committed prior to fiscal year end 2005 but had a settlement date in the 2006 fiscal year.

Stockholders’ equity - The Company’s book value per share was $11.41 at September 30, 2006 compared to $11.28 at September 30, 2005. The Company’s “average capital ratio”, or average capital to average assets, was 7.06% for the year ended September 30, 2006, compared to 7.15% for the year ended September 30, 2005. Stockholders’ equity increased $0.6 million or 1.12% during the year ended September 30, 2006; net income for fiscal 2006 was partially offset by dividends to stockholders and an increase in accumulated other comprehensive loss on securities.

The following table shows the variance in dollars and percent change between the Consolidated Statements of Income for the years ended September 30, 2006 and 2005:


	September 30,
	2006			2005		Variance			% Change
	(Amounts in Thousands)
INTEREST INCOME:
Loans receivable	$	28,772		$	23,805	$	4,967		20.87	%
Investment securities		10,410			11,827		(1,417	)	-11.98	%

Total interest income		39,182			35,632		3,550		9.96	%
INTEREST EXPENSE:
Deposits		17,105			12,232		4,873		39.84	%
Borrowed funds		5,416			5,269		147		2.79	%
Trust preferred securities		1,610			1,441		169		11.73	%

Total interest expense		24,131			18,942		5,189		27.39	%
NET INTEREST INCOME		15,051			16,690		(1,639	)	-9.82	%
PROVISION FOR LOAN LOSSES		845			525		320		60.95	%

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		14,206			16,165		(1,959	)	-12.12	%

NON-INTEREST INCOME:
Dividends		387			319		68		21.32	%
Fees and service charges		3,084			3,187		(103	)	-3.23	%
Gain on sale of loans		777			1,056		(279	)	-26.42	%
Gain on sale of securities, net		270			566		(296	)	-52.30	%
Trading gains, net		1			241		(240	)	-99.59	%
Gain on sale of loan servicing		159			—		159		100.00	%
Other		344			307		37		12.05	%

Total non-interest income		5,022			5,676		(654	)	-11.52	%

NON-INTEREST EXPENSES:
Compensation and benefits		9,350			9,342		8		0.09	%
Occupancy and equipment		2,942			2,780		162		5.83	%
Insurance premiums		406			374		32		8.56	%
Professional fees		1,479			1,008		471		46.73	%
Data processing		765			669		96		14.35	%
Advertising and donations		478			1,194		(716	)	-59.97	%
Office supplies		291			373		(82	)	-21.98	%
REO and other repossessed assets		90			211		(121	)	-57.35	%
Other		1,303			1,554		(251	)	-16.15	%

Total non-interest expense		17,104			17,505		(401	)	-2.29	%

INCOME BEFORE INCOME TAXES		2,124			4,336		(2,212	)	-51.01	%
INCOME TAXES		(90	)		1,097		(1,187	)	-108.20	%

NET INCOME	$	2,214		$	3,239	$	(1,025	)	-31.65	%

Net interest income – In 2006, our net interest income decreased due to the flattening yield curve that resulted from continued increases by the Federal Reserve in short term interest rates. However, this decrease was partially offset by positive effects of our growth in the balances of both loans and deposits at favorable interest rates. Net interest income decreased $1.6 million for the year ended September 30, 2006 compared to the year ended September 30, 2005. The cost on average interest bearing liabilities, including deposits, increased 74 basis points while the yield on average interest earning assets increased 38 basis points when comparing the year ended September 30, 2006 to the year ended September 30, 2005. The Company’s net interest rate spread decreased to 2.28% for the year ended September 30, 2006 compared to 2.64% for the year ended September 30, 2005. Net interest margin decreased to 2.23% for the year ended September 30, 2006 compared to 2.55% for the year ended September 30, 2005.

Non-interest income – Non-interest income decreased $0.7 million or 11.52% to $5.0 million for the year ended September 30, 2006 compared to the $5.7 million for the year ended September 30, 2005. The increase in the rate of earnings on FHLB stock and the income from the sale of servicing rights to Centennial Bank was offset by a decrease in the gain on the sale of loans, a decrease in the gain on the sale of securities, and a decrease in the trading gains for the fiscal year ended September 30, 2006 compared to the year ended September 30, 2005.

Operating expense – Operating expense decreased $0.4 million or 2.3% to $17.1 million for the year ended September 30, 2006 compared to the $17.5 million for the year ended September 30, 2005. The Company launched a new logo and advertising campaign in the year ended September 30, 2005, which resulted in several one time charges that were not repeated in the year ended September 30, 2006. The decrease in expenses associated with the logo and advertising for the year ended September 30, 2006, was partially offset by an increase in professional fees and in occupancy and equipment.

Income taxes – The Company’s effective tax rate for the twelve months ended September 30, 2006 was (4.3)% compared to 25.3% for the year ended September 30, 2005. The decrease in the effective tax rate and income tax benefit for the twelve months ended September 30, 2006 was due to the increased investment in non-taxable securities, most of which occurred during the last quarter of the year ended September 30, 2005 and the first quarter of fiscal 2006.

The table below analyzes net interest income by component and in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and the changes in the related yields and rates for the year ended September 30, 2006, compared to the year ended September 30, 2005.

