Pocahontas Bancorp (PFSL) 10-Q 2006 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005

OR

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

COMMISSION FILE # 0-23969

POCAHONTAS BANCORP, INC.

State of Incorporation	IRS Employer Identification
DELAWARE	No. 71-0806097
Address	Telephone Number
1700 E. Highland Jonesboro, Arkansas 72401	(870) 802-1700

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined by the Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x.

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

There were 4,641,717 shares of Common Stock ($0.01 par value) issued and outstanding as of February 10, 2006.

POCAHONTAS BANCORP, INC.

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
	Item 1.Unaudited Financial Statements:
		Condensed Consolidated Statements of Financial Condition at December 31, 2005 and September 30, 2005	1
		Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended December 31, 2005 and 2004	2
		Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2005	4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2005 and 2004	5
		Notes to Condensed Consolidated Financial Statements	7
		Report of Independent Registered Public Accounting Firm	11
	Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
	Item 3.Quantitative and Qualitative Disclosures About Market Risk		24
	Item 4.Controls and Procedures		25
PART II. OTHER INFORMATION			25
	Signatures		27
	Exhibits		28

Item 1

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

	December 31, 2005			September 30, 2005
ASSETS
Cash	$	26,144,377		$	23,411,451
Cash surrender value of life insurance		8,098,936			8,019,097
Securities held-to-maturity, at cost		144,282,884			129,952,373
Securities available-for-sale, at fair value		110,683,625			99,460,045
Trading securities, at fair value		—			3,126,044
Loans receivable, net		412,113,533			426,538,047
Loans receivable, held for sale		2,726,168			3,057,985
Accrued interest receivable		4,501,314			4,487,837
Premises and equipment, net		16,595,320			16,716,912
Federal Home Loan Bank stock, at cost		8,041,800			7,962,000
Goodwill		8,847,572			8,847,572
Core deposit premiums, net		5,080,018			5,323,319
Other assets		4,410,900			4,360,885
TOTAL ASSETS	$	751,526,447		$	741,263,567
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	533,639,492		$	514,043,734
Federal Home Loan Bank advances		142,580,123			148,645,397
Deferred compensation		2,120,850			2,176,859
Accrued expenses and other liabilities		3,658,074			7,066,640
Trust preferred securities		16,967,875			16,962,683
Total liabilities		698,966,414			688,895,313
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value, 8,000,000 shares authorized; 7,602,492 shares issued and 4,641,717 shares outstanding at December 31, 2005 and September 30, 2005		76,024			76,024
Additional paid-in capital		57,275,390			57,275,390
Unearned ESOP shares		(2,152,968	)		(2,076,856	)
Accumulated other comprehensive loss, net		(2,734,653	)		(2,517,282	)
Retained earnings		24,498,784			24,013,522
		76,962,577			76,770,798
Treasury stock at cost, 2,960,775 shares, at December 31, 2005 and September 30, 2005		(24,402,544	)		(24,402,544	)
Total stockholders’ equity		52,560,033			52,368,254
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	751,526,447		$	741,263,567

See notes to unaudited condensed consolidated financial statements.

1

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended December 31
	2005		2004
INTEREST INCOME:
Loans receivable	$	6,901,166	$	5,792,124
Investment securities		2,550,338		2,985,994
Total interest income		9,451,504		8,778,118
INTEREST EXPENSE:
Deposits		3,828,760		2,795,804
Borrowed funds		1,294,078		1,273,509
Trust preferred securities		375,347		341,398
Total interest expense		5,498,185		4,410,711
NET INTEREST INCOME		3,953,319		4,367,407
PROVISION FOR LOAN LOSSES		—		125,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,953,319		4,242,407
NON-INTEREST INCOME:
Dividends		97,701		61,868
Fees and service charges		813,728		793,704
Gain on sale of loans		201,634		273,429
Gain on sale of loan servicing		219,754		—
Gain on sale of securities, net		54,023		—
Trading gain, net		337		362,128
Other		67,758		59,659
Total other income		1,454,935		1,550,788
OPERATING EXPENSE:
Compensation and benefits		2,443,520		2,369,650
Occupancy and equipment		736,194		668,533
Insurance premiums		109,074		90,459
Professional fees		251,359		256,757
Data processing		183,990		148,212
Advertising and donations		139,497		166,744
Office supplies		73,167		52,755
REO and other repossessed assets		23,671		27,535
Other		357,066		319,272
Total operating expense		4,317,538		4,099,917
INCOME BEFORE INCOME TAXES		1,090,716		1,693,278
INCOME TAXES		234,117		575,900
NET INCOME	$	856,599	$	1,117,378

(Continued)

2

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended December 31
	2005			2004
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gain (loss) on securities available-for-sale arising during the period	$	(181,716	)	$	355,523
Reclassification adjustment for gains included in net income		(35,655	)		—
Other comprehensive income (loss)		(217,371	)		355,523
COMPREHENSIVE INCOME	$	639,228		$	1,472,901
EARNINGS PER SHARE:
Basic earnings per share	$	0.19		$	0.25
Diluted earnings per share	$	0.19		$	0.24

(Concluded)

See notes to unaudited condensed consolidated financial statements.

