Pocahontas Bancorp (PFSL) 10-Q 2006 Q2 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 March 31, 2006

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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934.

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

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

There were 4,641,717 shares of Common Stock ($0.01 par value) issued and outstanding as of May 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 March 31, 2006 and September 30, 2005	1
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2006 and 2005	2
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended March 31, 2006	4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2006 and 2005	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	26
Item 4. Controls and Procedures	27
PART II. OTHER INFORMATION	27
Signatures	29
Exhibits	30

Item 1

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

	March 31, 2006			September 30, 2005
ASSETS
Cash	$	14,705,765		$	23,411,451
Cash surrender value of life insurance		8,257,371			8,019,097
Securities held-to-maturity, at cost		140,492,855			129,952,373
Securities available-for-sale, at fair value		103,070,552			99,460,045
Trading securities, at fair value		—			3,126,044
Loans receivable, net		421,224,923			426,538,047
Loans receivable, held for sale		2,705,477			3,057,985
Accrued interest receivable		4,502,958			4,487,837
Premises and equipment, net		16,400,256			16,716,912
Federal Home Loan Bank stock, at cost		8,130,000			7,962,000
Goodwill		8,847,572			8,847,572
Core deposit premiums, net		4,836,717			5,323,319
Other assets		4,499,540			4,360,885
TOTAL ASSETS	$	737,673,986		$	741,263,567
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	528,199,424		$	514,043,734
Federal Home Loan Bank advances		135,483,858			148,645,397
Deferred compensation		2,084,390			2,176,859
Accrued expenses and other liabilities		3,224,612			7,066,640
Trust preferred securities		16,973,066			16,962,683
Total liabilities		685,965,350			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 March 31, 2006 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		(3,845,378	)		(2,517,282	)
Retained earnings		24,758,112			24,013,522
		76,111,180			76,770,798
Treasury stock at cost, 2,960,775 shares, at March 31, 2006 and September 30, 2005		(24,402,544	)		(24,402,544	)
Total stockholders’ equity		51,708,636			52,368,254
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	737,673,986		$	741,263,567

See notes to unaudited condensed consolidated financial statements.

1

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

	Three Months Ended March 31						Six Months Ended March 31
	2006			2005			2006		2005
INTEREST INCOME:
Loans receivable	$	6,983,801		$	5,522,801		$	13,884,967	$	11,314,925
Investment securities		2,786,064			3,201,417			5,336,402		6,187,410
Total interest income		9,769,865			8,724,218			19,221,369		17,502,335
INTEREST EXPENSE:
Deposits		4,005,888			2,934,733			7,834,648		5,730,537
Borrowed funds		1,472,168			1,280,508			2,766,246		2,554,017
Trust preferred securities		401,375			351,875			776,722		693,273
Total interest expense		5,879,431			4,567,116			11,377,616		8,977,827
NET INTEREST INCOME		3,890,434			4,157,102			7,843,753		8,524,508
PROVISION FOR LOAN LOSSES		310,000			—			310,000		125,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,580,434			4,157,102			7,533,753		8,399,508
NON-INTEREST INCOME:
Dividends		99,438			65,593			197,139		127,461
Fees and service charges		766,498			769,876			1,580,226		1,563,580
Gain on sale of loans		168,243			201,608			369,877		475,038
Gain (loss ) on sale of loan servicing, net		(25,698	)		—			194,056		—
Gain on sale of securities , net		211,936			—			265,959		—
Trading gain (loss), net		—			(338,408	)		337		23,720
Other		131,625			120,032			199,383		179,691
Total other income		1,352,042			818,701			2,806,977		2,369,490
OPERATING EXPENSE:
Compensation and benefits		2,378,834			2,391,062			4,822,353		4,760,712
Occupancy and equipment		762,698			766,139			1,498,892		1,434,672
Insurance premiums		89,323			85,882			198,396		176,341
Professional fees		333,018			280,496			584,377		537,253
Data processing		183,134			163,410			367,124		311,622
Advertising and donations		150,790			253,783			290,288		420,528
Office supplies		82,402			65,175			155,570		117,929
REO and other repossessed assets		57,431			11,977			81,102		39,512
Other		341,681			307,421			698,747		626,692
Total operating expense		4,379,311			4,325,345			8,696,849		8,425,261
INCOME BEFORE INCOME TAXES		553,165			650,458			1,643,881		2,343,737
INCOME TAXES (BENEFIT)		(77,500	)		220,600			156,617		796,500
NET INCOME	$	630,665		$	429,858		$	1,487,264	$	1,547,237

(Continued)

