SECURITIESTable ANDof EXCHANGE COMMISSION Contents

~~Washington,~~UNITED ~~D.C.~~STATES ~~20549~~

~~FORM~~SECURITIES ~~10-K~~AND EXCHANGE COMMISSION

xWashington, ~~Annual~~D.C. ~~Report~~20549 ~~Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~

~~For~~FORM ~~the~~10-K ~~Fiscal Year Ended September 30, 2004.~~

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

¨For ~~Transition Report Pursuant to Section 13 or 15(d) of~~ the ~~Securities~~Fiscal ~~Exchange~~Year ~~Act~~Ended ofSeptember 30, ~~1934~~2006.

~~For~~OR ~~the transition period from to~~

~~Commission~~¨ ~~File~~Transition ~~#0-23969~~Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

~~POCAHONTAS~~For ~~BANCORP,~~the ~~INC.~~transition period from to

~~(Exact name~~Commission ofFile ~~registrant~~#0-23969 ~~as specified in its charter)~~

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

POCAHONTAS BANCORP, INC.

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

(Exact name of registrant as specified in its charter)

(870) 802-1700


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

(~~Registrant’s telephone number~~870) 802-1700

~~Securities~~(Registrant’s ~~Registered~~telephone ~~Pursuant to Section 12(b~~number) ~~of the Act: None~~

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

(Title of Class)

Name of Each Exchange on which Registered: NASDAQ ~~National~~Global Market ~~System~~

~~Indicate~~Securities byRegistered ~~check~~Pursuant ~~mark whether the Registrant (1) has filed all reports required~~ to ~~be filed by~~ Section ~~13 or 15~~12(dg) of the ~~Securities Exchange~~ Act: ofNone ~~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 requirements for the past 90 days.~~

~~YES~~Indicated x.by NOcheck 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 ~~disclosure~~ ofthe ~~delinquent~~Registrant ~~filers pursuant to Item 405 of Regulation S-K~~ is not ~~contained~~required ~~herein,~~to ~~and~~file ~~will~~reports ~~not~~pursuant ~~be contained,~~ to ~~the~~Section 13 ~~best of Registrant’s knowledge, in definitive proxy~~ or ~~information~~Section 15(d) ~~statements incorporated by reference in Part III~~ of ~~this~~the ~~Form 10-K or any amendment to this Form 10-K~~Act. YES ¨ NO x.

Indicate by check mark whether the Registrant is(1) has anfiled ~~accelerated~~all ~~filer~~reports ~~(as~~required ~~defined~~to be filed by ~~the~~Section 13 ~~Rule~~or ~~12b-2~~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 ¨.

~~YES~~Indicate ¨by NOcheck 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

AsIndicate ofby ~~December~~check ~~20, 2004,~~mark ~~there~~whether ~~were~~the ~~issued~~Registrant ~~and~~is ~~outstanding~~a 4large accelerated filer,~~641,717~~ ~~shares~~an ofaccelerated ~~the~~filer ~~Registrant’s~~or ~~Common~~a ~~Stock~~non-accelerated filer. ~~Such~~See ~~shares~~definition ~~were~~of “large ~~listed~~accelerated onfiler and accelerated filer” in Rule 12b-2 of the ~~NASDAQ~~Securities ~~National~~Exchange ~~Market~~Act ~~System~~of 1934.

~~The~~Large ~~aggregate~~Accelerated ~~market value of the voting stock held by non~~Filer ¨ Accelerated Filer ¨ Non-~~affiliates~~Accelerated ofFiler x the Registrant, computed by reference to the last sale price on December 20, 2004, was $43,012,478. 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.

~~DOCUMENTS~~Indicate ~~INCORPORATED~~by BYcheck ~~REFERENCE:~~mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

1YES ¨ NO x. ~~Part II of Form 10-K – Annual Report to Stockholders for the fiscal year ended September 30, 2004.~~

2.As ~~Part~~of ~~III~~December 13, of2006, ~~Form~~there ~~10-K~~were –issued ~~Proxy~~and ~~Statement~~outstanding ~~for~~4,641,717 shares of the ~~2004~~Registrant’s ~~Annual~~Common ~~Meeting~~Stock. ofSuch ~~Stockholders~~shares were listed on the NASDAQ National Market System.

1The 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.

PARTTable Iof Contents

~~ITEM~~POCAHONTAS 1BANCORP, ~~BUSINESS~~INC.

~~General~~ TABLE OF CONTENTS

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 Savings Association Insurance Fund (“SAIF”). 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 its telephone number is 870-802-1700.


		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

~~The~~2 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 one.

OnTable 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. Contents

OnPART ~~May~~I 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.

OnITEM ~~June~~1 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. BUSINESS

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

OnPocahontas ~~April 30~~Bancorp, ~~2003,~~Inc. (the ~~Company~~“Registrant” ~~completed~~or the ~~acquisition~~“Company”) ofwas ~~Marked~~organized ~~Tree~~in ~~Bancshares~~March ~~(“Marked~~1998 ~~Tree”)~~to ~~and~~be ~~its~~the ~~bank~~holding ~~subsidiary,~~company ~~Marked~~for ~~Tree~~First Community Bank, in(the “Bank”), a ~~stock~~federally ~~transaction~~chartered ~~valued~~savings atand ~~approximately~~loan ~~$3.2~~association ~~million~~headquartered in Jonesboro, Arkansas. The ~~transaction~~Bank’s ~~was~~deposits ~~structured~~are asinsured aby ~~tax-free~~the ~~reorganization~~Federal ~~whereby~~Deposit ~~Marked~~Insurance ~~Tree~~Corporation ~~stockholders~~(“FDIC”) ~~received~~under ~~103.1004~~the ~~shares~~Depository ofInsurance ~~Company~~Fund (“DIF”). ~~stock~~The ~~for~~Company ~~each~~is ~~outstanding~~registered ~~share~~as ofa ~~Marked~~savings ~~Tree~~and ~~stock.~~loan ~~Marked Tree~~holding ~~was~~company ~~headquartered~~with inthe ~~Marked~~Office ~~Tree,~~of ~~Arkansas~~Thrift ~~and~~Supervision ~~operated~~(“OTS”). ~~one~~The ~~full-service~~Company’s ~~banking~~main office is located at 1700 E. AtHighland ~~April~~Drive, 30Jonesboro, ~~2003~~Arkansas, ~~Marked~~and ~~Tree~~the ~~had~~telephone number ~~total~~is ~~assets of $32~~870-802-1700.6 ~~million.~~

OnThe ~~August~~Company 15was organized in conjunction with the mutual-to-stock conversion of the Bank’s majority stockholder, ~~2003~~Pocahontas Bancorp, MHC, a federal mutual holding company, in March 1998. In this “second step” conversion, 3,570,750 shares of the Company’s ~~sold~~common ~~its~~stock ~~banking~~were ~~offices~~sold in ~~Brinkley~~a subscription and community offering at $10.00 per share, ~~Arkansas~~and tothe outstanding common stock of the Bank was exchanged for Company common stock at a ratio of ~~Brinkley~~4.0245 to 1.

On ~~March 5~~May 15, ~~2004~~2001, the Company ~~sold~~acquired Walden/Smith Financial Group, Inc. (“Walden”) and its ~~banking~~wholly-owned ~~offices~~bank insubsidiary, ~~Strawberry~~First Community Bank (“FCB”). As part of the acquisition, Walden’s stockholders received an aggregate of $27.4 million in cash for all of ~~Arkansas~~the toissued 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. ofIn ~~Cave~~addition, ~~City~~the Company moved its corporate headquarters to Jonesboro, Arkansas.

~~The~~On ~~Bank~~May 31, is2002, ~~a community-oriented~~the ~~savings~~Company’s ~~institution~~subsidiary, ~~that~~First ~~operates~~Community 18Bank ~~full-service~~acquired ~~offices~~Peoples inBank of ~~its~~Imboden, ~~market~~an ~~area~~Arkansas ~~consisting~~bank subsidiary of ~~Northeast~~Spring ~~Arkansas.~~Rivers ~~The~~Bancshares, ~~Bank~~Inc., isin ~~primarily~~a ~~engaged~~cash inmerger ~~the~~valued ~~business~~at ofapproximately ~~originating~~$8.4 ~~single-family~~million. ~~residential~~Peoples ~~mortgage loans~~Bank, ~~commercial~~which ~~real estate~~had ~~loans~~assets ~~and~~of ~~commercial~~$71.6 ~~business~~million, ~~loans~~was ~~funded~~headquartered ~~with~~in ~~deposits~~Imboden, Arkansas, and ~~Federal~~operated ~~Home~~four ~~Loan~~full-service banking ~~Bank (“FHLB”) advances~~offices.

~~The~~On ~~Bank’s~~June 18, ~~operations are affected by general economic conditions~~2002, the ~~monetary~~Company ~~and~~acquired ~~fiscal~~North ~~policies~~Arkansas ofBancshares, ~~the federal government and the regulatory policies of government authorities~~Inc., ~~Deposit flows and~~ the ~~cost~~holding ofcompany ~~interest-bearing~~for ~~liabilities~~Newport ~~(“cost~~Federal ofSavings ~~funds”) to the~~ Bank ~~are affected by interest rates on competing investments and general market interest rates. Similarly~~, ~~the~~for ~~Bank’s~~$15.00 ~~loan~~per ~~volume~~share, ~~and~~or ~~yields~~$4.3 onmillion ~~loans~~in ~~and~~the ~~investment~~aggregate ~~securities~~in ~~and~~a ~~the~~stock- ~~level~~for- ofstock ~~prepayments~~exchange. onNewport ~~such~~Federal ~~loans~~Savings ~~and~~Bank ~~investment~~was ~~securities~~a ~~are~~savings ~~affected~~bank bylocated ~~market~~in ~~interest~~Newport, ~~rates~~Arkansas, aswith ~~well~~$37.0 asmillion byin ~~additional~~total ~~factors~~assets ~~affecting~~at ~~the~~September 30, ~~supply of and demand for housing and the availability of funds~~2001.

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

~~The~~On ~~Company~~April 30, ~~and~~2003, ~~its~~the ~~affiliates~~Company ~~employed~~acquired ~~200~~Marked ~~full-time~~Tree ~~equivalent~~Bancshares ~~employees at~~(“Marked ~~September~~Tree”) ~~30,~~and ~~2004,~~its ~~compared~~bank tosubsidiary, ~~221~~Marked ~~and~~Tree ~~169~~Bank, atin ~~September~~a ~~30,~~stock ~~2003~~transaction ~~and~~valued ~~2002,~~at approximately ~~respectively~~$3.2 million. The ~~decrease~~transaction inwas ~~number~~structured ofas ~~full~~a tax-~~time~~free ~~equivalent~~reorganization ~~employees~~whereby inMarked ~~fiscal~~Tree ~~2004~~stockholders isreceived ~~primarily~~103.1004 ~~the~~shares ~~result~~ of ~~management’s~~Company ~~efforts~~stock tofor ~~improve~~each ~~efficiency~~outstanding ~~and stream~~share ~~line~~of ~~operations;~~Marked ~~the~~Tree ~~increase~~stock. ~~during~~Marked ~~fiscal~~Tree ~~2003~~ was ~~due~~headquartered ~~primarily~~in Marked ~~to the acquisitions of 2003~~Tree, Arkansas and ~~2002.~~operated Weone ~~believe~~full-service ~~that~~banking weoffice. ~~have~~At ~~been~~April 30, ~~successful~~2003, inMarked ~~attracting~~Tree ~~quality~~had ~~employees~~total ~~and~~assets ~~that~~of ~~our~~$32.6 ~~employee relations are good~~million.

2On August 15, 2003, the Company sold its banking offices in Brinkley, Arkansas, to the Bank of Brinkley.

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

The ~~Company~~Bank ~~makes~~is ~~its~~a ~~annual report on Form 10~~community-K,oriented ~~quarterly~~federally ~~reports~~chartered onsavings ~~Form 10-Q,~~ and ~~all~~loan ~~amendments to such reports filed pursuant to Section~~association ~~13(a)~~regulated orby ~~15(d) of~~ the ~~Exchange Act~~OTS, ~~available~~which asoperates ~~soon~~21 asfull-service ~~reasonably~~offices ~~practicable~~in ~~free~~its ofmarket ~~charge~~area onconsisting orof ~~through~~Northeast ~~its~~Arkansas ~~website~~and ~~located~~Tulsa atCounty, ~~fcb-online~~Oklahoma.~~com~~ ~~after~~The ~~filing~~Bank ~~with~~opened ~~the~~three ~~United~~new ~~States~~branch ~~Securities~~locations ~~and~~during ~~Exchange~~fiscal ~~Commission~~2005.

~~Competition~~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 ~~faces~~is ~~strong~~primarily engaged ~~competition both~~ in ~~attracting~~the ~~deposits~~business ~~and in origination~~ of ~~loans.~~originating ~~Competitors~~single-family ~~for~~residential ~~deposits~~mortgage ~~include thrift institutions~~loans, commercial ~~banks,~~real ~~credit~~estate ~~unions,~~loans ~~money market funds,~~ and ~~other~~commercial ~~investment~~business ~~alternatives,~~loans ~~such~~funded aswith ~~mutual~~deposits ~~funds, full service~~ and ~~discount~~Federal ~~broker-dealers,~~Home ~~brokerage~~Loan ~~accounts,~~Bank ~~and~~(“FHLB”) ~~savings bonds or other government securities~~advances. ~~Primary~~ ~~competitive factors include convenience of locations, variety of deposit or investment options, rates or terms offered, and quality of customer service.~~

The Bank’s ~~competes~~operations ~~for~~are ~~mortgage~~affected ~~loan~~by ~~originations~~general ~~with~~economic ~~thrift institutions~~conditions, ~~banks~~the monetary and ~~mortgage~~fiscal ~~companies,~~policies ~~including~~of ~~many~~the ~~large~~federal ~~financial~~government ~~institutions,~~and the regulatory policies of ~~which~~government ~~have~~authorities. ~~greater~~Deposit ~~financial~~flows and ~~marketing~~the ~~resources~~cost ~~available~~of interest-bearing liabilities (“cost of funds”) to ~~them.~~the ~~Primary~~Bank ~~competitive~~are ~~factors~~affected ~~include~~by ~~service~~interest ~~quality~~rates on competing investments and ~~speed~~general market interest rates. Similarly, ~~relationships~~the ~~with~~Bank’s ~~builders~~loan volume and ~~real~~yields ~~estate~~on ~~brokers,~~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 ~~fees~~demand for housing and the availability of funds.

~~The~~Employees ~~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~~The ~~Activities~~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.

~~Loan~~Available ~~Portfolio~~Information 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, 2004, the Bank’s net loan portfolio including loans held for sale totaled $383.8 million, of which $128.1 million, or 33.4% were single-family residential real estate mortgage loans, $2.4 million, or .6% were multifamily residential real estate loans, $17.9 million, or 4.7% were agricultural real estate loans, and $135.3 million, or 35.2%, were commercial real estate loans (including land loans). Additionally, the Bank’s loans at September 30, 2004 included commercial business loans (i.e., crop production, equipment and inventory loans), which totaled $57.0 million, or 14.9%, of the Bank’s net loan portfolio as of September 30, 2004. Other loans, including automobile loans and loans collateralized by deposit accounts totaled $50.0 million, or 13.1% of the Bank’s net loan portfolio as of September 30, 2004. The composition of the Bank’s loan portfolio has changed since 2000 due to acquisitions, with a larger percentage of loans in the commercial real estate and non-real estate loans. Since 2000, the 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 for subsequent originations of other commercial and non-real estate loans.

3The 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.

~~Analysis~~3 ~~of Loan Portfolio~~

SetTable 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. Contents

	At September 30
	2004				2003				2002				2001				2000
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Real estate loans:
Single-family residential	$	128,072	33.4	%	$	139,365	35.8	%	$	188,113	46.1	%	$	175,977	50.4	%	$	175,625	75.0	%
Multifamily residential		2,393	0.6			1,384	0.4			1,194	0.3			826	0.2			1,163	0.5
Agricultural		17,915	4.7			20,467	5.3			17,342	4.2			14,386	4.1			7,360	3.1
Commercial		135,326	35.2			113,855	29.2			91,298	22.4			73,282	21.0			25,730	11.0
Total real estate loans		283,706	73.9	%		275,071	70.7			297,947	73.0			264,471	75.7			209,878	89.6
Other loans:
Savings account loans		5,571	1.5			6,538	1.7			6,808	1.7			5,166	1.5			1,665	0.7
Commercial business (1)		57,045	14.9			67,747	17.3			64,524	15.8			65,432	18.8			12,555	5.3
Other (2)		44,409	11.6			47,354	12.2			46,459	11.4			17,551	5.0			13,610	5.8
Total other loans		107,025	28.0			121,639	31.2			117,791	28.9			88,149	25.3			27,830	11.8
Total loans receivable		390,731	101.9			396,710	101.9			415,738	101.9			352,620	101.0			237,708	101.4
Less:
Undisbursed loan proceeds		2,942	0.8			3,413	0.9			4,243	1.0			416	0.1			1,345	0.6
Unearned discount and net deferred loan fees		213	0.1			227	0.1			209	0.1			286	0.1			264	0.1
Allowance for loan losses		3,766	1.0			4,068	0.9			3,205	0.8			2,542	0.8			1,682	0.7
Total loans receivable, net	$	383,810	100.0	%	$	389,002	100.0	%	$	408,081	100.0	%	$	349,376	100.0	%	$	234,417	100.0	%

Competition

~~(1)~~The ~~Includes~~Bank faces ~~crop-production~~strong competition both in attracting deposits and in originating loans. Competitors for deposits include thrift institutions, ~~livestock~~commercial ~~loans~~banks, credit unions, money market funds, and ~~equipment~~other ~~loans~~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.

~~(2)~~The ~~Includes~~Bank ~~second~~competes for mortgage ~~loans~~loan originations with thrift institutions, ~~unsecured~~banks ~~personal~~and ~~lines~~mortgage ofcompanies, ~~credit~~including many large financial institutions, which have greater financial and ~~automobile~~marketing ~~loans~~resources available to them. Primary competitive factors include service quality and speed, relationships with builders and real estate brokers, and rates and fees.

~~Loan Maturity Schedule.~~ The ~~following table sets forth certain information as of September 30, 2004, regarding the dollar amount of gross loans maturing in the~~ Bank’s ~~portfolio~~believes ~~based~~that onit ~~their~~has ~~contractual~~been ~~terms~~able to ~~maturity.~~compete ~~Demand~~effectively ~~loans, loans having no stated schedule of repayments, and overdrafts are reported as due~~ in ~~one~~its ~~year~~principal ~~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~~markets, and ~~fixed~~that ~~rate~~competitive ~~loans~~pressures ~~are~~have ~~included~~not inmaterially ~~the~~interfered ~~period~~with ~~in which~~ the Bank’s ~~final~~ongoing ~~contractual repayment is due~~operations.

	Within1 Year		1-3Years		3-5Years		5-10Years		10-20Years		Beyond20Years		Total
	(In Thousands)
Fixed rate loans	$	77,392	$	60,036	$	118,083	$	13,016	$	15,918	$	9,372	$	293,817
Variable rate loans	$	9,185	$	6,313	$	14,760	$	7,488	$	21,540	$	37,628	$	96,914
Total	$	86,577	$	66,349	$	132,843	$	20,504	$	37,458	$	47,000	$	390,731

Lending Activities

Loan Portfolio Composition. The ~~following~~Bank’s ~~table~~net loan portfolio including loans held for sale consists primarily of first mortgage loans collateralized by single-family residential real estate, multifamily residential real ~~sets~~estate, ~~forth~~commercial atreal ~~September~~estate and agricultural real estate loans. At September 30, ~~2004~~2006, the ~~dollar~~Bank’s ~~amount~~net loan portfolio including loans held for sale totaled $435.2 million, of ~~all~~which ~~fixed~~$131.2 ~~rate~~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 ~~adjustable~~$130.4 ~~rate~~million, or 30.0%, were commercial real estate loans ~~due~~(including ~~after~~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, ~~2005~~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.