Rate/Volume Analysis (in thousands)


	2006 vs 2005												2005 vs 2004
	Increase/(Decrease) Due to									Total Increase (Decrease)			Increase/(Decrease) Due to									Total Increase (Decrease)
	Volume			Rate			Rate/ Volume			Total Increase (Decrease)			Volume			Rate			Rate/ Volume			Total Increase (Decrease)
Interest income:
Loans receivable	$	2,780		$	1,945		$	242		$	4,967		$	(450	)	$	272		$	(15	)	$	(193	)
Investment securities		(1,121	)		(328	)		32			(1,417	)		(50	)		(220	)		15			(255	)

Total interest earning assets		1,659			1,617			274			3,550			(500	)		52			—			(448	)

Interest expense:
Deposits		573			4,092			208			4,873			(651	)		1,338			(75	)		612
Borrowed funds		(615	)		865			(103	)		147			955			443			120			1,518
Trust Preferred		2			168			(1	)		169			2			152			0			154

Total interest bearing liabilities		(40	)		5,125			104			5,189			306			1,933			45			2,284

Net change in net interest income	$	1,699		$	(3,508	)	$	170		$	(1,639	)	$	(806	)	$	(1,881	)	$	(45	)	$	(2,732	)

The following tables summarize rates, yields and balances of average assets and liabilities for the periods indicated:

Average Balance Sheets (Dollars in thousands)


	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
Interest-earning assets: (1)
Loan receivable, net (2)	$	425,924	$	28,772	6.75	%	$	381,390	$	23,805	6.24	%	$	388,679	$	23,998	6.17	%
Investment securities		247,583		10,410	4.20			273,530		11,827	4.32			274,655		12,082	4.40

Total interest-earning assets		673,507		39,182	5.82	%		654,920		35,632	5.44	%		663,334		36,080	5.44	%
Noninterest-earning cash		20,117						33,823						25,800
Other noninterest-earning assets		45,440						46,521						44,009

Total assets	$	739,064					$	735,264					$	733,143

Interest-bearing liabilities:
Demand deposits	$	232,307	$	4,828	2.08	%	$	254,156	$	4,692	1.85	%	$	287,682	$	4,765	1.66	%
Time deposits		296,571		12,277	4.14			251,027		7,540	3.00			247,504		6,855	2.77
Borrowed funds (3)		136,383		5,416	3.97			154,432		5,269	3.41			123,107		3,751	3.05
Trust Preferred		16,974		1,610	9.49			16,953		1,441	8.50			16,933		1,287	7.60

Total interest-bearing liabilities		682,235		24,131	3.54	%		676,568		18,942	2.80	%		675,226		16,658	2.47	%

Noninterest-bearing liabilities (4)		4,619						6,108						5,793

Total liabilities		686,854						682,676						681,019
Stockholders’ equity		52,210						52,588						52,124

Total liabilities and stockholders’ equity	$	739,064					$	735,264					$	733,143

Net interest income			$	15,051					$	16,690					$	19,422

Net interest rate spread (5)					2.28	%					2.64	%					2.97	%

Interest-earning assets and net interest margin (6)	$	673,527			2.23	%	$	654,920			2.55	%	$	663,334			2.93	%

Ratio of average interest-earning assets to average interest-bearing liabilities					98.72	%					96.80	%					98.24	%

(1)	All interest-earning assets are disclosed net of loans in process, unamortized yield adjustments, and valuation allowances.

(2)	Does not include interest on nonaccrual loans. Non-performing loans are included in loans receivable, net.

(3)	Includes FHLB advances and securities sold under agreements to repurchase.

(4)	Escrow accounts are noninterest-bearing and are included in noninterest-bearing liabilities.

(5)	Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(6)	Net interest margin represents the net interest income as a percentage of average interest-earning assets.

The following table shows the variance in dollars and percent change between the Consolidated Statements of Income for the years ended September 30, 2005 and 2004:


	September 30,
	2005		2004		Variance			% Change
	(Amounts in Thousands)
INTEREST INCOME:
Loans receivable	$	23,805	$	23,998	$	(193	)	-0.80	%
Investment securities		11,827		12,082		(255	)	-2.11	%

Total interest income		35,632		36,080		(448	)	-1.24	%
INTEREST EXPENSE:
Deposits		12,232		11,620		612		5.27	%
Borrowed funds		5,269		3,751		1,518		40.47	%
Trust preferred securities		1,441		1,287		154		11.97	%

Total interest expense		18,942		16,658		2,284		13.71	%
NET INTEREST INCOME		16,690		19,422		(2,732	)	-14.07	%
PROVISION FOR LOAN LOSSES		525		3,900		(3,375	)	-86.54	%

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		16,165		15,522		643		4.14	%

NON-INTEREST INCOME:
Fees and service charges		3,187		3,082		105		3.41	%
Gain on sale of loans		1,056		1,239		(183	)	-14.77	%
Gain on sale of securities, net		566		386		180		46.63	%
Trading gains, net		241		398		(157	)	-39.45	%
Gain on sale of branches		—		137		(137	)	-100.00	%
Other		626		430		196		45.58	%

Total non-interest income		5,676		5,672		4		0.07	%

NON-INTEREST EXPENSE:
Compensation and benefits		9,342		9,540		(198	)	-2.08	%
Occupancy and equipment		2,780		2,723		57		2.09	%
Insurance premiums		374		335		39		11.64	%
Professional fees		1,008		826		182		22.03	%
Data processing		669		675		(6	)	-0.89	%
Advertising and donations		1,194		408		786		192.65	%
Office supplies		373		234		139		59.40	%
REO and other repossessed assets		211		321		(110	)	-34.27	%
Other		1,554		1,212		342		28.22	%