2

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

	Three Months Ended March 31						Six Months Ended March 31
	2006			2005			2006			2005
OTHER COMPREHENSIVE LOSS,
NET OF TAX:
Unrealized holding loss on securities available-for-sale arising during the period	$	(970,848	)	$	(2,423,551	)	$	(1,152,563	)	$	(2,068,028	)
Reclassification adjustment for gains included in net income		(139,877	)		—			(175,533	)		—
Other comprehensive loss		(1,110,725	)		(2,423,551	)		(1,328,096	)		(2,068,028	)
COMPREHENSIVE INCOME (LOSS)	$	(480,060	)	$	(1,993,693	)	$	159,168		$	(520,791	)
EARNINGS PER SHARE:
Basic earnings per share	$	0.14		$	0.10		$	0.33		$	0.34
Diluted earnings per share	$	0.14		$	0.09		$	0.33		$	0.34

(Concluded)

See notes to unaudited condensed consolidated financial statements.

3

POCAHONTAS BANCORP, INC.

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

									Accumulated
				Additional		Unearned			Other										Total
	Common Stock			Paid-In		ESOP			Comprehensive			Retained			Treasury Stock				Stockholders’
	Shares	Amount		Capital		Shares			Income(loss)			Earnings			Shares	Amount			Equity
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										(1,420,384	)									(1,420,384	)
Amortization of loss for securities transferred to HTM										92,288					—		—			92,288
Net income													1,487,264							1,487,264
Dividends declared	—		—		—		—			—			(742,674	)	—		—			(742,674	)
BALANCE, MARCH 31, 2006	7,602,492	$	76,024	$	57,275,390	$	(2,152,968	)	$	(3,845,378	)	$	24,758,112		2,960,775	$	(24,402,544	)	$	51,708,636

See notes to unaudited condensed consolidated financial statements.

4

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended March 31,
	2006			2005
OPERA TING ACTIVITIES:
Net income	$	1,487,264		$	1,547,237
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		310,000			125,000
Depreciation of premises and equipment		661,050			702,197
Amortization of deferred loan fees		(29,542	)		(34,867	)
Amortization of premiums and discounts, net		95,740			84,550
Amortization of core deposit premium		486,602			486,602
Decrease in loans held for sale		722,385			295,335
Net gain on sale of loans		(369,877	)		(475,038	)
Net gain on sale of investment securities		(265,959	)		—
Net gain on sale of mortgage servicing rights		(194,056	)		—
Increase in cash surrender value of life insurance policies		(238,274	)		(241,250	)
Stock dividends on FHLB stock		(168,000	)		(106,700	)
Changes in operating assets and liabilities:
Trading securities		(442,256	)		(923,554	)
Accrued interest receivable		(15,121	)		210,467
Other assets		(852,613	)		(1,856,579	)
Deferred compensation		(92,469	)		(156,322	)
Accrued expenses and other liabilities		(308,976	)		428,898
Net cash provided by operating activities		785,898			85,976
INVESTING ACTIVITIES:
Purchases of investment securities		(36,868,631	)		(78,029,357	)
Proceeds from sale of securities available-for-sale		2,896,665			—
Proceeds from maturities, calls and principal prepayment of investment securities		19,080,070			22,842,533
Net decrease in loans		5,032,665			21,947,014
Proceeds from sale of real estate owned		908,014			505,534
Proceeds from sale of assets		3,235			681
Purchases of premises and equipment		(347,629	)		(2,590,526	)
Net cash used in investing activities		(9,295,611	)		(35,324,121	)

(Continued)

5

POCAHONTAS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended March 31
	2006			2005
FINANCING ACTIVITIES:
Net increase in deposits	$	14,155,690		$	9,652,142
Federal Home Loan Bank advances		552,600,000			10,910,000
Repayment of Federal Home Loan Bank advances		(565,761,539	)		(6,623,841	)
Purchase of stock for ESOP		(76,112	)		(319,733	)
Dividends paid		(1,114,012	)		(742,675	)
Net cash (used in) provided by financing activities		(195,973	)		12,875,893
NET DECREASE IN CASH		(8,705,686	)		(22,362,252	)
CASH AT BEGINNING OF PERIOD		23,411,451			35,218,491
CASH AT END OF PERIOD	$	14,705,765		$	12,856,239

(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 and six months ended March 31, 2006 and 2005 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 and six months ended March 31, 2006, 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 - Statement Number 123 (revised 2004) (“FAS 123(R)”),Share-Based Payments, requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. As of October 1, 2005, the Company adopted FAS 123(R) using the modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that 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 six-month period ended March 31, 2006.

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

7

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

Reclassifications –Certain amounts for the six-month period ended March 31, 2005, have been reclassified to conform to the presentation for the six-month period ended March 31, 2006.