	Fixed		Adjustable		Total
	(in Thousands)
Single family residential	$	54,870	$	66,562	$	121,432
Multifamily residential		1,376		670	$	2,046
Agricultural		14,317		—	$	14,317
Commercial		94,665		14,870	$	109,535
Commercial Business		23,035		3,202	$	26,237
Other		28,162		2,425	$	30,587
Total:	$	216,425	$	87,729	$	304,154

Analysis of Loan Portfolio

4Set 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.

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, 2004, the Bank had $128.1 million, or 33.4%, of its total net loan portfolio invested in single-family residential mortgage loans, substantially all of which were collateralized by properties located in the Bank’s market area or in counties contiguous with the Bank’s market area.


	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	%

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 adjustable rate mortgage (~~“ARM”~~1) ~~loans~~Includes ~~that~~crop-production ~~it originates. Whether the Bank can or will sell fixed rate~~ loans, ~~however,~~livestock ~~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, 2004~~ loans ~~held for sale were $1.5 million, at September 30, 2003 loans held for sale were $3.1 million,~~ and atequipment ~~September 30, 2002~~ loans ~~held for sale were $11~~.9 million. During the fiscal years ended September 30, 2004 and 2003, the Bank sold into the secondary market $27.4 million and $79.1 million, respectively, of single-family, fixed rate, residential mortgage loans, generally from current period originations. The Bank retained the servicing rights on loans sold in fiscal year 2004 and 2003. The servicing rights asset, which was $0.7 million and $0.7 million as of September 30, 2004 and 2003, respectively, is included in other assets in the consolidated financial statements.

~~The~~(2) ~~Bank~~Includes ~~currently~~second ~~offers single-family residential~~ mortgage loans ~~with terms typically ranging from 10 to 30 years~~, ~~and~~unsecured ~~with~~personal ~~adjustable~~lines 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~~credit ~~that the Bank’s single-family residential mortgage loans remain outstanding varies significantly depending upon trends in market interest rates~~ and ~~other~~automobile ~~factors. Accordingly, estimates of the average length of single-family~~ loans ~~that remain outstanding cannot be made with any degree of accuracy~~.

~~Originations~~Loan ofMaturity ~~fixed-rate~~Schedule. The ~~mortgage~~following ~~loans~~table ~~versus~~sets ~~ARM~~forth ~~loans~~certain ~~are~~information ~~monitored~~as onof anSeptember 30, ~~ongoing~~2006, ~~basis~~regarding ~~and~~the ~~are~~dollar ~~affected~~amount ~~significantly~~of bygross loans maturing in the ~~level~~Bank’s ofportfolio ~~market~~based ~~interest~~on ~~rates,~~their contractual ~~customer~~terms ~~preference~~to maturity. Demand loans, ~~the~~loans ~~Bank’s~~having ~~interest~~no ~~rate~~stated ~~risk~~schedule ~~analysis~~of repayments, and ~~loan products~~overdrafts ~~offered~~are byreported ~~the~~as ~~Bank’s~~due ~~competitors.~~in ~~Particularly~~one inyear aor ~~relatively~~less. ~~low~~Adjustable ~~interest~~and floating rate ~~environment,~~loans ~~borrowers~~are ~~may~~included ~~prefer~~in ~~fixed~~the ~~rate~~period ~~loans~~in towhich ~~ARM~~interest ~~loans.~~rates ~~However,~~are ~~management’s~~next scheduled ~~strategy~~to isadjust torather ~~emphasize~~than ~~ARM~~in ~~loans~~which they mature, and ~~the~~fixed ~~Bank~~rate ~~has~~loans ~~been successful~~are included in ~~maintaining~~the aperiod ~~level~~in ofwhich ~~ARM~~the ~~loan~~final ~~originations~~contractual ~~acceptable~~repayment tois ~~management~~due.

~~The~~4 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 225 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.

TheTable 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. Contents

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.


	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

~~Regulations~~The ~~limit~~following ~~the~~table ~~amount~~sets ~~that~~forth aat ~~savings~~September 30, ~~association may lend relative to the appraised value of the real estate securing the loan~~2006, ~~as determined by an appraisal at~~ the ~~time~~dollar ofamount ~~loan origination. Such regulations permit a maximum loan-to-value ratio~~ of ~~100%~~all ~~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~~adjustable rate loans ~~without~~due ~~private~~after ~~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~~September 30, ~~as well as title insurance, on all properties securing real estate loans made by the Bank~~2007.

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 $2.4 million, or .6% of the Bank’s total net loan portfolio at September 30, 2004, compared to $1.4 million, or 0.4% of the Bank’s total net loan portfolio at September 30, 2003, $1.2 million, or 0.3% of the Bank’s total net loan portfolio at September 30, 2002, $0.8 million, or 0.2%, of the Bank’s total net loan portfolio at September 30, 2001, and $1.2 million, or 0.5%, of the total net loan portfolio at September 30, 2000. 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


	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

5Single-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 ~~project~~resale in the secondary mortgage market. ~~Fixed~~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 ~~generally~~held ~~have~~for ~~five~~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~~-seven-~~ 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 ~~terms~~ended ~~with~~September 30, a2006, ~~balloon~~the ~~payment~~Bank ~~based~~sold the servicing rights on aloans 15sold to 25Fannie ~~year~~Mae ~~amortization~~for ~~schedule~~a net gain of $159 thousand.

~~Loans~~The ~~collateralized~~Bank bycurrently ~~multifamily~~offers ~~real estate generally involve a greater degree of credit risk than~~ single-family residential mortgage loans ~~and~~with ~~carry~~terms ~~individually~~typically ~~larger~~ranging ~~loan~~from ~~balances.~~10 ~~This~~to ~~increased~~30 ~~credit~~years, ~~risk~~and iswith aadjustable ~~result~~or fixed ofinterest ~~several~~rates. ~~factors,~~Single-family ~~including~~residential ~~the~~real ~~concentration~~estate ofloans ~~principal~~often inremain aoutstanding ~~limited~~for ~~number~~significantly ofshorter ~~loans and~~periods ~~borrowers,~~than ~~the~~their ~~effects~~contractual ofterms ~~general~~because ~~economic~~borrowers ~~conditions~~may onrefinance ~~income~~or ~~producing~~prepay ~~properties,~~loans ~~and~~at ~~the~~their ~~increased~~option. ~~difficulty~~The ofaverage ~~evaluating~~length ~~and monitoring these types~~ of ~~loans.~~time that ~~Furthermore,~~ the ~~repayment~~Bank’s ofsingle-family ~~loans~~residential ~~collateralized~~mortgage byloans ~~multifamily~~remain ~~real~~outstanding ~~estate typically~~varies ~~depends~~significantly depending upon ~~the~~trends ~~successful~~in ~~operation~~market ofinterest ~~the~~rates ~~related~~and ~~real~~other ~~estate property~~factors. IfAccordingly, ~~the~~estimates ~~cash~~of ~~flow~~the ~~from~~average ~~the~~length ~~project~~of issingle-family ~~reduced,~~loans ~~the~~that ~~borrower’s~~remain outstanding ~~ability~~cannot tobe ~~repay~~made ~~the~~with ~~loan~~any ~~may~~degree beof ~~impaired~~accuracy.

~~Agricultural~~Originations ~~Real~~of ~~Estate~~fixed-rate ~~Loans.~~mortgage Inloans ~~recent~~versus ~~years~~ARM ~~the~~loans ~~Bank~~are ~~has~~monitored ~~increased its~~on ~~originations~~an ofongoing ~~agricultural~~basis ~~real~~and are ~~estate~~affected ~~loans~~significantly ~~for~~by the ~~purchase~~level of ~~farmland~~market ininterest rates, customer preference, the Bank’s ~~market~~interest ~~area.~~rate ~~Loans~~risk ~~collateralized~~analysis, byand ~~farmland~~loan ~~constituted~~products ~~approximately~~offered ~~$17.9~~by ~~million or 4.7%, of~~ the Bank’s ~~total~~competitors. ~~net~~Particularly ~~loan~~in ~~portfolio~~a ~~at September~~relatively ~~30,~~low ~~2004,~~interest ~~compared~~rate toenvironment, borrowers ~~$20.5~~may ~~million,~~prefer orfixed ~~5.3%,~~rate ~~$17.3~~loans ~~million,~~to orARM 4loans.~~2%,~~ ~~$14.4 million~~However, ormanagement’s ~~4.1%,~~strategy ~~and~~is ~~$7.4~~to ~~million,~~emphasize orARM ~~3.1%~~loans, ofand the Bank’s ~~total~~has ~~net~~been ~~loan~~successful ~~portfolio~~in atmaintaining ~~September~~a ~~30,~~level ~~2003,~~of ~~2002,~~ARM ~~2001,~~loan ~~and~~originations ~~2000,~~acceptable ~~respectively~~to management.

~~Agricultural~~The ~~mortgage~~Bank’s ARM loans ~~have~~are ~~various~~generally for terms upof to30 10 years, with ainterest ~~balloon payment~~rates ~~based~~that onadjust ~~a 20-year amortization schedule~~annually. ~~Such~~The ~~loans~~Bank ~~are~~establishes ~~originated~~various ~~with~~annual ~~fixed rates~~ and ~~generally include personal guarantees. The loan~~life-toof-~~value~~the-loan ~~ratio~~caps on ARM ~~agricultural~~loan ~~mortgage~~interest ~~loans~~rate ~~is generally limited to 75%~~adjustments. The Bank’s ~~earns~~current ~~higher~~index ~~yields~~ on ~~agricultural~~its ~~mortgage~~ARM loans ~~than~~is onthe ~~single~~one-~~family~~year ~~residential~~constant ~~mortgage~~maturity ~~loans.~~treasury ~~Agricultural~~(“CMT”) ~~related~~rate ~~lending,~~for ~~however,~~one-year ~~involves~~ARM loans, a ~~greater~~three-year ~~degree~~CMT ofrate ~~risk~~for ~~than single~~three-~~family~~year ~~residential~~ARM ~~mortgage~~ loans, ~~because~~and ofa ~~the~~five-year ~~typically~~CMT ~~larger~~rate ~~loan~~for five-year ~~amounts~~ARM ~~and a~~loans, ~~somewhat~~plus ~~more~~a ~~volatile~~range ~~market.~~of Inmargin ~~addition,~~of ~~repayments~~200 onto ~~agricultural~~300 ~~mortgage~~basis ~~loans~~points, ~~are~~subject ~~substantially~~to ~~dependent~~change based on ~~the~~market ~~successful~~conditions. ~~operation~~The orBank ~~management~~determines ofwhether ~~the~~a ~~farm~~borrower ~~property~~qualifies ~~collateralizing~~for ~~the~~an ARM loan, ~~which~~based ison ~~affected~~the byfully ~~many~~indexed ~~factors,~~rate ~~such~~of ~~as weather~~the ~~and~~ARM ~~changing~~loan ~~market~~at ~~prices, outside~~ the ~~control~~time of the loan ~~borrower~~is originated.

~~Commercial~~The ~~Real~~primary ~~Estate~~purpose ~~Loans.~~of ~~Loans~~offering ~~collateralized~~ARM ~~by commercial real estate, including land~~ loans, ~~constituted~~is ~~approximately~~to ~~$135.3~~make ~~million, or 35.2% of~~ the Bank’s ~~total net~~ loan portfolio atmore ~~September 30,~~interest ~~2004,~~rate ~~compared to $113~~sensitive.9 ~~million,~~ARM orloans ~~29.2%,~~carry increased ~~$91.3~~credit ~~million,~~risk orassociated ~~22.4%,~~with ~~$73.3~~potentially ~~million,~~higher ormonthly ~~21.0%,~~payments ~~and~~by ~~$25.7~~borrowers ~~million,~~as orgeneral ~~11.0%,~~market ofinterest ~~the~~rates ~~Bank’s~~increase. ~~total~~It ~~net~~is ~~loan portfolio at September 30~~possible, ~~2003~~therefore, ~~2002,~~that ~~2001, and 2000, respectively. The increase in these loans~~ during ~~fiscal~~periods ~~2001~~of ~~was~~rising ~~primarily~~interest ~~due~~rates, to the ~~acquisition~~risk of ~~FCB,~~default ~~which~~on ~~had~~ARM ~~approximately~~loans ~~$44.8~~may ~~million~~increase due into ~~commercial real estate loans;~~ the ~~continued~~upward ~~growth~~adjustment inof ~~years~~interest ~~2002,~~costs ~~2003~~to ~~and~~the ~~2004~~borrower. isManagement ~~due~~believes tothat the ~~Company~~Bank’s ~~diversification~~credit ~~from~~risk ~~a traditional~~associated ~~single-family~~with ~~lending~~its ~~institution~~ARM toloans anis ~~increase~~reduced inbecause of the ~~commercial~~lifetime ~~loan~~interest ~~market.~~rate ~~The~~adjustment ~~Bank’s~~limitations ~~commercial~~on ~~real~~such ~~estate~~ loans. ~~are~~However, interest ~~collateralized~~rate bycaps ~~property~~and ~~such~~the aschanges ~~office~~in ~~buildings,~~the ~~churches~~CMT ~~and~~rate, ~~other~~which ~~nonresidential~~is ~~buildings.~~a ~~At September~~lagging ~~30,~~market ~~2004,~~index ~~substantially~~to ~~all~~which of the Bank’s ~~commercial~~ARM ~~real estate~~ loans ~~were~~are ~~collateralized~~indexed, bymay ~~properties~~reduce ~~located within~~ the Bank’s net earnings in a period of rising market ~~area~~interest rates.

~~Commercial~~5 real estate loans currently are offered with fixed rates only 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.

LoansTable 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. Contents

~~Commercial~~The ~~Business Loans. In recent years, the~~ Bank’s ~~has~~single-family ~~emphasized~~residential ~~the~~first ~~origination~~mortgage ~~of commercial business~~ loans~~, which~~ customarily include ~~equipment,~~due-on-sale ~~inventory and crop production loans. Such loans comprised $57.0 million~~clauses, orwhich ~~14.9%~~are provisions ofgiving the Bank’s ~~total~~the ~~net~~right ~~loan~~to ~~portfolio~~declare ata ~~September~~loan ~~30,~~immediately ~~2004,~~due asand ~~compared~~payable toin ~~$67.7~~the ~~million~~event, oramong ~~17.3%,~~other ~~$64.5 million~~things, orthat ~~15.8%,~~the ~~$65.4 million,~~borrower orsells ~~18.8%, and $12.6 million,~~ or ~~5.3%,~~otherwise disposes of the ~~Bank’s~~underlying ~~total~~real ~~net~~property ~~loan~~serving ~~portfolio~~as atsecurity ~~September~~for ~~30,~~the ~~2003,~~loan. ~~2002,~~Due-on-sale ~~2001,~~clauses are ~~and~~an ~~2000,~~important ~~respectively.~~means ~~Commercial~~of ~~business~~adjusting ~~loans~~the ~~are~~rates ~~offered primarily~~ on athe Bank’s fixed rate ~~basis~~mortgage ~~with~~loan ~~maturities generally of less than five years~~portfolio.

AsRegulations ~~with~~limit ~~agricultural~~the amount that a savings association may lend relative to the appraised value of the real estate ~~loans~~securing the loan, ~~agricultural~~ ~~operating~~as ~~loans~~determined ~~involve~~by an appraisal at the time of loan origination. Such regulations permit a ~~greater~~maximum ~~degree~~loan-to-value ratio of ~~risk~~100% ~~than~~for residential ~~mortgage~~property and a lower percentage for other real estate loans, ~~because~~depending on the ~~payments~~type of loan. The Bank’s lending policies limit the maximum loan-to-value ratio on ~~such~~both fixed rate and ARM loans ~~are~~without ~~dependent~~private onmortgage insurance to 90% of the ~~successful~~lesser ~~operation~~of the appraised value or ~~management~~the purchase price of the ~~farm~~ property ~~for~~to ~~which~~serve ~~the~~as ~~operating~~collateral ~~loan~~for isthe ~~utilized~~loan. ~~See~~ ~~“Agricultural~~The ~~Real~~Bank ~~Estate~~generally ~~Loans”~~requires ~~for~~fire ~~the~~and ~~various~~casualty ~~risks~~insurance, ~~associated~~as ~~with~~well ~~agricultural~~as ~~operating~~title insurance, on all properties securing real estate loans. made by the Bank.

~~Other~~Multifamily Residential Real Estate Loans. ~~The~~Although the Bank ~~originates~~does ~~various~~not ~~consumer~~emphasize ~~loans,~~multifamily ~~including~~residential ~~automobile,~~loans ~~deposit~~and ~~account~~has ~~loans~~not ~~and~~been ~~second~~active recently ~~mortgage~~in ~~loans~~this area, ~~principally~~the ~~in response~~Bank tohas ~~customer~~originated ~~demand.~~loans Ascollateralized ofby ~~September~~multifamily ~~30,~~residential ~~2004,~~real ~~such~~estate. Such loans ~~totaled~~constituted approximately $509.06 million, or 132.12% of the Bank’s total net loan portfolio asat ~~compared~~September 30, 2006, compared to $538.98 million, or 132.90% of the Bank’s total net loan portfolio at September 30, 2005, $532.34 million, or 130.16% of the Bank’s total net loan portfolio at September 30, 2004, $221.74 million, or 60.54% of the Bank’s total net loan portfolio at September 30, 2003, and $151.32 million, or 60.53%, of the Bank’s total net loan portfolio asat of September 30, ~~2003,~~ 2002,. ~~2001,~~The ~~and~~Bank’s ~~2000~~multifamily real estate loans are primarily collateralized by multifamily residences, ~~respectively~~such as apartment buildings. ~~Consumer~~Multifamily residential real estate loans are offered ~~primarily~~with onfixed and adjustable interest rates and are structured in a ~~fixed~~number of different ways depending upon the circumstances of the borrower and the type of multifamily project. Fixed interest rate ~~basis~~loans generally have five-to-seven-year terms with ~~maturities~~a ~~generally~~balloon ofpayment ~~less~~based ~~than~~on ~~ten~~a ~~years~~15 to 25 year amortization schedule.

6Loans 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.

~~Origination,~~Agricultural ~~Purchase~~Real ~~and~~Estate ~~Sale~~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 ~~and~~collateralized ~~Mortgage-Backed~~by ~~Securities~~farmland constituted $18.1 ~~The~~million, ~~table~~or ~~below~~4.1% ~~shows~~of the Bank’s ~~originations~~total net loan portfolio at September 30, ~~purchases~~2006, ~~and~~compared ~~sales~~to $20.2 million, or 4.7% of ~~loans~~the Bank’s total net loan portfolio at September 30, ~~including~~2005, ~~loans~~$17.9 ~~held~~million ~~for~~or ~~sale~~4.7%, $20.5 million, or 5.3%, and ~~mortgage-backed~~$17.3 ~~securities~~million, ~~for~~or 4.2% of the ~~periods~~Bank’s ~~indicated.~~total net loan portfolio at September 30, 2004, 2003, and 2002, respectively.

