##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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



For the quarterly period ended June 30, 2004



OR



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



COMMISSION FILE # 0-23969



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POCAHONTAS BANCORP, INC.



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



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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.



There were 4,570,504 shares of Common Stock
($0.01 par value) issued and outstanding as of June 30, 2004.



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##### Table of Contents

POCAHONTAS BANCORP, INC.



TABLE OF CONTENTS



|                                                                                                                                       |  |     
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                       |  | Page
|PART I.    FINANCIAL INFORMATION                                                                                                       |  |     
|                                                                                                                                       | 
|Item 1.    
Unaudited Financial Statements:                                                                                            |  |     
|                                                                                                                                       | 
|Condensed Consolidated Statements of Financial Condition at June 30, 2004 and September 30, 2003                                       |  | 1   
|                                                                                                                                       | 
|Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Nine months Ended June 30, 2004 and 2003 |  | 2   
|                                                                                                                                       | 
|Condensed Consolidated Statement of Changes in Stockholders Equity for the Nine months Ended June 30, 2004                            |  | 4   
|                                                                                                                                       | 
|Condensed Consolidated Statements of Cash Flows for the Nine months Ended June 30, 2004 and 2003                                       |  | 5   
|                                                                                                                                       | 
|Notes to Condensed Consolidated Financial Statements                                                                                   |  | 7   
|                                                                                                                                       | 
|Report of Independent Registered Public Accounting Firm                                                                                |  | 12  
|                                                                                                                                       | 
|Item 2.    
Managements Discussion and Analysis of Financial Condition and Results of Operations                                      |  | 13  
|                                                                                                                                       | 
|Item 3.    
Quantitative and Qualitative Disclosures About Market Risk                                                                 |  | 25  
|                                                                                                                                       | 
|Item 4.    
Controls and Procedures                                                                                                    |  | 26  
|                                                                                                                                       | 
|PART II.     
OTHER INFORMATION                                                                                                        |  | 26  
|                                                                                                                                       | 
|Signatures                                                                                                                             |  | 28  
|                                                                                                                                       | 
|Exhibits                                                                                                                               |  | 29  





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##### Table of Contents

Item 1



POCAHONTAS BANCORP, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)



|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ----------- | - | ------------------ | - | ----------- | -
|                                                                                                                                                                                                       |  | June 30, 2004 |             |   | September 30, 2003 |  
|ASSETS                                                                                                                                                                                                 |  |               |             |   |                    |   |             |  
|Cash                                                                                                                                                                                                   |  | $             | 12,143,898  |   |                    | $ | 22,020,489  |  
|Cash surrender value of life insurance                                                                                                                                                                 |  |               | 7,636,086   |   |                    |   | 7,340,618   |  
|Securities held-to-maturity                                                                                                                                                                            |  |               | 2,508,407   |   |                    |   | 5,403,862   |  
|Securities available-for-sale                                                                                                                                                                          |  |               | 255,838,888 |   |                    |   | 293,569,266 |  
|Trading securities, at fair value                                                                                                                                                                      |  |               | 1,820,285   |   |                    |   | 1,497,252   |  
|Loans receivable, net                                                                                                                                                                                  |  |               | 389,271,382 |   |                    |   | 385,872,017 |  
|Loans receivable, held for sale                                                                                                                                                                        |  |               | 861,618     |   |                    |   | 3,130,238   |  
|Accrued interest receivable                                                                                                                                                                            |  |               | 3,772,558   |   |                    |   | 5,161,006   |  
|Premises and equipment, net                                                                                                                                                                            |  |               | 13,632,128  |   |                    |   | 13,998,751  |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                                  |  |               | 7,646,400   |   |                    |   | 5,583,700   |  
|Goodwill                                                                                                                                                                                               |  |               | 8,847,572   |   |                    |   | 8,847,572   |  
|Core deposit premiums                                                                                                                                                                                  |  |               | 6,539,824   |   |                    |   | 7,880,406   |  
|Other assets                                                                                                                                                                                           |  |               | 2,417,035   |   |                    |   | 3,182,703   |  
|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  
|TOTAL ASSETS                                                                                                                                                                                           |  | $             | 712,936,081 |   |                    | $ | 763,487,880 |  
|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                   |  |               |             |   |                    |   |             |  
|LIABILITIES:                                                                                                                                                                                           |  |               |             |   |                    |   |             |  
|Deposits                                                                                                                                                                                               |  | $             | 492,452,360 |   |                    | $ | 586,092,147 |  
|Federal Home Loan Bank advances                                                                                                                                                                        |  |               | 150,857,404 |   |                    |   | 100,693,629 |  
|Deferred compensation                                                                                                                                                                                  |  |               | 2,510,108   |   |                    |   | 2,885,238   |  
|Accrued expenses and other liabilties                                                                                                                                                                  |  |               | 496,672     |   |                    |   | 3,899,149   |  
|Trust preferred securities                                                                                                                                                                             |  |               | 16,936,725  |   |                    |   | 16,921,150  |  
|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  
|Total liabilities                                                                                                                                                                                      |  |               | 663,253,269 |   |                    |   | 710,491,313 |  
|STOCKHOLDERS EQUITY:                                                                                                                                                                                  |  |               |             |   |                    |   |             |  
|Common stock, $0.01 par value, 8,000,000 shares authorized; 7,517,779 and 7,497,066 shares issued and 4,570,504 and 4,549,791 shares
outstanding at June 30, 2004 and September 30, 2003, respectively |  |               | 75,177      |   |                    |   | 74,970      |  
|Additional paid-in capital                                                                                                                                                                             |  |               | 56,707,574  |   |                    |   | 56,533,430  |  
|Unearned ESOP shares                                                                                                                                                                                   |  |               | (2,058,101  | ) |                    |   | (538,121    | )
|Accumulated other comprehensive income (loss)                                                                                                                                                          |  |               | (3,697,819  | ) |                    |   | 899,339     |  
|Retained earnings                                                                                                                                                                                      |  |               | 22,828,181  |   |                    |   | 20,199,149  |  
|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  
|                                                                                                                                                                                                       |  |               | 73,855,012  |   |                    |   | 77,168,767  |  
|Treasury stock at cost, 2,947,275 shares, at June 30, 2004 and September 30, 2003                                                                                                                      |  |               | (24,172,200 | ) |                    |   | (24,172,200 | )
|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  
|Total stockholders equity                                                                                                                                                                             |  |               | 49,682,812  |   |                    |   | 52,996,567  |  
|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                             |  | $             | 712,936,081 |   |                    | $ | 763,487,880 |  
|                                                                                                                                                                                                       |  |               |             |   |                    |   |             |  



See notes to unaudited condensed
consolidated financial statements.