Total non-interest expense		17,505		16,274		1,231		7.56	%

INCOME BEFORE INCOME TAXES		4,336		4,920		(584	)	-11.87	%
INCOME TAXES		1,097		1,463		(366	)	-25.02	%

NET INCOME	$	3,239	$	3,457	$	(218	)	-6.31	%

Net interest income – In 2005, the Company launched an advertising campaign in our market areas to increase both loans and deposits by offering more attractive products, rates and terms. Our net interest income decreased due to the flattening yield curve that resulted from continuing increases by the Federal Reserve in short term interest rates. However, this decrease was partially offset by positive effects of our advertising campaign, which contributed to growth in the balances of both loans and deposits at favorable interest rates. Net interest income decreased $2.7 million for the year ended September 30, 2005 compared to the year ended September 30, 2004. The cost on average interest bearing liabilities, including deposits, increased 33 basis points while the yield on average interest earning assets remained constant at 5.44% when comparing the year ended September 30, 2005 to the year ended September 30, 2004. The Company’s net interest rate spread decreased to 2.64% for the year ended September 30, 2005 compared to 2.97% for the year ended September 30, 2004. Net interest margin decreased to 2.55% for the year ended September 30, 2005 compared to 2.93% for the year ended September 30, 2004.

Non-interest income – Non-interest income remained constant in the year ended September 30, 2005 compared to the year ended September 30, 2004. The increased portfolio balance of loans and deposits contributed to an increase in fees and service charges and a higher dividend was received on FHLB stock which increased other income. These increases were offset by a decrease in net trading gains and gain on sale of branches. A decrease in the origination of loans held for sale and resulting decrease in the gain on sale of loans was offset by an increase in the gain on sale of securities for the year ended September 30, 2005 compared to the year ended September 30, 2004.

Operating expense – The Company hired a professional advertising company to assist in the design and marketing of a new logo for the Bank during 2005. The new logo and marketing campaign included several one time charges which contributed to the $1.2 million increase in operating expenses for the year ended September 30, 2005 compared to the year ended September 30, 2004. Professional fees increased for the year ended September 30, 2005 compared to the same period last year due to increasing costs associated with new regulations.

Income taxes – During 2005 the Company increased our investment in non-taxable securities, half of which occurred during the last quarter. The increase in non-taxable securities resulted in a lower effective tax rate for the Company compared to prior years. During the fourth quarter of the year ended September 30, 2005, the Company recorded an income tax benefit of $0.1 million.

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General. It is the objective of the Company to minimize, to the degree prudently possible, its exposure to interest rate risk, while maintaining an acceptable interest rate spread. Interest rate spread is the difference between the Company’s yield on its interest-earning assets and its cost of interest-bearing liabilities. Interest rate risk is generally understood to be the sensitivity of the Company’s earnings, net asset values, and stockholders’ equity to changes in market interest rates.

Changes in interest rates affect the Company’s earnings. The effect on earnings of changes in interest rates generally depends on how quickly the Company’s yield on interest-earning assets and cost of interest-bearing liabilities react to the changes in market rates of interest. If the Company’s cost of deposit accounts reacts more quickly to changes in market interest rates than the yield on the Company’s mortgage loans and other interest-earnings assets, then an increasing interest rate environment is likely to adversely affect the Company’s earnings and a decreasing interest rate environment is likely to favorably affect the Company’s earnings. On the other hand, if the Company’s yield on its mortgage loans and other interest-earnings assets reacts more quickly to changes in market interest rates than the Company’s cost of deposit accounts, then an increasing rate environment is likely to favorably affect the Company’s earnings and a decreasing interest rate environment is likely to adversely affect the Company’s earnings.

Net Portfolio Value. The value of the Company’s loan and investment portfolio will change as interest rates change. Rising interest rates will generally decrease the Company’s net portfolio value (“NPV”), while falling interest rates will generally increase the value of that portfolio. The table below sets forth, quantitatively, as of September 30, 2006, the estimate of the projected changes in NPV in the event of a 100, 200, and 300 basis point instantaneous and permanent increase and a 100 and 200 basis point instantaneous and permanent decrease in market interest rates. Due to the current low prevailing interest rate environment, the changes in NPV is not estimated for a decrease in interest rates of 300 basis points.


Change in Interest Rates in Basis Points (Rate Shock)								NPV as a% of Estimated Market Value of Assets
	Net Portfolio Value							NPV as a% of Estimated Market Value of Assets
	Amount		$ Change			% Change		Ratio		Change
	(Amounts in Thousands)
+300	$	49,670	$	(25,884	)	(34.0	)%	6.98	%	(3.13	)%
+200		58,551		(17,003	)	(23.0	)%	8.09	%	(2.02	)%
+100		67,105		(8,449	)	(11.0	)%	9.13	%	(0.99	)%
0		75,554		—		0.0	%	10.11	%	0.00	%
-100		82,934		7,379		10.0	%	10.94	%	0.83	%
-200		87,499		11,945		16.0	%	11.43	%	1.31	%

Computations of prospective effects of hypothetical interest rate changes are calculated by the OTS from data provided by the Company and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit runoffs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates.