	Year Ended September 30
	2004			2003			2002			2001			2000
	(In Thousands)
Total loans receivable, net at beginning of year	$	389,002		$	408,081		$	349,376		$	234,417		$	217,710
Loans originated:
Real estate:
Single-family residential		55,019			87,843			93,072			37,264			38,629
Multifamily residential		1,305			313			—			—			—
Commercial		60,409			55,255			41,130			28,367			6,346
Agricultural		32,188			39,287			27,100			920			1,766
Other:
Commercial business		12,855			19,140			18,324			24,305			11,650
Savings account loans		2,647			5,102			6,310			3,387			1,649
Other		25,856			18,462			22,558			27,234			10,316
Total loans originated		190,279			225,402			208,494			121,477			70,356
Loans purchased		9,721			20,041			76,676			139,094			4,333
Loans sold		(27,382	)		(79,097	)		(28,469	)		(21,786	)		(635	)
Loans transferred to REO		(2,707	)		(2,119	)		(2,312	)		(1,603	)		(948	)
Loans to facilitate the sale of REO		(1,150	)		(1,533	)		(1,471	)		(806	)		(505	)
Loan repayments		(171,226	)		(182,495	)		(194,449	)		(121,571	)		(55,989	)
Other loan activity (net) (1)		(2,727	)		722			236			154			95
Total loans receivable, net at end of year	$	383,810		$	389,002		$	408,081		$	349,376		$	234,417
Mortgage-backed securities, net at beginning of year	$	216,072		$	104,835		$	37,090		$	86,930		$	191,125
Purchases		105,054			239,594			106,121			400			—
Sales		(31,085	)		(88	)		(19,256	)		(41,459	)		(91,600	)
Fair value adjustment		(1,922	)		(1,024	)		745			2,144			(2,005	)
Repayments		(69,514	)		(127,375	)		(20,183	)		(11,194	)		(10,831	)
Discount amortization		(138	)		130			318			269			241
Mortgage-backed and related securities, net at end of year	$	218,467		$	216,072		$	104,835		$	37,090		$	86,930
Total loans receivable, net, and mortage-backed and related securities, net, at end of year	$	602,277		$	605,074		$	512,916		$	386,466		$	321,347

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.

~~(1)~~Commercial ~~Includes~~Real ~~provisions~~Estate ~~for~~Loans. Loans collateralized by commercial real estate, including land loans, constituted $130.4 million, or 30.0% of the Bank’s total net loan ~~losses~~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 ~~amortization~~$91.3 million, or 22.4% of ~~deferred~~the Bank’s total net loan ~~fees~~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.

~~Loans~~Commercial toreal ~~One~~estate ~~Borrower. The maximum~~ loans ~~that~~currently aare ~~savings~~offered ~~association~~primarily ~~may~~with ~~make~~fixed torates ~~one~~and ~~borrower~~are orstructured in a ~~related~~number ~~group~~ of ~~borrowers~~ isdifferent ~~15%~~ways ofdepending upon the ~~savings~~circumstances ~~association’s~~of ~~unimpaired~~the ~~capital~~borrower and ~~unimpaired~~the ~~surplus~~nature onof anthe ~~unsecured~~project. ~~basis,~~Fixed ~~and~~rate anloans ~~additional~~generally ~~amount equal~~ have five-to-seven ~~10%~~year ofterms ~~unimpaired~~with ~~capital~~a ~~and~~balloon ~~unimpaired~~payment ~~surplus~~based ifon ~~the~~a ~~loan~~15 isto ~~collateralized~~25 byyear ~~readily marketable~~amortization ~~collateral (generally, financial instruments and bullion, but not real estate)~~schedule.

~~Asset~~Loans ~~Quality~~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.

~~When~~Commercial ~~a borrower~~Business ~~fails~~Loans. toIn ~~make~~recent ayears, ~~required~~the ~~payment~~Bank onhas aemphasized ~~loan,~~ the ~~Bank~~origination ~~attempts~~of tocommercial ~~cure~~business ~~the~~loans, ~~deficiency~~which byinclude ~~contacting~~equipment, ~~the~~inventory ~~borrower~~ and ~~seeking~~crop production ~~the~~loans. ~~payment~~Such loans comprised $78.6 ~~Depending~~million ~~upon~~or 18.1% of the ~~type~~Bank’s oftotal net loan portfolio at September 30, ~~late~~2006, ~~notices~~as ~~are~~compared ~~sent~~to ~~and/~~$80.7 million, or ~~personal~~18.8%, ~~contacts~~$57.0 ~~are~~million, ~~made~~or 14.9%, In$67.7 ~~most cases~~million, ~~deficiencies~~or ~~are~~17.3%, ~~cured~~and ~~promptly~~$64.5 ~~While~~million, or 15.8% of the Bank’s ~~generally~~total ~~prefers~~net toloan ~~work~~portfolio ~~with~~at ~~borrowers~~September 30, to2005, ~~resolve~~2004, ~~such problems~~2003, ~~when~~and a2002, ~~mortgage~~respectively. ~~loan~~When ~~becomes~~making 90commercial ~~days~~business ~~delinquent~~loans, ~~the~~we ~~Bank~~consider ~~generally~~the ~~institutes~~financial ~~foreclosure~~strength orof ~~other~~the ~~proceedings~~borrower, asour ~~necessary, to~~lending ~~minimize~~history ~~any~~with ~~potential~~the ~~loss.~~borrower, ~~Real~~the debt ~~estate~~service ~~that~~capabilities of the ~~Company~~borrower, ~~obtains~~the asprojected acash ~~result~~flows of ~~these~~the ~~proceedings~~business isand ~~classified~~the asvalue ~~real~~and ~~estate~~type ~~owned~~of ~~(“REO”)~~the ~~until~~collateral. ~~such~~In ~~time~~addition, aswe itusually isrequire ~~sold.~~the ~~REO~~business isprincipals ~~initially~~to ~~recorded~~execute atpersonal ~~its~~guarantees. ~~estimated~~Commercial ~~fair~~business ~~value,~~loans ~~less~~are ~~estimated~~offered ~~selling~~primarily ~~expenses.~~on ~~Management~~a ~~periodically~~fixed ~~performs~~rate ~~valuations,~~basis ~~and~~with ~~any~~maturities ~~subsequent~~generally ~~decline~~of inless ~~estimated~~than ~~fair~~five ~~value is charged to operations~~years.

~~Classification~~6 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

7Table of Contents

As with agricultural real estate loans, agricultural operating loans involve a greater degree of risk than residential ~~required~~mortgage toloans bebecause ~~designated~~the ~~“special~~payments ~~mention”~~on bysuch 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” ~~designated~~for asthe ~~special~~various ~~mention~~risks ~~are~~associated with agricultural operating loans. Other commercial business loans generally have a greater credit risk than residential mortgage loans ~~that~~as well. Unlike residential mortgage loans, ~~while~~which ~~current~~generally inare ~~required~~made on the basis of the borrower’s ability ~~payments~~to make repayment from his or her employment or other income, ~~have~~and ~~exhibited~~which ~~some~~are ~~potential~~secured ~~weaknesses~~by ~~that~~real property whose value tends to be more easily ascertainable, ifcommercial ~~not~~business ~~corrected~~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, ~~could~~the ~~increase~~availability of funds for the ~~level~~repayment of ~~risk~~commercial inbusiness loans may depend substantially on the ~~future~~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.

AOther ~~savings~~Loans. ~~institution’s~~The ~~determination~~Bank asoriginates various consumer loans, including automobile, deposit account loans and second mortgage loans, principally in response to ~~the~~customer ~~classification~~demand in our primary market area. As of ~~its~~September 30, ~~assets~~2006, such ~~and~~loans ~~the~~totaled ~~amount~~$76.0 million, or 17.4% of ~~its~~the ~~valuation~~Bank’s ~~allowances~~total isnet ~~subject~~loan portfolio as compared to ~~review~~$58.4 ~~by federal~~million, ~~regulators~~or 13.6%, ~~who~~to ~~can~~$50.0 ~~order~~million, or 13.1%, $53.9 million, or 13.9%, and $53.3 million, or 13.1%, of the ~~establishment~~Bank’s total net loan portfolio as of ~~additional~~September 30, ~~general~~2005, or2004, ~~specific~~2003, ~~loss~~and ~~allowances~~2002, respectively. Consumer loans are offered primarily on a fixed rate basis with maturities generally of less than ten years.

~~The~~Consumer ~~following~~loans ~~table~~entail ~~sets~~greater ~~forth~~risk than do residential mortgage loans, particularly in the ~~aggregate~~case ~~amount~~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 ~~Bank~~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 ~~classified~~continuing ~~assets~~financial atstability, ~~the~~and ~~dates~~thus ~~indicated~~are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

	At September 30
	2004		2003		2002		2001		2000
	(In Thousands)
Substandard assets	$	7,826	$	8,150	$	4,166	$	5,435	$	2,093
Doubtful assets		600		915		—		597		359
Total classified assets	$	8,426	$	9,065	$	4,166	$	6,032	$	2,452

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.

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 Company’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.


	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

~~During~~(1) ~~the~~Includes ~~fiscal~~provisions ~~years ended September 30, 2004, 2003, 2002, 2001, and 2000, the Bank added $3,900,000, $2,595,000, $900,000, $200,000, and $120,000, respectively, to its allowance~~ for loan losses. ~~The Bank’s allowance for loan losses totaled $3.8 million, or 1.0% of total loans, $4.1 million, or 1.0% of total loans, $3.2 million, or 0.8% of total loans, $2.5 million, or 0.7% of total loans,~~ and ~~$1.7~~amortization ~~million, or 0.7%~~ of ~~total~~deferred loans, at September 30, 2004, 2003, 2002, 2001, and 2000, respectively. Net charge offs totaled $4.2 million or 1.1% of total loans, $2.1 million or 0.5% of total loans, $1.1 million or 0.3% of total loans, $0.9 million or 0.3% of total loans, and $0.05 million or 0.02% of total loans for the years ended September 30, 2004, 2003, 2002, 2001, and 2000, respectively. Total nonperforming loans decreased $0.9 million to $4.7 million at September 30, 2004 from $5.6 million at September 30, 2003, compared to the increase of $2.4 in 2003 from $3.2 million at September 30, 2002. Based on presently available information, management believes that the current allowance for loan ~~losses is adequate~~fees. ~~Changing economic and other conditions may require future adjustments to the allowance for loan losses.~~

~~During~~Loans ~~the~~to ~~last~~One ~~three fiscal years, the Company has completed separate acquisitions of four banks~~Borrower. The maximum loans ~~acquired~~that asa ~~part~~savings ofassociation ~~these~~may ~~acquisitions~~make ~~have contributed~~ to ~~the~~one ~~increase~~borrower inor ~~the~~a ~~balance~~related ofgroup ~~nonperforming loans in the Company’s portfolio;~~ of ~~the~~borrowers ~~$4.7~~is ~~million in nonperforming loans as of September 30, 2004, $1.6 million, or 34.0~~15% ~~were loans acquired as part~~ of the ~~bank~~savings ~~acquisitions.~~association’s ~~Nonperforming~~unimpaired ~~commercial~~capital ~~loans~~and ~~have~~unimpaired ~~increased~~surplus ~~$1.0~~on ~~million~~an ~~due to~~unsecured ~~the acquisitions. We believe that the increase in non-performing commercial loans was a result of a lower quality of underwriting~~ basis, and ~~collection~~an ~~efforts~~additional atamount ~~the~~equal ~~acquired institutions prior~~ to ~~the~~10% ~~Company’s acquisition~~ of ~~the~~unimpaired ~~institutions compared~~capital ~~to the Company’s underwriting~~ and ~~collection~~unimpaired ~~efforts.~~surplus ~~Approximately~~if ~~$2.0~~the ~~million of~~ loan ~~loss~~is ~~allowance~~collateralized onby ~~the~~readily ~~loans~~marketable ~~was~~collateral ~~transferred~~(generally, ~~with~~financial ~~these~~instruments ~~bank~~and ~~acquisitions.~~bullion, ~~Total~~but ~~charge~~not ~~offs~~real ~~for fiscal years 2001 – 2004 total $9~~estate).4 ~~million with $4.2 million in charge offs recorded in connection with the 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 under 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 $0.9 million or 16.1% from September 30, 2003 to September 30, 2004 to $4.7 million from $5.6 million. The interest income not recognized by the Company on the non-accrual loans was $0.5 million, $0.4 million, $0.3 million, $0.4 million, and $0.1 million, for the years ended September 30, 2004, 2003, 2002, 2001, and 2000, respectively. There was no interest income recognized on non-accrual loans during the periods.

8Table of Contents

~~The~~Asset ~~following~~Quality ~~table sets forth information regarding loans delinquent for 90 days or more (nonperforming loans) and real estate owned by the Bank at the dates indicated.~~

	At September 30
	2004			2003			2002			2001			2000
	(Dollars In Thousands)
Nonperforming loans:
Single-family residential real estate	$	1,540		$	2,383		$	1,744		$	1,883		$	1,477
All other real estate loans		2,740			1,985			546			2,988			485
Other loans		386			1,242			893			1,454			54
Total delinquent loans		4,666			5,610			3,183			6,325			2,016
Total real estate owned		684			876			1,707			1,342			646
Total nonperforming assets	$	5,350		$	6,486		$	4,890		$	7,667		$	2,662
Total loans delinquent 90 days or more to net loans receivable		1.22	%		1.44	%		0.78	%		1.81	%		0.86	%
Total loans delinquent 90 days or more to total assets		0.65	%		0.74	%		0.52	%		1.30	%		0.50	%
Total nonperforming loans and REO to total assets		0.74	%		0.85	%		0.80	%		1.58	%		0.66	%

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.

~~The~~Classification ~~allowance~~of Assets. Federal regulations provide for ~~loan~~the ~~losses~~classification isof ~~a valuation~~loans ~~allowance~~and toother ~~provide~~assets ~~for~~such ~~incurred~~as ~~but~~debt ~~not~~and ~~yet~~equity ~~realized~~securities ~~losses.~~considered ~~The~~by ~~Company~~the ~~reviews~~OTS ~~its~~to ~~loans~~be ~~for~~of ~~impairment~~lesser onquality aas ~~quarterly~~“substandard,” ~~basis~~“doubtful,” or “loss” assets. ~~Impairment~~An asset is ~~determined~~considered by“substandard” ~~assessing~~if ~~the~~it ~~probability~~is ~~that~~inadequately protected by the ~~borrower~~current ~~will~~net ~~not~~worth beand ~~able~~paying tocapacity ~~fulfill~~of the ~~contractual~~ ~~terms~~obligor or of the ~~agreement.~~collateral Ifpledged, aif ~~loan~~any. is“Substandard” ~~determined~~assets toinclude bethose characterized ~~impaired,~~by the ~~amount~~“distinct ofpossibility” that the ~~impairment~~savings isinstitution ~~measured~~will ~~based~~sustain on“some loss” if the ~~present~~deficiencies ~~value~~are not corrected. Assets classified as “doubtful” have all of ~~expected~~the ~~future~~weaknesses ~~cash~~inherent ~~flows~~in ~~discounted~~those classified at“substandard,” with the ~~loan’s~~added ~~effective~~characteristic ~~interest~~that ~~rate~~the weaknesses present make “collection or byliquidation ~~use~~in offull,” on the basis of currently existing facts, conditions, and values, “highly questionable and ~~observable~~improbable.” ~~market~~Assets ~~price~~classified ofas ~~the~~“loss” ~~loan~~are orthose ~~fair~~considered ~~value~~“uncollectible” and of ~~collateral~~such iflittle ~~the~~value ~~loan~~that their continuance as assets is ~~collateral~~not ~~dependent~~warranted. ~~Throughout~~These “loss” assets are charged against the ~~year~~allowance for loan losses in the period management ~~estimates~~believes the ~~level~~uncollectibility of ~~probable~~a ~~losses~~loan tobalance ~~determine~~is ~~whether~~confirmed. ~~the~~The ~~allowance~~amount ~~for~~by which loan ~~losses~~principal isfor ~~appropriate~~classified, ~~considering~~ asset-based loans exceeds the estimated ~~losses~~value ~~existing~~of inthe collateral on the ~~portfolio.~~loan ~~Based~~is onalso ~~these~~considered ~~estimates,~~by the anCompany ~~amount~~a isloss ~~charged~~asset toand afforded the ~~provision~~same ~~for~~accounting ~~loan~~treatment ~~losses~~as ~~and~~other ~~credited~~loss toassets. ~~the~~Assets ~~allowance~~that ~~for~~do ~~loan~~not ~~losses~~expose inthe ~~order~~savings institution to ~~adjust~~risk sufficient to warrant classification in one of the ~~allowance~~aforementioned tocategories, abut ~~level~~which ~~determined~~possess bysome weaknesses, ~~management~~are required to be ~~appropriate~~ ~~relative~~designated to“special ~~losses~~mention” by management. ~~The~~Loans ~~allowance~~designated ~~for~~as ~~loan~~special ~~losses~~mention isare ~~increased~~generally byloans ~~charges~~that, towhile ~~income~~current ~~(provisions)~~in ~~and~~required ~~decreased~~payments, byhave ~~charge-offs~~exhibited some potential weaknesses that, ~~net~~if not corrected, could increase the level of ~~recoveries~~risk in the future.

~~Management~~A savings institution’s ~~periodic~~determination ~~evaluation~~as ofto the ~~appropriateness~~classification of ~~the~~its ~~allowance~~assets isand ~~based on~~ the ~~Company’s~~amount ~~past~~of ~~loan~~its valuation ~~loss~~allowances ~~experience,~~is ~~known~~subject ~~and~~to ~~inherent risks~~review inby ~~the~~federal ~~portfolio~~regulators, ~~adverse~~who ~~situations~~can ~~that~~order ~~may affect~~ the ~~borrower’s~~establishment ~~ability to repay, the estimated value~~ of ~~any~~additional ~~underlying~~loan ~~collateral~~loss ~~and current economic conditions~~allowances.

~~Homogeneous loans are those that are considered to have common characteristics that provide for evaluation on an aggregate or pool basis.~~ The ~~Company~~following 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 allowancetable ~~for~~sets ~~losses~~forth ~~of each group of loans on a pool basis. The primary methodology used to determine~~ the ~~appropriateness~~aggregate ofamount ~~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 loanBank’s ~~collateral~~ ~~reduced~~classified byassets ~~any cost of selling and discounted~~ at the ~~loan’s~~dates ~~effective interest rate if the estimated time to receipt of monies is more than three months~~indicated.

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.


	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

~~Estimates~~Non-performing ofLoans, ~~the~~Allowance ~~probability~~for ofLoan Losses and Loan Loss Provisions. The allowance for loan losses ~~involve~~is established anthrough ~~exercise~~a ofprovision ~~judgment.~~for ~~While~~loan itlosses isbased ~~possible~~on ~~that~~management’s inquarterly ~~the~~asset ~~near~~classification ~~term~~review and evaluation of the ~~Company~~risk ~~may~~inherent ~~sustain~~in ~~losses, which~~the ~~are~~Bank’s ~~substantial~~loan inportfolio ~~relation~~and tochanges in the ~~allowance~~nature ~~for~~and volume of its loan ~~losses~~activity. Such evaluation, itwhich isincludes ~~the~~a ~~judgment~~review of ~~management~~all ~~that~~loans ~~the~~on ~~allowance~~which ~~for~~full ~~loan~~collection ~~losses~~may ~~reflected~~not inbe reasonably assured, considers among other matters, the ~~consolidated~~estimated ~~statements~~value of ~~financial~~collateral, ~~condition~~cash isflow ~~appropriate~~analysis, ~~considering~~historical ~~the~~loan ~~estimated~~loss ~~probable~~experience, and other factors that ~~losses~~warrant recognition in ~~the~~providing ~~portfolio~~allowances.

~~While~~During ~~both~~the ~~general~~fiscal years ended September 30, 2006, 2005, 2004, 2003, and ~~specific~~2002, ~~loss~~the Bank added $845,000, ~~allowances~~$525,000, ~~are~~$3,900,000, ~~charged~~$2,595,000, ~~against~~and ~~earnings~~$900,000, ~~general~~respectively, to its allowance for loan ~~loss~~losses. ~~allowances~~The ~~are~~Bank’s ~~added~~allowance ~~back~~for toloan ~~capital~~losses totaled $3.0 million, ~~subject~~or to0.6% aof ~~limitation~~total loans, $3.2 million, or 0.7% of total loans, $3.8 million, or 1.250% of total ~~risk-based~~loans, ~~assets~~$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 ~~computing~~2005 ~~risk-based~~from ~~capital~~$4.7 ~~under~~million ~~OTS~~at ~~regulations~~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.