1



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##### Table of Contents

POCAHONTAS BANCORP, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME (LOSS) (UNAUDITED)



|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|--------------------------------------------------- |  | -------------------------- | --------- | ------------------------- | ---- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                                    |  | Three Months Ended June 30 |           | Nine Months Ended June 30
|                                                    |  | 2004                       |           |                           | 2003 |   | 2004      |  | 2003
|INTEREST INCOME:                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Loans receivable                                    |  | $                          | 5,881,534 |                           |      | $ | 6,407,929 |  | $    | 18,041,432 |  | $ | 20,065,257
|Investment securities                               |  |                            | 2,821,660 |                           |      |   | 2,978,468 |  |      | 9,258,008  |  |   | 7,600,590 
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Total interest income                               |  |                            | 8,703,194 |                           |      |   | 9,386,397 |  |      | 27,299,440 |  |   | 27,665,847
|INTEREST EXPENSE:                                   |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Deposits                                            |  |                            | 2,645,527 |                           |      |   | 4,431,341 |  |      | 9,052,977  |  |   | 12,632,610
|Borrowed funds                                      |  |                            | 980,608   |                           |      |   | 260,110   |  |      | 2,524,980  |  |   | 842,701   
|Trust preferred securities                          |  |                            | 318,636   |                           |      |   | 318,543   |  |      | 948,205    |  |   | 975,351   
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Total interest expense                              |  |                            | 3,944,771 |                           |      |   | 5,009,994 |  |      | 12,526,162 |  |   | 14,450,662
|NET INTEREST INCOME                                 |  |                            | 4,758,423 |                           |      |   | 4,376,403 |  |      | 14,773,278 |  |   | 13,215,185
|PROVISION FOR LOAN LOSSES                           |  |                            | 650,000   |                           |      |   | 650,000   |  |      | 1,150,000  |  |   | 1,495,000 
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |                            | 4,108,423 |                           |      |   | 3,726,403 |  |      | 13,623,278 |  |   | 11,720,185
|OTHER INCOME:                                       |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Fees and service charges                            |  |                            | 719,908   |                           |      |   | 959,644   |  |      | 2,255,865  |  |   | 2,837,070 
|Gain on sale of loans                               |  |                            | 323,199   |                           |      |   | 788,204   |  |      | 925,620    |  |   | 2,429,780 
|Gain on sale of securities, net                     |  |                            | 343,832   |                           |      |   | 259,168   |  |      | 383,367    |  |   | 264,896   
|Trading gains (losses), net                         |  |                            | (199,031  | )                         |      |   | 243,801   |  |      | 241,421    |  |   | 331,201   
|Gain on sale of branches                            |  |                            | (2,500    | )                         |      |   |          |  |      | 136,834    |  |   | 513,594   
|Other                                               |  |                            | 104,512   |                           |      |   | 102,556   |  |      | 326,497    |  |   | 324,943   
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Total other income                                  |  |                            | 1,289,920 |                           |      |   | 2,353,373 |  |      | 4,269,604  |  |   | 6,701,484 
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|OPERATING EXPENSE:                                  |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Compensation and benefits                           |  |                            | 2,359,372 |                           |      |   | 2,466,049 |  |      | 7,130,579  |  |   | 7,474,644 
|Occupancy and equipment                             |  |                            | 642,741   |                           |      |   | 664,041   |  |      | 2,094,590  |  |   | 1,917,525 
|Insurance premiums                                  |  |                            | 85,398    |                           |      |   | 87,483    |  |      | 248,678    |  |   | 238,200   
|Professional fees                                   |  |                            | 130,166   |                           |      |   | 234,176   |  |      | 598,872    |  |   | 781,922   
|Data processing                                     |  |                            | 173,805   |                           |      |   | 188,934   |  |      | 512,507    |  |   | 550,269   
|Advertising and donations                           |  |                            | 122,836   |                           |      |   | 183,434   |  |      | 264,877    |  |   | 465,132   
|Office supplies                                     |  |                            | 58,617    |                           |      |   | 92,649    |  |      | 179,488    |  |   | 255,444   
|REO and other repossessed assets                    |  |                            | 91,849    |                           |      |   | 150,092   |  |      | 269,515    |  |   | 424,666   
|Other                                               |  |                            | 331,026   |                           |      |   | 355,002   |  |      | 942,857    |  |   | 1,091,336 
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|Total operating expense                             |  |                            | 3,995,810 |                           |      |   | 4,421,860 |  |      | 12,241,963 |  |   | 13,199,138
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|INCOME BEFORE INCOME TAXES                          |  |                            | 1,402,533 |                           |      |   | 1,657,916 |  |      | 5,650,919  |  |   | 5,222,531 
|INCOME TAXES                                        |  |                            | 476,000   |                           |      |   | 505,000   |  |      | 1,927,000  |  |   | 1,832,257 
|                                                    |  |                            |           |                           |      |   |           |  |      |            |  |   |           
|NET INCOME                                          |  | $                          | 926,533   |                           |      | $ | 1,152,916 |  | $    | 3,723,919  |  | $ | 3,390,274 



(Continued)



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##### Table of Contents

POCAHONTAS BANCORP, INC.



CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)



|                                                                                          |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|----------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                                                                          |  | Three Months Ended June 30 |            |   | Nine Months Ended June 30 |  
|                                                                                          |  | 2004                       |            |   | 2003                      |   |           | 2004 |  |   | 2003       |  
|OTHER COMPREHENSIVE INCOME (LOSS),                                                        |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|NET OF TAX:                                                                               |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Unrealized holding gain (loss) on securities available for-sale arising during the period |  | $                          | (5,238,515 | ) |                           | $ | 970,582   |      |  | $ | (4,344,136 | ) |  | $ | 1,138,409 |  
|Reclassification adjustment for gains included in net income                              |  | $                          | (226,929   | ) |                           | $ | (177,051  | )    |  | $ | (253,022   | ) |  | $ | (174,831  | )
|                                                                                          |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Other comprehensive income (loss)                                                         |  | $                          | (5,465,444 | ) |                           | $ | 793,531   |      |  | $ | (4,597,158 | ) |  | $ | 963,578   |  
|                                                                                          |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|COMPREHENSIVE INCOME (LOSS)                                                               |  | $                          | (4,538,911 | ) |                           | $ | 1,946,447 |      |  | $ | (873,239   | ) |  | $ | 4,353,852 |  
|                                                                                          |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|EARNINGS PER SHARE:                                                                       |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Basic earnings per share                                                                  |  | $                          | 0.21       |   |                           | $ | 0.26      |      |  | $ | 0.83       |   |  | $ | 0.79      |  
|                                                                                          |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Diluted earnings per share                                                                |  | $                          | 0.20       |   |                           | $ | 0.26      |      |  | $ | 0.81       |   |  | $ | 0.78      |  
|                                                                                          |  |                            |            |   |                           |   |           |      |  |   |            |   |  |   |           |  



(Concluded)



See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

POCAHONTAS BANCORP, INC.



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



|                                                                                  |  |              |  |                           |        |                      |   |            |                                            |        |            |                  |  |   |                |   |  |                           |            |   |  |           |  |   |             |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ------------ |  | ------------------------- | ------ | -------------------- | - | ---------- | ------------------------------------------ | ------ | ---------- | ---------------- |  | - | -------------- | - |  | ------------------------- | ---------- | - |  | --------- |  | - | ----------- | - |  | - | ---------- | -
|                                                                                  |  | Common Stock |  | Additional Paid-InCapital |        | Unearned ESOP Shares |   |            | AccumulatedOther ComprehensiveIncome(loss) |        |            | RetainedEarnings |  |   | Treasury Stock |   |  | Total StockholdersEquity |           
|                                                                                  |  | Shares       |  | Amount                    |        |                      |   |            |                                            | Shares |            | Amount           |  |  
|BALANCE, SEPTEMBER 30, 2003                                                       |  | 7,497,066    |  | $                         | 74,970 |                      | $ | 56,533,430 |                                            | $      | (538,121   | )                |  | $ | 899,339        |   |  | $                         | 20,199,149 |   |  | 2,947,275 |  | $ | (24,172,200 | ) |  | $ | 52,996,567 |  
|Purchase of stock with ESOP loan                                                  |  |              |  |                           |        |                      |   |            |                                            |        | (1,519,980 | )                |  |   |                |   |  |                           |            |   |  |           |  |   |             |   |  |   | (1,519,980 | )
|Options exercised                                                                 |  | 20,713       |  |                           | 207    |                      |   | 174,144    |                                            |        |            |                  |  |   |                |   |  |                           |            |   |  |           |  |   |             |   |  |   | 174,351    |  
|Net change in unrealized gain (loss) on available-for-sale securities, net of tax |  |              |  |                           |        |                      |   |            |                                            |        |            |                  |  |   | (4,597,158     | ) |  |                           |            |   |  |           |  |   |             |   |  |   | (4,597,158 | )
|Net income                                                                        |  |              |  |                           |        |                      |   |            |                                            |        |            |                  |  |   |                |   |  |                           | 3,723,919  |   |  |           |  |   |             |   |  |   | 3,723,919  |  
|Dividends                                                                         |  |             |  |                           |       |                      |   |           |                                            |        |           |                  |  |   |               |   |  |                           | (1,094,887 | ) |  |          |  |   |            |   |  |   | (1,094,887 | )
|                                                                                  |  |              |  |                           |        |                      |   |            |                                            |        |            |                  |  |   |                |   |  |                           |            |   |  |           |  |   |             |   |  |   |            |  
|BALANCE, JUNE 30, 2004                                                            |  | 7,517,779    |  | $                         | 75,177 |                      | $ | 56,707,574 |                                            | $      | (2,058,101 | )                |  | $ | (3,697,819     | ) |  | $                         | 22,828,181 |   |  | 2,947,275 |  | $ | (24,172,200 | ) |  | $ | 49,682,812 |  
|                                                                                  |  |              |  |                           |        |                      |   |            |                                            |        |            |                  |  |   |                |   |  |                           |            |   |  |           |  |   |             |   |  |   |            |  