Management cannot predict future interest rates or their effect on the Company’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable rate loans, which represent the Company’s primary loan product, have features that restrict changes in interest rates during the initial term and over the remaining life of the asset. In addition, the proportion of adjustable rate loans in the Company’s portfolio could decrease in future periods due to refinancing activity if market rates decrease. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Pocahontas Bancorp, Inc.

Jonesboro, Arkansas

We have audited the accompanying consolidated statement of financial condition of Pocahontas Bancorp, Inc. and subsidiaries (the “Company”) as of September 30, 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Pocahontas Bancorp, Inc. and subsidiaries for the years ended September 30, 2005 and 2004, were audited by other auditors whose report, dated December 22, 2005 (December 21, 2006 and May 19, 2006 as to the effects of the restatements of those financial statements, as described in the first and second paragraphs, respectively, of Note 26 thereof), expressed an unqualified opinion on those statements.

We conducted our audit of the 2006 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2006 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pocahontas Bancorp, Inc. and subsidiaries as of September 30, 2006, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

LOGO

Nashville, Tennessee

November 21, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Pocahontas Bancorp, Inc.

Jonesboro, Arkansas

We have audited the accompanying consolidated statement of financial condition of Pocahontas Bancorp, Inc. and subsidiaries (the “Company”) as of September 30, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years ended September 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2005, and the results of its operations and its cash flows for the years ended September 30, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 26, the consolidated financial statements for the years ended September 30, 2005 and 2004 have been restated.

LOGO

Little Rock, Arkansas

December 22, 2005 (December 21, 2006 and May 19, 2006 as to the effects of the

restatements described in the first and second paragraphs, respectively, in Note 26)

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

SEPTEMBER 30, 2006 AND 2005


	2006			2005
ASSETS
Cash and due from banks:
Interest bearing	$	17,055		$	14,600
Noninterest bearing		23,808,233			23,396,851

		23,825,288			23,411,451
Cash surrender value of life insurance		8,392,191			8,019,097
Securities held-to-maturity, at amortized cost (fair value of $130,187,272 and $127,755,514 in 2006 and 2005, respectively)		133,120,083			129,952,373
Securities available-for-sale, at fair value (amortized cost of $97,152,528 and $102,343,904 in 2006 and 2005, respectively)		93,561,067			99,460,045
Trading securities, at fair value		—			3,126,044
Loans receivable, net		431,768,328			426,538,047
Loans receivable, held for sale		3,243,591			3,057,985
Accrued interest receivable		5,037,759			4,487,837
Premises and equipment, net		15,876,493			16,716,912
Federal Home Loan Bank stock, at cost		6,571,500			7,962,000
Goodwill		8,847,572			8,847,572
Core deposit premiums, net		4,350,114			5,323,319
Other assets		3,859,743			4,360,885

TOTAL ASSETS	$	738,453,729		$	741,263,567

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	557,788,431		$	514,043,734
Federal Home Loan Bank advances		104,398,292			148,645,397
Deferred compensation		1,788,721			2,176,859
Accrued interest payable		1,243,944			1,289,978
Accrued expenses and other liabilities		3,294,690			5,776,662
Trust preferred securities		16,983,450			16,962,683

Total liabilities		685,497,528			688,895,313

STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value, 8,000,000 shares authorized; 7,602,492 shares issued and 4,641,717 shares outstanding at 2006 and 2005		76,024			76,024
Additional paid-in capital		57,134,937			57,275,390
Unearned ESOP shares		(1,799,459	)		(2,076,856	)
Accumulated other comprehensive loss		(2,837,087	)		(2,517,282	)
Retained earnings		24,784,330			24,013,522

		77,358,745			76,770,798
Less treasury stock at cost, 2,960,775 shares at 2006 and 2005		(24,402,544	)		(24,402,544	)

Total stockholders’ equity		52,956,201			52,368,254

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	738,453,729		$	741,263,567

See notes to consolidated financial statements.

POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004


	2006			2005		2004
INTEREST INCOME:
Loans receivable	$	28,771,889		$	23,804,611	$	23,997,993
Securities:
Taxable		8,527,625			10,772,099		11,158,113	*
Nontaxable		1,882,097			1,054,706		924,043	*

Total interest income		39,181,611			35,631,416		36,080,149

INTEREST EXPENSE:
Deposits		17,105,078			12,232,219		11,619,647
Borrowed funds		5,415,796			5,269,259		3,751,246
Trust preferred securities		1,610,239			1,440,363		1,286,688

Total interest expense		24,131,113			18,941,841		16,657,581

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		15,050,498			16,689,575		19,422,568
PROVISION FOR LOAN LOSSES		845,000			525,000		3,900,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		14,205,498			16,164,575		15,522,568

NON-INTEREST INCOME:
Dividends		386,678			319,108		135,413
Fees and service charges		3,083,804			3,187,079		3,081,843
Trading gains, net		337			240,736		398,165
Gain on sales of loans		777,312			1,056,477		1,239,706
Gain on sales of securities, net		269,941			565,939		385,866
Gain on sale of branches		—			—		136,834
Gain on sale of loan servicing		159,148			—		—
Other		344,314			306,465		294,690