~~Analysis~~Loans are placed on non-accrual status when, in the judgment of management, the ~~Allowance~~probability ~~for~~of ~~Loan~~collection ~~Losses~~of interest is deemed to be insufficient to warrant further accrual. ~~The~~When ~~following~~a ~~table~~loan ~~sets~~is ~~forth~~placed ~~the~~on ~~analysis~~non-accrual ofstatus, ~~the~~previously accrued but unpaid interest is deducted from ~~allowance~~interest ~~for~~income ~~loan~~and ~~losses~~a ~~for~~corresponding ~~the~~specific ~~periods~~interest ~~indicated~~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 under 90 days past due and, in the

	Year Ended September 30
	2004			2003			2002			2001			2000
	(Dollars In Thousands)
Total loans outstanding	$	390,731		$	396,710		$	415,738		$	352,620		$	237,708
Average net loans outstanding		388,679			391,588			353,585			265,182			224,751
Allowance balances (at beginning of year)		4,068			3,205			2,542			1,682			1,612
Provision for losses:		3,900			2,595			900			200			120
Balance transferred at acquisition*		0			355			836			1,595			—
Charge-offs:
Single Family		(601	)		(397	)		(239	)		(237	)		(31	)
Agriculture		(87	)		(129	)		—			(2	)		(3	)
Commercial real estate		(858	)		(211	)		(32	)		(221	)		—
Commercial business		(2,418	)		(378	)		(692	)		(385	)		—
Other		(681	)		(1,089	)		(174	)		(103	)		(24	)
Recoveries:
Single Family		6			6			1			2			4
Agriculture		17			—			—			—			—
Commercial real estate		104			27			6			2			—
Commercial business		189			—			5			—			—
Other		126			84			52			9			4
Allowance balance (at end of year)	$	3,765		$	4,068		$	3,205		$	2,542		$	1,682
Allowance for loan losses as a percent of total loans receivable at end of year		0.96	%		1.03	%		0.77	%		0.72	%		0.71	%
Net loans charged off as a percent of average net loans outstanding		1.20	%		0.56	%		0.32	%		0.36	%		0.03	%
Ratio of allowance for loan losses to total nonperforming loans at end of year		80.69	%		72.51	%		100.69	%		40.19	%		83.43	%
Ratio of allowance for loan losses to total nonperforming loans and REO at end of year		70.37	%		62.72	%		65.54	%		33.16	%		63.19	%

*Table Markedof Tree Bancshares in 2003, People’s Bank and North Arkansas Bancshares in 2002, and First Community Bank in 2001Contents

~~Allocation~~ opinion of ~~Allowance~~management, ~~for~~collection ~~Loan~~of ~~Losses~~the remaining balance can be reasonably expected. ~~The~~Non-accrual ~~following~~loans ~~table~~decreased ~~sets~~$1.8 million or 46.2% to $2.1 million at ~~forth~~September 30, ~~the~~2006 ~~allocation~~from of$3.9 ~~allowance~~million ~~for~~at ~~loan~~September 30, ~~losses~~2005. The interest income not recognized by ~~loan~~the ~~category~~Company aton the ~~dates~~non-accrual ~~indicated~~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.

	At September 30
	2004				2003				2002				2001				2000
	Amount		% of Loansin EachCategory toTotal Loans		Amount		% of Loansin Each Category toTotal Loans		Amount		% of Loansin Each Category toTotal Loans		Amount		% of Loansin Each Category toTotal Loans		Amount		% of Loansin Each Category toTotal Loans
	(Dollars in Thousands)
Balance at end of period applicable to:
Single Family	$	601	31.5	%	$	705	33.8	%	$	1,445	45.1	%	$	1,279	50.3	%	$	1,252	74.4	%
Multi Family		34	0.6			20	0.4			10	0.3			5	0.2			8	0.5
Agriculture real estate		493	4.7			395	5.3			135	4.2			104	4.1			52	3.1
Commercial real estate		1,435	35.2			1,606	29.2			718	22.4			534	21.0			185	11.0
Commercial business		977	14.9			1,108	17.4			506	25.8			582	22.9			89	5.3
Other Loans		225	13.1			234	13.9			391	12.2			38	1.5			96	5.7
Total allowance for loan losses	$	3,765	100.0	%	$	4,068	100.0	%	$	3,205	100.0	%	$	2,542	100.0	%	$	1,682	100.0	%

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	%

~~Investment~~(1) ~~Activities~~Net of valuation allowances

~~Mortgage-Backed~~The ~~Securities.~~allowance ~~Mortgage-backed~~for ~~securities~~loan ~~represent~~losses is a ~~participation~~valuation allowance ~~interest~~to inprovide afor ~~pool~~incurred ofbut ~~single-family~~not oryet ~~multi-family~~realized ~~mortgages,~~losses. ~~the principal~~The ~~and~~Company ~~interest~~reviews ~~payments~~its loans for impairment on ~~which~~a ~~are~~quarterly ~~passed~~basis. ~~from~~Impairment ~~the~~is ~~mortgagors,~~determined ~~through~~by ~~intermediaries~~assessing the probability that ~~pool~~the ~~and~~borrower ~~repackage~~will ~~the~~not ~~participation~~be ~~interests~~able into fulfill the ~~form~~contractual terms of ~~securities,~~the toagreement. ~~investors~~If ~~such~~a asloan ~~the~~is ~~Bank.~~determined ~~Mortgage-backed~~to ~~securities~~be ~~typically~~impaired, ~~are issued~~the ~~with~~amount ~~stated~~of ~~principal~~the ~~amounts.~~impairment ~~The~~is ~~securities~~measured ~~are~~based ~~backed~~on bythe ~~pools~~present value of ~~mortgages~~expected ~~that~~future ~~have~~cash ~~loans~~flows ~~with~~discounted ~~interest~~at ~~rates~~the ~~that~~loan’s ~~are~~effective ~~within~~interest arate ~~range~~or ~~and~~by ~~have~~use ~~varying~~of ~~maturities.~~the ~~The~~observable market ~~underlying~~price ~~pool~~ of ~~mortgages~~the ~~can~~loan beor ~~composed~~fair value of ~~either~~collateral ~~fixed-rate mortgages~~if orthe ~~ARM~~loan ~~loans.~~is Ascollateral adependent. ~~result,~~Throughout the ~~interest~~year ~~rate~~management ~~risk~~estimates ~~characteristics~~the level of probable losses to determine whether the ~~underlying~~allowance ~~pool~~for ofloan ~~mortgages,~~losses ~~i.e.,~~is ~~fixed-rate~~appropriate orconsidering ~~adjustable-rate,~~the estimated aslosses ~~well~~existing asin the ~~prepayment~~portfolio. ~~risk~~Based on these estimates, ~~are~~an ~~passed~~amount onis charged to the ~~certificate~~provision ~~holder.~~for ~~The~~loan ~~Bank~~losses ~~invests~~and credited to the allowance for loan losses in ~~mortgage-backed~~ ~~securities~~order to ~~supplement~~adjust ~~local~~the ~~single-family~~allowance ~~loan~~to ~~originations~~a aslevel ~~well~~determined asby management to ~~reduce~~be appropriate ~~interest~~relative ~~rate~~to ~~risk~~losses. ~~exposure,~~The ~~because~~allowance ~~mortgage-backed~~for ~~securities~~loan ~~are~~losses ~~more~~is ~~liquid~~increased ~~than~~by ~~mortgage~~charges ~~loans~~to income (provisions) and decreased by charge-offs, net of recoveries.

~~Set~~Management’s ~~forth~~periodic ~~below~~evaluation of the appropriateness of the allowance is ~~selected~~based ~~data~~on ~~relating~~the toCompany’s past loan loss experience, known and inherent risks in the ~~composition~~portfolio, ofadverse situations that may affect the ~~Bank~~ borrower’s ability ~~mortgage-backed~~to ~~securities~~repay, ~~portfolio~~the asestimated value of ~~the~~any ~~dates~~underlying ~~indicated~~collateral and current economic conditions.

	At September 30
	2004				2003				2002				2001				2000
	$		%		$		%		$		%		$		%		$		%
	(Dollars in Thousands)
Mortgage-backed securities:
Adjustable	$	12,180	5.6	%	$	15,179	7.0	%	$	14,075	13.4	%	$	796	2.1	%	$	40,969	47.1	%
Fixed		206,287	94.4	%		200,893	93.0	%		90,760	86.6	%		36,294	97.9	%		45,961	52.9	%
Total mortage-backed securities, net	$	218,467	100	%	$	216,072	100	%	$	104,835	100	%	$	37,090	100	%	$	86,930	100	%

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.

AtNon-homogeneous ~~September~~loans ~~30,~~are ~~2004~~those loans that can be included in a particular loan type, such as commercial loans and multi-family and commercial first mortgage~~-backed~~ ~~securities~~loans, ~~aggregated~~but ~~$218~~which differ in other characteristics to the extent that valuation on a pool basis is not valid.4 ~~million~~After segregating specific, orpoorly ~~30.35%~~performing ofloans and applying the ~~Bank’s~~methodology ~~total~~as ~~assets.~~noted Atin ~~September~~the 30preceding paragraph for such specific loans, ~~2004~~the remaining loans are evaluated based on payment experience, ~~$159.1~~known ~~million~~difficulties ofin the ~~Bank~~borrower’s ~~mortgage-backed~~business ~~securities~~or ~~were~~geographic ~~classified~~area, asloss ~~available-for-sale~~experience, inherent risks and ~~$59.3~~other ~~million~~factors usually beyond the control of the Company. These ~~Bank’s~~loans ~~mortgage-backed~~are ~~securities~~then ~~were~~graded ~~classified~~and asa ~~held-~~factor, based on experience, is applied to~~-maturity~~ estimate the probable loss.

~~Other~~Estimates ~~Investment~~of ~~Securities.~~the ~~The~~probability ~~Bank’s investment portfolio, excluding mortgage-backed securities, FHLB stock, and trading securities, consists~~ of ~~obligations~~loan oflosses ~~the~~involve ~~United States Government treasuries~~an ~~and~~exercise ~~agencies~~of ~~thereof,~~judgment. ~~municipal~~While ~~bonds,~~it ~~corporate~~is ~~bonds,~~possible ~~interest-earning~~that ~~deposits~~ in ~~other~~the ~~institutions~~near ~~and~~term ~~equity investments. The carrying value of this portion of~~ the ~~Bank’s~~Company ~~investment~~may ~~portfolio~~sustain ~~totaled $28.4 million~~losses, ~~$82.9~~which ~~million, $20.6~~are ~~million,~~substantial ~~$39.4~~in ~~million,~~relation ~~and~~to ~~$40.6~~the ~~million~~allowance atfor ~~September~~loan 30losses, ~~2004,~~it ~~2003,~~is ~~2002,~~the ~~2001,~~judgment ~~and~~of ~~2000,~~management ~~respectively.~~that ~~At September 30, 2004, $1.6 million of~~ the ~~Bank’s~~allowance ~~investment~~for ~~securities,~~loan ~~excluding~~losses ~~mortgage-backed~~reflected ~~securities,~~in ~~had a remaining term~~the toconsolidated ~~maturity~~statements of ~~one~~financial ~~year~~condition oris ~~less,~~appropriate ~~and~~considering ~~$3.4 million had a remaining term to maturity of five years or less. During~~ the ~~year~~estimated ~~ended~~probable ~~September~~losses ~~30,~~in ~~2004,~~ the ~~Company analyzed the classification of securities and subsequently transferred $86~~portfolio.1 ~~million of securities from available-for-sale to held-to-maturity.~~

~~The~~While loss allowance is charged ~~following~~against ~~table~~earnings, ~~sets~~loan ~~forth~~loss ~~the~~allowance ~~composition~~is ofadded ~~the~~back ~~Bank’s~~to ~~investments~~capital, assubject to a limitation of ~~the~~1.25% ~~dates~~of ~~indicated~~risk-based assets, in computing risk-based capital under OTS regulations.

	At September 30
	2004		2003		2002		2001		2000
	(Dollars In Thousands)
Investment securities:
Mortgage-backed securities	$	218,467	$	216,072	$	104,835	$	37,090	$	86,930
Corporate bonds		—		14,269		3,814		2,014		—
U.S. Government treasury obligations		—		4,171		—		1,951		—
U.S. Government agency obligations		4,442		39,105		3,648		13,803		27,095
Trust preferred securities		—		—		—		4,040		4,000
Municipal bonds		22,934		24,351		13,167		12,537		9,466
Equity securities		—		—		—		5,040		1,127
Mutual fund		990		1,005		—		—		—
Total investment securities		246,833		298,973		125,464		76,475		128,618
FHLB stock		7,926		5,584		2,126		3,787		5,988
Total investments	$	254,759	$	304,557	$	127,590	$	80,262	$	134,606

TheTable 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. Contents

11Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.

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, 2004.


	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	%

	One Year or Less				One to Five Years				Five to Ten Years				Over Ten Years				Total
	CarryingValue		AnnualizedWeightedAverageYield		CarryingValue		AnnualizedWeightedAverageYield		CarryingValue		AnnualizedWeightedAverageYield		CarryingValue		Annualized Weighted Average Yield		CarryingValue		Market Value		Average Life in Years
	(Dollars In Thousands)
Investment securities:
U.S. Government Agency Securities	$	—	0.00	%	$	501	3.81	%	$	—	0.00	%	$	3,941	3.88	%	$	4,442	$	4,397	6.93
State and municipal obligations (1)		652	2.69	%		2,953	3.23	%		8,503	4.15	%		10,826	4.70	%		22,934		23,480	3.52
Corporate Bonds		—	0.00	%		—	0.00	%		—	0.00	%		—	0.00	%		—		—	0.00
CMOs (2)		—	0.00	%		—	0.00	%		—	0.00	%		38,042	4.13	%		38,042		37,342	2.22
Mortgage-backed securities		—	0.00	%		—	0.00	%		114,412	3.95	%		66,013	4.59	%		180,425		180,006	4.84
Mutual Fund		990	3.55	%		—	0.00	%		—	0.00	%		0	0.00	%		990		990	8.04
Total investment securities		1,642	3.21	%		3,454	3.32	%		122,915	3.97	%		118,822	4.43	%		246,833		246,215
FHLB stock																		7,926		7,926
Accrued interest on investments																		1,125		1,125
Total investment securities, including accrued interest																	$	255,884	$	255,266

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

~~(1)~~Allocation of Allowance for Loan Losses. The ~~yield~~following ontable ~~these~~sets ~~tax-exempt~~forth ~~obligations~~the ~~has~~allocation ~~not~~of ~~been~~allowance ~~compiled~~for onloan alosses ~~tax-equivalent~~by ~~basis~~loan category at the dates indicated.

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


	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	%

12Investment Activities

~~Sources~~Mortgage-Backed Securities. Mortgage-backed securities represent a participation interest in a pool of ~~Funds~~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

~~General.~~10 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.Table 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, passbook savings, money market deposit accounts, term certificate accounts and individual retirement accounts. The Bank also markets term certificate accounts nationally to attract deposits. 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 must 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. Contents

~~Time~~ interest ~~Deposit~~rate ~~Rates~~risk characteristics of the underlying pool of mortgages, i.e., ~~The~~fixed-rate ~~following~~or ~~table~~adjustable-rate, ~~sets~~as ~~forth~~well as the ~~certificates~~prepayment ofrisk, ~~deposit~~are passed ofon to the certificate holder. The Bank ~~classified~~invests byin ~~rates~~mortgage-backed securities to supplement local single-family loan originations as ~~of the~~well ~~dates~~as ~~indicated:~~to reduce interest rate risk exposure, because mortgage-backed securities are more liquid than mortgage loans.

	At September 30
	2004		2003		2002		2001		2000
	(In thousands)
Rate
0.00-1.99%	$	63,971	$	57,083	$	12,997	$	2,167	$	28
2.00-2.99%		105,611		35,416		95,895		683		—
3.00-3.99%		38,744		130,930		126,881		32,369		—
4.00-5.99%		28,429		47,239		85,244		154,585		34,126
6.00-7.99%		2,482		4,013		11,165		43,252		128,051
8.00-9.99%		224		223		225		225		—
Total	$	239,461	$	274,904	$	332,407	$	233,281	$	162,205

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

Time Deposit Maturities. The following table sets forth the amount and maturities of certificates of deposit at September 30, 2004.


	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	%

	Maturity
	3 monthsor less		3 to 6months		6 to 12months		Over 12months		Total
	(In thousands)
Certificate of Deposit less than $100,000	$	30,153	$	30,398	$	55,986	$	36,373	$	152,910
Certificate of Deposit greater than or equal to $100,000		11,433		11,347		32,572		31,199	$	86,551
Total Certificates of Deposit		41,586		41,745		88,558		67,572		239,461

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.

~~Borrowings~~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.

~~Deposits~~The offollowing ~~the~~table ~~Bank~~sets ~~are~~forth athe ~~significant~~composition ~~source~~ of ~~funds as is short term and long term advances from~~ the ~~FHLB. FHLB advances are collateralized by the~~ Bank’s ~~stock~~investments inas ~~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~~dates ~~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~~indicated. ~~The maximum amount of FHLB advances to a member institution generally is reduced by borrowings from any other source. At September 30, 2004, the Bank’s FHLB advances totaled $153.9 million.~~


	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 ~~following~~Bank ~~table~~is ~~sets~~required ~~forth~~under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain ~~information~~other ~~regarding~~investments. ~~borrowings~~The byBank generally has maintained a portfolio of liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or decreased depending upon the ~~Bank~~yields ~~during~~on investment alternatives and upon management’s judgment as to the ~~years~~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 ~~ended~~management’s ~~September~~projections ~~30:~~of short term demand for funds in the Bank’s loan origination and other activities.

	Year Ended September 30,
	2004			2003			2002			2001			2000
	(Dollars In Thousands)
Weighted average rate paid on: (1)
FHLB advances		2.56	%		3.13	%		3.70	%		5.66	%		5.78	%
Other borrowings (2)		5.25	%		5.25	%		0.00	%		5.38	%		5.62	%
FHLB advances:
Maximum balance	$	159,337		$	110,184		$	73,316		$	112,125		$	185,535
Average balance	$	123,107		$	33,651		$	36,713		$	82,915		$	145,312
Other borrowings: (2)
Maximum balance	$	671		$	284		$	350		$	2,650		$	2,465
Average balance	$	336		$	284		$	—		$	1,598		$	1,901

(1)Table Calculatedof using monthly weighted average interest rates.Contents

~~(2)~~Investment ~~Includes~~Portfolio ~~securities~~Maturities The ~~sold~~following ~~under~~table ~~agreements~~sets toforth ~~repurchase and a loan assumed with~~ the ~~acquisition~~scheduled ~~of Marked Tree Bancshares~~maturities, ~~Inc~~carrying ~~in 2003. Other borrowings~~values, market asvalues ~~of September 30, 2003 are included in accrued expenses~~ and ~~other~~average ~~liabilities~~yields infor the ~~consolidated~~Bank’s ~~statement~~investment ofsecurities ~~financial~~at ~~condition~~September 30, 2006.

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.