See notes to unaudited condensed
consolidated financial statements.



4



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##### Table of Contents

POCAHONTAS BANCORP, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                                         |  |                            |              |   |      |   |              |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | ------------ | - | ---- | - | ------------ | -
|                                                                                         |  | Nine months ended June 30, |             
|                                                                                         |  | 2004                       |              |   | 2003 |  
|OPERATING ACTIVITIES:                                                                    |  |                            |              |   |      |   |              |  
|Net income                                                                               |  | $                          | 3,723,919    |   |      | $ | 3,390,274    |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                            |              |   |      |   |              |  
|Provision for loan losses                                                                |  |                            | 1,150,000    |   |      |   | 1,495,000    |  
|Depreciation of premises and equipment                                                   |  |                            | 981,237      |   |      |   | 850,235      |  
|Amortization of core deposit premium                                                     |  |                            | 701,395      |   |      |   | 829,382      |  
|Amortization of deferred loan fees                                                       |  |                            | (44,448      | ) |      |   | (52,369      | )
|Amortization (accretion) of premiums and discounts, net                                  |  |                            | 89,568       |   |      |   | (215,653     | )
|Net gain on sales of loans                                                               |  |                            | (925,620     | ) |      |   | (2,429,780   | )
|Net gain on sales of securities                                                          |  |                            | (383,367     | ) |      |   | (264,896     | )
|Net gain on sales of branches                                                            |  |                            | (136,834     | ) |      |   | (513,594     | )
|Increase in cash surrender value of life insurance policies                              |  |                            | (295,468     | ) |      |   | (238,468     | )
|Change in operating assets and liabilities:                                              |  |                            |              |   |      |   |              |  
|Trading securities                                                                       |  |                            | (323,033     | ) |      |   | 15,453       |  
|Accrued interest receivable                                                              |  |                            | 1,388,448    |   |      |   | (441,778     | )
|Other assets                                                                             |  |                            | (888,287     | ) |      |   | (1,854,099   | )
|Deferred compensation                                                                    |  |                            | (375,130     | ) |      |   | (1,192,146   | )
|Accrued expenses and other liabilities                                                   |  |                            | (3,383,108   | ) |      |   | (328,033     | )
|                                                                                         |  |                            |              |   |      |   |              |  
|Net cash provided (used) by operating activities                                         |  |                            | 1,279,272    |   |      |   | (950,472     | )
|                                                                                         |  |                            |              |   |      |   |              |  
|INVESTING ACTIVITIES:                                                                    |  |                            |              |   |      |   |              |  
|Cash acquired in acquisitions                                                            |  |                            |             |   |      |   | 6,198,350    |  
|Net effect of sale of branches                                                           |  |                            | (9,697,800   | ) |      |   | (14,044,395  | )
|Loan repayments, originations, and purchases, net                                        |  |                            | (18,840,730  | ) |      |   | (29,064,578  | )
|Proceeds from sale of loans                                                              |  |                            | 17,530,053   |   |      |   | 60,442,284   |  
|Net increase in FHLB Stock                                                               |  |                            | (2,062,700   | ) |      |   | (41,200      | )
|Purchase of investment securities                                                        |  |                            | (112,557,349 | ) |      |   | (279,482,250 | )
|Proceeds from sale of REO                                                                |  |                            | 1,653,956    |   |      |   | 1,797,759    |  
|Proceeds from sale of premises and equipment                                             |  |                            | 7,568        |   |      |   | 173,333      |  
|Proceeds from sales, maturities and principal repayments of securities                   |  |                            | 148,895,397  |   |      |   | 144,740,793  |  
|Purchases of premises and equipment                                                      |  |                            | (633,329     | ) |      |   | (2,424,563   | )
|                                                                                         |  |                            |              |   |      |   |              |  
|Net cash provided (used) by investing activities                                         |  |                            | 24,295,066   |   |      |   | (111,704,467 | )
|                                                                                         |  |                            |              |   |      |   |              |  



(Continued)



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POCAHONTAS BANCORP, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                 |  |                            |             |   |      |   |             |  
|------------------------------------------------ |  | -------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                 |  | Nine months ended June 30, |            
|                                                 |  | 2004                       |             |   | 2003 |  
|FINANCING ACTIVITIES:                            |  |                            |             |   |      |   |             |  
|Net increase (decrease) in deposits              |  | $                          | (83,174,188 | ) |      | $ | 107,142,316 |  
|Net increase (decrease) in FHLB advances         |  |                            | 50,163,775  |   |      |   | (1,623,452  | )
|Purchase of stock with ESOP loan                 |  |                            | (1,519,980  | ) |      |   |            |  
|Purchase of treasury shares                      |  |                            |            |   |      |   | (1,214,028  | )
|Issuance of RRPs                                 |  |                            |            |   |      |   | 26,438      |  
|Stock options exercised                          |  |                            | 174,351     |   |      |   | 30,352      |  
|Dividends paid                                   |  |                            | (1,094,887  | ) |      |   | (1,059,264  | )
|                                                 |  |                            |             |   |      |   |             |  
|Net cash provided (used) by financing activities |  |                            | (35,450,929 | ) |      |   | 103,302,362 |  
|                                                 |  |                            |             |   |      |   |             |  
|NET DECREASE IN CASH                             |  |                            | (9,876,591  | ) |      |   | (9,352,579  | )
|CASH AT BEGINNING OF PERIOD                      |  |                            | 22,020,489  |   |      |   | 34,306,598  |  
|                                                 |  |                            |             |   |      |   |             |  
|CASH AT END OF PERIOD                            |  | $                          | 12,143,898  |   |      | $ | 24,954,019  |  
|                                                 |  |                            |             |   |      |   |             |  



(Concluded)



See notes to unaudited condensed consolidated financial statements.