3

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

	Common Stock			Additional Paid-In Capital		Unearned ESOP Shares			Accumulated Other Comprehensive Income(loss)			Retained Earnings			Treasury Stock				Total Stockholders’ Equity
	Shares	Amount													Shares	Amount
BALANCE, OCTOBER 1, 2005	7,602,492	$	76,024	$	57,275,390	$	(2,076,856	)	$	(2,517,282	)	$	24,013,522		2,960,775	$	(24,402,544	)	$	52,368,254
Purchase of stock with ESOP loan							(76,112	)												(76,112	)
Net change in unrealized loss on available-for-sale securities, net of tax										(278,010	)									(278,010	)
Amortization of loss for securities transferred to HTM										60,639					—		—			60,639
Net income													856,599							856,599
Dividends declared	—		—		—		—			—			(371,337	)	—		—			(371,337	)
BALANCE, December 31, 2005	7,602,492	$	76,024	$	57,275,390	$	(2,152,968	)	$	(2,734,653	)	$	24,498,784		2,960,775	$	(24,402,544	)	$	52,560,033

See notes to unaudited condensed consolidated financial statements.

4

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended December 31,
	2005			2004
OPERATING ACTIVITIES:
Net income	$	856,599		$	1,117,378
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—			125,000
Depreciation of premises and equipment		328,973			311,077
Amortization of deferred loan fees		(17,090	)		(23,567	)
Amortization of premiums and discounts, net		68,719			37,443
Amortization of core deposit premium		243,301			243,301
Decrease in loans held for sale		533,451			446,000
Net gain on sale of loans		(201,634	)		(273,429	)
Net gain on sale of investment securities		(54,023	)		—
Net gain on sale of mortgage servicing rights		(219,754	)		—
Increase in cash surrender value of life insurance policies		(79,839	)		(93,936	)
Changes in operating assets and liabilities:
Trading securities		(442,256	)		(365,686	)
Accrued interest receivable		(13,477	)		321,261
Other assets		(183,282	)		(301,007	)
Deferred compensation		(56,009	)		(54,539	)
Accrued expenses and other liabilities		(2,894,011	)		145,759
Net cash (used) provided by operating activities		(2,130,332	)		1,635,055
INVESTING ACTIVITIES:
Purchases of investment securities		(34,438,631	)		(42,714,327	)
Proceeds from sale of securities available-for-sale		1,662,471			—
Proceeds from maturities, calls and principal prepayment of investment securities		10,420,277			10,968,501
Net increase in FHLB Bank stock		(79,800	)		(48,700	)
Net decrease in loans		14,441,604			17,419,482
Proceeds from sale of real estate owned		353,020			348,321
Proceeds from sale of assets		—			681
Purchases of premises and equipment		(207,381	)		(1,898,083	)
Net cash used by investing activities	$	(7,848,440	)	$	(15,924,125	)

(Continued)

5

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended December 31
	2005			2004
FINANCING ACTIVITIES:
Net increase in deposits	$	19,595,758		$	13,786,159
Net decrease in FHLB advances		(6,065,274	)		(61,453	)
Purchase of stock for ESOP		(76,112	)		(319,733	)
Dividends paid		(742,674	)		(371,338	)
Net cash provided by financing activities		12,711,698			13,033,635
NET INCREASE (DECREASE) IN CASH		2,732,926			(1,255,435	)
CASH AT BEGINNING OF PERIOD		23,411,451			35,218,491
CASH AT END OF PERIOD	$	26,144,377		$	33,963,056

(Concluded)

See notes to unaudited condensed consolidated financial statements.

6

POCAHONTAS BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The condensed consolidated statement of financial condition information at September 30, 2005 was derived from the audited consolidated statement of financial condition of Pocahontas Bancorp, Inc. (the “Company”), at September 30, 2005. The condensed consolidated financial statements at and for the three months ended December 31, 2005 and 2004 are unaudited. The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation 10 of Regulation S-X. Certain information required for a complete presentation in accordance with generally accepted accounting principles has been omitted. All adjustments that are, in the opinion of management, necessary for a fair presentation of the interim financial statements have been included. The results of operations for the three months ended December 31, 2005, are not necessarily indicative of the results that may be expected for the entire fiscal year or any interim period.

The interim financial information should be read in conjunction with the consolidated financial statements and notes of the Company, including a summary of significant accounting policies followed by the Company, included in the Annual Report for the fiscal year ended September 30, 2005. The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, First Community Bank (the “Bank”); as well as the Bank’s subsidiaries, Southern Mortgage Corporation, P.F. Service, Inc. and Sun Realty, Inc., which provide real estate services (collectively referred to as the “Company”). All significant intercompany transactions have been eliminated in consolidation.

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

Stock Compensation –As discussed below, FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. As of October 1, 2005, the Company adopted FAS 123(R) using the modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. As of October 31, 2005, the Company’s options were fully vested, requiring no expense to be recorded for the three-month period ended December 31, 2005.

Recently Adopted or Issued Accounting Standards– In November 2005,FSP FAS 115-1 and FAS 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” was issued. The FSP addressed the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance of the FSP amended FASB Statements No. 115,Accounting for Certain Investments in Debt and Equity Securities, No. 124,Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB Opinion No 18,The Equity Method of Accounting for Investments in Common Stock. The FSP nullified certain requirements of Emerging

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Issues Task Force (“EITF”) Issue 03-1 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The FSP gives guidance regarding how to determine whether an investment is impaired, if impaired how to evaluate whether the impairment is other-than-temporary, and proper accounting and disclosures for the investments. The Guidance is effective for reporting periods beginning after December 15, 2005; earlier application is permitted. The adoption of EITF 03-1 did not have an effect on net income or stockholders’ equity.