Total non-interest income, net		5,021,534			5,675,804		5,672,517

NON-INTEREST EXPENSES:
Compensation and benefits		9,350,132			9,342,144		9,539,845
Occupancy and equipment		2,941,812			2,779,615		2,723,191
Insurance premiums		406,065			373,886		334,768
Professional fees		1,478,705			1,008,483		826,156
Data processing		765,205			668,737		675,485
Advertising and donations		478,135			1,193,756		408,480
Office supplies		290,779			373,345		234,129
REO and other repossessed assets		89,889			210,695		321,249
Other		1,303,230			1,554,128		1,211,924

Total non-interest expenses		17,103,952			17,504,789		16,275,227

INCOME BEFORE INCOME TAXES		2,123,080			4,335,590		4,919,858
INCOME TAX EXPENSE (BENEFIT)		(90,550	)		1,096,534		1,463,244

NET INCOME	$	2,213,630		$	3,239,056	$	3,456,614

EARNINGS PER SHARE:
Basic earnings per share	$	0.49		$	0.72	$	0.77

Diluted earnings per share	$	0.48		$	0.71	$	0.75

DIVIDENDS PAID	$	0.32		$	0.32	$	0.32

*	2004 amounts as restated, see Note 26

See notes to consolidated financial statements.

POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004


	Common Stock			Additional Paid-In Capital			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)						Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Shares	Amount			Total Stockholders’ Equity
BALANCE, OCTOBER 1, 2003	7,497,066	$	74,970	$	56,533,430		$	(538,121	)	$	899,339		$	20,199,149		2,947,275	$	(24,172,200	)	$	52,996,567
Comprehensive income (loss)
Net change in unrealized gain on available-for-sale securities, net of tax											(478,727	)									(478,727	)
Unrealized loss for securities transferred to held-to-maturity											(906,107	)									(906,107	)
Amortization of unrealized loss on securities transferred to held-to-maturity											23,082										23,082
Less reclassification adjustment for (gains) losses included in net income											(254,672	)									(254,672	)
Net income														3,456,614							3,456,614

Total comprehensive income																					1,840,190
Repayment of ESOP loan and related increase in share value					(9,424	)		692,663													683,239
Purchase of stock for ESOP								(2,270,740	)												(2,270,740	)
Options exercised	105,426		1,054		923,649																924,703
Treasury stock purchased																13,500		(230,344	)		(230,344	)
Dividends														(1,442,791	)						(1,442,791	)

BALANCE, SEPTEMBER 30, 2004	7,602,492		76,024		57,447,655			(2,116,198	)		(717,085	)		22,212,972		2,960,775		(24,402,544	)		52,500,824
Comprehensive income (loss)
Net change in unrealized loss on available-for-sale securities, net of tax											(1,695,767	)									(1,695,767	)
Amortization of unrealized loss on securities transferred to held-to-maturity											269,090										269,090
Less reclassification adjustment for (gains) losses included in net income											(373,520	)									(373,520	)
Net income														3,239,056							3,239,056

Total comprehensive income																					1,438,859
Repayment of ESOP loan and related increase in share value					(172,265	)		508,252													335,987
Purchase of stock for ESOP								(468,910	)												(468,910	)
Dividends														(1,438,506	)						(1,438,506	)

BALANCE, SEPTEMBER 30, 2005	7,602,492		76,024		57,275,390			(2,076,856	)		(2,517,282	)		24,013,522		2,960,775		(24,402,544	)		52,368,254
Comprehensive income (loss)
Net change in unrealized gain on available-for-sale securities, net of tax											(288,856	)									(288,856	)
Amortization of unrealized loss on securities transferred to held-to-maturity											147,212										147,212
Less reclassification adjustment for (gains) losses included in net income											(178,161	)									(178,161	)
Net income														2,213,630							2,213,630

Total comprehensive income																					1,893,825
Repayment of ESOP loan and related increase in share value					(140,453	)		353,509													213,056
Purchase of stock for ESOP								(76,112	)												(76,112	)
Dividends	—		—		—			—			—			(1,442,822	)	—		—			(1,442,822	)

BALANCE, SEPTEMBER 30, 2006	7,602,492	$	76,024	$	57,134,937		$	(1,799,459	)	$	(2,837,087	)	$	24,784,330		2,960,775	$	(24,402,544	)	$	52,956,201

See notes to consolidated financial statements.

POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004


	2006			2005			2004
				(As restated, see Note 26)
OPERATING ACTIVITIES:
Net income	$	2,213,630		$	3,239,056		$	3,456,614
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		845,000			525,000			3,900,000
Depreciation of premises and equipment		1,297,821			1,302,848			1,259,864
Deferred income tax provision (benefit)		(533,993	)		487,640			(1,324,590	)
Amortization of deferred loan fees		(60,390	)		(67,185	)		(66,577	)
Amortization of premiums and discounts, net		153,163			244,153			147,083
Amortization of core deposit premium		973,205			973,204			944,696
Adjustment of ESOP shares and release of shares under recognition and retention plan		213,056			335,987			683,239
(Increase) decrease in loans held for sale		591,706			(507,309	)		2,875,744
Net gains on sales of loans		(777,312	)		(1,056,477	)		(1,239,706	)
Net gains on sales of investment securities		(269,941	)		(565,939	)		(385,866	)
Net gains on sales of branches		—			—			(136,834	)
Net gain on sale of mortgage servicing rights		(159,148	)		—			—
Increase in cash surrender value of life insurance policies		(373,093	)		(334,846	)		(343,633	)
Stock dividends on FHLB stock		(348,700	)		(257,700	)		(113,400	)
Changes in operating assets and liabilities, net
Trading securities		(442,256	)		(1,143,679	)		(485,113	)
Accrued interest receivable		(549,921	)		(291,734	)		964,903
Accrued interest payable		(46,034	)		263,943			(21,783	)
Other assets		1,298,788			(1,123,662	)		1,832,607
Deferred compensation		(388,139	)		(253,235	)		(455,144	)
Accrued expenses and other liabilities		(51,973	)		1,313,021			(798,322	)