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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, 2003 was derived from the audited balance sheet of Pocahontas
Bancorp, Inc. (the Company), at September 30, 2003. The condensed consolidated financial statements at and for the three and nine months ended June 30, 2004 and 2003 are unaudited. The accompanying condensed consolidated financial
statements were prepared in accordance with generally accepted accounting principles 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 nine months ended June 30, 2004, 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, 2003. 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 financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



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Stock Compensation - The Company applies the provisions of APB 25 in accounting for its
stock options plans, as allowed under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the options granted to employees
or directors with strike prices at or above the market value of the stock. Had compensation cost for these options been determined at the grant dates for awards under those plans consistent with the methods of SFAS No. 123, the Companys pro
forma net income and pro forma earnings per share for the three and nine months ended June 30, 2004 and 2003, would have been as follows:



|                                                                                                                    |  |                            |      |      |                           |       |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | ---- | ------------------------- | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                    |  | Three-Months EndedJune 30, |      |      | Nine-Months EndedJune 30, |      
|                                                                                                                    |  | 2004                       |      | 2003 |                           |       | 2004 |  |   | 2003  |  
|                                                                                                                    |  | (in thousands)             |     
|Net income, as reported                                                                                             |  | $                          | 926  |      | $                         | 1,153 |      |  | $ | 3,724 |   |  | $ | 3,390 |  
|Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects |  |                            |     |      |                           | (27   | )    |  |   | (12   | ) |  |   | (81   | )
|                                                                                                                    |  |                            |      |      |                           |       |      |  |   |       |   |  |   |       |  
|Pro forma net income                                                                                                |  | $                          | 926  |      | $                         | 1,126 |      |  | $ | 3,712 |   |  | $ | 3,309 |  
|                                                                                                                    |  |                            |      |      |                           |       |      |  |   |       |   |  |   |       |  
|Earnings per share:                                                                                                 |  |                            |      |      |                           |       |      |  |   |       |   |  |   |       |  
|Basic - as reported                                                                                                 |  | $                          | 0.21 |      | $                         | 0.26  |      |  | $ | 0.83  |   |  | $ | 0.79  |  
|Basic - pro forma                                                                                                   |  | $                          | 0.21 |      | $                         | 0.26  |      |  | $ | 0.83  |   |  | $ | 0.77  |  
|Diluted - as reported                                                                                               |  | $                          | 0.20 |      | $                         | 0.26  |      |  | $ | 0.81  |   |  | $ | 0.78  |  
|Diluted - pro forma                                                                                                 |  | $                          | 0.20 |      | $                         | 0.25  |      |  | $ | 0.81  |   |  | $ | 0.76  |  



In determining the
above pro forma disclosure, the fair value of options granted during the year was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: expected volatility - 37%, expected life
of grant - 6.5 years, risk free interest rate 5.25%, and expected dividend rate of 2.5%.



Recently Adopted Accounting Standards In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46R), which replaces FASB Interpretation No. 46. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements,to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support. Application of FIN 46R (or FIN 46) is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as
special-purpose entities for periods ending after December 15, 2003. Application for all other types of entities is required in financial statements for periods ending after March 15, 2004.



Under the provisions of FIN 46R, the Company is required to deconsolidate
Pocahontas Capital Trust I and II (the Trusts), which are business trusts established to facilitate the issuance of the trust preferred securities. The Company adopted FIN 46R during the quarter ended December 31, 2003. The Company has
presented the subordinated debentures payable to the Trusts as a liability in its consolidated financial statements and reclassified the prior period to present the subordinated debentures as a liability. The interest expense has historically been
presented as a component of net interest income. Such presentation will not change based on the adoption of FIN 46R. The adoption of FIN 46R did not have an effect on net income or stockholders equity.



In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes. As of June 30, 2004, assuming the Company was not allowed to include the $16.9
million in trust preferred securities issued by the Trusts in Tier I capital; the Company would still exceed the regulatory required minimum for capital adequacy purposes.



Management of the Company is considering the impact of Emerging Issues Task Force (EITF) Issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). The EITF has concluded that EITF 03-1 indicates that an investor must have the intent and ability to hold an investment until a
forecasted recovery of the fair value up to or beyond the cost of



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the investment in order to determine that any impairment is temporary. If the investor does not have the
intent and ability to hold the investment until a forecasted recovery, then an other-than-temporary impairment must be recorded. The consensus by the EITF is effective for periods beginning after June 15, 2004. Management has determined that the
impact of EITF 03-1 is not material at June 30, 2004, but is continuing to evaluate the possible future impact on the Companys consolidated financial statements.



Reclassifications Certain amounts for the three-month and nine-month periods ended June 30, 2003 have
been reclassified to conform to the presentation for the three-month and nine-month periods ended June 30, 2004.



|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 OwnershipPlans, 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 |  | Nine Months Ended
|                                                                                      |  | June 30,2004       |  | June 30,2003      |  | June 30,2004 |  | June 30,2003
|Total weighted average basic shares outstanding                                       |  | 4,462,199          |  | 4,393,738         |  | 4,485,207    |  | 4,305,617   
|Add dilutive effect of unexercised options                                            |  | 126,984            |  | 78,105            |  | 120,252      |  | 63,919      
|                                                                                      |  |                    |  |                   |  |              |  |             
|Total weighted average shares outstanding for dilutive earnings-per-share calculation |  | 4,589,183          |  | 4,471,843         |  | 4,605,459    |  | 4,369,536   
|                                                                                      |  |                    |  |                   |  |              |  |             



|3. | DECLARATION OF DIVIDENDS
|-- | ------------------------



On May 19, 2004, the Board of Directors declared an $.08 per share quarterly cash dividend for holders of record June 15, 2004. The dividend was paid July
5, 2004.



|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 equals 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 June 30, 2004, 254,000 options were outstanding.



NARK Stock Option PlanIn connection with the acquisition of North Arkansas Bancshares, Inc. (NARK) by the Company on June 18,
2002, the outstanding options of the 1998 Stock Option and Incentive Plan (SOIP) of NARK were exchanged for options to purchase stock of the Company. Each



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outstanding option to purchase a share of NARK stock was exchanged for an option to purchase 1.515 shares
of the Companys stock. The SOIP granted both incentive and non-incentive options to key employees and directors of NARK. All options granted expire one year after the employee or director ceases to maintain continuous service as an employee or
director of the Company or an affiliate. The exercise price in each case equals the original exercise price divided by the exchange rate. On June 19, 2002 the exchange resulted in 30,970 outstanding options at an exercise price of $6.44 each. On
June 30, 2004, 21,544 options were outstanding.



|5. | BRANCH SALES
|-- | ------------



In March 2004, the Company completed the transaction to sell its branch in Strawberry, Arkansas to the Bank of Cave City. The sale of the branch resulted
from managements decision to concentrate on the Banks other Arkansas markets. The Strawberry, Arkansas branch office had $10.5 million in deposits when sold and resulted in a gain of $0.1 million.



|6. | GOODWILL AND INTANGIBLE ASSETS
|-- | ------------------------------



The Company performed its annual impairment test as of April 1, 2004 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, 2005.



As of June 30, 2004 the Company had total core deposit premiums of $6,539,824, net of accumulated amortization of $3,050,382. Core deposit premiums
decreased approximately $639,000 during the nine-month period ended June 30, 2004 relating to the sale of the Companys branch office in Strawberry, Arkansas. Core deposit premiums are estimated to have a useful life of 10 years.



The Company has no identifiable intangible assets with indefinite useful
lives.



Total amortization expense for core deposit premiums
was approximately $701,000 for the nine-month period ended June 30, 2004. Amortization expense for the net carrying amount of core deposit premiums at June 30, 2004, is estimated to be as follows (in thousands):



|                                       |  |   |      
|-------------------------------------- |  | - | -----
|Three months ending September 30, 2004 |  | $ | 243  
|Year ending September 30, 2005         |  |   | 973  
|Year ending September 30, 2006         |  |   | 973  
|Year ending September 30, 2007         |  |   | 973  
|Year ending September 30, 2008         |  |   | 839  
|After September 30, 2008               |  |   | 2,539
|                                       |  |   |      
|Total                                  |  | $ | 6,540
|                                       |  |   |      



|7. | 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.