In December 2004 the FASB issued Statement Number 123 (revised 2004) (“FAS 123 (R)”),Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. As of October 1, 2005, the Company adopted FAS 123(R) using the modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. As of October 31, 2005, the Company’s options were fully vested. Accordingly, the adoption of FAS 123 (R) did not have an effect on the Company’s consolidated financial statements.

Reclassifications –Certain amounts for the three-month period ended December 31, 2004 have been reclassified to conform to the presentation for the three -month period ended December 31, 2005.

2. EARNINGS PER SHARE

The earnings per share amounts were computed using the weighted average number of shares outstanding during the periods presented. In accordance with Statement of Position No. 93-6,Employers’ Accounting for Employee Stock Ownership Plans, issued by the American Institute of Certified Public Accountants, shares owned by the Company’s Employee Stock Ownership Plan that have not been committed to be released are not considered to be outstanding for the purpose of computing earnings per share.

The weighted average numbers of shares used in the basic and diluted earnings per share calculation are set out in the table below:

	Three Months Ended December 31,
	2005	2004
Total weighted average basic shares outstanding	4,512,609	4,512,059
Add dilutive effect of unexercised options	55,132	84,315
Total weighted average shares outstanding for dilutive earnings-per-share calculation	4,567,741	4,596,374

3. DECLARATION OF DIVIDENDS

On November 16, 2005, the Board of Directors declared an $0.08 per share quarterly cash dividend for holders of record on December 15, 2005.

4. BENEFIT PLANS

Stock Option Plan - The Company’s stockholders approved the 1998 Stock Option Plan (“SOP”) on October 23, 1998. The SOP provides for a committee of the Company’s Board of Directors to award incentive non-qualified or compensatory stock options to purchase up to 357,075 shares of Company common stock. The options vest in equal amounts over five years with the first vesting date on October 23, 1999. Options granted vest immediately in the event of retirement, disability, or death, or

8

following a change in control of the Company. Outstanding stock options can be exercised over a ten-year period. Under the SOP, options have been granted to directors and key employees of the Company. The exercise price in each case equaled the fair market value of the Company’s stock at the date of grant. The Company granted 350,000 options on October 23, 1998, which have an exercise price of $9.00 per share. As of December 31, 2005, 174,000 options were outstanding and exercisable.

NARK Stock Option Plan–During the fiscal year ended September 30, 2002, the Company completed its acquisition of North Arkansas Bancshares, Inc. The Company assumed 30,970 in stock options granted to employees and directors of North Arkansas Bancshares, Inc. related to such acquisition. All options granted to non-employee directors shall expire one year after the non-employee director ceases to maintain continuous service. On December 31, 2005, 16,831 options were outstanding.

5. GOODWILL AND INTANGIBLE ASSETS

The Company performed its annual goodwill impairment test as of April 1, 2005 and concluded there was no impairment to the book value of the Company’s goodwill. Absent any impairment indicators, the Company will perform its next impairment test as of April 1, 2006, during the quarter ended June 30, 2006.

As of December 31, 2005 the Company had total core deposit premiums of $5,080,018, net of accumulated amortization of $4,510,189. Core deposit premiums are estimated to have a useful life of 10 years.

The amortization of core deposit premiums is reported in the “interest expense on deposits” line item of the Company’s Condensed Consolidated Statements of Income and Comprehensive Income. Total amortization expense for core deposit premiums was approximately $243,301 for the three-month period ended December 31, 2005. Amortization expense for the net carrying amount of core deposit premiums at December 31, 2005, was estimated to be as follows (in thousands):

Nine months ending September 30, 2006	$	730
Year ending September 30, 2007		973
Year ending September 30, 2008		839
Year ending September 30, 2009		794
Year ending September 30, 2010		794
After September 30, 2010		950
Total	$	5,080

6. CONTINGENCIES

The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the condensed consolidated financial statements of the Company and its subsidiaries.

9

7. ALLOWANCE FOR LOAN LOSSES

A summary of the activity in the allowance for loan losses is as follows (in thousands):

	Three Months Ended December 31,
	2005			2004
Balance at beginning of the period	$	3,209		$	3,765
Provision for losses		—			125
Charge-offs		(459	)		(386	)
Recoveries		20			162
Balance at end of the period	$	2,770		$	3,666

8. EMPLOYEE STOCK OWNERSHIP PLAN

The Company established an Employee Stock Ownership Plan (“ESOP”) on March 31, 1998. During the fiscal year ended September 30, 2005, the ESOP established a new $3.09 million line of credit with the Company. The loan proceeds were used to pay off the $0.29 million balance of the loan established during fiscal 2003 and the $1.80 million balance of the loan established during fiscal 2004. The remaining $1.00 million was to be used to purchase additional shares of Company stock on or before December 31, 2005. The loan is collateralized by shares that were purchased with the proceeds of the loan. As of December 31, 2005, the ESOP owed $2.13 million on the line of credit. As the loan is repaid, ESOP shares will be allocated to participants of the ESOP and are available for release to the participants subject to the vesting provisions of the ESOP.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Pocahontas Bancorp, Inc.