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 March 31,		Six Months Ended March 31,
	2006	2005	2006	2005
Total weighted average basic shares outstanding	4,507,109	4,491,752	4,509,859	4,498,732
Add dilutive effect of unexercised options	61,174	84,243	58,478	84,012
Total weighted average shares outstanding for dilutive earnings-per-share calculation	4,568,283	4,575,995	4,568,337	4,582,744

3. DECLARATION OF DIVIDENDS

On February 15, 2006, the Board of Directors declared an $0.08 per share quarterly cash dividend for holders of record on March 15, 2006.

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 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 March 31, 2006, 174,000 options were outstanding and exercisable.

8

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 March 31, 2006, 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 March 31, 2006 the Company had total core deposit premiums of $4,836,717, net of accumulated amortization of $4,753,490. 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 $486,602 for the six-month period ended March 31, 2006. Amortization expense for the net carrying amount of core deposit premiums at March 31, 2006, was estimated to be as follows (in thousands):

Six months ending September 30, 2006	$	487
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	$	4,837

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.

7. ALLOWANCE FOR LOAN LOSSES

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

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
Balance at beginning of the period	$	2,770		$	3,666		$	3,209		$	3,765
Provision for losses		310			—			310			125
Charge-offs		(657	)		(378	)		(1,116	)		(764	)
Recoveries		169			149			189			311
Balance at end of the period	$	2,592		$	3,437		$	2,592		$	3,437

9

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 March 31, 2006, 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.

10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Pocahontas Bancorp, Inc.

Jonesboro, Arkansas

We have reviewed the accompanying condensed consolidated statement of financial condition of Pocahontas Bancorp, Inc. and subsidiaries (the “Company”) as of March 31, 2006, and the related condensed consolidated statements of income and comprehensive income (loss) for the three-month and six-month periods ended March 31, 2006 and 2005, stockholders’ equity for the six-month period ended March 31, 2006, and cash flows for the six-month periods ended March 31, 2006 and 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, (May 19, 2006 as to the effects of the restatement described in Note 26) 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

May 19, 2006

11

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 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, Green, 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.

Second Quarter Highlights - Net income was $0.63 million for the quarter ended March 31, 2006, compared to net income of $0.43 million for the quarter ended March 31, 2005, an increase of $0.20 million. Basic and diluted earnings per share were $0.14 for the quarter ended March 31, 2006, compared to basic earnings per share of $0.10 and diluted earnings per share of $0.09 for the same period last year.

The increase in net income for the quarter ended March 31, 2006 was primarily due to the increase in non-interest income and decrease in income taxes which were partially offset by the decrease in net interest income and increase in provision for loan losses for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005. The increase in non-interest income for the quarter ended March 31, 2006 was primarily due to the increase in gain on sale of securities and no trading loss for the quarter compared to the same period last year. Net interest income before provision for loan loss for the quarter ended March 31, 2006 decreased 6.4% to $3.89 million from $4.16 million for the quarter ended March 31, 2005; provision for loan losses increased to $0.31 million for the quarter ended March 31, 2006 compared to no provision for the same period last year. The Company’s net interest rate spread was 2.33% for the quarter ended March 31, 2006 compared to 2.70% for the quarter ended March 31, 2005. Net interest margin was 2.29% for the quarter ended March 31, 2006 compared to 2.55% for the quarter ended March 31, 2005. The yield on average interest-earning assets increased 39 basis points and the cost on average interest-bearing liabilities increased 76 basis points for the quarter ended March 31, 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 quarter.

Net income was $1.49 million for the six months ended March 31, 2006, compared to net income of $1.55 million for the six months ended March 31, 2005, a decrease of $0.06 million. Basic and diluted earnings per share were $0.33 for the six months ended March 31, 2006, compared to basic and diluted earnings per share of $0.34 for the same period last year.

12

The decrease in net income for the six months ended March 31, 2006 was primarily due to the decrease in net interest income for the six months ended March 31, 2006 compared to the six months ended March 31, 2005. Net interest income before provision for loan loss for the six months ended March 31, 2006 decreased 8.0% to $7.84 million from $8.53 million for the six months ended March 31, 2005. The Company’s net interest rate spread was 2.38% for the six months ended March 31, 2006 compared to 2.75% for the six months ended March 31, 2005. Net interest margin was 2.32% for the six months ended March 31, 2006 compared to 2.63% for the six months ended March 31, 2005. The yield on average interest-earning assets increased 30 basis points and the cost on average interest-bearing liabilities increased 67 basis points for the six months ended March 31, 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 six months.