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|8. | ALLOWANCE FOR LOAN LOSSES
|-- | -------------------------



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



|                                   |  |                    |       |   |                   |   |       |              |  |   |              |   |  |   |        |  
|---------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                   |  | Three Months Ended |       |   | Nine Months Ended |  
|                                   |  | June 30,2004       |       |   | June 30,2003      |   |       | June 30,2004 |  |   | June 30,2003 |  
|Balance at beginning of the period |  | $                  | 3,943 |   |                   | $ | 3,268 |              |  | $ | 4,068        |   |  | $ | 3,205  |  
|Provision for losses               |  |                    | 650   |   |                   |   | 650   |              |  |   | 1,150        |   |  |   | 1,495  |  
|Balance transferred at acquisition |  |                    |      |   |                   |   | 355   |              |  |   |             |   |  |   | 355    |  
|Charge-offs                        |  |                    | (780  | ) |                   |   | (800  | )            |  |   | (1,659       | ) |  |   | (1,658 | )
|Recoveries                         |  |                    | 149   |   |                   |   | 25    |              |  |   | 403          |   |  |   | 101    |  
|                                   |  |                    |       |   |                   |   |       |              |  |   |              |   |  |   |        |  
|Balance at end of the period       |  | $                  | 3,962 |   |                   | $ | 3,498 |              |  | $ | 3,962        |   |  | $ | 3,498  |  
|                                   |  |                    |       |   |                   |   |       |              |  |   |              |   |  |   |        |  



|9. | EMPLOYEE STOCK OWNERSHIP PLAN
|-- | -----------------------------



The Company established an Employee Stock Ownership Plan (ESOP) on March 31, 1998. In 2003, the ESOP established a $2.0 million line of credit
with the Company that was used by the ESOP to purchase additional shares of Company stock on or before December 31, 2003. The loan is collateralized by shares that are purchased with the proceeds of the loan; as of June 30, 2004, the ESOP owed $0.7
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.



During the quarter ended March 31, 2004, the ESOP established a second $2.0
million line of credit with the Company to be used to purchase additional shares of Company stock on or before December 31, 2004. The loan is collateralized by shares that are purchased with the proceeds of the loan; as of June 30, 2004, the ESOP
owed $1.2 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 June 30, 2004, and the related condensed consolidated statements of income and comprehensive income
(loss) for the three months and nine months ended June 30, 2004 and 2003, and of cash flows and stockholders equity for the nine-month period ended June 30, 2004. These financial statements are the responsibility of the Companys
management.



We conducted our review in accordance with standards of the Public
Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and of making inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with auditing 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
review, we are not aware of any material modifications that should be made to such condensed consolidated 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, 2003, 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 16, 2003, we expressed an unqualified opinion, which includes an explanatory paragraph relating to the adoption of SFAS No. 142, Goodwill and
other Intangible Assets 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, 2003, is fairly stated, in all material
respects, in relation to the consolidated statement of financial condition from which it has been derived.



As discussed in Note 1 to the condensed consolidated financial statements, the Company changed its method of accounting for its trust preferred securities to conform to the Financial Accounting Standards Board
Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as of December 31, 2003.



|                         
|-------------------------
|/s/ Deloitte & Touche LLP
|                         
|Little Rock, Arkansas    
|August 6, 2004           



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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 - Pocahontas Bancorp, Inc.
(the Company) is a savings and loan holding company headquartered in Jonesboro, Arkansas. The Company operates its wholly owned subsidiary, First Community Bank (the Bank).



First Community Bank is a community-oriented federally chartered savings and loan association
regulated by the Office of Thrift Supervision. The Bank has a total of 18 locations concentrated in the Northeast Arkansas counties of Craighead, Clay, Green, Jackson, Lawrence, Poinsett, Randolph and Sharp. The Bank is the seventh largest financial
institution headquartered in Arkansas, based on total assets as of March 31, 2004.



The Companys 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.



The Company is moving
forward with many strategic initiatives this fiscal year. We currently have two new branch locations under construction in Jonesboro and Paragould that are scheduled to open this winter.



Third Quarter Highlights - Net income was $0.9 million for the quarter ended June 30, 2004, compared to net income of $1.2
million for the quarter ended June 30, 2003, a decrease of $0.3 million or 25.0%. Basic earnings per share was $0.21 and diluted earnings per share was $0.20 compared to basic and diluted earnings per share of $0.26 for the same period last year.



The decrease in net income for the quarter ended June 30, 2004 was primarily
due to the decrease in non- interest income. A subdued refinancing environment during the quarter ended June 30, 2004 resulted in a decreased number of loans originated and subsequently sold which resulted in both lower fee income and a lower gain
on sale of loans. Gain on sale of loans decreased $0.5 million or 62.5% and fees and service charges decreased $0.3 million or 30.0% for the quarter ended June 30, 2004 when compared to the same period last year. A net trading loss of $0.2 million
in the value of the Companys trading securities for the quarter ended June 30, 2004 compared to the $0.2 million increase in value for the same period last year, accounted for a $0.4 million decrease in non interest income. Net interest income
before provision for loan loss for the quarter ended June 30, 2004 was $4.8 million compared to $4.4 million for the quarter ended June 30, 2003, an increase of $0.4 million or 9.1%. The Companys net interest rate spread was 2.98% for the
quarter ended June 30, 2004 compared to 2.79% for the quarter ended June 30, 2003. Net interest margin was 2.92% for the quarter ended June 30, 2004 compared to 2.71% for the quarter ended June 30, 2003. Both the yield on average interest earning
assets and the cost on average interest bearing liabilities for the quarter ended June 30, 2004 decreased when compared to the rates for the same period last year. However, the decrease in the cost of average interest bearing liabilities decreased
66 basis points while the yield on average interest earning assets decreased 47 basis points, resulting in the increase in net interest income for the quarter ended June 30, 2004.



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Net income for the nine month period ended June 30, 2004 was $3.7 million, compared to net income of $3.4 million for the
nine month period ended June 30, 2003, an increase of $0.3 million or 9.9%. Basic earnings per share was $0.83 and diluted earnings per share was $0.81 compared to basic earnings per share of $0.79 and diluted earnings per share of $0.78 for the
same period last year.



The increase in net income for the nine months ended
June 30, 2004 was primarily due to the increase in net interest income and decrease in operating expenses. Net interest income before provision for loan loss for the nine month period ended June 30, 2004 was $14.8 million compared to $13.2 million
for the nine month period ended June 30, 2003, an increase of $1.6 million or 11.8%. The increase in net interest income was mainly due to an increase in the average balance of interest-earning assets of $84.2 million, or 14.6%, which more than
offset the lower yields earned on such assets. By contrast, the increase in total interest bearing liabilities of $84.7 million, or 14.2%, was more than offset by the decreased cost of such liabilities in the lower market interest rate environment.
The Companys net interest rate spread was 3.05% for the nine month period ended June 30, 2004 compared to 3.16% for the nine month period ended June 30, 2003. Net interest margin was 2.98% for the nine month period ended June 30, 2004 compared
to 3.05% for the nine month period ended June 30, 2003. Both the yield on average interest earning assets and the cost on average interest bearing liabilities for the nine month period ended June 30, 2004 decreased when compared to the rates for the
same period last year.



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



The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for losses
on loans. The allowance for losses on loans is based on managements current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision for
loan losses based on managements evaluation of the risk inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Such evaluation, which includes a review of
all loans on which full collectability may not be reasonably assured, considers among other matters, the estimate net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience,
managements knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. 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 and
complexity and require subjective judgments about uncertain matters.