Pocahontas, Arkansas

We have reviewed the accompanying condensed consolidated statement of financial condition of Pocahontas Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related condensed consolidated statements of income and comprehensive income and cash flows for the three-month period ended December 31, 2005 and 2004, and of stockholders’ equity for the three-month period ended December 31, 2005. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of Pocahontas Bancorp, Inc. and subsidiaries as of September 30, 2005, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated December 22, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of September 30, 2005, is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

Little Rock, Arkansas

February 8, 2006

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ITEM 2

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

This quarterly report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company’s actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, the Bank’s continued ability to originate quality loans, fluctuation of interest rates, real estate market conditions in the Bank’s lending areas, general and local economic conditions, the Bank’s continued ability to attract and retain deposits, the Company’s ability to control costs, new accounting pronouncements and changing regulatory requirements.

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. A new mall is scheduled to open in Jonesboro during the spring of 2006 and we expect to open a location there as well. 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.

First Quarter Highlights - Net income was $0.86 million for the quarter ended December 31, 2005, compared to net income of $1.12 million for the quarter ended December 31, 2004, a decrease of $0.26 million. Basic earnings per share were $0.19 and diluted earnings per share were $0.19 for the quarter ended December 31, 2005, compared to basic earnings per share of $0.25 and diluted earnings per share of $0.24 for the same period last year.

The decrease in net income for the quarter ended December 31, 2005 was primarily due to the decrease in net interest income and increase in operating expenses for the quarter ended December 31, 2005 compared to the quarter ended December 31, 2004. Net interest income before provision for loan loss for the quarter ended December 31, 2005 decreased 9.5% to $3.95 million from $4.37 million for the quarter ended December 31, 2004; operating expenses increased 5.3% to $4.32 million for the quarter ended December 31, 2005 from $4.10 million for the same period last year. The Company’s net interest rate spread was 2.43% for the quarter ended December 31, 2005 compared to 2.87% for the quarter ended December 31, 2004. Net interest margin was 2.35% for the quarter ended December 31, 2005 compared to 2.72% for the quarter ended December 31, 2004. The yield on average interest-earning assets increased 15 basis points and the cost on average interest-bearing liabilities increased 59 basis points for the quarter ended December 31, 2005 when compared to the rates for the same period last year resulting in the decreased interest rate spread and net interest income for the quarter.

The Company’s effective tax rate for the quarter ended December 31, 2005 was 21.5% compared to 25.3% for the year ended September 30, 2005. The decrease in the effective tax rate is due to the increased

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investment in non-taxable securities, half of which occurred during the last quarter of the year ended September 30, 2005.

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 the 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 periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for loan losses. The allowance for loan losses is based on management’s current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses 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 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, net present value of expected future cash flows, 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 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 implied fair value.

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

13

Statement of Financial Condition Analysis as of December 31, 2005 and September 30, 2005 and Analysis and Comparison of Results of Operations for the Three Months Ended December 31, 2005 and 2004

The following table shows the variance in dollars and percent change between the Condensed Consolidated Statements of Financial Condition at December 31, 2005 and at September 30, 2005 (unaudited):

	December 31 2005			September 30, 2005
	(amounts in thousands)						Variance			% Change
ASSETS
Cash	$	26,144		$	23,411		$	2,733		11.7	%
Cash surrender value of life insurance		8,099			8,019			80		1.0	%
Securities held-to-maturity, at amortized cost		144,283			129,952			14,331		11.0	%
Securities available-for-sale, at fair value		110,684			99,460			11,224		11.3	%
Trading securities, at fair value		—			3,126			(3,126	)	-100.0	%
Loans receivable, net		412,114			426,538			(14,424	)	-3.4	%
Loans receivable held for sale		2,726			3,058			(332	)	-10.9	%
Accrued interest receivable		4,501			4,488			13		0.3	%
Premises and equipment, net		16,595			16,717			(122	)	-0.7	%
Federal Home Loan Bank Stock, at cost		8,042			7,962			80		1.0	%
Goodwill		8,848			8,848			—		0.0	%
Core deposit premiums, net		5,080			5,323			(243	)	-4.6	%
Other assets		4,410			4,362			48		1.1	%
TOTAL ASSETS	$	751,526		$	741,264		$	10,262		1.4	%
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	533,639		$	514,044		$	19,595		3.8	%
Federal Home Loan Bank advances		142,580			148,645			(6,065	)	-4.1	%
Deferred compensation		2,121			2,177			(56	)	-2.6	%
Accrued expenses and other liabilities		3,658			7,067			(3,409	)	-48.2	%
Trust preferred securities		16,968			16,963			5		0.0	%
Total liabilities		698,966			688,896			10,070		1.5	%
STOCKHOLDERS’ EQUITY:
Common stock		76			76			—		0.0	%
Additional paid-in capital		57,275			57,275			—		0.0	%
Unearned ESOP Shares		(2,153	)		(2,077	)		(76	)	3.7	%
Accumulated other comprehensive loss		(2,734	)		(2,517	)		(217	)	8.6	%
Retained earnings		24,499			24,014			485		2.0	%
		76,963			76,771			192		0.3	%
Less treasury stock, at cost		(24,403	)		(24,403	)		—		0.0	%
Total stockholders’ equity		52,560			52,368			192		0.4	%
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	751,526		$	741,264		$	10,262		1.4	%

14

The following table shows the variance in dollars and percent change between the Condensed Consolidated Statements of Income for the three months ended December 31, 2005 and 2004 (unaudited):