The Company’s effective tax rate for the six months ended March 31, 2006 was 9.5% 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. Due to the increase in non taxable income associated with these securities, the Company recorded an income tax benefit of $77.5 thousand during the quarter ended March 31, 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 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 March 31, 2006 and September 30, 2005 and Analysis and Comparison of Results of Operations for the Three and Six Months Ended March 31, 2006 and 2005

The following table shows the variance in dollars and percent change between the Condensed Consolidated Statements of Financial Condition at March 31, 2006 and at September 30, 2005 (unaudited):

	March 31, 2006			September 30, 2005			Variance			% Change
	(dollars in thousands)
ASSETS
Cash	$	14,706		$	23,411		$	(8,705	)	-37.2	%
Cash surrender value of life insurance		8,257			8,019			238		3.0	%
Securities held-to-maturity, at amortized cost		140,493			129,952			10,541		8.1	%
Securities available-for-sale, at fair value		103,071			99,460			3,611		3.6	%
Trading securities, at fair value		—			3,126			(3,126	)	-100.0	%
Loans receivable, net		421,225			426,538			(5,313	)	-1.2	%
Loans receivable held for sale		2,705			3,058			(353	)	-11.5	%
Accrued interest receivable		4,503			4,488			15		0.3	%
Premises and equipment, net		16,400			16,717			(317	)	-1.9	%
Federal Home Loan Bank Stock, at cost		8,130			7,962			168		2.1	%
Goodwill		8,848			8,848			—		0.0	%
Core deposit premiums, net		4,837			5,323			(486	)	-9.1	%
Other assets		4,499			4,362			137		3.1	%
TOTAL ASSETS	$	737,674		$	741,264		$	(3,590	)	-0.5	%
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	528,199		$	514,044		$	14,155		2.8	%
Federal Home Loan Bank advances		135,484			148,645			(13,161	)	-8.9	%
Deferred compensation		2,084			2,177			(93	)	-4.3	%
Accrued expenses and other liabilities		3,225			7,067			(3,842	)	-54.4	%
Trust preferred securities		16,973			16,963			10		0.1	%
Total liabilities		685,965			688,896			(2,931	)	-0.4	%
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		(3,844	)		(2,517	)		(1,327	)	52.7	%
Retained earnings		24,758			24,014			744		3.1	%
		76,112			76,771			(659	)	-0.9	%
Less treasury stock, at cost		(24,403	)		(24,403	)		—		0.0	%
Total stockholders’ equity		51,709			52,368			(659	)	-1.3	%
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	737,674		$	741,264		$	(3,590	)	-0.5	%

14

The following table shows the variance in dollars and percent change between the Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 (unaudited):

	Three Months Ended March 31
	2006				2005			Variance			% Change
	(dollars in thousands)
INTEREST INCOME:
Loans receivable	$	6,984			$	5,523		$	1,461		26.5	%
Investment securities		2,786				3,201			(415	)	-13.0	%
Total interest income		9,770				8,724			1,046		12.0	%
INTEREST EXPENSE:
Deposits		4,006				2,935			1,071		36.5	%
Borrowed funds		1,472				1,280			192		15.0	%
Trust preferred securities		401				352			49		13.9	%
Total interest expense		5,879				4,567			1,312		28.7	%
NET INTEREST INCOME		3,891				4,157			(266	)	-6.4	%
PROVISION FOR LOAN LOSSES		310				—			310		100.00	%
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,581				4,157			(576	)	-13.9	%
OTHER INCOME:
Dividends		99				66			33		50.0	%
Fees and service charges		767				770			(3	)	-0.4	%
Gain on sale of loans		168				201			(33	)	-16.4	%
Gain (loss) on sale of loan servicing, net		(26	)			—			(26	)	100.0	%
Gain on sale of securities		212				—			212		100.0	%
Trading loss, net		—				(338	)		338		-100.0	%
Other		132				120			12		10.0	%
Total other income		1,352				819			533		65.1	%
				��
OPERATING EXPENSE:
Compensation and benefits		2,379				2,391			(12	)	-0.5	%
Occupancy and equipment		763				766			(3	)	-0.4	%
Insurance premiums		89				86			3		3.5	%
Professional fees		333				280			53		18.9	%
Data processing		183				163			20		12.3	%
Advertising and donations		151				254			(103	)	-40.6	%
Office supplies		82				65			17		26.2	%
REO and other repossessed assets		57				12			45		375.0	%
Other		342				308			34		11.0	%
Total operating expense		4,379				4,325			54		1.2	%
INCOME BEFORE INCOME TAXES		554				651			(97	)	-14.9	%
INCOME TAXES (BENEFIT)		(77	)			221			(298	)	-134.8	%
NET INCOME	$	631			$	430		$	201		46.7	%

15

The following table shows the variance in dollars and percent change between the Condensed Consolidated Statements of Income for the six months ended March 31, 2006 and 2005 (unaudited):