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



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



14



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##### Table of Contents

Balance Sheet Analysis and Comparison of Results of Operations for the Nine Months Ended June 30, 2004 and 2003



The following table shows the variance in dollars and percent change
between the Consolidated Statements of Financial Condition at June 30, 2004 from September 30, 2003:



|                                               |  |                        |   |  |                   |   |  |          |   |  |          |  
|---------------------------------------------- |  | ---------------------- | - |  | ----------------- | - |  | -------- | - |  | -------- | -
|                                               |  | June 30,2004           |   |  | September 30,2003 |   |  | Variance |   |  | % Change |  
|                                               |  | (Amounts in thousands) |   |  |                   |   |  |          |  
|                                               |  | (Unaudited)            |   |  |                   |   |  |          |  
|ASSETS                                         |  |                        |   |  |                   |   |  |          |   |  |          |  
|Cash                                           |  | 12,144                 |   |  | 22,020            |   |  | (9,876   | ) |  | -44.85   | %
|Cash surrender value of life insurance         |  | 7,636                  |   |  | 7,341             |   |  | 295      |   |  | 4.02     | %
|Securities held-to-maturity, at amortized cost |  | 2,508                  |   |  | 5,404             |   |  | (2,896   | ) |  | -53.59   | %
|Securities available-for-sale, at fair value   |  | 255,839                |   |  | 293,569           |   |  | (37,730  | ) |  | -12.85   | %
|Trading securities, at fair value              |  | 1,820                  |   |  | 1,497             |   |  | 323      |   |  | 21.58    | %
|Loans receivable, net                          |  | 389,271                |   |  | 385,872           |   |  | 3,399    |   |  | 0.88     | %
|Loans receivable held for sale                 |  | 862                    |   |  | 3,130             |   |  | (2,268   | ) |  | -72.46   | %
|Accrued interest receivable                    |  | 3,773                  |   |  | 5,161             |   |  | (1,388   | ) |  | -26.89   | %
|Premises and equipment, net                    |  | 13,632                 |   |  | 13,999            |   |  | (367     | ) |  | -2.62    | %
|Federal Home Loan Bank Stock, at cost          |  | 7,646                  |   |  | 5,584             |   |  | 2,062    |   |  | 36.93    | %
|Goodwill                                       |  | 8,848                  |   |  | 8,848             |   |  |         |   |  | 0.00     | %
|Core deposit premiums, net                     |  | 6,540                  |   |  | 7,880             |   |  | (1,340   | ) |  | -17.01   | %
|Other assets                                   |  | 2,417                  |   |  | 3,183             |   |  | (766     | ) |  | -24.07   | %
|                                               |  |                        |   |  |                   |   |  |          |   |  |          |  
|TOTAL ASSETS                                   |  | 712,936                |   |  | 763,488           |   |  | (50,552  | ) |  | -6.62    | %
|                                               |  |                        |   |  |                   |   |  |          |   |  |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY           |  |                        |   |  |                   |   |  |          |   |  |          |  
|LIABILITIES:                                   |  |                        |   |  |                   |   |  |          |   |  |          |  
|Deposits                                       |  | 492,452                |   |  | 586,092           |   |  | (93,640  | ) |  | -15.98   | %
|Federal Home Loan Bank advances                |  | 150,857                |   |  | 100,694           |   |  | 50,163   |   |  | 49.82    | %
|Deferred compensation                          |  | 2,510                  |   |  | 2,885             |   |  | (375     | ) |  | -13.00   | %
|Accrued expenses and other liabilties          |  | 497                    |   |  | 3,899             |   |  | (3,402   | ) |  | -87.25   | %
|Trust preferred securities                     |  | 16,937                 |   |  | 16,921            |   |  | 16       |   |  | 0.09     | %
|                                               |  |                        |   |  |                   |   |  |          |   |  |          |  
|Total liabilities                              |  | 663,253                |   |  | 710,491           |   |  | (47,238  | ) |  | -6.65    | %
|                                               |  |                        |   | 
|STOCKHOLDERS EQUITY:                          |  |                        |   |  |                   |   |  |          |   |  |          |  
|Common stock                                   |  | 75                     |   |  | 75                |   |  |         |   |  | 0.00     | %
|Additional paid-in capital                     |  | 56,708                 |   |  | 56,534            |   |  | 174      |   |  | 0.31     | %
|Unearned ESOP Shares                           |  | (2,058                 | ) |  | (538              | ) |  | (1,520   | ) |  | 282.53   | %
|Accumulated other comprehensive income (loss)  |  | (3,698                 | ) |  | 899               |   |  | (4,597   | ) |  | -511.35  | %
|Retained earnings                              |  | 22,828                 |   |  | 20,199            |   |  | 2,629    |   |  | 13.02    | %
|                                               |  |                        |   |  |                   |   |  |          |   |  |          |  
|                                               |  | 73,855                 |   |  | 77,169            |   |  | (3,314   | ) |  | -4.29    | %
|Less treasury stock, at cost                   |  | (24,172                | ) |  | (24,172           | ) |  |         |   |  | 0.00     | %
|Total stockholders equity                     |  | 49,683                 |   |  | 52,997            |   |  | (3,314   | ) |  | -6.25    | %
|                                               |  |                        |   |  |                   |   |  |          |   |  |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY     |  | 712,936                |   |  | 763,488           |   |  | (50,552  | ) |  | -6.62    | %
|                                               |  |                        |   |  |                   |   |  |          |   |  |          |  



15



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##### Table of Contents

The following table shows the variance in dollars and percent change between the Consolidated Statements of Income for
the nine months ended June 30, 2004 and 2003:



|                                                    |  |                           |  |          |  |        |         |  |       |  
|--------------------------------------------------- |  | ------------------------- |  | -------- |  | ------ | ------- |  | ----- | -
|                                                    |  | Nine Months EndedJune 30, |  | Variance |  |        | %Change | 
|                                                    |  | 2004                      |  | 2003     |  |       
|                                                    |  | (amounts in thousands)    |  |          |  |        |         | 
|                                                    |  | (unaudited)               |  |          |  |        |         | 
|INTEREST INCOME:                                    |  |                           |  |          |  |        |         |  |       |  
|Loans receivable                                    |  | 18,041                    |  | 20,065   |  | (2,024 | )       |  | -10.1 | %
|Investment securities                               |  | 9,258                     |  | 7,601    |  | 1,657  |         |  | 21.8  | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|Total interest income                               |  | 27,299                    |  | 27,666   |  | (367   | )       |  | -1.3  | %
|INTEREST EXPENSE:                                   |  |                           |  |          |  |        |         |  |       |  
|Deposits                                            |  | 9,053                     |  | 12,633   |  | (3,580 | )       |  | -28.3 | %
|Borrowed funds                                      |  | 2,525                     |  | 843      |  | 1,682  |         |  | 199.5 | %
|Trust preferred securities                          |  | 948                       |  | 975      |  | (27    | )       |  | -2.8  | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|Total interest expense                              |  | 12,526                    |  | 14,451   |  | (1,925 | )       |  | -13.3 | %
|                                                    |  |                           |  |         
|NET INTEREST INCOME                                 |  | 14,773                    |  | 13,215   |  | 1,558  |         |  | 11.8  | %
|                                                    |  |                           |  |         
|PROVISION FOR LOAN LOSSES                           |  | 1,150                     |  | 1,495    |  | (345   | )       |  | -23.1 | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  | 13,623                    |  | 11,720   |  | 1,903  |         |  | 16.2  | %
|                                                    |  |                           |  |         
|OTHER INCOME:                                       |  |                           |  |          |  |        |         |  |       |  
|Fees and service charges                            |  | 2,256                     |  | 2,837    |  | (581   | )       |  | -20.5 | %
|Gain on sale of loans                               |  | 926                       |  | 2,430    |  | (1,504 | )       |  | -61.9 | %
|Gain (loss) on sale of securities                   |  | 383                       |  | 265      |  | 118    |         |  | 44.5  | %
|Trading gains, net                                  |  | 241                       |  | 331      |  | (90    | )       |  | -27.2 | %
|Gain on sale of branches                            |  | 137                       |  | 514      |  | (377   | )       |  | -73.3 | %
|Other                                               |  | 327                       |  | 324      |  | 3      |         |  | 0.9   | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|Total other income                                  |  | 4,270                     |  | 6,701    |  | (2,431 | )       |  | -36.3 | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|OPERATING EXPENSE:                                  |  |                           |  |          |  |        |         |  |       |  
|Compensation and benefits                           |  | 7,130                     |  | 7,475    |  | (345   | )       |  | -4.6  | %
|Occupancy and equipment                             |  | 2,095                     |  | 1,918    |  | 177    |         |  | 9.2   | %
|Insurance premiums                                  |  | 249                       |  | 238      |  | 11     |         |  | 4.6   | %
|Professional fees                                   |  | 599                       |  | 782      |  | (183   | )       |  | -23.4 | %
|Data processing                                     |  | 512                       |  | 550      |  | (38    | )       |  | -6.9  | %
|Advertising and donations                           |  | 265                       |  | 465      |  | (200   | )       |  | -43.0 | %
|Office supplies                                     |  | 179                       |  | 255      |  | (76    | )       |  | -29.8 | %
|REO and other repossessed assets                    |  | 270                       |  | 425      |  | (155   | )       |  | -36.5 | %
|Other                                               |  | 943                       |  | 1,091    |  | (148   | )       |  | -13.6 | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|Total operating expense                             |  | 12,242                    |  | 13,199   |  | (957   | )       |  | -7.3  | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|INCOME BEFORE INCOME TAXES                          |  | 5,651                     |  | 5,222    |  | 429    |         |  | 8.2   | %
|                                                    |  |                           |  |         
|INCOME TAXES                                        |  | 1,927                     |  | 1,832    |  | 95     |         |  | 5.2   | %
|                                                    |  |                           |  |          |  |        |         |  |       |  
|NET INCOME                                          |  | 3,724                     |  | 3,390    |  | 334    |         |  | 9.9   | %
|                                                    |  |                           |  |          |  |        |         |  |       |  



16



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##### Table of Contents

Investment Activities - The Companys investment portfolio, including, FHLB stock, and
trading securities, consists of mortgage-backed securities, obligations of the United States Government treasuries 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 75%, 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. Investment balances have decreased during the nine month period ended June 30,
2004, from September 30, 2003 due primarily to the receipt of $57.0 million in principal paydowns, the sale of $82.6 million in securities and a $6.9 million decrease in market value, which was partly offset by $112.6 million in securities
purchased. As interest rates have begun to rise, the Companys investment portfolio has declined in market value due to the higher yielding products becoming available, resulting in accumulated other comprehensive loss of $3.7 million at June
30, 2004 compared to accumulated other comprehensive income of $899,000 at September 30, 2003. Accumulated other comprehensive income (loss) is reported in the equity section of the financials 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,
and satisfy consumer demand for fixed-rate mortgage loans during the period of historically low interest rates, the Company has been focusing more on originating fixed-rate loans to sell individually into the secondary market, retaining the
servicing rights and customer relationships.



As interest rates begin to
stabilize, the Bank has seen a reduction in the demand for fixed rate mortgages during the nine-month period ended June 30, 2004, compared to the nine-month period ended June 30, 2003 which resulted in both lower service fee income and gains from
sale of loans. During the nine-month period ended June 30, 2004, the Company recognized a $0.9 million gain on the sale of $17.5 million of loans held for sale, compared to a $2.4 million gain on the sale of $60.4 million of loans held for sale
during the nine-month period ended June 30, 2003. In addition to the subdued refinancing environment during the nine months ended June 30, 2004, the $2.4 million gain on sale of loans for the nine months ended June 30, 2003 included the sale of a
loan package that provided $0.6 million of the gain on sale of loans.



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 nine-month period ended June 30, 2004, the Companys loan portfolio increased less than 1%.



Non-performing 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 all loans on
which full collection may not be reasonably assured, considers among other matters, the estimated value of collateral, cash flow analysis, historical loan loss experience, and other factors that warrant recognition in providing allowances.



A provision of $1.2 million was made during the nine months ended June 30,
2004. The Companys allowance for loan losses totaled $3.9 million, or 1.0% of total loans at June 30, 2004 compared to $4.1 million, or 1.0% of total loans, at September 30, 2003, a decrease of $0.2 million or 4.9%. Charge offs, net of
recoveries totaled $1.3 million or 0.3% of total loans, for the nine months ended June 30, 2004. Total



17



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##### Table of Contents

nonperforming loans increased to $5.9 million at June 30, 2004 from $5.6 million at September 30, 2003, an increase of
$0.3 million. 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 last three fiscal years, the Company has completed separate
acquisitions of four banks. The loans acquired as part of these acquisitions have contributed to the increase in the balance of nonperforming loans in the Companys portfolio; of the $5.9 million in nonperforming loans as of June 30, 2004, $2.6
million, or 44.1% are loans acquired as part of the bank acquisitions. Nonperforming commercial loans have increased $1.7 million due to the acquisitions. We believe that the increase in non-performing commercial loans is a result of a lower quality
of underwriting and collection efforts at the acquired institutions prior to the Companys acquisition of the institutions compared to the Companys underwriting and collection efforts. Approximately $2.0 million of loan loss allowance on
the loans was transferred with these bank acquisitions. Additionally, $3.7 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 and a corresponding specific interest reserve is
established. The Bank generally does not accrue interest on loans past due 90 days or more. Loans may be reinstated to accrual status when payments are made to bring the loan under 90 days past due and, in the opinion of management, collection of
the remaining balance can be reasonably expected. Delinquent loans 90 days or more past due increased $0.3 million or 5.4% to $5.9 million at June 30, 2004 from $5.6 million at September 30, 2003. The balance of interest income not recognized by the
Company on the non-accrual loans was $0.4 million at June 30, 2004 compared to $0.4 million at September 30, 2003. 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.



|                                                    |  |                        |       |   |                   |   |       |  
|--------------------------------------------------- |  | ---------------------- | ----- | - | ----------------- | - | ----- | -
|                                                    |  | June 30,2004           |       |   | September 30,2003 |  
|                                                    |  | (Dollars in Thousands) |      
|Nonperforming loans:                                |  |                        |       |   |                   |   |       |  
|Single family                                       |  | $                      | 1,825 |   |                   | $ | 2,383 |  
|Agriculture real estate                             |  |                        | 850   |   |                   |   | 66    |  
|Commercial real estate                              |  |                        | 2,161 |   |                   |   | 1,919 |  
|Commercial non real estate                          |  |                        | 907   |   |                   |   | 764   |  
|Other loans                                         |  |                        | 192   |   |                   |   | 478   |  
|                                                    |  |                        |       |   |                   |   |       |  
|Total nonperforming loans:                          |  |                        | 5,935 |   |                   |   | 5,610 |  
|Total real estate owned and repossessed assets (1)  |  |                        | 1,142 |   |                   |   | 876   |  
|                                                    |  |                        |       |   |                   |   |       |  
|Total non-performing assets                         |  | $                      | 7,077 |   |                   | $ | 6,486 |  
|                                                    |  |                        |       |   |                   |   |       |  
|Total nonperforming loans to total loans receivable |  |                        | 1.51  | % |                   |   | 1.44  | %
|Total nonperforming loans to total assets           |  |                        | 0.83  | % |                   |   | 0.74  | %
|Total nonperforming assets to total assets          |  |                        | 0.99  | % |                   |   | 0.85  | %
|Allowance to nonperforming loans                    |  |                        | 66.80 | % |                   |   | 72.50 | %
|Allowance to total loans receivable                 |  |                        | 1.00  | % |                   |   | 1.00  | %

---

|(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



18



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##### Table of Contents

provisions and loan loss allowances. Impaired loans increased $0.5 million or 5.5% to $9.6 million at June 30, 2004 from
$9.1 million at September 30, 2003. The increase in impaired loans is primarily attributable to an increase in commercial loans classified as substandard and doubtful during the nine months ended June 30, 2004.