	Three Months Ended December 31
	2005		2004
	(amounts in thousands)				Variance			% Change
INTEREST INCOME:
Loans receivable	$	6,901	$	5,792	$	1,109		19.1	%
Investment securities		2,550		2,986		(436	)	-14.6	%
Total interest income		9,451		8,778		673		7.7	%
INTEREST EXPENSE:
Deposits		3,829		2,796		1,033		36.9	%
Borrowed funds		1,294		1,274		20		1.6	%
Trust preferred securities		375		341		34		10.0	%
Total interest expense		5,498		4,411		1,087		24.6	%
NET INTEREST INCOME		3,953		4,367		(414	)	-9.5	%
PROVISION FOR LOAN LOSSES		—		125		(125	)	-100.0	%
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,953		4,242		(289	)	-6.8	%
OTHER INCOME:
Dividends		98		62		36		58.1	%
Fees and service charges		814		794		20		2.5	%
Gain on sale of loans		202		273		(71	)	-26.0	%
Gain on sale of loan servicing		220		—		220		100.0	%
Gain on sale of securities		54		—		54		100.0	%
Trading gains, net		—		362		(362	)	-100.0	%
Other		67		60		7		11.7	%
Total other income		1,455		1,551		(96	)	-6.2	%
OPERATING EXPENSE:
Compensation and benefits		2,444		2,370		74		3.1	%
Occupancy and equipment		736		669		67		10.0	%
Insurance premiums		109		90		19		21.1	%
Professional fees		251		257		(6	)	-2.3	%
Data processing		184		148		36		24.3	%
Advertising and donations		139		167		(28	)	-16.8	%
Office supplies		73		53		20		37.7	%
REO and other repossessed assets		24		27		(3	)	-11.1	%
Other		357		319		38		11.9	%
Total operating expense		4,317		4,100		217		5.3	%
INCOME BEFORE INCOME TAXES		1,091		1,693		(602	)	-35.6	%
INCOME TAXES		234		576		(342	)	-59.4	%
NET INCOME	$	857	$	1,117	$	(260	)	-23.3	%

15

Investment Activities - The Company’s investment portfolio, FHLB stock and trading securities, consist 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. A majority of the Company’s investment portfolio, over 65%, is held in mortgage-backed securities; these securities are backed by pools of mortgages which can be composed of either fixed-rate mortgages or ARM loans. The Bank invests in mortgage-backed securities to supplement local single-family loan originations as well as to reduce interest rate risk exposure because mortgage-backed securities are more liquid than mortgage loans. 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. The Company has experienced a decrease in the prepayments on these mortgage-backed securities during recent months as rates began to rise. At December 31, 2005, amortized cost and estimated fair value of the Company’s investment securities were as follows:

	Amortized Cost		Estimated Fair Value
Held-to-Maturity
US Government Agencies	$	4,000,000	$	3,910,364
US Treasury Notes		19,863,419		19,671,875
Mortgage-Backed Securities		71,353,217		68,894,224
Municipal bonds		49,066,248		48,556,343
Total	$	144,282,884	$	141,032,806
Available-for-sale
Mortgage-Backed Securities		111,028,859		107,916,450
Preferred Security		111,350		94,250
Equity Securities		1,848,502		1,702,445
Mutual fund		1,000,000		970,480
Total	$	113,988,711	$	110,683,625

Changes in the composition of investment securities for the three-month period ended December 31, 2005, from September 30, 2005 were as follows:

	Carrying Value
	December 31, 2005		September 30, 2005		Change
Held-to-Maturity
US Government Agencies	$	4,000,000	$	4,000,000	$	—
US Treasury Notes		19,863,419		19,844,509		18,910
Mortgage-Backed Securities		71,353,217		76,704,653		(5,351,436	)
Municipal bonds		49,066,248		29,403,211		19,663,037
Total	$	144,282,884	$	129,952,373	$	14,330,511
Available-for-sale
Mortgage-Backed Securities		107,916,450		98,484,030		9,432,420
Preferred Security		94,250		—		94,250
Equity Securities		1,702,445		—		1,702,445
Mutual fund		970,480		976,015		(5,535	)
Total	$	110,683,625	$	99,460,045	$	11,223,580

Investment balances have increased for the three-month period ended December 31, 2005, from September 30, 2005. This increase was primarily due to investment purchases of $34.44 million, which was partially offset by $10.42 million in principal payments and maturities and $1.66 million in investment sales. During the three months ended December 31, 2005 the Company also transferred $3.57 million from trading securities to available-for-sale securities. During the three months ended December 31, 2005, the accumulated other comprehensive loss increased to $2.73 million from $2.52 million at September 30, 2005. Accumulated other comprehensive loss, which was due entirely to changes in market interest rates, is

16

reported in the equity section of the financial statements and is considered a temporary impairment; the Company has the intent and ability to hold 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 primarily 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, the Company offers adjustable rate mortgages; to satisfy consumer demand for fixed-rate mortgage loans the Company has been focusing more on originating fixed-rate loans to sell individually into the secondary market.

As interest rates begin to increase, the Bank has seen a reduction in the demand for fixed-rate mortgages during the three-month period ended December 31, 2005, compared to the three-month period ended December 31, 2004 which resulted in both lower service fee income and lower gains from sale of loans. During the three-month period ended December 31, 2005, the Company recognized a $0.20 million gain on the sale of $11.94 million of loans held for sale, compared to a $0.27 million gain on the sale of $15.11 million of loans held for sale during the three-month period ended December 31, 2004.

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.

During the three-month period ended December 31, 2005, the Company’s net loan portfolio decreased approximately 3.4%. The decrease in the net loan portfolio during the three-month period ended December 31, 2005, was due to normal seasonal activity.