	Six Months Ended March 31
	2006		2005		Variance			% Change
	(dollars in thousands)
INTEREST INCOME:
Loans receivable	$	13,885	$	11,315	$	2,570		22.7	%
Investment securities		5,336		6,187		(851	)	-13.8	%
Total interest income		19,221		17,502		1,719		9.8	%
INTEREST EXPENSE:
Deposits		7,835		5,730		2,105		36.7	%
Borrowed funds		2,766		2,554		212		8.3	%
Trust preferred securities		776		693		83		12.0	%
Total interest expense		11,377		8,977		2,400		26.7	%
NET INTEREST INCOME		7,844		8,525		(681	)	-8.0	%
PROVISION FOR LOAN LOSSES		310		125		185		148.0	%
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,534		8,400		(866	)	-10.3	%
OTHER INCOME:
Dividends		197		127		70		55.1	%
Fees and service charges		1,580		1,563		17		1.1	%
Gain on sale of loans		370		475		(105	)	-22.1	%
Gain on sale of loan servicing		194		—		194		100.0	%
Gain on sale of securities		266		—		266		100.0	%
Trading gains, net		1		24		(23	)	-95.8	%
Other		199		180		19		10.6	%
Total other income		2,807		2,369		438		18.5	%
OPERATING EXPENSE:
Compensation and benefits		4,823		4,761		62		1.3	%
Occupancy and equipment		1,499		1,435		64		4.5	%
Insurance premiums		198		176		22		12.5	%
Professional fees		584		537		47		8.8	%
Data processing		367		312		55		17.6	%
Advertising and donations		290		420		(130	)	-31.0	%
Office supplies		156		118		38		32.2	%
REO and other repossessed assets		81		39		42		107.7	%
Other		699		627		72		11.5	%
Total operating expense		8,697		8,425		272		3.2	%
INCOME BEFORE INCOME TAXES		1,644		2,344		(700	)	-29.9	%
INCOME TAXES		157		797		(640	)	-80.3	%
NET INCOME	$	1,487	$	1,547	$	(60	)	-3.9	%

16

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 March 31, 2006, 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	$	3,830,171
US Treasury Notes		19,882,125		19,603,125
Mortgage-Backed Securities		68,110,022		64,520,835
Municipal bonds		48,500,708		48,251,305
Total	$	140,492,855	$	136,205,436
Available-for-sale
Mortgage-Backed Securities		106,168,915		101,169,059
Preferred Security		111,350		107,025
Equity Securities		826,244		842,438
Mutual fund		1,000,000		952,030
Total	$	108,106,509	$	103,070,552

Changes in the composition of investment securities for the six-month period ended March 31, 2006, from September 30, 2005 were as follows:

	Carrying Value
	March 31, 2006		September 30, 2005		Change
Held-to-Maturity
US Government Agencies	$	4,000,000	$	4,000,000	$	—
US Treasury Notes		19,882,125		19,844,509		37,616
Mortgage-Backed Securities		68,110,022		76,704,653		(8,594,631	)
Municipal bonds		48,500,708		29,403,211		19,097,497
Total	$	140,492,855	$	129,952,373	$	10,540,482
Available-for-sale
Mortgage-Backed Securities		101,169,059		98,484,030		2,685,029
Preferred Security		107,025		—		107,025
Equity Securities		842,438		—		842,438
Mutual fund		952,030		976,015		(23,985	)
Total	$	103,070,552	$	99,460,045	$	3,610,507

Investment balances have increased for the six-month period ended March 31, 2006, from September 30, 2005. This increase was primarily due to investment purchases of $34.44 million, which was partially offset by $19.08 million in principal payments, calls, and maturities and $2.90 million in investment sales. During the six months ended March 31, 2006, the accumulated other comprehensive loss increased to $3.85 million from $2.52 million at September 30, 2005. Accumulated other comprehensive loss, which was due entirely to changes in market interest rates, is 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.

17

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 six-month period ended March 31, 2006, compared to the six-month period ended March 31, 2005 which resulted in both lower service fee income and lower gains from sale of loans. During the six-month period ended March 31, 2006, the Company recognized a $0.37 million gain on the sale of $22.25 million of loans held for sale, compared to a $0.48 million gain on the sale of $24.20 million of loans held for sale during the six-month period ended March 31, 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.

During the six-month period ended March 31, 2006, the Company’s net loan portfolio decreased approximately 1.2%. The decrease in the net loan portfolio during the six-month period ended March 31, 2006, 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.