	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

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

On(2) March 28, 2001, Pocahontas Capital Trust I, a Delaware statutory business trust wholly owned by Pocahontas Bancorp, Inc., sold to qualified buyers in a private placement offering $7.5 million of 10.18% cumulative trust preferred securities. The ~~proceeds~~average ~~were~~life used to purchase an equal principal amount of 10.18% subordinated debentures of Pocahontas Bancorp, Inc. Pocahontas Bancorp, Inc. has, through various contractual arrangements, fully and unconditionally guaranteed all obligations of Pocahontas Capital Trust I on a subordinated basis with respect to the preferred securities. Subject to certain limitations, the preferred securities qualify as regulatory Tier 1 capital and are presented in ~~the~~years ~~consolidated statements of financial condition as Trust Preferred Securities. The sole asset of Pocahontas Capital Trust I~~ is ~~the~~based ~~subordinated debentures issued by Pocahontas Bancorp, Inc. Both the preferred securities of Pocahontas Capital Trust I and the subordinated debentures of Pocahontas Bancorp, Inc. will mature~~ on ~~June~~actual 6,stated ~~2031~~maturities; however, ~~they~~management ~~may~~anticipates bea ~~prepaid,~~shorter ~~prior~~life ~~to maturity at any time~~ on orthese ~~after June 8, 2011, or earlier upon the occurrence of a special event as defined as certain changes in tax or investment company laws or regulatory capital requirements~~securities.

On12 November 28, 2001, Pocahontas Capital Trust II, a Delaware statutory business trust wholly owned by Pocahontas Bancorp, Inc., sold to qualified buyers in a private placement offering $10.0 million of variable rate (LIBOR +3.75%) cumulative trust preferred securities. The coupon resets semi-annually and has a coupon cap of 11.0% until December 8, 2006. The proceeds were used to purchase an equal principal amount of variable rate (LIBOR +3.75%) subordinated debentures of Pocahontas Bancorp, Inc. Pocahontas Bancorp, Inc. has, through various contractual arrangements, fully and unconditionally guaranteed all obligations of Pocahontas Capital Trust II on a subordinated basis with respect to the preferred securities. Subject to certain limitations, the preferred securities qualify as regulatory Tier 1 capital and are presented in the consolidated statements of financial condition as Trust Preferred Securities. The sole asset of Pocahontas Capital Trust II is the subordinated debentures issued by Pocahontas Bancorp, Inc. Both the preferred securities of Pocahontas Capital Trust II and the subordinated debentures of Pocahontas Bancorp, Inc. will mature on December 8, 2031; however, they may be prepaid, prior to maturity and upon prior approval from the OTS at any time on or after December 8, 2006, or earlier upon the occurrence of a special event as defined as certain changes in tax or investment company laws or regulatory capital requirements.

ForTable the year ended September 30, 2004, 2003, 2002 and 2001, interest expense incurred on the trust preferred securities totaled $1,286,688, $1,292,519, $1,248,692 and $388,490, respectively. Such interest expense is shown under interest expense as a separate line item, in the consolidated statements of income and comprehensive income. Contents

~~Subsidiaries’~~Sources ~~Activities~~of Funds

~~The~~General. ~~Bank~~Deposits isare ~~the~~a ~~wholly~~significant ~~owned~~source ~~subsidiary~~ of the ~~Company. The~~ Bank’s ~~has~~funds ~~three wholly~~for ~~owned~~lending ~~subsidiaries,~~and ~~Sun~~other ~~Realty,~~investment ~~Inc~~purposes., ~~P.F.~~In ~~Service~~addition to deposits, ~~Inc.~~the Bank derives funds from FHLB advances, the amortization and ~~Southern~~prepayment ~~Mortgage~~of ~~Corporation.~~loans ~~Sun~~and mortgage-backed ~~Realty~~securities, ~~Inc.~~the ~~and~~sale ~~P.F.~~or ~~Services~~maturity of investment securities, ~~Inc~~and operations. Scheduled loan principal repayments are ~~Arkansas~~a ~~corporations~~relatively stable source of funds, while deposit inflows and ~~both~~outflows and loan prepayments are ~~substantially~~influenced significantly ~~inactive~~by general interest rates and market conditions. ~~Southern~~Borrowings ~~Mortgage~~may ~~Corporation~~be isused on a ~~Tulsa, Oklahoma~~short-term ~~based~~basis ~~lending~~to ~~company~~compensate ~~that~~for ~~primarily~~reductions ~~originates~~in ~~single~~the ~~family~~availability ~~loans~~of tofunds ~~sell~~from ~~into~~other ~~the~~sources ~~secondary~~or ~~market.~~on a longer-term basis for general business purposes.

~~Regulation~~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 ~~discussion~~table ~~describes~~sets ~~elements~~forth of the ~~extensive~~certificates ~~regulatory~~of ~~framework~~deposit ~~applicable~~of tothe ~~savings~~Bank ~~and~~classified ~~loan~~by ~~holding~~rates ~~companies~~as ~~and~~of ~~federal~~the ~~savings associations~~dates ~~and~~indicated: ~~provides some specific information relevant to us. This regulatory framework is~~


	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

~~primarily~~Time ~~intended~~Deposit ~~for~~Maturities. ~~the~~The ~~protection~~following oftable ~~depositors,~~sets ~~federal~~forth ~~deposit~~the ~~insurance~~amount ~~funds~~ and ~~the~~maturities ~~banking~~of ~~system~~certificates ~~as a whole rather than for the protection~~ of ~~shareholders~~deposit ~~and~~at ~~creditors~~September 30, 2006.

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.


	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

AsBorrowings a federally chartered, SAIF-insured 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 Federal Home Loan Bank (“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 SAIF. 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~~Deposits ~~Capital~~of ~~Requirements~~the Bank are a significant source of funds as are short term and long term advances from the FHLB. ~~The~~FHLB ~~Company~~advances isare ~~not~~collateralized ~~currently~~by ~~subject~~the toBank’s ~~any~~stock ~~regulatory~~in ~~capital~~the ~~requirements~~FHLB, ~~but~~investment ~~its~~securities ~~subsidiary~~and ~~federal~~a ~~savings~~blanket lien on the ~~association~~Bank’s ismortgage ~~subject~~portfolio. Such advances are made pursuant to ~~various~~different ~~capital~~credit ~~requirements.~~programs, ~~Federally~~each ~~insured~~of ~~savings~~which ~~institutions~~has ~~are~~its ~~required~~own tointerest ~~maintain~~rate ~~minimum~~and ~~levels~~range of ~~regulatory capital~~maturities. The ~~OTS~~maximum ~~has~~amount ~~established~~that ~~capital~~the ~~standards~~FHLB ~~applicable~~will advance to ~~all~~member ~~savings~~ institutions., ~~These~~including the Bank, ~~standards~~for ~~generally~~purposes ~~must~~other bethan asmeeting ~~stringent~~withdrawals, asfluctuates ~~the~~from ~~comparable~~time ~~capital~~to ~~requirements~~time ~~imposed~~in onaccordance ~~national~~with ~~banks~~the policies of the FHLB. The ~~OTS~~maximum ~~also~~amount isof ~~authorized~~FHLB advances to ~~impose~~a ~~capital~~member ~~requirements~~institution ingenerally ~~excess~~is ofreduced ~~these~~by ~~standards~~borrowings onfrom ~~individual~~any ~~institutions~~other onsource. aAt September 30, ~~case-by-case~~2006, ~~basis~~the Bank’s FHLB advances totaled $104. 4 million.

~~Under~~The ~~the~~following ~~tangible~~table ~~capital~~sets ~~requirement,~~forth 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~~information ~~perpetual~~regarding ~~preferred~~borrowings ~~stock and~~by ~~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.~~Bank ~~Further,~~during the ~~accumulated~~years ~~unrealized gains~~ended ~~or losses on available-for-sale securities determined in accordance with SFAS No. 115 are excluded from the regulatory capital calculation. At~~ September 30,: 2004, the Bank had $8.8 million in goodwill and intangible assets and $0.26 million in accumulated unrealized gains on available-for-sale 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.


	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		$	—

~~Under the~~(1) ~~risk-based~~Calculated ~~capital~~using ~~requirement,~~monthly ~~a savings association must maintain total capital equal to at least 8% of risk-~~weighted ~~assets.~~average ~~Total~~interest ~~capital consists of core capital, as defined above, and supplementary capital~~rates. 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, 2004, the Bank had no capital instruments that qualify as supplementary capital and $3.8 million of general loss reserves, which was less than 1.0% of risk-weighted assets.

~~The~~(2) ~~OTS~~Includes ~~and~~securities ~~the~~sold ~~FDIC are authorized and~~ under, ~~certain~~agreements ~~circumstances required,~~ to ~~take~~repurchase ~~certain~~and ~~actions~~a ~~against~~loan ~~associations~~assumed ~~that~~with ~~fail to meet capital requirements. The OTS is generally required to take action to restrict~~ the ~~activities~~acquisition of anMarked ~~“undercapitalized~~Tree ~~association” (generally defined to be one with less than 4% tier 1 risk-based capital~~Bancshares, 3%Inc. ~~leverage~~in ~~capital, or 8% total risk-based capital)~~2003. ~~Any~~Other ~~such~~borrowings ~~association~~are ~~must~~included ~~submit~~in aaccrued ~~capital~~expenses ~~restoration plan~~ and ~~until~~other ~~such~~liabilities ~~plan~~in ~~is approved by~~ the ~~OTS~~consolidated ~~may~~statement ~~not~~of ~~increase~~financial ~~its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions~~ condition.

~~The~~13 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 Registrant’s shareholders do not have preemptive rights.

AsTable of September 30, 2004, the Bank met all capital requirements to which it was subject and satisfied the requirements to be treated as well-capitalized. Contents

15Savings 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.

~~Qualified~~Trust ~~Thrift~~Preferred ~~Lender~~Securities 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, 2004, the Bank met the test.

AThe ~~savings~~Company ~~institution~~has ~~that~~issued ~~fails~~two toseries ~~become~~of ~~or maintain~~Trust aPreferred ~~qualified~~Securities ~~thrift~~totaling ~~lender must either become a bank (other than a savings bank) or be subject to certain restrictions~~$17.5 ~~A savings institution that converts to a bank must pay applicable exit and entrance fees involved in converting from one insurance fund to another~~million. AThe ~~savings~~Trust ~~institution~~Preferred ~~that~~Securities ~~fails~~are todiscussed ~~meet the QTL test and does not convert to a bank will be: (1) prohibited from making any investment or engaging~~ in ~~activities~~detail ~~that would not be permissible for national banks; (2) prohibited from establishing any new branch office where a national bank located~~ in ~~the~~Note ~~savings~~11 ~~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~~Consolidated ofFinancial ~~dividends~~Statements, ~~comparable~~contained ~~to the statutory and regulatory dividend restrictions applicable to national banks~~herein.

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 institutionSubsidiaries’s ~~record~~Activities 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 June 2004 and received a rating of satisfactory.

~~Accounting.~~The AnBank ~~OTS~~is ~~policy statement applicable to all savings associations clarifies and re-emphasizes that~~ the ~~investment~~wholly owned ~~activities~~subsidiary of athe ~~savings association~~Company. ~~must~~The beBank inhas ~~compliance~~three ~~with~~wholly ~~approved~~owned ~~and~~subsidiaries, ~~documented~~Sun ~~investment~~Realty, ~~policies~~Inc., ~~and~~P.F. Service, ~~strategies~~Inc., and ~~must~~Southern beMortgage ~~accounted~~Corporation. ~~for~~Sun inRealty, ~~accordance~~Inc. ~~with~~and ~~generally accepted accounting principles (“GAAP”)~~P.F. ~~Under the policy statement~~Services, ~~management~~Inc. ~~must support~~are ~~its~~Arkansas ~~classification~~corporations of and ~~accounting~~both ~~for~~are substantially ~~loans~~inactive. ~~and~~Southern ~~securities~~Mortgage ~~(i.e.,~~Corporation ~~whether~~is ~~held~~a ~~for investment~~Tulsa, ~~sale~~Oklahoma orbased ~~trading)~~lending ~~with~~company ~~appropriate~~that ~~documentation.~~primarily ~~The~~originates ~~Bank~~single isfamily inloans ~~compliance~~to ~~with~~sell ~~these~~into ~~policy~~the ~~statements~~secondary market.

~~The~~Regulation 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~~The ~~of Accounts~~following ~~and~~discussion ~~Regulation~~describes byelements ~~the FDIC. As insurer~~ of the ~~Bank’s~~extensive ~~deposit~~regulatory ~~accounts,~~framework ~~the~~applicable ~~FDIC is authorized~~ to ~~conduct examinations of~~ savings and toloan ~~require~~holding ~~reporting~~companies byand ~~the~~federal ~~Bank.~~savings Itassociations ~~also~~and ~~may~~provides ~~prohibit~~some ~~any~~specific ~~SAIF-insured~~information ~~association~~relevant ~~from~~to ~~engaging~~us. inThis ~~any activity~~regulatory ~~the~~framework ~~FDIC~~is ~~determines~~primarily byintended ~~regulation~~for orthe ~~order~~protection toof ~~pose~~depositors, afederal ~~serious~~deposit ~~threat~~insurance tofunds ~~the~~and ~~SAIF. The FDIC also has~~ the ~~authority~~banking system toas ~~initiate~~a ~~enforcement~~whole ~~actions~~rather ~~against~~than ~~savings~~for ~~associations, after first giving~~ the ~~OTS~~protection anof ~~opportunity~~shareholders toand ~~take such action~~creditors.

~~The~~To ~~FDIC~~the ~~has~~extent ~~adopted~~that athis ~~risk-based~~section ~~deposit~~describes ~~insurance~~statutory ~~assessment~~and regulatory ~~system.~~provisions, ~~The~~it ~~FDIC~~is ~~assigns~~qualified anin ~~institution~~its toentirety ~~one~~by ofreference ~~three~~to ~~capital~~those ~~categories,~~provisions. ~~based~~Those onstatutes ~~the~~and ~~institution’s financial information~~regulations, as ofwell ~~the~~as ~~reporting~~related ~~period ending seven months before the assessment period~~policies, ~~and one of three supervisory subcategories within each capital group. The three capital categories~~ are ~~well~~subject ~~capitalized, adequately capitalized and undercapitalized. The supervisory subgroup~~ to ~~which~~change ~~an institution is assigned is based on a supervisory evaluation provided to the FDIC~~ by ~~the~~Congress, ~~institution’s~~state ~~primary~~legislatures ~~federal regulator~~ and ~~information~~federal ~~which the FDIC determines to be relevant to the institution’s financial condition~~ and ~~the~~state ~~risk posed to the deposit insurance funds~~regulators. AnChanges ~~institution’s~~in ~~assessment~~statutes, ~~rate~~regulations ~~depends~~or onregulatory ~~the~~policies ~~capital~~applicable ~~category and supervisory category~~ to ~~which it is assigned. The FDIC is authorized to raise~~ the ~~assessment~~Company, ~~rates.~~including ~~The~~interpretation ~~FDIC~~or ~~has~~implementation ~~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~~thereof, it could have ana ~~adverse~~material effect on the ~~earnings~~Company’s ~~of the Bank~~business.

~~Limitations~~As ona ~~Dividends~~federally chartered, savings association, the Bank is subject to examination, supervision and ~~Capital~~extensive ~~Distributions~~regulation by the OTS and the FDIC. The ~~Company~~Bank is a ~~legal~~member ~~entity~~of ~~separate~~the FHLB system. This regulation and ~~distinct~~supervision establishes ~~from~~a ~~its~~comprehensive ~~banking~~framework of activities in which an institution can engage and ~~other~~is ~~subsidiaries. Its~~intended ~~principal~~primarily ~~sources~~for the protection of ~~funds~~the ~~are~~insurance ~~cash~~fund ~~dividends~~and ~~paid~~depositors. The Registrant also is subject to regulation by ~~those~~the ~~subsidiaries,~~Board ~~investment~~of ~~income,~~Governors of the Federal Reserve System (the “Federal Reserve Board”) governing reserves to be maintained against deposits and ~~borrowings~~certain other matters. The OTS ~~regulations~~regularly ~~impose~~examines ~~limitations~~the onRegistrant ~~all~~and ~~capital~~the ~~distributions~~Bank byand ~~savings~~prepares ~~institutions~~a ~~such~~report asfor the consideration of the Bank’s Board of Directors on any deficiencies that it may find in the Bank’s operations. ~~Capital~~The ~~distributions~~FDIC ~~include cash~~also ~~dividends,~~examines ~~payments~~the toBank ~~repurchase~~in orits ~~otherwise~~role ~~acquire~~as the ~~savings~~administrator ~~association~~of the DIF. The Bank’s ~~shares,~~relationship ~~payments~~with its depositors and borrowers also is regulated to ~~shareholders~~a ofgreat ~~another~~extent ~~institution~~by both federal and state laws especially in asuch ~~cash-out~~matters ~~merger~~as the ownership of savings accounts and ~~other~~the ~~distributions~~form ~~charged~~and ~~against~~content ~~capital~~of the Bank’s mortgage documents.

ARegulatory ~~savings~~Capital ~~institution~~Requirements. ~~must~~The ~~file~~Company anis ~~application~~not ~~for~~currently ~~OTS~~subject ~~approval~~to ofany ~~the capital~~regulatory ~~distribution if either (1) the total~~ capital ~~distributions~~requirements, ~~for~~but ~~the~~its ~~applicable~~subsidiary ~~calendar~~federal ~~year~~savings ~~exceed~~association ~~the~~is ~~sum~~subject ~~of the institution’s net income for that year~~ to ~~date~~various ~~plus~~capital ~~the~~requirements. ~~institution’s retained net income for the preceding two~~Federally ~~years,~~insured ~~(2)~~savings ~~the~~institutions ~~institution~~are ~~would~~required ~~not~~to bemaintain atminimum ~~least~~levels ~~adequately~~of ~~capitalized~~regulatory ~~following~~capital. ~~the~~The ~~distribution,~~OTS ~~(3)~~has ~~the~~established ~~distribution~~capital ~~would~~standards ~~violate any~~ applicable ~~statute,~~to ~~regulation,~~all ~~agreement~~savings orinstitutions. ~~OTS-imposed~~These ~~condition,~~standards orgenerally ~~(4)~~must ~~the~~be ~~institution~~as isstringent ~~not~~as ~~eligible~~the ~~for~~comparable capital ~~expedited~~requirements ~~treatment~~imposed ofon ~~its~~national ~~filings~~banks. IfThe anOTS ~~application~~also is ~~not~~authorized ~~required~~ to beimpose ~~filed,~~capital ~~savings~~requirements ~~institutions~~in ~~which~~excess ~~are a subsidiary~~ of athese ~~holding~~standards ~~company,~~on asindividual ~~well as certain other~~ institutions, ~~must~~on ~~still file~~ a ~~notice~~case-by-case ~~with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution~~basis.

16Under 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.

~~Any~~The ~~additional~~leverage ~~capital~~limit ~~distributions~~adopted ~~would~~by ~~require~~the ~~prior~~OTS ~~regulatory~~requires ~~approval.~~that Insavings ~~the~~associations ~~event~~maintain ~~the Bank’s~~“core capital” ~~fell~~in ~~below~~an ~~its~~amount ~~required~~equal ~~levels~~to orat ~~the~~least ~~OTS~~3% ~~notified~~of itadjusted ~~that~~total itassets. Core ~~was~~capital ingenerally ~~need~~consists of ~~more~~tangible ~~than~~capital ~~normal~~plus ~~supervision~~certain intangible assets, ~~the~~including ~~Bank’s~~supervisory ~~ability~~goodwill (which is phased out over a five-year period) and up to ~~make~~25% ~~capital~~of ~~distributions~~other ~~could~~intangibles bethat ~~restricted~~meet certain separate salability and market valuation tests. InAs ~~addition,~~a result of the ~~OTS~~prompt ~~could~~corrective ~~prohibit~~action provisions described below, however, a ~~proposed capital~~savings ~~distribution~~association bymust ~~any~~maintain ~~institution,~~a ~~which~~core ~~would~~capital ~~otherwise~~ratio beof ~~permitted~~at byleast ~~the~~4% ~~regulation,~~to ifbe ~~the~~considered ~~OTS~~adequately ~~determines~~capitalized ~~that~~unless ~~the~~its ~~distribution~~supervisory ~~would~~condition ~~constitute~~is such anto ~~unsafe~~allow orit ~~unsound~~to ~~practice~~maintain a 3% ratio.