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.

No provision was made during the three months ended December 31, 2005. The Company’s allowance for loan losses totaled $2.77 million, or 0.7% of total loans at December 31, 2005 compared to $3.21 million, or 0.7% of total loans, at September 30, 2005, a decrease of $0.44 million or 13.7%. Charge-offs, net of recoveries totaled $0.44 million, or 0.11% of total loans, for the three months ended December 31, 2005. Total nonperforming loans decreased $0.25 million to $3.69 million at December 31, 2005 from $3.94 million at September 30, 2005. Based on presently available information, management believes that the current allowance for loan losses is appropriate. Changing economic and other conditions may require future adjustments to the allowance for loan losses.

During the 2001, 2002 and 2003 fiscal years, the Company 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 $3.69 million in nonperforming loans as of December 31, 2005, $0.68 million, or 18.6% were loans acquired as part of the bank acquisitions. Nonperforming commercial loans have increased $0.27 million due to the acquisitions. Approximately $2.03 million of loan loss allowance on the commercial loans was transferred with these bank acquisitions. Additionally, $5.29 million in charge-offs have been recorded in connection with the loans acquired in these acquisitions since June 2001.

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. The Bank generally does not accrue

17

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 $0.25 million or 6.3% to $3.69 million at December 31, 2005 from $3.94 million at September 30, 2005. The interest income not recognized by the Company on the non-accrual loans was $0.40 million and $0.42 million at December 31, 2005 and September 30, 2005. There was no interest income recognized on non-accrual loans during the periods.

The following table sets forth information regarding loans delinquent for 90 days or more (nonperforming loans) and real estate owned by the Company on the dates indicated.

	December 31, 2005			September 30, 2005
	(dollars in thousands)
Nonperforming loans:
Single family	$	2,158		$	2,644
Agriculture real estate		533			386
Commercial real estate		582			581
Commercial non real estate		206			178
Other loans		211			147
Total nonperforming loans:		3,690			3,936
Total real estate owned and repossessed assets (1)		50			349
Total nonperforming assets	$	3,740		$	4,285
Total nonperforming loans to net loans receivable		0.89	%		0.92	%
Total nonperforming loans to total assets		0.49	%		0.53	%
Total nonperforming assets to total assets		0.50	%		0.58	%
Allowance to nonperforming loans		75.07	%		81.53	%
Allowance to total loans receivable		0.66	%		0.73	%

(1) Net of valuation allowances

The Company determines the impairment of loans by assessing the probability that the borrower will not be able to fulfill the contractual terms of the agreement as part of the quarterly review for determining necessary provisions and loan loss allowances. Impaired loans increased to $1.19 million at December 31, 2005 from $0.94 million at September 30, 2005.

The following is a summary of information pertaining to impaired and non-accrual loans:

	December 31, 2005		September 30, 2005
	(in thousands)
Impaired loans with a valuation allowance	$	1,190	$	937
Impaired loans without a valuation allowance		—		—
Total Impaired Loans	$	1,190	$	937
Valuation allowance related to impaired loans	$	246	$	229
Total non-accrual loans	$	3,690	$	3,936
Total loans past-due ninety days or more and still accruing	$	215	$	161
	Three Months Ended December 31, 2005		Year Ended September 30, 2005
	(in thousands)
Average investment in impaired loans	$	1,063	$	4,700
Interest income recognized on impaired loans *	$	55	$	35

* Interest income recognized on a cash basis on impaired loans is not significantly different from interest recognized on impaired loans above. No additional funds are committed to be advanced in connection with impaired loans.

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Loan delinquency and losses on loans and REO are closely connected to the local economy. The Company operates in rural areas and in many of its locations one or two employers significantly influence the local markets. Should the economy deteriorate to a point that those employers begin reducing their work force, it could have a material negative impact on the Company.

Deposits and FHLB Advances- 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.

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 passbook 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:

	December 31, 2005		September 30, 2005		Change			% Change
	(dollars in thousands)
Checking Accounts	$	221,549	$	200,411	$	21,138		10.55	%
Passbook Savings Accounts		43,347		45,847		(2,500	)	-5.45	%
Certificate Accounts		268,743		267,786		957		0.36	%
	$	533,639	$	514,044	$	19,595		3.81	%

The cost on average demand deposits (checking and savings accounts) for the three-month period ended December 31, 2005 was 2.11%, up 26 basis points from 1.85% for the year ended September 30, 2005. The cost on average certificate accounts for the three-month period ended December 31, 2005 was 3.68%, up 68 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 December 31, 2005, FHLB advances totaled $142.58 million, with an average cost of 3.57% compared to $148.65 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 at December 31, 2005, estimates that an additional $71.92 million of funding is available from FHLB advances.

Accrued expenses and other liabilities- Accrued expenses and other liabilities includes items such as the Company’s accrual for income taxes, accrual for annual retirement plan contribution, dividends payable, 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 $3.41 million or 48.2% at December 31, 2005 to $3.66 million from $7.07 million at September 30, 2005. The decrease in accrued

19

expenses and other liabilities was primarily due to a $2.4 million liability for investment securities that were committed prior to fiscal year end but had a settlement date after fiscal year end.