A provision of $0.31 million was made during the six months ended March 31, 2006. The Company’s allowance for loan losses totaled $2.59 million, or 0.6% of total loans at March 31, 2006 compared to $3.21 million, or 0.7% of total loans, at September 30, 2005, a decrease of $0.62 million or 19.3%. Charge-offs, net of recoveries totaled $0.93 million, or 0.2% of total loans, for the six months ended March 31, 2006. Total nonperforming loans decreased $1.54 million to $2.40 million at March 31, 2006 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 $2.40 million in nonperforming loans as of March 31, 2006, $0.60 million, or 25.0% were loans acquired as part of the bank acquisitions. Nonperforming commercial loans have increased $0.33 million due to the acquisitions. Approximately $2.03 million of loan loss allowance on the commercial loans was transferred with these bank acquisitions. Additionally, $5.43 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

18

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 $1.54 million or 39.1% to $2.40 million at March 31, 2006 from $3.94 million at September 30, 2005. The interest income not recognized by the Company on the non-accrual loans was $0.22 million at March 31, 2006 compared to $0.42 million at 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.

	March 31, 2006			September 30, 2005
	(dollars in thousands )
Nonperforming loans :
Single family	$	1,444		$	2,644
Commercial real estate		601			386
Agriculture real estate		—			581
Commercial non real estate		170			178
Other loans		181			147
Total nonperforming loans:		2,396			3,936
Total real estate owned and repossessed assets (1)		320			349
Total nonperforming assets	$	2,716		$	4,285
Total nonperforming loans to net loans receivable		0.57	%		0.92	%
Total nonperforming loans to total assets		0.32	%		0.53	%
Total nonperforming assets to total assets		0.37	%		0.58	%
Allowance to nonperforming loans		108.18	%		81.53	%
Allowance to total loans receivable		0.61	%		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 $1.42 million at March 31, 2006 from $0.94 million at September 30, 2005.

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

	March 31, 2006		September 30, 2005
	(in thousands)
Impaired loans with a valuation allowance	$	1,418	$	937
Impaired loans without a valuation allowance		—		—
Total Impaired Loans	$	1,418	$	937
Valuation allowance related to impaired loans	$	265	$	229
Total non-accrual loans	$	2,396	$	3,936
Total loans past-due ninety days or more and still accruing	$	92	$	161
	Six Months Ended March 31, 2006		Year Ended September 30, 2005
	(in thousands)
Average investment in impaired loans	$	1,182	$	4,700
Interest income recognized on impaired loans *	$	44	$	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.

19

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 has 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:

	March 31, 2006		September 30, 2005		Change			% Change
	(dollars in thousands)
Checking Accounts	$	192,113	$	200,411	$	(8,298	)	-4.14	%
Passbook Savings Accounts		40,789		45,847		(5,058	)	-11.03	%
Certificate Accounts		295,297		267,786		27,511		10.27	%
	$	528,199	$	514,044	$	14,155		2.75	%

The cost on average demand deposits (checking and savings accounts) for the six-month period ended March 31, 2006 was 2.22%, up 37 basis points from 1.85% for the year ended September 30, 2005. The cost on average certificate accounts for the six-month period ended March 31, 2006 was 3.69%, up 69 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 March 31, 2006, FHLB advances totaled $135.48 million, with an average cost of 3.75% 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 March 31, 2006, estimates that an additional $79.08 million of funding is available from FHLB advances.

Accrued expenses and other liabilities - Accrued expenses and other liabilities include 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 $3.84 million or 54.4% at March 31, 2006 to $3.23 million from $7.07 million at September 30, 2005. The decrease in accrued 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.

20

Stockholders’ equity - The Company’s book value per share was $11.14 at March 31, 2006 compared to $11.28 at September 30, 2005. The Company’s average capital ratio, average capital to average assets, was 7.01% for the six months ended March 31, 2006 compared to 7.15% for the year ended September 30, 2005. The decrease in stockholders’ equity at March 31, 2006, compared to September 30, 2005, was primarily due to the change in accumulated other comprehensive loss on securities and dividends declared, which were partially offset by net income for the six-month period ended March 31, 2006.

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 March 31, 2006, the Bank met all capital adequacy requirements to which it was subject.

As of March 31, 2006, 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 March 31, 2006:
Tangible capital to tangible assets	$	52,466	7.22	%	$	10,901	1.50	%		N/A	N/A
Core capital to adjusted tangible assets	$	52,466	7.22	%	$	29,068	4.00	%	$	36,335	5.00	%
Total capital to risk weighted assets	$	55,058	12.32	%	$	35,760	8.00	%	$	44,700	10.00	%
Tier I capital to risk weighted assets	$	52,466	11.74	%	$	17,880	4.00	%	$	26,820	6.00	%

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

Average Balance Sheets (Dollars in Thousands)