~~Equity~~Under ~~Risk~~the ~~Limitations.~~risk-based ~~Certain~~capital ~~OTS~~requirement, ~~regulations~~a ~~limit~~savings ~~the~~association ~~Registrant’s~~must ~~investment~~maintain intotal ~~“equity~~capital ~~risk~~equal to at least 8% ~~investments,”~~of ~~which~~risk-weighted ~~include~~assets. ~~investments~~Total incapital ~~equity~~consists ~~securities~~of core capital, ~~real~~as ~~estate~~defined above, ~~service~~and ~~corporations~~supplementary capital. Supplementary capital consists of certain permanent and ~~operating~~maturing ~~subsidiaries,~~capital asinstruments ~~well~~that do not qualify as ~~land~~core ~~loans~~capital and ~~non-residential~~general valuation ~~construction~~loan ~~loans~~and ~~with~~lease ~~loan-to-value~~loss ~~ratios~~allowances inup ~~excess~~to a maximum of ~~80%~~1.25% ~~Equity~~of risk ~~investments~~-weighted ~~increase~~assets. ~~the~~Supplementary capital ~~requirements~~may ofbe used to satisfy the ~~Bank.~~risk-based ~~Federal~~requirement ~~laws~~only ~~and~~to ~~regulations~~the ~~also~~extent ~~impose~~of ~~certain~~core ~~limitations~~capital. onThe ~~operations,~~OTS ~~including~~is ~~restrictions~~also onauthorized ~~loans-~~to~~-one-borrower,~~ ~~transactions~~require ~~with~~a ~~affiliates~~savings association ~~and~~to ~~affiliated~~maintain ~~persons~~an ~~and~~additional ~~liability growth.~~amount ~~They~~of ~~also~~total ~~impose~~capital ~~requirements~~to account for ~~the~~concentration ~~retention~~ of ~~housing~~credit risk and ~~thrift~~the risk of non-~~related~~traditional ~~investments~~activities. ~~See~~At ~~“Qualified~~September 30, ~~Thrift~~2006, ~~Lender~~the ~~Test~~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.

~~Mortgage~~The ~~Banking~~OTS and ~~Mortgage~~the ~~Servicing~~FDIC ~~Rights.~~are ~~The~~authorized ~~four federal banking agencies~~and, ~~including~~under certain ~~the~~circumstances ~~Company’s regulators~~required, ~~have~~to ~~jointly~~take ~~issued expanded~~certain ~~examination~~actions ~~and~~against ~~supervision~~associations ~~guidance~~that ~~relating~~fail to ~~mortgage~~meet ~~banking~~capital ~~and mortgage servicing rights~~requirements. The ~~guidance~~OTS onis ~~mortgage~~generally ~~banking~~required ~~activities~~to ~~and~~take ~~mortgage~~action ~~servicing~~to ~~rights~~restrict ~~highlights~~ the ~~banking~~activities ~~agencies’~~of ~~concerns~~an ~~about~~“undercapitalized ~~and~~association” ~~provides~~(generally ~~guidance~~defined ~~relating~~ to ~~mortgage~~be ~~banking~~one ~~activities,~~with ~~primarily~~less inthan ~~the~~4% ~~valuation~~tier ~~and~~1 ~~hedging~~risk-based ofcapital, ~~mortgage~~3% ~~servicing~~leverage ~~rights.~~capital, ~~The~~or ~~guidance~~8% ~~states~~total ~~that~~risk-based ~~institutions~~capital). ~~with~~Any ~~significant~~such ~~exposure~~association tomust ~~mortgage~~submit ~~related~~a ~~assets,~~capital ~~especially~~restoration ~~mortgage~~plan ~~servicing~~and ~~rights, should~~until ~~expect~~such ~~greater~~plan ~~scrutiny~~is ofapproved ~~those~~by ~~assets~~the ~~during~~OTS ~~examinations,~~may ~~and~~not ~~additional~~increase ~~capital~~its ~~may~~assets, acquire beanother ~~required~~institution, ~~for~~establish ~~institutions~~a ~~that~~branch ~~fail~~or toengage ~~follow~~in ~~the~~any ~~practices~~new ~~set~~activities, ~~forth~~and ingenerally ~~the~~may ~~guidelines~~not make capital distributions.

~~Transactions~~14 ~~with Affiliates~~

TheTable 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. Contents

The ~~Bank’s~~imposition ~~authority~~by tothe ~~extend~~OTS ~~credit~~or tothe ~~executive~~FDIC ~~officers,~~of ~~directors~~any ~~and~~of ~~10% stockholders, or entities controlled by~~ these ~~persons,~~measures ison ~~currently governed by Sections 22(g) and 22(h) of~~ the ~~Federal~~Bank ~~Reserve~~may ~~Act,~~have ~~and~~a ~~also~~substantial byadverse ~~Regulation~~effect ~~O. Among other things, these regulations generally require these loans to be made~~ on ~~terms substantially~~ the Registrant’s ~~same~~operations asand ~~those~~profitability ~~offered to unaffiliated individuals~~ and ~~do not involve more than~~ the ~~normal~~value ~~risk~~ of ~~repayment.~~its ~~However,~~common ~~recent~~stock. ~~regulations~~If ~~now~~the ~~permit~~OTS ~~executive~~or ~~officers and directors to receive~~ the ~~same~~FDIC ~~terms~~require ~~through~~an ~~benefit~~association orsuch ~~compensation~~as ~~plans~~the ~~that~~Bank, ~~are widely available~~ to ~~other~~raise ~~employees,~~additional ascapital ~~long as~~through the ~~director~~issuance orof ~~executive~~Company ~~officer~~common isstock ~~not~~or ~~given preferential treatment compared to~~ other ~~participating~~capital ~~employees.~~instruments, such ~~Regulation~~issuance Omay ~~also~~result ~~places~~in ~~individual~~the ~~and~~dilution ~~aggregate~~in ~~limits on~~ the ~~amount~~percentage of ~~loans~~ownership ~~the~~of ~~Bank~~those ~~may~~persons ~~make~~holding toshares ~~these~~of ~~person~~common ~~based,~~stock insince ~~part on~~ the ~~Bank~~Company’s ~~capital~~shareholders ~~position,~~do ~~and~~not ~~requires~~have ~~approval~~preemptive ~~procedures to be followed~~rights. ~~At September 30, 2004, the Bank was in compliance with these regulations.~~

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

~~Federal~~Qualified ~~Reserve~~Thrift ~~Board~~Lender ~~regulations~~Test. ~~require~~All ~~all~~savings ~~depository~~associations, ~~institutions~~including tothe ~~maintain~~Bank, ~~non-interest~~are ~~earning~~required ~~reserves~~to ~~against~~meet ~~their~~a ~~transaction~~qualified ~~accounts~~thrift lender (~~primarily~~“QTL”) ~~NOW~~test ~~and~~to ~~Super~~avoid ~~NOW~~certain ~~checking~~restrictions ~~accounts)~~on ~~and~~their ~~non-personal~~operations. ~~time~~This ~~deposits.~~test Atrequires ~~September~~a ~~30,~~savings ~~2004,~~association ~~the~~to ~~Bank~~have ~~was~~at inleast ~~compliance~~65% ~~with~~of ~~these~~its ~~reserve~~portfolio ~~requirements.~~assets ~~The~~(which ~~balances~~consists ~~maintained~~of tototal ~~meet~~assets ~~the~~less ~~reserve~~intangibles, ~~requirements~~properties ~~imposed~~used byto conduct the ~~Federal~~savings ~~Reserve~~association’s ~~Board~~business ~~may~~and beliquid ~~used~~assets tonot ~~satisfy~~exceeding ~~liquidity~~20% ~~requirements~~of ~~that~~total ~~may~~assets) bein ~~imposed~~qualifying bythrift ~~the~~investments ~~OTS~~on a monthly average for nine out of every twelve months on a rolling basis. At September 30, 2006, the Bank met the test.

~~Holding~~A ~~Company~~savings ~~Regulation~~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.

~~The~~Community ~~Company~~Reinvestment isAct. Under the Community Reinvestment Act (“CRA”), every FDIC insured institution has a continuing ~~non-diversified~~and ~~savings~~affirmative obligation consistent with safe and ~~loan~~sound ~~holding~~banking ~~company~~practices ~~within~~to help meet the ~~meaning~~credit needs of its entire community, including low and moderate-income neighborhoods. In addition, the ~~Home~~Equal ~~Owners’~~Credit ~~Loan~~Opportunity Act ~~(“HOLA”),~~and asthe ~~amended~~Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. AsThe ~~such,~~CRA requires the ~~Company~~OTS, isin ~~registered~~connection with the ~~OTS~~examination ~~and~~of isthe ~~subject~~Bank, to ~~OTS~~assess ~~regulations,~~the institution’s ~~examinations,~~record ~~supervision~~of meeting the credit needs of its community and ~~reporting~~to ~~requirements.~~take Insuch ~~addition~~record into account in its evaluation of certain applications, such as a merger or the ~~OTS~~establishment ~~has~~of ~~enforcement~~a ~~authority~~branch, ~~over~~by the ~~Company~~Bank. ~~and~~An ~~its~~institution’s ~~non-savings~~failure ~~institution~~to ~~subsidiaries.~~comply ~~Among~~with ~~other~~the provisions ~~things~~of the CRA could, ~~this~~at ~~authority~~a ~~permits~~minimum, ~~the~~result ~~OTS~~in toregulatory ~~restrict~~restrictions oron ~~prohibit~~its activities ~~that~~, ~~are~~and ~~determined~~failure to becomply awith ~~serious~~the ~~risk~~Equal toCredit Opportunity Act and the ~~subsidiary~~Fair ~~savings~~Housing ~~institution.~~Act ~~The~~could ~~Bank~~result isin ~~required~~enforcement toactions ~~notify~~by the OTS, 30as ~~days~~well ~~before~~as ~~declaring~~other federal ~~any~~regulatory ~~dividend~~agencies toand the ~~Company~~Department of Justice. The Bank was examined for CRA compliance in May 2004 and received a rating of “satisfactory”.

AsAccounting. aAn ~~unitary~~OTS ~~savings~~policy ~~and~~statement ~~loan~~applicable ~~holding company, the Company generally is not restricted under existing laws as~~ to ~~the~~all ~~types of~~savings ~~business~~associations ~~activities~~clarifies inand ~~which~~re-emphasizes ~~it may engage, provided~~ that the ~~Bank~~investment ~~continues~~activities toof be a ~~QTL.~~savings ~~Upon~~association ~~any~~must ~~nonsupervisory~~be ~~acquisition~~in bycompliance ~~the~~with ~~Company~~approved ofand ~~another~~documented ~~savings~~investment ~~association~~policies orand strategies, ~~savings~~and ~~bank~~must ~~that~~be ~~meets~~accounted ~~the~~for ~~QTL~~in ~~test~~accordance ~~and~~with isgenerally ~~deemed~~accepted toaccounting beprinciples a(“GAAP”). ~~savings institution~~Under by the ~~OTS~~policy statement, ~~the~~management ~~Company~~must ~~would~~support ~~become~~its aclassification ~~multiple~~of ~~savings~~ and ~~loan~~accounting ~~holding~~for ~~company~~loans ~~(if~~and ~~the~~securities ~~acquired~~(i.e., ~~institution is~~ whether held asfor ainvestment, ~~separate~~available ~~subsidiary)~~for ~~and~~sale ~~would~~or betrading) ~~subject~~with toappropriate ~~extensive~~documentation. ~~limitations~~The onBank ~~the~~is ~~types~~in ofcompliance ~~business~~with ~~activities~~these inpolicy ~~which it could engage~~statements. ~~The HOLA~~

17The 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.

~~limits~~Insurance ~~the activities~~ of aAccounts ~~multiple savings~~ and ~~loan~~Regulation ~~holding~~by ~~company and its non-insured institution subsidiaries primarily to activities permissible for~~the ~~bank~~FDIC. ~~holding~~As ~~companies~~insurer ~~under Section 4(c)(8)~~ of the Bank’s ~~Holding~~deposit ~~Company Act~~accounts, ~~subject~~the toFDIC ~~the~~is ~~prior~~authorized ~~approval~~to ofconduct ~~the~~examinations ~~OTS,~~of and ~~activities~~to ~~authorized~~require reporting by ~~OTS~~the ~~regulation~~Bank. ~~The~~It ~~OTS~~also ismay ~~prohibited~~prohibit ~~from approving~~ any ~~acquisition~~insured ~~that~~association ~~would~~from ~~result~~engaging in aany ~~multiple savings~~activity ~~and~~the ~~loan~~FDIC ~~holding~~determines ~~company~~by regulation ~~controlling~~or ~~savings~~order ~~institutions~~to inpose ~~more~~a ~~than~~serious ~~one~~threat ~~state, subject~~ to ~~two exceptions: (i)~~ the ~~approval~~DIF. ofThe ~~interstate~~FDIC ~~supervisory~~also ~~acquisitions~~has bythe ~~savings~~authority ~~and~~to ~~loan~~initiate ~~holding~~enforcement ~~companies,~~actions ~~and~~against ~~(ii) the acquisition of a~~ savings ~~institution~~ inassociations, ~~another~~after ~~state~~first ifgiving the ~~laws~~OTS ofan ~~the~~opportunity ~~state~~to oftake ~~the target savings institution specifically permit~~ such ~~acquisitions~~action.

The ~~HOLA~~FDIC ~~prohibits~~has adopted a ~~savings~~risk-based ~~and~~deposit ~~loan~~insurance ~~holding~~assessment ~~company,~~system. ~~directly~~The orFDIC ~~indirectly,~~assigns oran ~~through~~institution to one orof ~~more~~three ~~subsidiaries~~capital categories, ~~from~~based ~~acquiring~~on ~~other savings~~the ~~institutions~~institution’s orfinancial ~~holding companies thereof~~information, ~~without~~as ~~prior written approval~~ of the ~~OTS.~~reporting Itperiod ~~also~~ending ~~prohibits~~seven months before the ~~acquisition~~assessment orperiod, ~~retention~~and one of, ~~with~~three ~~certain~~supervisory ~~exceptions,~~subcategories ~~more~~within ~~than~~each 5%capital ofgroup. ~~non-subsidiary~~The ~~savings~~three ~~institution,~~capital acategories ~~non-subsidiary~~are ~~holding~~well ~~company~~capitalized, oradequately acapitalized ~~non-subsidiary~~and ~~company~~undercapitalized. ~~engaged~~The insupervisory ~~activities~~subgroup ~~other~~to ~~than~~which ~~those~~an ~~permitted~~institution byis ~~the~~assigned ~~HOLA;~~is orbased ~~acquiring~~on ora ~~retaining~~supervisory ~~control~~evaluation ofprovided anto the FDIC by the institution’s ~~that~~primary isfederal ~~not~~regulator ~~federally~~and ~~insured.~~information Inwhich ~~evaluating~~the ~~applications~~FDIC determines byto ~~holding~~be ~~companies~~relevant to ~~acquire~~the ~~savings institutions,~~institution’s financial condition and the ~~OTS~~risk ~~must~~posed ~~consider~~to the ~~financial~~deposit ~~and~~insurance ~~managerial~~funds. ~~resources,~~An ~~future~~institution’s ~~prospects~~assessment ofrate depends on the ~~company~~capital category and ~~institution~~supervisory ~~involved~~category ~~the~~to ~~effect~~which ofit ~~the~~is ~~acquisition~~assigned. onThe FDIC ~~the~~is ~~risk~~authorized to raise the ~~insurance~~assessment ~~fund,~~rates. The FDIC has exercised this authority several times in the ~~convenience~~past and ~~needs~~may raise insurance premiums in the future. If this type of action is taken by the ~~community~~FDIC, ~~and~~it could have an adverse effect on the ~~competitive~~earnings ~~factors~~of the Bank.

~~Federal~~Limitations ~~Securities~~on ~~Laws~~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.

~~The~~A ~~Company~~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 ~~common~~net ~~stock~~income isfor ~~registered~~that ~~with~~year to date plus the ~~SEC~~institution’s ~~under~~retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized ~~Securities~~following ~~Exchange~~the ~~Act~~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 ~~1934~~its filings. ~~The~~If ~~Company~~an application is ~~subject~~not required to ~~the~~be ~~information~~filed, ~~proxy~~savings ~~solicitation~~institutions which are a subsidiary of a holding company, ~~insider~~as ~~trading~~well ~~restrictions~~as ~~and~~certain other ~~requirements~~institutions, ~~under~~must still file a notice with the ~~Exchange~~OTS ~~Act~~at least 30 days before the board of directors declares a dividend or approves a capital distribution.

~~Shares~~15 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.

RecentTable Legislationof Contents

~~USA~~Any ~~Patriot~~additional ~~Act~~capital ofdistributions ~~2001.~~would Inrequire ~~October~~prior ~~2001,~~regulatory ~~the~~approval. ~~USA~~In ~~Patriot~~the ~~Act~~event ~~of 2001 was enacted in response to~~ the ~~terrorist~~Bank’s ~~attacks~~capital ~~in New York, Pennsylvania~~fell ~~and~~below ~~Washington,~~its ~~D.C.,~~required ~~which~~levels ~~occurred~~or onthe ~~September~~OTS ~~11,~~notified ~~2001.~~it ~~The~~that ~~Patriot~~it ~~Act~~was isin ~~intended~~need toof ~~strengthen~~more ~~U.S.~~than ~~law~~normal ~~enforcement’s~~supervision, ~~and~~ the ~~intelligence communities~~Bank’s ~~abilities~~ability to ~~work~~make ~~cohesively~~capital todistributions ~~combat~~could ~~terrorism~~be ~~on a variety of fronts~~restricted. ~~The potential~~In ~~impact~~addition, of the ~~Patriot~~OTS ~~Act~~could onprohibit ~~financial~~a ~~institutions~~proposed ofcapital ~~all~~distribution ~~kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards~~by ~~for~~any ~~verifying customer identification at account opening~~institution, ~~and~~which ~~rules~~would tootherwise ~~promote~~be ~~cooperation~~permitted ~~among~~by ~~financial~~the ~~institutions~~regulation, ~~regulators,~~if ~~and~~the ~~law~~OTS ~~enforcement~~determines ~~entities in identifying parties~~ that ~~may~~the bedistribution ~~involved~~would inconstitute ~~terrorism~~an unsafe or ~~money~~unsound ~~laundering~~practice.

~~Financial~~Equity ~~Services~~Risk ~~Modernization Legislation~~Limitations. ~~In November~~Certain ~~1999,~~OTS ~~the~~regulations ~~Gramm-Leach-Bliley~~limit ~~Act~~the ofCompany’s ~~1999,~~investment in “~~GLB~~equity risk investments,” which include investments in equity securities, ~~was~~real ~~enacted.~~estate, ~~The~~service ~~GLB~~corporations ~~repeals~~and operating ~~provisions~~subsidiaries, ofas ~~the~~well ~~Glass~~as land loans and non-~~Steagall~~residential ~~Act~~construction ~~which~~loans ~~restricted~~with loan-to-value ratios in excess of 80%. Equity risk investments increase the ~~affiliation~~capital requirements of ~~Federal~~the ~~Reserve~~Bank. ~~member~~Federal ~~banks~~laws ~~with~~and ~~firms~~regulations ~~“engaged~~also ~~principally”~~impose incertain ~~specified~~limitations ~~securities~~on ~~activities~~operations, ~~and~~including ~~which~~restrictions ~~restricted~~on ~~officer~~loans-to-one-borrower, ~~director,~~transactions orwith ~~employee~~affiliates ~~interlocks~~and ~~between~~affiliated apersons ~~member~~and ~~bank~~liability ~~and~~growth. ~~any~~They ~~company~~also orimpose ~~person~~requirements ~~“primarily~~for ~~engaged”~~the inretention ~~specified~~of ~~securities~~housing ~~activities~~and thrift-related investments. See “Qualified Thrift Lender Test.”