Net cash provided by operating activities		3,585,469			3,083,086			10,693,782
INVESTING ACTIVITIES:
Sale of branches to Bank of Cave City, Arkansas		—			—			(9,697,800	)
Purchases of available for sale and held to maturity securities		(36,868,631	)		(80,574,357	)		(112,557,349	)
Proceeds from sale of securities available-for-sale		2,900,647			49,180,848			86,953,100
Proceeds from maturities, calls and principal prepayment of investment securities		37,414,708			49,787,128			76,386,821
Net (increase) decrease in FHLB Bank stock		1,739,200			221,600			(2,228,800	)
Increase in loans, net		(6,819,525	)		(46,043,012	)		(1,834,799	)
Proceeds from sale of REO		940,713			988,675			881,693
Proceeds from sale of premises and equipment		3,235			13,456			7,567
Purchases of premises and equipment		(460,638	)		(4,270,778	)		(1,042,267	)

Net cash provided (used) by investing activities		(1,150,291	)		(30,696,440	)		36,868,166

(Continued)

POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004


	2006			2005			2004
				(As restated, see Note 26)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits other than in acquisitions and branch sales	$	43,744,697		$	22,965,201		$	(84,548,016	)
Federal Home Loan Bank advances		1,446,820,000			1,000,211,000			877,684,600
Repayment of Federal Home Loan Bank advances		(1,491,067,104	)		(1,005,462,472	)		(824,481,358	)
Exercise of stock options		—			—			924,703
Purchase of treasury shares		—			—			(230,344	)
Purchase of stock for ESOP		(76,112	)		(468,909	)		(2,270,740	)
Dividends paid		(1,442,822	)		(1,438,506	)		(1,442,791	)

Net cash provided (used) by financing activities		(2,021,341	)		15,806,314			(34,363,946	)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		413,837			(11,807,040	)		13,198,002
CASH AND DUE FROM BANKS, BEGINNING OF YEAR		23,411,451			35,218,491			22,020,489

CASH AND DUE FROM BANKS, END OF YEAR	$	23,825,288		$	23,411,451		$	35,218,491

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	24,177,147		$	18,677,897		$	16,679,365

Income taxes	$	533,026		$	1,138,685		$	2,884,070

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Transfers from loans to real estate acquired, or deemed acquired, through foreclosure	$	1,188,433		$	2,184,747		$	2,706,959

Loans originated to finance the sale of real estate acquired through foreclosure	$	383,799		$	821,500		$	1,149,662

Trading securities transferred to available-for-sale	$	3,568,300		$	—		$	—

Securities purchased not settled	$	—		$	2,430,000		$	—

Securities transferred to held-to-maturity	$	—		$	—		$	86,089,901

(Concluded)

See notes to consolidated financial statements.

POCAHONTAS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Pocahontas Bancorp, Inc. (“Bancorp”), its wholly owned subsidiary, First Community Bank (the “Bank”), as well as the Bank’s subsidiaries, Southern Mortgage Corporation, P.F. Service, Inc. and Sun Realty, Inc. (collectively referred to as the “Company”). All significant intercompany transactions have been eliminated in consolidation. The Bank operates 21 offices in northeastern Arkansas and Tulsa County Oklahoma, as a federally chartered savings and loan.

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

Cash and Due From Banks - For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the statement of financial condition caption “cash and due from banks.” This includes cash on hand and amounts due from depository institutions and highly-liquid investments having a maturity at acquisition of three months or less.

Trading Securities - Equity securities held principally for resale in the near term are classified as trading securities and reported at their fair values. Unrealized gains and losses on trading securities are included in other income.

Securities Held-to-Maturity - Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for the amortization of premiums and the accretion of discounts, which are recognized in income using the level-yield method over the assets’ remaining lives and adjusted for anticipated prepayments. Should other than a temporary decline in the fair value of a security occur, the carrying value of such security would be written down to current market value by a charge to operations. As of September 30, 2006 and 2005, no securities were determined to have other than a temporary decline in fair value below cost. For a debt security transferred into the held-to-maturity category from the available-for-sale category, the unrealized holding gain or loss at the date of the transfer, which is included in accumulated other comprehensive income, is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.

Securities Available-for-Sale - Available-for-sale securities consist of securities that the Company intends to hold for an indefinite period of time and are reported at fair value. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as accumulated other comprehensive income (loss), a separate component of stockholders’ equity, until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary would result in a write-down of the individual security to its fair value. The related write-down would be included in earnings as a realized loss. As of September 30, 2006, no securities were determined to have other than a temporary decline in fair value below cost.

Loans Receivable - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the life of the related loan.