	Three Months Ended March 2006						Three Months Ended March 2005
	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
Interest-earning assets: (1)
Loan receivable, net (2)	$	422,806	$	6,984	6.61	%	$	360,261	$	5,523	6.13	%
Investment securities		256,045		2,786	4.35	%		289,405		3,201	4.42	%
Total interest-earning assets		678,851		9,770	5.76	%		649,666		8,724	5.37	%
Noninterest-earning cash		17,319						45,573
Other noninterest-earning assets		46,065						45,265
Total assets		742,235						740,504
Interest-bearing liabilities:
Demand deposits	$	232,899	$	1,365	2.34	%	$	263,106	$	1,189	1.81	%
Time deposits		285,127		2,641	3.71	%		248,188		1,746	2.81	%
Borrowed funds (3)		150,319		1,472	3.92	%		155,264		1,280	3.30	%
Trust Preferred		16,971		401	9.45	%		16,951		352	8.31	%
Total interest-bearing liabilities		685,316		5,879	3.43	%		683,509		4,567	2.67	%
Noninterest-bearing liabilities (4)		4,556						4,752
Total liabilities		689,872						688,261
Stockholders’ equity		52,363						52,243
Total liabilities and stockholders’ equity	$	742,235					$	740,504
Net interest income			$	3,891					$	4,157
Net interest rate spread (5)					2.33	%					2.70	%
Interest-earning assets and net interest margin (6)	$	678,851			2.29	%	$	649,666			2.55	%
Ratio of average interest-earning assets to average interest-bearing liabilities					99.06	%					95.05	%

(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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Average Balance Sheets (Dollars in Thousands)

	Six Months Ended March 2006						Year Ended September 2005						Six Months Ended March 2005
	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)	$	421,571	$	13,885	6.59	%	$	381,390	$	23,805	6.24	%	$	365,182	$	11,315	6.20	%
Investment securities		254,070		5,336	4.20	%		273,530		11,827	4.32	%		284,072		6,187	4.36	%
Total interest-earning assets		675,641		19,221	5.69	%		654,920		35,632	5.44	%		649,254		17,502	5.39	%
Noninterest-earning cash		22,070						33,823						43,896
Other noninterest-earning assets		46,710						46,521						45,318
Total assets		744,421						735,264						738,468
Interest-bearing liabilities:
Demand deposits	$	245,607	$	2,725	2.22	%	$	254,156	$	4,692	1.85	%	$	261,501	$	2,301	1.76	%
Time deposits		276,905		5,110	3.69	%		251,027		7,540	3.00	%		247,540		3,430	2.77	%
Borrowed funds (3)		147,686		2,766	3.75	%		154,432		5,269	3.41	%		154,560		2,554	3.30	%
Trust Preferred		16,969		776	9.15	%		16,953		1,441	8.50	%		16,948		693	8.18	%
Total interest-bearing liabilities		687,167		11,377	3.31	%		676,568		18,942	2.80	%		680,549		8,978	2.64	%
Noninterest-bearing liabilities (4)		5,053						6,108						5,186
Total liabilities		692,220						682,676						685,735
Stockholders’ equity		52,201						52,588						52,733
Total liabilities and stockholders’ equity	$	744,421					$	735,264					$	738,468
Net interest income			$	7,844					$	16,690					$	8,524
Net interest rate spread (5)					2.38	%					2.64	%					2.75	%
Interest-earning assets and net interest margin (6)	$	675,641			2.32	%	$	654,920			2.55	%	$	649,254			2.63	%
Ratio of average interest-earning assets to average interest-bearing liabilities					98.32	%					96.80	%					95.40	%

(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 $0.27 million for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005. The cost on average interest bearing liabilities, including deposits, increased 76 basis points while the yield on average interest earning assets increased 39 basis points when comparing the quarter ended March 31, 2006 to the quarter ended March 31, 2005. The Company’s net interest rate spread decreased to 2.33% for the quarter ended March 31, 2006 compared to 2.70% for the quarter ended March 31, 2005. Net interest margin decreased to 2.29% for the quarter ended March 31, 2006 compared to 2.55% for the quarter ended March 31, 2005.

Net interest income decreased $0.68 million for the six months ended March 31, 2006 compared to the six months ended March 31, 2005. The cost on average interest bearing liabilities, including deposits, increased 67 basis points while the yield on average interest earning assets increased 30 basis points when comparing the six months ended March 31, 2006 to the six months ended March 31, 2005. The Company’s net interest rate spread decreased to 2.38% for the six months ended March 31, 2006 compared to 2.75% for the six months ended March 31, 2005. Net interest margin decreased to 2.32% for the six months ended March 31, 2006 compared to 2.63% for the six months ended March 31, 2005.

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 six-month period ended March 31, 2006, compared to the six-month period ended March 31, 2005.