InMortgage ~~addition,~~Banking ~~the~~and ~~GLB~~Mortgage ~~also~~Servicing ~~contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance~~Rights. The ~~general~~four ~~effect~~federal ofbanking ~~the~~agencies ~~law~~have isjointly ~~to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities~~issued ~~firms,~~expanded ~~and~~examination ~~other financial service providers by revising~~ and ~~expanding~~supervision ~~the~~guidance ~~Bank~~relating ~~Holding Company Act framework~~ to ~~permit~~mortgage ~~holding~~banking ~~company~~and tomortgage ~~engage~~servicing inrights. aThe ~~full~~guidance ~~range~~on ofmortgage ~~financial~~banking activities ~~through~~and amortgage ~~new~~servicing ~~entity~~rights ~~known~~highlights asthe abanking ~~“financial~~agencies’ ~~holding company.”~~concerns ~~“Financial~~about ~~activities”~~and isprovides guidance ~~broadly~~relating ~~defined~~ to ~~include~~mortgage ~~not only~~ banking, ~~insurance and securities~~ activities, ~~but~~primarily ~~also~~in ~~merchant~~the ~~banking~~valuation and ~~additional~~hedging ~~activities~~of ~~that~~mortgage ~~the~~servicing ~~Federal~~rights. ~~Reserve~~The ~~Board,~~guidance instates ~~consultation~~that institutions with ~~the Secretary~~significant ofexposure ~~the~~to ~~Treasury,~~mortgage ~~determines~~related toassets, beespecially ~~financial~~mortgage inservicing ~~nature~~rights, should ~~incidental~~expect togreater ~~such~~scrutiny ~~financial~~of ~~activities,~~those orassets ~~complementary~~during ~~activities~~examinations, ~~that~~and doadditional ~~not~~capital ~~pose~~may abe ~~substantial~~required ~~risk~~for toinstitutions ~~the~~that ~~safety~~fail ~~and~~to ~~soundness~~follow ofthe ~~depository~~practices ~~institutions~~set orforth in the ~~financial system generally~~guidelines.

~~The~~Transactions ~~GLB~~with ~~provides~~Affiliates 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~~Bank’s ~~also~~authority ~~permits~~to ~~national~~engage ~~banks~~in transactions with related parties or “affiliates” or to ~~engage~~make inloans ~~expanded~~to ~~activities~~specified ~~through~~insiders ~~the~~is ~~formation~~limited by Sections 23A and 23B of ~~financial~~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. ASection 23A ~~national~~limits ~~bank~~the ~~may~~aggregate ~~have~~amount aof certain “covered” transactions with any individual affiliate to 10% of the capital and surplus of the ~~subsidiary~~savings ~~engaged~~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 ~~any~~an amount ~~activity~~and ~~authorized~~of ~~for~~a ~~national~~type ~~banks~~described ~~directly~~in orSection 23A ~~any~~and ~~financial~~the ~~activity,~~purchase ~~except~~of ~~for~~low ~~insurance~~quality ~~underwriting~~assets from affiliates are generally prohibited. Section 23B provides that covered transactions with affiliates, ~~insurance~~including ~~investments~~loans and asset purchases, ~~real~~must ~~estate~~be ~~investment~~on terms orand ~~development~~under circumstances, orincluding ~~merchant~~credit ~~banking~~standards, ~~which~~that ~~may~~are ~~only~~substantially bethe ~~conducted through~~same aor ~~subsidiary~~at ofleast aas ~~financial~~favorable ~~holding~~to ~~company~~the institution as those prevailing at the time for comparable transactions with non-affiliated companies. ~~Financial~~In ~~activities~~addition, ~~include~~savings institutions ~~all~~are prohibited from lending to any affiliate that is engaged in activities ~~permitted~~that ~~under~~are ~~new~~not ~~sections~~permissible offor bank holding companies and no savings institution may purchase the ~~Bank~~securities ~~Holding~~of ~~Company~~any ~~Act~~affiliate orother ~~permitted~~than bya ~~regulation~~subsidiary.

ToThe ~~the~~Bank’s ~~extent~~authority ~~that~~to ~~the~~extend ~~GLB~~credit ~~permits~~to ~~banks~~executive officers, ~~securities~~directors ~~firms~~and 10% stockholders, or entities controlled by these persons, is currently governed by Sections 22(g) and ~~insurance~~22(h) ~~companies~~of tothe ~~affiliate~~Federal Reserve Act, and also by Regulation O. Among other things, these regulations generally require these loans to be made on terms substantially the ~~financial~~same ~~services~~as those offered to unaffiliated individuals and do not ~~industry~~involve ~~may~~more ~~experience~~than ~~further~~the ~~consolidation~~normal risk of repayment. ~~The~~However, ~~GLB~~recent isregulations ~~intended~~now permit executive officers and directors to ~~grant~~receive the same terms through benefit or compensation plans that are widely available to ~~community~~other ~~banks~~employees, ~~certain~~as ~~powers~~long as athe director ~~matter~~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 ~~right~~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.

18The Federal Reserve System

~~that~~Federal ~~larger~~Reserve Board regulations require all depository institutions ~~have~~to ~~accumulated~~maintain onnon-interest anearning adreserves against ~~hoc~~their ~~basis~~transaction accounts (primarily NOW and ~~which~~Super ~~unitary~~NOW ~~savings~~checking accounts) and ~~loan~~non-personal ~~holding~~time ~~companies~~deposits. ~~already~~At ~~possess.~~September 30, ~~Nevertheless~~2006, the ~~GLB~~Bank ~~may have~~was ~~the~~in ~~result~~compliance ofwith ~~increasing~~these ~~the~~reserve ~~amount~~requirements. ofThe ~~competition~~balances ~~that~~maintained weto ~~face~~meet ~~from~~the ~~larger~~reserve requirements ~~institutions~~imposed ~~and~~by ~~other~~the ~~types~~Federal ofReserve ~~companies~~Board ~~offering~~may ~~financial~~be ~~products,~~used ~~many~~to ofsatisfy ~~which~~liquidity ~~may~~requirements ~~have~~that ~~substantially~~may ~~more~~be ~~financial~~imposed ~~resources~~by ~~than~~the ~~we have~~OTS.

~~Sarbanes-Oxley~~Holding ~~Act. On July 30, 2002, President Bush signed into law~~Company ~~the~~Regulation 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~~Company ~~includes~~is ~~very~~a ~~specific~~non-diversified ~~additional~~savings ~~disclosure~~and ~~requirements~~loan ~~and~~holding ~~new~~company ~~corporate~~within ~~governance~~the ~~rules,~~meaning ~~requires~~of the ~~Securities~~Home ~~and~~Owners’ ~~Exchange~~Loan ~~Commission~~Act ~~and~~(“HOLA”), ~~securities~~as ~~exchanges~~amended. toAs ~~adopt~~such, ~~extensive~~the ~~additional~~Company ~~disclosure,~~is ~~corporate~~registered ~~governance~~with the OTS and ~~other~~is ~~related~~subject ~~rules~~to ~~and~~OTS ~~mandates~~regulations, ~~further~~examinations, ~~studies~~supervision ofand ~~certain~~reporting ~~issues~~requirements. byIn addition, the ~~Securities~~OTS ~~and~~has ~~Exchange~~enforcement ~~Commission.~~authority ~~The~~over ~~SOA~~the ~~represents~~Company ~~significant~~and ~~federal~~its ~~involvement~~non-savings institution insubsidiaries. ~~matters~~Among ~~traditionally~~other ~~left~~things, tothis ~~state~~authority ~~regulatory~~permits ~~systems,~~the ~~such~~OTS asto ~~the~~restrict ~~regulation~~or ofprohibit ~~the~~activities ~~accounting~~that ~~profession,~~are ~~and~~determined to ~~state~~be ~~corporate~~a ~~law,~~serious ~~such~~risk asto the ~~relationship~~subsidiary ~~between~~savings ainstitution. ~~board~~The ofBank ~~directors~~is ~~and~~required ~~management~~to ~~and~~notify ~~between~~the aOTS ~~board~~30 ofdays ~~directors~~before ~~and~~declaring ~~its~~any ~~committees~~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 ~~SOA~~HOLA ~~addresses~~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, ~~among~~subject ~~other~~to ~~matters~~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.

•16 ~~audit committees;~~

•Table certification of financial statements by the chief executive officer and the chief financial officer;Contents

•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 ~~forfeiture~~OTS. It also prohibits the acquisition or retention of, ~~bonuses~~with certain exceptions, more than 5% of non-subsidiary savings institution, a non-subsidiary holding company, or ~~other~~a ~~incentive~~non-~~based~~subsidiary ~~compensation~~company ~~and~~engaged ~~profits~~in ~~from~~activities other than those permitted by the ~~sale~~HOLA; or acquiring or retaining control of an ~~issuer’s~~institution ~~securities~~that is not federally insured. In evaluating applications by ~~directors~~holding companies to acquire savings institutions, the OTS must consider the financial and ~~senior~~managerial ~~officers~~resources, infuture prospects of the ~~twelve~~company ~~month~~and ~~period~~institution ~~following~~involved ~~initial~~the ~~publication~~effect of ~~any~~the ~~financial~~acquisition ~~statements~~on ~~that~~the ~~later~~risk ~~require~~to ~~restatement;~~the insurance fund, the convenience and needs of the community and competitive factors.

•Federal aSecurities ~~prohibition~~Laws ~~on insider trading during pension plan black out periods;~~

•The ~~disclosure~~Company’s common stock is registered with the Securities Exchange Commission (“SEC”) under the Securities Exchange Act of ~~off-balance~~1934. ~~sheet~~The ~~transactions;~~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 ~~prohibition~~number onof ~~personal~~shares ~~loans~~not to ~~directors~~exceed, ~~and~~in ~~officers;~~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 ~~expedited~~Legislation ~~filing requirements for Forms 4;~~

•USA ~~disclosure~~Patriot Act of a2001. ~~code~~In October 2001, the USA Patriot Act of ~~ethics~~2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and ~~filing~~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 ~~Form~~variety 8of 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-Kmoney laundering and financial transparency laws and requires various regulations, including standards for averifying ~~change~~customer oridentification ~~waiver~~at ofaccount ~~such~~opening, ~~code;~~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 ~~“real~~Services ~~time~~Modernization Legislation. In November 1999, the Gramm-Leach-Bliley Act of 1999, “GLB”, ~~filing~~was enacted. The GLB repeals provisions of ~~periodic~~the ~~reports;~~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 ~~formation~~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 ~~public~~comprehensive ~~accounting~~framework ~~oversight~~to ~~board;~~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 ~~auditor~~GLB ~~independence;~~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 ~~various~~GLB ~~increased~~also ~~criminal~~permits ~~penalties~~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 ~~violations~~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 ~~securities~~financial ~~laws~~holding company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation.

~~The~~To ~~SOA~~the ~~contains~~extent ~~provisions~~that ~~which~~the ~~became~~GLB ~~effective~~permits ~~upon~~banks, ~~enactment~~securities firms, and ~~provisions~~insurance ~~which~~companies ~~became~~to ~~effective~~affiliate, ~~from~~the ~~within~~financial 30services ~~days~~industry may experience further consolidation. The GLB is intended to ~~one~~grant ~~year~~to ~~from~~community ~~enactment.~~banks certain powers as a ~~The~~matter ~~Securities~~of right that larger institutions have accumulated on an ad hoc basis and ~~Exchange~~which ~~Commission~~unitary ~~has~~savings ~~been~~and ~~delegated~~loan holding companies already possess. Nevertheless, the ~~task~~GLB may have the result of ~~enacting~~increasing ~~rules~~the toamount ~~implement~~of ~~various~~competition ~~provisions~~that ~~with~~we ~~respect~~face ~~to,~~from larger ~~among~~institutions and other ~~matters~~types of companies offering financial products, ~~disclosure~~many inof ~~periodic~~which ~~filings~~may ~~pursuant~~have tosubstantially ~~the~~more ~~Securities~~financial ~~and~~resources ~~Exchange~~than ~~Act~~we have.

19Sarbanes-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.

~~FEDERAL~~17 ~~AND STATE TAXATION~~

FederalTable Taxationof Contents

~~Tax Bad Debt Reserves.~~ The ~~Bank~~SOA isincludes ~~subject~~very tospecific ~~the~~additional ~~rules~~disclosure ofrequirements ~~federal~~and ~~income~~new ~~taxation~~corporate ~~generally~~governance ~~applicable~~rules, torequires ~~corporations under~~ the ~~Internal Revenue~~ ~~Code~~Securities ofand ~~1986,~~Exchange asCommission ~~amended~~and ~~(the~~securities ~~“Code”).~~exchanges ~~Most corporations are not permitted~~ to ~~make~~adopt ~~deductible~~extensive ~~additions~~additional ~~to bad debt reserves under the Code. However~~disclosure, ~~savings~~corporate ~~and~~governance ~~loan associations~~ and ~~savings~~other ~~associations~~related ~~such~~rules asand ~~the~~mandates ~~Bank,~~further ~~which~~studies ~~meet~~ of certain ~~tests~~issues ~~prescribed~~ by the ~~Code~~Securities ~~may~~and ~~benefit~~Exchange ~~from favorable provisions regarding deductions from taxable income for annual additions to their bad debt reserve~~Commission. ~~For~~The ~~purposes of the bad debt reserve deduction, loans are separated into~~SOA ~~“qualifying~~represents ~~real~~significant ~~property~~federal ~~loans,”~~involvement ~~which generally are loans collateralized by interests~~ in ~~real~~matters ~~property,~~traditionally ~~and~~left ~~non-qualifying loans, which are all other loans. The bad debt reserve deduction with respect~~ to ~~non-qualifying~~state ~~loans~~regulatory ~~must~~systems, ~~be based~~such onas ~~actual~~the ~~loss~~regulation ~~experience. The amount~~ of the ~~bad~~accounting ~~debt~~profession, ~~reserve~~and ~~deduction with respect~~ to ~~qualifying~~state ~~real~~corporate ~~property~~law, ~~loans~~such ~~may~~as ~~be based upon actual loss experience (~~the ~~“experience~~relationship ~~method”)~~between or a ~~percentage~~board of ~~taxable~~directors ~~income determined~~and ~~without~~management ~~regard~~and tobetween ~~such~~a ~~deduction~~board ~~(the “percentage~~ of ~~taxable~~directors ~~income~~and ~~method”)~~its committees.

The ~~Bank~~SOA has elected to use the method that results in the greatest deduction for federal income tax purposes. The amount of the bad debt deduction that a thrift institution may claim with respect to additions to its reserve for bad debts is subject to certain limitations. Firstaddresses, ~~the~~among ~~full~~other ~~deduction~~matters: is available only if at least 60% of the institution’s assets fall within certain designated categories. Second, under the percentage of taxable income method the bad debt deduction attributable to “qualifying real property loans” cannot exceed the greater of (i) the amount deductible under the experience method or (ii) the amount which, when added to the bad debt deduction for non-qualifying loans, equals the amount by which 12% of the sum of the total deposits and the advance payments by borrowers for taxes and insurance at the end of the taxable years exceeds the sum of the surplus, undivided profits, and reserves at the beginning of the taxable year. Third, the amount of the bad debt deduction attributable to qualifying real property loans computed using the percentage of taxable income method is permitted only to the extent that the institution’s reserve for losses on qualifying real property loans at the close of the taxable year does not exceed 6% of such loans outstanding at such time.

~~The~~• ~~percentage~~audit of taxable income method has been repealed for years beginning after December 31, 1995, “large” associations, i.e., the quarterly average of the association’s total assets or the consolidated group of which it is a member, exceeds $500 million for the year, may no longer be entitled to use the experience method of computing additions to their bad debt reserve. A “large” association 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. If the Bank is not a “large” association, the Bank will continue to be permitted to use the experience method. The Bank will be required to recapture (i.e., take into income) over a six year period its applicable excess reserves, 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” association, 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 is possible for a two-year period if an association meets a minimum level of mortgage lending for 1996 and 1997. committees;

If• ancertification 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~~financial ~~pre-1988~~statements ~~reserves~~by ~~are also subject to recapture in~~ the ~~case~~chief ofexecutive ~~certain~~officer ~~excess distributions to (including distributions on liquidation~~ and ~~dissolution),~~the orchief ~~redemptions~~financial ~~of, shareholders.~~ officer;

~~Distributions.~~• To the ~~extent~~forfeiture ~~that~~of ~~(i)~~bonuses 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~~other ~~reserve for losses on loans (“Excess Distributions”), then an amount~~ incentive-based oncompensation ~~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~~from inthe ~~redemption~~sale of ~~stock~~an ~~and distributions in partial or complete liquidation. However, dividends paid out of the Bank~~issuer’s ~~current~~securities orby ~~accumulated~~directors ~~earnings~~ and ~~profits,~~senior asofficers ~~calculated for federal income tax purposes, will not be considered to result~~ in ~~a distribution from~~ the ~~Bank’s~~twelve ~~tax~~month ~~bad~~period ~~debt~~following ~~reserves.~~initial ~~Thus,~~publication 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~~any ~~taxable~~financial ~~income~~statements ~~created from an Excess Distribution is an amount~~ that ~~when~~later ~~reduced~~require 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 restatement;

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

~~capital~~• ~~stock~~disclosure (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~~ off-balance ~~Limitations~~sheet 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. transactions;

~~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~~prohibition computed tax base. Included in this base will be a number of preference items, including the following: (i) 100% of the excess of a thrift institution’s bad debt deduction over the amount that would have been allowable on ~~the~~personal ~~basis~~loans ofto ~~actual~~directors ~~experience; (ii) interest on certain tax-exempt bonds issued after August 7, 1986;~~ and (iii) for years beginning in 1988 and 1989 an amount equal to one-half of the amount by which a institution’s “book income” (as specially defined) exceeds its taxable income with certain adjustments, including the addition of preference items (for taxable years commencing after 1989 this adjustment item is replaced with a new preference item relating to “adjusted current earnings” as specially computed). In addition, for purposes of the new 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. officers;

~~The~~• ~~Bank~~expedited ~~has~~filing ~~not~~requirements ~~had~~for ~~its~~Forms ~~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.~~ 4;

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

~~The~~• ~~State~~“real oftime” ~~Arkansas~~filing ~~generally imposes income tax on thrift institutions computed at a rate~~ of ~~6.5%~~periodic of net earnings. For the purpose of the 6.5% 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 of Arkansas, plus (ii) any deduction for state income taxes. reports;

~~The~~• ~~Company is a Delaware business corporation is required to file annual income tax returns and annual franchise tax returns in~~ the ~~states~~formation of ~~Arkansas~~a ~~and~~public ~~Delaware.~~accounting ~~These~~oversight ~~taxes and fees are not expected to be material.~~ board;

21• auditor independence; and

~~ITEM~~• 2various ~~PROPERTIES~~increased criminal penalties for violations of securities laws.