The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet contractual principal or interest obligations or where interest or principal is 90 days or more past due. When a loan is placed on nonaccrual status, accrual of interest ceases and, in general, uncollected past due interest (including interest applicable to prior reporting periods, if any) is reversed and charged against current income. Therefore, interest income is not recognized unless the financial condition or payment record of the borrower warrants the recognition of interest income. Interest on loans that have been restructured is generally accrued according to the renegotiated terms.

Loans Receivable Held for Sale - Loans receivable, held for sale are carried at the lower of cost or market, which is computed by the aggregate method (unrealized losses are offset by unrealized gains). Gains or losses on loan sales are recognized at the time of sale and are determined by the difference between net sales proceeds and the unpaid principal balance of loans sold, adjusted for unamortized discount points and fees collected from borrowers, deferred origination costs and amounts allocated to retained servicing rights.

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance to provide for incurred but not yet realized losses. The Company reviews its loans for impairment on a quarterly basis. Impairment is determined by assessing the probability that the borrower will not be able to fulfill the contractual terms of the agreement. If a loan is determined to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or by

use of the observable market price of the loan or fair value of collateral if the loan is collateral dependent. Throughout the year management estimates the level of probable losses to determine whether the allowance for loan losses is appropriate considering the estimated losses existing in the portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined by management to be appropriate relative to losses. The allowance for loan losses is increased by charges to income (provisions) and decreased by charge offs, net of recoveries. Loans are charged off by reducing the loan balance and the allowance in the period in which the loans are deemed uncollectible in whole or in part.

Homogeneous loans are those that are considered to have common characteristics that provide for evaluation on an aggregate or pool basis. The Company considers the characteristics of (1) one-to-four family residential first mortgage loans; (2) automobile loans; and (3) consumer and home improvement loans to permit consideration of the appropriateness of the allowance for losses of each group of loans on a pool basis. The primary methodology used to determine the appropriateness of the allowance for losses includes segregating certain specific, poorly performing loans based on their performance characteristics from the pools of loans as to type and then applying a loss factor to the remaining pool balance based on several factors including classification of the loans as to grade, past loss experience, inherent risks, economic conditions in the primary market areas and other factors which usually are beyond the control of the Company. Those segregated specific loans are evaluated using the present value of future cash flows, usually determined by estimating the fair value of the loan’s collateral reduced by any cost of selling and discounted at the loan’s effective interest rate if the estimated time to receipt of monies is more than three months.

Non-homogeneous loans are those loans that can be included in a particular loan type, such as commercial loans and multi-family and commercial first mortgage loans, but which differ in other characteristics to the extent that valuation on a pool basis is not valid. After segregating specific, poorly performing loans and applying the methodology as noted in the preceding paragraph for such specific loans, the remaining loans are evaluated based on payment experience, known difficulties in the borrowers business or geographic area, loss experience, inherent risks and other factors usually beyond the control of the Company. These loans are then graded and a factor, based on experience, is applied to estimate the probable loss.

Estimates of the probability of loan losses involve an exercise of judgment. While it is possible that in the near term the Company may sustain losses which are substantial in relation to the allowance for loan losses, it is the judgment of management that the allowance for loan losses reflected in the consolidated statements of financial condition is appropriate considering the estimated probable losses in the portfolio.

Servicing - Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

Interest Rate Risk - The Company’s asset base is exposed to risk including the risk resulting from changes in interest rates and changes in the timing of cash flows. The Company monitors the effect of such risks by considering the mismatch of the maturities of its assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates. The Company’s management has considered the effect of significant increases and decreases in interest rates and believes such changes, if they occurred, would be manageable and would not affect the ability of the Company to hold its assets as planned. However, the Company is exposed to significant market risk in the event of significant and prolonged interest rate changes.

Foreclosed Real Estate - Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in non-interest expenses. Properties obtained in this matter are also referred to as real estate owned (“REO”).

Premises and Equipment - Land is carried at cost. Buildings and furniture, fixtures, and equipment are carried at cost, less accumulated depreciation. Depreciation for financial statement purposes is computed using the straight-line method over the estimated useful lives of the assets ranging from 3 to 40 years.

Core Deposit Premiums - Core deposit premiums paid are being amortized over ten years which approximates the estimated life of the purchased deposits. The carrying value of core deposit premiums is periodically evaluated to estimate the remaining periods of benefit. If these periods of benefit are determined to be less than the remaining amortizable life, an adjustment to reflect such shorter life will be made.

Goodwill - Goodwill is tested periodically for impairment and written down to fair value as necessary. As of April 1, 2006 and 2005, the Company performed its annual impairment test and concluded there was no impairment of the carrying value of the Company’s goodwill. Absent any impairment indicators, the Company expects to perform its next impairment test as of April 1, 2007.

Income Taxes - Deferred tax assets and liabilities are recorded for temporary differences between the carrying value and tax bases of assets and liabilities. Such amounts are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce the deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in applicable deferred tax assets and liabilities.

Stock Compensation – At September 30, 2006, the Company has two stock-based employee compensation plans, which are more fully described in Note 21. Financial Accounting Standards Board Statement Number 123 (revised 2004) (“FAS 123 (R)”), Share-Based Payments, requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. As of October 1, 2005, the Company adopted FAS 123(R) using the modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remained outstanding at the date of adoption. As of October 1, 2005, the Company’s options were fully vested, requiring no expense to be recorded for the year ended September 30, 2006.