Stockholders’ equity - The Company’s book value per share was $11.32 at December 31, 2005 compared to $11.28 at September 30, 2005. The Company’s average capital ratio, average capital to average assets, was 6.97% for the three months ended December 31, 2005 compared to 7.15% for the year ended September 30, 2005. The increase in stockholders’ equity at December 31, 2005, compared to September 30, 2005, was primarily the result of net income for the three-month period ended December 31, 2005, which was partially offset by the change in accumulated other comprehensive loss on securities, dividends declared and unearned ESOP shares.

Regulatory Capital - The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) to risk weighted assets (as defined). As of December 31, 2005, the Bank met all capital adequacy requirements to which it was subject.

As of December 31, 2005, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total, tangible, and core capital ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Bank’s actual capital amounts (in thousands) and ratios are also presented in the table:

	Actual				Required For Capital Adequacy Purposes				Required To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2005:
Tangible capital to tangible assets	$	51,415	6.97	%	$	11,064	1.50	%		N/A	N/A
Core capital to adjusted tangible assets	$	51,415	6.97	%	$	29,503	4.00	%	$	36,879	5.00	%
Total capital to risk weighted assets	$	54,185	12.08	%	$	35,881	8.00	%	$	44,851	10.00	%
Tier I capital to risk weighted assets	$	51,415	11.46	%	$	17,940	4.00	%	$	26,910	6.00	%

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

20

Average Balance Sheets (Dollars in Thousands)

	Three Months Ended December 2005						Year Ended September 2005						Three Months Ended December 2004
	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
Interest-earning assets: (1)
Loan receivable, net (2)	$	420,335	$	6,901	6.57	%	$	381,390	$	23,805	6.24	%	$	370,856	$	5,792	6.25	%
Investment securities		252,095		2,550	4.05	%		273,530		11,827	4.32	%		270,999		2,986	4.41	%
Total interest-earning assets		672,430		9,451	5.62	%		654,920		35,632	5.44	%		641,855		8,778	5.47	%
Noninterest-earning cash		26,821						33,823						49,850
Other noninterest-earning assets		47,356						46,521						45,099
Total assets		746,607						735,264						736,804
Interest-bearing liabilities:
Demand deposits	$	258,314	$	1,360	2.11	%	$	254,156	$	4,692	1.85	%	$	259,784	$	1,111	1.71	%
Time deposits		268,684		2,469	3.68	%		251,027		7,540	3.00	%		246,894		1,685	2.73	%
Borrowed funds (3)		145,052		1,294	3.57	%		154,432		5,269	3.41	%		153,856		1,274	3.31	%
Trust Preferred		16,966		375	8.84	%		16,953		1,441	8.50	%		16,945		341	8.05	%
Total interest-bearing liabilities		689,016		5,498	3.19	%		676,568		18,942	2.80	%		677,479		4,411	2.60	%
Noninterest-bearing liabilities (4)		5,552						6,108						6,102
Total liabilities		694,568						682,676						683,581
Stockholders’ equity		52,039						52,588						53,223
Total liabilities and stockholders’ equity	$	746,607					$	735,264					$	736,804
Net interest income			$	3,953					$	16,690					$	4,367
Net interest rate spread (5)					2.43	%					2.64	%					2.87	%
Interest-earning assets and net interest margin (6)	$	672,429			2.35	%	$	654,920			2.55	%	$	641,855			2.72	%
Ratio of average interest-earning assets to average interest-bearing liabilities					97.59	%					96.80	%					94.74	%

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

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

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

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

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

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

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Net interest income –Our net interest income decreased due to the flattening yield curve that resulted from continuing increases by the Federal Reserve in short-term interest rates. However, this decrease was partially offset by positive effects of our ongoing advertising campaign, which contributed to growth in the average balances of both loans and deposits at favorable interest rates. Net interest income decreased $0.41 million for the three months ended December 31, 2005 compared to the three months ended December 31, 2004. The cost on average interest bearing liabilities, including deposits, increased 59 basis points while the yield on average interest earning assets increased 15 basis points when comparing the three months ended December 31, 2005 to the three months ended December 31, 2004. The Company’s net interest rate spread decreased to 2.43% for the three months ended December 31, 2005 compared to 2.87% for the three months ended December 31, 2004. Net interest margin decreased to 2.35% for the three months ended December 31, 2005 compared to 2.72% for the three months ended December 31, 2004.

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 three-month period ended December 31, 2005, compared to the three-month period ended December 31, 2004.

Rate/Volume Analysis (in thousands)

Three-Month period ended December 31, 2005 vs. 2004

	Increase/(Decrease) Due to									Total Increase (Decrease)
	Volume			Rate			Rate/ Volume
Interest income:
Loan Receivable	$	3,092		$	1,187		$	(3,170	)	$	1,109
Investment securities		(834	)		(976	)		1,374			(436	)
Total interest-earning assets		2,258			211			(1,796	)		673
Interest expense:
Deposits		449			3,547			(2,963	)		1,033
Borrowed funds		(291	)		400			(89	)		20
Trust Preferred		2			134			(102	)		34
Total interest-bearing liabilities		160			4,081			(3,154	)		1,087
Net change in net interest income	$	2,098		$	(3,870	)	$	1,358		$	(414	)

Non-interest income –Non-interest income decreased 6.2% for the three-month period ended December 31, 2005 compared to the three-month period ended December 31, 2004. Non-interest income decreased due to a decrease in gains on the sale of loans and net trading gains which were partially offset by the gain on sale of loan servicing. The increase in deposits contributed to an increase in service fees and charges for the three months ended December 31, 2005 compared to the same period last year. The Company sold the servicing rights on mortgage loans sold to Fannie Mae during the three-month period ended December 31, 2005 which resulted in a $0.22 million gain. Dividends increased due to the higher dividend rate received on Federal Home Loan Bank stock during the three months ended December 31, 2005 compared to the same period last year.