The ~~Bank~~SOA ~~conducts~~contains ~~its~~provisions ~~business~~which ~~through~~became ~~its~~effective ~~main~~upon ~~office~~enactment, and 17provisions ~~full-service~~which ~~branch~~became ~~offices~~effective ~~located~~from inwithin ~~nine~~30 ~~counties~~days into ~~Northeast~~one ~~Arkansas.~~year ~~Each~~from ~~office is owned or leased by the Bank~~enactment. The ~~following~~Securities ~~table~~and ~~sets~~Exchange ~~forth~~Commission ~~certain~~has ~~information~~been ~~concerning~~delegated the task ~~main~~of ~~office~~enacting ~~and~~rules ~~each~~to ~~branch~~implement ~~office~~various ofprovisions ~~the~~with ~~Bank~~respect atto, ~~September~~among 30other matters, ~~2004.~~disclosure ~~The~~in ~~aggregate~~periodic ~~net~~filings ~~book~~pursuant ~~value~~to of the ~~Bank’s~~Securities ~~premises~~ and ~~equipment~~Exchange ~~was $13~~Act.~~9 million~~ ~~at September 30, 2004.~~

~~Main~~FEDERAL ~~Office:~~AND STATE TAXATION

~~1700~~Federal E.Taxation ~~Highland~~

~~Jonesboro~~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, ~~Arkansas~~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” (~~Opened~~as ~~2001~~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.

~~Branch~~Banks ~~Offices:~~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.

~~Pocahontas~~Distributions. To the extent ~~Branch~~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

~~203~~18 ~~W. Broadway~~

Pocahontas,Table Arkansasof Contents

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 (~~Opened~~including ~~1935~~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.

~~Corning~~Corporate ~~Branch~~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.

~~309~~The ~~Missouri~~Bank ~~Drive~~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.

~~Corning,~~State ~~Arkansas~~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 (~~Opened~~i) interest ~~1983~~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.

~~Hardy~~ITEM ~~Branch~~1A RISK FACTORS

~~101~~In W.analyzing ~~Main~~whether ~~Street~~to make or to continue an investment in our securities, investors should consider, among other factors, the following risk factors.

~~Hardy,~~Our ~~Arkansas~~results of operations are significantly dependent on economic conditions and related uncertainties.

~~(Opened~~Community ~~1998)~~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.

~~Paragould~~Changes ~~Wal-Mart~~in ~~Branch~~interest rates could have a material adverse effect on our operations.

~~2802~~The Woperations 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 ~~Kings~~in ~~Hwy~~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.

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

~~(Opened~~In ~~1999)~~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

~~Swifton~~19 ~~Branch~~

101Table Mainof Street Contents

~~Swifton~~ 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, ~~Arkansas~~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.

~~(Opened~~Our ~~2001)~~allowance for losses on loans may not be adequate to cover probable losses.

~~Hoxie~~We ~~Branch~~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.

~~126~~We SWare ~~Texas~~subject to extensive regulation which could adversely affect our business and operations.

~~Hoxie~~We are subject to extensive federal supervision and regulation, ~~Arkansas~~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.

~~(Opened~~We ~~2002)~~face strong competition which may adversely affect our profitability.

~~Walnut~~We ~~Ridge~~are ~~Branch~~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.

~~120~~Our W.ability ~~Main~~to ~~Street~~successfully compete may be reduced if we are unable to make technological advances.

~~Walnut~~The ~~Ridge~~banking industry is experiencing rapid changes in technology. In addition to improving customer services, ~~Arkansas~~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.

~~(Opened~~ITEM ~~1968)~~1B UNRESOLVED STAFF COMMENTS

~~Highland~~None ~~Branch~~

~~1566~~20 ~~Highway 62~~

Hardy,Table Arkansasof Contents

~~(Opened~~ITEM ~~1983)~~2 PROPERTIES

~~Pocahontas~~The ~~Branch~~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.

~~205~~The ~~Rice~~following ~~Street~~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.

~~Pocahontas,~~Main ~~Arkansas~~Office:

~~(Opened~~1700 ~~2001)~~E. Highland

Jonesboro, ~~Branch~~Arkansas

~~209~~(Opened W.2001) ~~Washington.~~

~~Jonesboro,~~Branch Offices: ~~Arkansas~~

~~(Opened~~Pocahontas ~~2001)~~Branch

~~Newport~~203 ~~Branch~~W. Broadway

~~200~~Pocahontas, ~~Olivia~~Arkansas ~~Drive~~

~~Newport,~~(Opened ~~Arkansas~~1935)

~~(Opened~~Corning ~~2002)~~Branch

~~Marked~~309 ~~Tree~~Missouri ~~Branch~~Drive

~~210~~Corning, ~~Frisco~~Arkansas ~~Street~~

~~Marked~~(Opened ~~Tree,~~1983) ~~Arkansas~~

~~(Opened~~Hardy ~~2003)~~Branch

~~Jonesboro~~101 ~~Branch~~W. Main Street

~~625~~Hardy, ~~S.W.~~Arkansas ~~Drive~~

~~Jonesboro,~~(Opened ~~Arkansas~~1998)

~~(Opened~~Paragould ~~1976)~~Wal-Mart Branch

~~Lake~~2802 ~~City~~W. ~~Branch~~Kingshighway

~~100~~Paragould, ~~Colbean~~Arkansas ~~Blvd~~

~~Lake~~(Opened ~~City,~~1999) ~~Arkansas~~

~~(Opened~~Swifton ~~1998)~~Branch

~~Pocahontas~~101 ~~Wal-Mart~~Main ~~Branch~~Street

~~Hwy~~Swifton, 67Arkansas ~~South~~

~~Pocahontas,~~(Opened ~~Arkansas~~2001)

~~(Opened~~Hoxie ~~1998)~~Branch

~~Tuckerman~~126 ~~Branch~~SW Texas

~~106~~Hoxie, E.Arkansas ~~Main Street~~

~~Tuckerman,~~(Opened ~~Arkansas~~2002)

~~(Opened~~Paragould ~~2001)~~Branch

~~Imboden~~3104 ~~Branch~~West Kingshighway

~~201~~Paragould, EArkansas ~~3rd Street~~

~~Imboden,~~(Opened AR2005)

~~(Opened~~Walnut ~~2002)~~Ridge Branch

22120 W. Main Street

~~ITEM~~Walnut 3Ridge, ~~LEGAL~~Arkansas ~~PROCEEDINGS~~

~~The~~(Opened ~~Company~~1968) currently is not involved in any 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~~Highland 4Branch ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~

No1566 ~~matters~~Highway ~~were~~62 ~~submitted during the fourth quarter of fiscal 2004 to a vote of security holders.~~

~~PART~~Hardy, IIArkansas

~~ITEM~~(Opened 51983) ~~MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS~~

~~Page~~Pocahontas 4Branch ~~of the Annual Report to Stockholders is herein incorporated by reference.~~

~~ITEM~~205 6Rice ~~SELECTED~~Street ~~CONSOLIDATED FINANCIAL AND OTHER DATA~~

~~Pages~~Pocahontas, 1Arkansas ~~through 3 of the Annual Report to Stockholders are herein incorporated by reference.~~

~~ITEM~~(Opened 72001) ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Pages~~Jonesboro 5Branch ~~through 13 of the Annual Report to Stockholders are herein incorporated by reference.~~

~~ITEM~~209 7AW. ~~QUANTITATIVE~~Washington ~~AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

~~Page~~Jonesboro, 13Arkansas ~~of the Annual Report to Stockholders is herein incorporated by reference.~~

~~ITEM~~(Opened 82001) ~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~

~~Pages~~Newport 15Branch ~~through 40 of the Annual Report to Stockholders are herein incorporated by reference.~~

~~ITEM~~200 9Olivia ~~CHANGES~~Drive ~~IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~

~~Not~~Newport, ~~applicable.~~Arkansas

~~ITEM~~(Opened 9A2002) ~~CONTROLS AND PROCEDURES~~

~~Under~~Marked ~~the~~Tree ~~supervision~~Branch and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms in timely alerting them to the material information relating to the Company (or its consolidated subsidiaries) required to be included in its periodic SEC filings.

~~There~~210 ~~has~~Frisco ~~been~~Street no change in the Company’s internal control over financial reporting during the Company’s fourth quarter of fiscal year 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

23Marked Tree, Arkansas

~~PART~~(Opened ~~III~~2003)

~~ITEM~~Broken 10Arrow ~~DIRECTORS~~Branch ~~AND EXECUTIVE OFFICERS OF THE REGISTRANT~~

~~Pages~~3101 4W ~~and~~Kenosha ~~5 of the Proxy Statement are herein incorporated by reference.~~

~~Audit~~Tulsa, ~~Committee~~Oklahoma ~~Financial Expert~~

~~The~~(Opened ~~Company’s~~2005) Board of Directors has appointed Marcus Van Camp as the audit committee financial expert serving on the Company’s Audit Committee. The Company believes Mr. Van Camp satisfies the current requirements for an audit committee financial expert as well as other criteria that the Company believes are important for the financial expert to make a meaningful contribution to the deliberations of the Board of Directors as a whole.

~~The Company~~Jonesboro ~~has~~Branch a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Committee is composed of Directors Marcus Van Camp, Robert Rainwater, N. Ray Campbell, and A. J. Baltz, Jr.

~~Code~~625 ofS.W. ~~Ethics~~Drive

~~The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer~~Jonesboro, ~~principal~~Arkansas ~~financial officer and principal accounting officer. The Company has included the Code of Ethics as Exhibit 14 to this Form 10K.~~

~~ITEM~~(Opened 111976) ~~EXECUTIVE COMPENSATION~~

~~Page~~Lake 9City ofBranch ~~the Proxy Statement is herein incorporated by reference.~~

~~ITEM~~100 12Cobean ~~SECURITY~~Blvd ~~OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS~~

~~Pages~~Lake 2City, ~~and~~Arkansas ~~3 of the Proxy Statement are herein incorporated by reference.~~

~~Equity-Based~~(Opened ~~Compensation~~1998) ~~Plans~~

~~The~~Pocahontas ~~Company has adopted three equity~~Wal-~~based~~Mart ~~compensation~~Branch ~~plans: the 1994 Stock Option Plan, the 1998 Stock Option Plan and the 1998 Recognition and Retention Plan. All three equity-based compensation plans have been approved by stockholders of the Company.~~

~~Set~~1415 ~~forth~~Hwy ~~below~~67 isSouth certain information as of September 30, 2004 regarding equity-based compensation plans for directors and executive officers of the Company, all of which have been approved by stockholders. The Company maintains no equity compensation plans that have not been approved by stockholders.

Plan	Number of Securitiesto be issued uponexercise of outstandingoptions and rights	Weightedaverageexercise price	Number ofSecurities remainingavailable forIssuance under plan
1994 Stock Option Plan	—	—	4,274
1998 Stock Option Plan	174,000	9.00	23,075
1998 Recognition and Retention Plan	—	—	35,707
Total	174,000	9.00	63,056

Pocahontas, Arkansas

~~ITEM~~(Opened 131998) ~~CERTAIN TRANSACTIONS~~

~~Page~~Tuckerman 18Branch ~~of the Proxy Statement is herein incorporated by reference.~~

24106 E. Main Street

~~ITEM~~Tuckerman, 14Arkansas ~~PRINCIPAL ACCOUNTANT FEES AND SERVICES.~~

~~Pages~~(Opened 182001) ~~and 19 of the Proxy Statement are herein incorporated by reference.~~

~~PART~~Imboden IVBranch

~~ITEM~~201 15E ~~EXHIBITS,~~3rd ~~FINANCIAL~~Street ~~STATEMENT SCHEDULES AND REPORTS ON FORM 8-K~~

~~(a)(1)~~Imboden, ~~Financial~~Arkansas ~~Statements~~

~~The~~(Opened ~~Company’s~~2002) Consolidated Financial Statements contained in the Annual Report to Stockholders, including the Notes thereto and the Independent Auditor’s Report thereon, are incorporated herein by this reference. The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein.

~~(a)(2)~~Jonesboro ~~Financial~~Branch ~~Statement Schedules~~

~~All~~3513 ~~financial~~E ~~statement~~Johnson ~~schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements~~Ave.

~~(a)(3)~~Jonesboro, ~~Exhibits~~Arkansas

Regulation S-KExhibit Number	Document	Sequential PageReference to PriorFiling or ExhibitNumber AttachedHereto	Number WhereAttached ExhibitsAre Located in ThisForm 10-K Report
2	Plan of Reorganization	Footnote (1)	Not Applicable
3(a)	Articles of Incorporation	Footnote (2)	Not Applicable
3(b)	Bylaws	Footnote (3)	Not Applicable
4	Instruments defining the rights of security holders, including debentures	Footnote (4)	Not Applicable
9	Voting trust agreement	None	Not Applicable
10(a)	Employment Agreement between First Community Bank and Dwayne Powell.	Footnote (5)	Not Applicable
10(b)	Stock Option Plan	Footnote (6)	Not Applicable
10(c)	Amended 401(k) Savings and Employee Stock Ownership Plan.	Footnote (7)	Not Applicable
10(d)	Restated Supplemental Retirement Income Agreement for Dwayne Powell	Footnote (8)	Not Applicable
10(e)	Amended and Restated Stock Option Plan	Footnote (9)	Not Applicable
10(f)	Agreement with Ralph P. Baltz amending his Director Supplemental Retirement Income Agreement.	Footnote (10)	Not Applicable
10(g)	Agreement with Dwayne Powell amending his Director Supplemental Retirement Income Agreement	Footnote (11)	Not Applicable
11	Statement re: computation of per share earnings	Not Required	Not Applicable

(Opened 2005)

25ITEM 3 LEGAL PROCEEDINGS

12	Statement re: computation of ratios	Not Required	Not Applicable
13	Annual Report to Stockholders	13	Page 29
14	Code of Ethics	14	Page 71
16	Letter re: change in certifying accountants	None	Not Applicable
18	Letter re: change in accounting principles	None	Not Applicable
19	Previously unfilled documents	None	Not Applicable
21	Subsidiaries of Registrant	21	Page 72
22	Published report regarding matters submitted to vote of security holders	None	Not Applicable
23	Consent of Experts and Counsel	23.1	Page 73
24	Power of Attorney	None	Not Applicable
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	31.1	Page 74
31.2	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	31.2	Page 75
32.1	Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	32.1	Page 76
32.2	Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	32.2	Page 77

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.

1)ITEM ~~Incorporated~~4 bySUBMISSION ~~reference~~OF ~~from~~MATTERS ~~Exhibit~~TO 2A ofVOTE ~~the~~OF ~~S-1~~SECURITY ~~Registration Statement, filed on December 23, 1997, Registration No. 333-43143.~~HOLDERS

2)No matters ~~Incorporated~~were bysubmitted ~~reference~~during ~~from~~the ~~Exhibit~~fourth ~~3.1~~quarter of ~~the~~fiscal ~~S-1~~2006 ~~Registration~~to ~~Statement,~~a ~~filed~~vote onof ~~December~~security ~~23, 1997, Registration No~~holders. ~~333-43143.~~

3)21 ~~Incorporated by reference from Exhibit 3.2 of the Forms S-1 Registration Statement, filed on December 23, 1997, Registration No. 333-43143.~~

4)Table Incorporated by reference from Exhibit 4 of the S-1 Registration Statement, filed on December 23, 1997, Registration No. 333-43143.Contents

5)PART ~~Incorporated~~II ~~by reference from Exhibit 10.3 of the S-1 Registration Statement, filed on December 23, 1997, Registration No. 333-43143.~~

6)ITEM ~~Incorporated~~5 byMARKET ~~reference~~FOR ~~from~~REGISTRANT’S ~~Exhibit~~COMMON AEQUITY, toRELATED ~~the~~STOCKHOLDER ~~proxy statement dated September 16~~MATTERS, ~~1998~~AND ~~for~~ISSUER ~~the~~PURCHASES ~~Annual~~OF ~~Meeting~~EQUITY ~~of Stockholders held on October 23, 1998~~SECURITIES.

7)Trading ~~Incorporated~~in byCommon ~~reference~~Stock ~~from~~and ~~Exhibit~~Related ~~10(e)~~Matters ~~of the S-4 Registration Statement, filed on January 31, 2003, Registration No. 333-102880.~~

8)The ~~Incorporated~~Company’s common bystock ~~reference~~is ~~from~~traded ~~Exhibit~~on ~~10.6 of~~ the ~~S-1~~NASDAQ ~~Registration~~National ~~Statement,~~Market ~~filed~~System onusing ~~December~~the ~~23,~~symbol ~~1997, Registration No~~“PFSL.” ~~333-43143.~~

9)The ~~Incorporated~~following bytable ~~reference~~shows ~~from~~the ~~Exhibit~~quarterly ~~10(g)~~range of bid prices for the ~~S-4~~Company’s ~~Registration~~common ~~Statement,~~stock ~~filed~~during onfiscal ~~March~~2006 29and 2005. This information has been obtained from monthly statistical stock summaries provided by the NASDAQ Stock Market. As of December 13, ~~2002~~2006, ~~Registration~~there ~~No.~~were ~~333-85222~~4,641,717 shares of common stock issued and outstanding and 632 stockholders of record.

10) Incorporated by reference from Exhibit 10(i) of the S-4 Registration Statement, filed on March 29, 2002, Registration No. 333-85222.


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

11) Incorporated by reference from Exhibit 10(j) of the S-4 Registration Statement, filed on March 29, 2002, Registration No. 333-85222.


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

26Cash Dividends Declared in Fiscal 2006:

(b) Reports on Form 8-K:


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

OnCash ~~August~~Dividends 3,Declared ~~2004, the Company filed with the Securities and Exchange Commission a Current Report on Form 8-K. The report disclosed~~ in ~~Item~~Fiscal 92005: ~~“Regulation FD Disclosure” that the Company had released earnings for the three and nine month periods ended on June 30, 2004. Financial statements were filed as an exhibit to the report.~~


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

~~SIGNATURES~~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.

~~Pursuant~~The toCompany ~~the~~is subject to requirements of ~~Section~~Delaware 13law orthat ~~15(d)~~generally oflimits ~~the~~dividends ~~Securities~~to ~~Exchange~~an ~~Act~~amount ofequal to ~~1934,~~the difference between the ~~Registrant~~amount ~~has~~by ~~duly~~which ~~caused~~total ~~this~~assets ~~report~~exceed total liabilities and the amount equal to bethe ~~signed~~aggregate onpar ~~its~~value ~~behalf~~of bythe outstanding shares of capital stock. If there is no difference between these amounts, dividends are limited to net income for the ~~undersigned~~current and/or immediately preceding year. As of September 30, ~~thereunto~~2006 ~~duly~~and ~~authorized~~2005, the Company was in compliance with these requirements.

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

Date: December 29, 2004						By:		/s/ Dwayne Powell
								Dwayne Powell, President and Chief Executive Officer

PursuantTable to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Contents

By:	/s/ Dwayne Powell	By:	/s/ Terry Prichard
	Dwayne Powell		Terry Prichard
	President, Chief Executive Officer, Director (Principal Executive Officer)		Executive Vice President, Chief Financial Officer Treasurer (Principal Financial and Accounting Officer)
Date: December 29, 2004		Date: December 29, 2004

ITEM 6

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

By:	/s/ Ralph P. Baltz	By:	/s/ James Edington
	Ralph P. Baltz		James Edington
	Chairman of the Board and Director		Director and Secretary
Date: December 29, 2004		Date: December 29, 2004

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.

By:	/s/ A.J. Baltz, Jr.	By:	/s/ Marcus Van Camp
	A.J. Baltz. Jr.		Marcus Van Camp
	Director		Director
Date: December 29, 2004		Date: December 29, 2004

Selected Financial Condition Data

By:	/s/ N. Ray Campbell			By:	/s/ Robert Rainwater
	At September 30
	N. Ray Campbell				Robert Rainwater
	2006		2005		2004		2003		2002
	Director				Director
	(in Thousands)
Date: December 29, 2004				Date: December 29, 2004
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

By:		/s/ Lindley Smith
		Lindley Smith
		Director
Date: December 29, 2004

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

Filing Compare · POCAHONTAS BANCORP INC