Rate/Volume Analysis (in thousands)

Six-Month period ended March 31, 2006 vs. 2005

	Increase/(Decrease)
	Due to									Total
	Volume			Rate			Rate/ Volume			Increase (Decrease)
Interest income:
Loan Receivable	$	3,496		$	1,424		$	(2,350	)	$	2,570
Investment securities		(1,308	)		(455	)		912			(851	)
Total interest-earning assets		2,188			969			(1,438	)		1,719
Interest expense:
Deposits		303			3,818			(2,016	)		2,105
Borrowed funds		(227	)		696			(257	)		212
Trust Preferred		2			164			(83	)		83
Total interest-bearing liabilities		78			4,678			(2,356	)		2,400
Net change in net interest income	$	2,110		$	(3,709	)	$	918		$	(681	)

Non-interest income –Non-interest income increased 65.1% for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005. The increase in non-interest income was primarily due to a $0.21 million gain on sale of securities during the quarter ended March 31, 2006 compared to no gain for the quarter ended March 31, 2005 and no trading loss on equity securities during the quarter ended March 31, 2006 compared to a $0.34 million trading loss on equity securities for the quarter ended March 31, 2005.

Non-interest income increased 18.5% for the six-month period ended March 31, 2006 compared to the six-month period ended March 31, 2005. The increase in non-interest income was primarily due to an increase in gains on the sale of securities and the gain on sale of loan servicing. The Company sold the servicing rights on mortgage loans sold to Fannie Mae during the six-month period ended March 31, 2006 which resulted in a $0.19 million gain. Dividends increased due to the higher dividend rate received on Federal Home Loan Bank stock during the six months ended March 31, 2006 compared to the same period last year.

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Operating expense –Total operating expenses increased 1.3% for the quarter ended March 31, 2006, compared to the quarter ended March 31, 2005. The increase in total operating expense was primarily due to the increases in REO and other repossessed assets and professional fees, which were partially offset by a decrease in advertising

The increase in total operating expense was primarily due to the increases in compensation and benefits, occupancy and equipment and other expenses which were partially offset by a decrease in advertising and donations. The Bank had 21 locations at March 31, 2006 compared to 19 locations at March 31, 2005. Both compensation and benefits and occupancy and equipment expenses increased during the six-month period ended March 31, 2006 compared to the same period last year as a result of the increase in branch locations.

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 March 31, 2006, the Company’s off-balance sheet arrangements principally included lending commitments, which are described below. At March 31, 2006, the Company had no interests in non-consolidated special purpose entities. At March 31, 2006, commitments included:

Total approved loan origination commitments outstanding were $9.25 million, including $2.71 million in loans committed to sell.

Rate lock agreements with customers of $4.04 million, all of which have been locked with an investor.

Undisbursed balances of construction loans of $6.74 million.

Total unused lines of credit of $40.80 million.

Outstanding letters of credit of $0.57 million.

Total certificates of deposit scheduled to mature in one year or less of $222.77 million.

Total unfunded commitments to originate loans for sale and the related commitments to sell of $4.04 million meet the definition of a derivative financial instrument; the related asset and liability are considered immaterial at March 31, 2006.

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 March 31, 2006, the future payments on our significant contractual obligations.

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	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	$	4,039	$	4,039	$	—	$	—	$	—
Operating lease obligations		432		125		223		84		—
Certificates of deposit maturities		295,297		222,775		52,318		20,204		—
FHLB advances maturities		135,484		86,725		30,359		16,132		2,268
Total contractual obligations	$	435,252	$	313,664	$	82,900	$	36,420	$	2,268

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										Change in NPV
Interest Rates										as a Percentage of
in Basis Points	Net Portfolio Value									Estimated Market
(Rate Shock )	Amount		$ Change			% Change		Ratio		Value of Assets
	(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	%

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

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

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.

Management has implemented a process to aid in ensuring the correct classification of items included in the consolidated statements of cash flows, including a detailed statement of cash flows preparation checklist. Management believes that this process will accentuate the internal controls already in place. There have been no other changes made in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

Not Applicable

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

During the quarter ended March 31, 2006 no shares were purchased by or on behalf of the Company. The Company currently has no repurchase plans or programs outstanding.

Item 3. Defaults Upon Senior Securities

None

27

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

The following matters were submitted to the security holders at the annual meeting held on February 8, 2006:

Election of Directors:	For	%		Withheld	%
Ralph Baltz	3,955,818	95.6	%	180,815	4.4	%
Marcus Van Camp	3,991,188	96.5	%	145,445	3.5	%

There were zero non votes or abstained votes

Continuing Directors:

Dwayne Powell James Edington Bruce Burrow N. Ray Campbell A.J. Baltz, Jr.

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: May 19, 2006	/s/ Dwayne Powell
	Dwayne Powell
	President and Chief Executive Officer
Date: May 19, 2006	/s/ Terry Davis
	Terry Davis
	Chief Financial Officer

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