Operating expense - The increase in total operating expense was primarily due to the increases in compensation and benefits, and occupancy and equipment. The Bank had 21 locations at December 31, 2005 compared to 19 locations at December 31, 2004. Both compensation and benefits and occupancy and equipment expenses increased during the three-month period ended December 31, 2005 compared to the same period last year as a result of the increase in branch locations.

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Off-Balance Sheet Arrangements and Commitments-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.

At December 31, 2005, the Company’s off-balance sheet arrangements principally included lending commitments, which are described below. At December 31, 2005, the Company had no interests in non-consolidated special purpose entities. At December 31, 2005, commitments included:

Total approved loan origination commitments outstanding were $20.56 million, including $2.73 million in loans committed to sell.

Rate lock agreements with customers of $4.19 million, all of which have been locked with an investor.

Undisbursed balances of construction loans of $4.54 million.

Total unused lines of credit of $27.44 million.

Outstanding letters of credit of $0.63 million.

Total certificates of deposit scheduled to mature in one year or less of $190.86 million.

Total unfunded commitments to originate loans for sale and the related commitments to sell of $4.19 million meet the definition of a derivative financial instrument; the related asset and liability are considered immaterial at December 31, 2005.

Based on historical experience, management believes that a significant portion of maturing deposits will remain with the Company. The Company anticipates that it will continue to have sufficient funds, through repayments, deposits and borrowings, to meet its current commitments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Unless noted otherwise, the Company does not require collateral or other security to support such financial instruments with credit risk.

The Company may also have liabilities under certain contractual agreements contingent upon occurrence of certain events. The following table presents, as of December 31, 2005, 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	$	4,190	$	4,190	$	—	$	—	$	—
Operating lease obligations		470		121		223		111		15
Certificates of deposit maturities		268,743		190,862		55,792		22,089		—
FHLB advances maturities		142,580		93,751		30,415		16,129		2,285
Total contractual obligations	$	415,983	$	288,924	$	86,430	$	38,329	$	2,300

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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Net Portfolio Value. The value of the Company’s loan and investment portfolio will change as interest rates change. Rising interest rates will generally decrease the Company’s net portfolio value (“NPV”), while falling interest rates will generally increase the value of that portfolio. The following table sets forth, quantitatively, as of September 30, 2005, the estimate of the projected changes in NPV in the event of a 100, 200, and 300 basis point instantaneous and permanent increase and a 100 and 200 basis point decrease in market interest rates. Due to the current low prevailing interest rate environment, the changes in NPV is not estimated for a decrease in interest rates of 200 or 300 basis points.

Change in Interest Rates in Basis Points (Rate Shock)	Net Portfolio Value							Ratio		Change in NPV as a Percentage of Estimated Market Value of Assets
	Amount		$ Change			% Change
	(Dollars in Thousands)
+300	$	56,868	$	(23,073	)	(29.0	)%	7.91	%	(2.67	)%
+200		64,836		(15,106	)	(19.0	)%	8.87	%	(1.72	)%
+100		72,600		(7,342	)	(9.0	)%	9.77	%	0.82	%
0		79,941		—		0.0	%	10.59	%	0.00	%
-100		84,079		4,138		5.0	%	11.01	%	0.42	%
-200		85,021		5,079		6.0	%	11.05	%	0.46	%

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

Management cannot predict future interest rates or their effect on the Company’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable rate loans, which represent the Company’s primary loan product, have features that restrict changes in interest rates during the initial term and over the remaining life of the asset. In addition, the proportion of adjustable

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rate loans in the Company’s portfolio could decrease in future periods due to refinancing activity if market rates decrease. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

ITEM 4

CONTROLS AND PROCEDURES

Under the supervision 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) and 15d-15(e) under the Exchange Act) 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 that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There has been no change made in the Company’s internal controls over financial reporting in connection with the quarterly evaluation that occurred during the Company’s last fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities and Use of Proceeds

During the quarter ended December 31, 2005 no shares were purchased by or on behalf of the Company. The Company currently has no repurchase plans or programs outstanding. As reported in note eight of the Notes to Condensed Consolidated Financial Statements, the Company made a loan to the ESOP during the fiscal year ended September 30, 2005 to purchase an aggregate of up to $1 million of Company stock. The Employee Stock Ownership Plan, an affiliated purchaser, made purchases of Company stock during the quarter ended December 31, 2005 as shown in the table below.

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
Month of October 2005	—	$	0.00	N/A	$	0.5 Million
Month of November 2005	—	$	0.00	N/A	$	0.5 Million
Month of December 2005	6,188	$	12.30	N/A	$	0.0 Million
Total	6,188	$	12.30	N/A	$	0.0 Million

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Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibits

Exhibit No. 31.1 – Certification of President and Chief Executive Officer.

Exhibit No. 31.2 – Certification of Chief Financial Officer

Exhibit No. 32.1 – Written Statement of President and Chief Executive Officer.

Exhibit No. 32.2 – Written Statement of Chief Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	POCAHONTAS BANCORP, INC.
Date: February 10, 2006	/s/ Dwayne Powell
	Dwayne Powell
	President and Chief Executive Officer
Date: February 10, 2006	/s/ Terry Davis
	Terry Davis
	Chief Financial Officer

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