Recently Adopted or Issued Accounting Standards – In November 2005, FSP FAS 115-1 and FAS 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” was issued. The FSP addressed the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It also included accounting considerations 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 guidance of the FSP amended FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB Opinion No 18, The Equity Method of Accounting for Investments in Common Stock. The FSP nullified certain requirements of Emerging Issues Task Force (“EITF”) Issue 03-1 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The FSP gives guidance regarding how to determine whether an investment is impaired, if impaired how to evaluate whether the impairment is other-than-temporary, and proper accounting and disclosures for the investments. The Guidance is effective for reporting periods beginning after December 15, 2005; earlier application is permitted. The adoption of EITF 03-1 did not have an effect on the Company’s consolidated financial statements.

In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 which is effective for fiscal years beginning after December 15, 2006. FIN No. 48 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not file in a particular jurisdiction. The cumulative effect of the changes arising from the initial application of FIN 48 is required to be reported as an adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact, if any, of the adoption of FIN 48 on our financial statements.

Reclassifications - Certain 2004 and 2005 amounts have been reclassified to conform to the 2006 presentations. Accrued interest payable is being presented as a separate line item on the Consolidated Statements of Financial Condition in 2006 compared to 2005, dividends are being presented as a separate line item on the Consolidated Statements of Income in 2006 compared to 2005 and 2004, and the other comprehensive income is presented in the Consolidated Statements of Stockholders’ Equity in 2006 instead of in a Statement of Income and Other Comprehensive Income in 2005 and 2004.

2.	FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The carrying amounts and estimated fair values of financial instruments at September 30, 2006 and 2005, were as follows (items which are not financial instruments are not included):


	2006				2005
	Carrying Amounts		Estimated Fair Value		Carrying Amounts		Estimated Fair Value
Financial assets and liabilities:
Cash and due from banks	$	23,825,288	$	23,825,288	$	23,411,451	$	23,411,451
Cash surrender value of life insurance		8,392,191		8,392,191		8,019,097		8,019,097
Securities held-to-maturity		133,120,083		130,187,272		129,952,373		127,755,514
Securities available-for-sale		93,561,067		93,561,067		99,460,045		99,460,045
Trading securities		—		—		3,126,044		3,126,044
Loans receivable, net		431,768,328		432,669,000		426,538,047		423,664,000
Loans receivable held for sale		3,243,591		3,308,000		3,057,985		3,260,000
Accrued interest receivable		5,037,759		5,037,759		4,487,837		4,487,837
Federal Home Loan Bank stock		6,571,500		6,571,500		7,962,000		7,962,000
Demand and savings deposits		216,605,387		216,605,387		246,257,677		245,604,000
Time deposits		341,183,044		339,821,000		267,786,057		267,157,000
Federal Home Loan Bank advances		104,398,292		104,198,000		148,645,397		147,967,000

For purposes of the above disclosures of estimated fair value, the following assumptions were used. The estimated fair values for cash and due from banks, cash surrender value of life insurance, accrued interest receivable, and FHLB stock are considered to approximate cost. The estimated fair values for securities are based on quoted market values for the individual securities or for equivalent securities. The fair value for loans is estimated by discounting the future cash flows using the current rates the Company would charge for similar such loans at the applicable date. The estimated fair values for demand and savings deposits are based on the amounts for which they could be settled on demand. The estimated fair values for time deposits and FHLB advances are based on estimates of the rate the Company would pay on such deposits and borrowed funds at the applicable date, applied for the time period until maturity. The estimated fair values for other financial instruments approximate cost and are not considered significant to this presentation. Fair values for the Company’s off-balance-sheet instruments, which consist of lending commitments and standby and commercial letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance-sheet instruments is not significant.

3.	SECURITIES

The amortized cost and estimated fair values of securities at September 30 are as follows:


	2006
Held-to-Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
US Government Agencies	$	4,000,000	$	—	$	133,380	$	3,866,620
US Government Treasury Notes		19,920,698		—		176,948		19,743,750
Mortgage Backed Securites		61,329,055		—		2,755,893		58,573,162
Municipal bonds		47,870,330		268,955		135,545		48,003,740

Total	$	133,120,083	$	268,955	$	3,201,766	$	130,187,272


Available-for-sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage backed securities	$	95,214,934	$	—	$	3,520,437	$	91,694,497
Preferred Security		111,350		—		3,325		108,025
Equity Securities (Common Stock)		826,244		26,000		56,799		795,445
Mutual fund		1,000,000		—		36,900		963,100

Total	$	97,152,528	$	26,000	$	3,617,461	$	93,561,067


	2005
Held-to-Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
US Government Agencies	$	4,000,000	$	—	$	74,057	$	3,925,943
US Government Treasury Notes		19,844,509		—		133,571		19,710,938
Mortgage Backed Securites		76,704,653		9,560		2,101,766		74,612,447
Municipal bonds		29,403,211		257,902		154,927		29,506,186

Total	$	129,952,373	$	267,462	$	2,464,321	$	127,755,514


Available-for-sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage backed securities	$	101,343,904	$	—	$	2,859,874	$	98,484,030
Mutual fund		1,000,000		—		23,985		976,015

Total	$	102,343,904	$	—	$	2,883,859	$	99,460,045

The amortized cost and estimated fair value of securities at September 30, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

POCAHONTAS BANCORP INC 10-K