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



|                                                            |  |                                |       |                               |   |      
|----------------------------------------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | -----
|                                                            |  | June 30, 2004                  |       | September 30, 2003           
|                                                            |  | (in thousands)                
|Impaired loans with a valuation allowance                   |  | $                              | 9,629 |                               | $ | 9,065
|Impaired loans without a valuation allowance                |  |                                |      |                               |   |     
|                                                            |  |                                |       |                               |   |      
|Total Impaired Loans                                        |  | $                              | 9,629 |                               | $ | 9,065
|                                                            |  |                                |       |                               |   |      
|Valuation allowance related to impaired loans               |  | $                              | 1,882 |                               | $ | 1,680
|Total non-accrual loans                                     |  | $                              | 5,935 |                               | $ | 5,610
|Total loans past-due ninety days or more and still accruing |  | $                              | 45    |                               | $ | 414  
|                                                            |  |                               
|                                                            |  | Nine Months EndedJune 30, 2004 |       | Year Ended September 30, 2003
|                                                            |  | (in thousands)                
|Average investment in impaired loans                        |  | $                              | 8,607 |                               | $ | 6,725
|                                                            |  |                                |       |                               |   |      
|Interest income recognized on impaired loans                |  | $                              | 171   |                               | $ | 349  
|                                                            |  |                                |       |                               |   |      



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.



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. Recent efforts to control cost of funds and
manage interest rate risk have caused the Company to shift some of the focus off of certificate accounts to low rate FHLB advances. 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:



|                          |  |                        |         |                   |   |        
|------------------------- |  | ---------------------- | ------- | ----------------- | - | -------
|                          |  | June 30,2004           |         | September 30,2003
|                          |  | (amounts in thousands)
|Checking Accounts         |  | $                      | 220,634 |                   | $ | 239,148
|Passbook Savings Accounts |  |                        | 52,750  |                   |   | 72,040 
|Certificate Accounts      |  |                        | 219,068 |                   |   | 274,904
|                          |  |                        |         |                   |   |        
|                          |  | $                      | 492,452 |                   | $ | 586,092
|                          |  |                        |         |                   |   |        



19



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Total deposits decreased $93.6 million or 16.0% during the nine-month period ended June 30, 2004. Contributing to the
decrease in deposits was the sale of the Companys branch office in Strawberry, Arkansas, which had total deposits of $12.7 million at September 30, 2003 and $10.5 million when sold. The decrease in savings accounts was primarily due to the
withdrawal of funds from customers Christmas Club accounts which accumulate throughout the year and are disbursed each November. Recent efforts to control cost of funds and manage interest rate risk have caused the Company to shift some of the
focus off of certificate accounts to low rate FHLB advances, resulting in a decrease in the balance of those deposits. The cost on average certificate accounts for the nine month period ended June 30, 2004 was 2.83%, down 87 basis points from 3.70%
for the year ended September 30, 2003.



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 June 30, 2004, FHLB advances totaled $150.9 million, with an average cost of 2.98% compared to $100.7
million, with an average cost of 3.91% at September 30, 2003. Based on the current level of advances, asset size and available collateral under the FHLB programs, the Bank at June 30, 2004, estimates that an additional $53.3 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 deferred tax liability, accrual for income taxes, accounts payable, escrowed taxes and insurance and other miscellaneous obligations that may occur during the
normal course of business. Accrued expenses and other liabilities decreased $3.4 million or 87.3% during the nine-month period ended June 30, 2004 to $0.5 million from $3.9 million at September 30, 2003. The decrease was primarily the result of the
change in the Companys deferred tax liability account which reflects the tax effect from the decrease in the market value of the investment portfolio discussed in the investment activities section.



Stockholders equity - The Companys book value per
share was $10.87 at June 30, 2004 compared to $11.65 at September 30, 2003. The Companys average capital ratio, average capital to average assets, was 7.07% for the nine months ended June 30, 2004 compared to 7.20% for the year ended September
30, 2003. The change in accumulated other comprehensive income (loss) on securities available for sale is the primary cause for the decrease in stockholders equity at June 30, 2004 compared to September 30, 2003.



Regulatory Capital - The Bank is subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate 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 June 30, 2004, the Bank met all capital adequacy requirements to which it was subject.



As of June 30, 2004, 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.



20



---

##### Table of Contents

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



|                                         |  |        |        |       |                                      |   |        |                                                                                       |        |  |      |        |  |       |        |  |      
|---------------------------------------- |  | ------ | ------ | ----- | ------------------------------------ | - | ------ | ------------------------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | -----
|                                         |  | Actual |        |       | Required For CapitalAdequacyPurposes |   |        | Required To Be Categorized AsWell Capitalized UnderPrompt CorrectiveAction Provisions
|                                         |  | Amount |        | Ratio |                                      |   | Amount |                                                                                       | Ratio  |  |      | Amount |  | Ratio
|As of June 30, 2004:                     |  |        |        |       |                                      |   |        |                                                                                       |        |  |      |        |  |       |        |  |      
|Tangible capital to tangible assets      |  | $      | 49,914 |       | 7.13                                 | % |        | $                                                                                     | 10,508 |  | 1.50 | %      |  |       | N/A    |  | N/A  
|Core capital to adjusted tangible assets |  |        | 49,914 |       | 7.13                                 |   |        |                                                                                       | 28,021 |  | 4.00 |        |  | $     | 35,027 |  | 5.00 
|Total capital to risk weighted assets    |  |        | 53,875 |       | 12.67                                |   |        |                                                                                       | 34,013 |  | 8.00 |        |  |       | 42,516 |  | 10.00
|Tier I capital to risk weighted assets   |  |        | 49,914 |       | 11.74                                |   |        |                                                                                       | 17,006 |  | 4.00 |        |  |       | 25,510 |  | 6.00 



Net interest income -The declines in interest rates have decreased the cost on average interest bearing liabilities 78 basis points and the yield on average interest earning assets 89 basis points when comparing the nine month period ended June 30, 2004 to the
nine month period ended June 30, 2003. The Companys net interest rate spread was 3.05% for the nine month period ended June 30, 2004 compared to 3.16% for the nine month period ended June 30, 2003. Net interest margin was 2.98% for the nine
month period ended June 30, 2004 compared to 3.05% for the nine month period ended June 30, 2003. Both the yield on average interest earning assets and the cost on average interest bearing liabilities for the nine month period ended June 30, 2004
decreased when compared to the rates for the same period last year.



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 nine-month period ended June 30, 2004, compared
to the nine-month period ended June 30, 2003.



Rate/Volume
Analysis (in thousands)

Nine-month period ended June 30, 2004 vs. 2003



|                                   |  |                            |       |   |                          |   |        |             |  |   |        |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                   |  | Increase/(Decrease) Due to |       |   | Total Increase(Decrease) |  
|                                   |  | Volume                     |       |   | Rate                     |   |        | Rate/Volume |  |  
|Interest income:                   |  |                            |       |   |                          |   |        |             |  |   |        |   |  |   |        |  
|Loan Receivable                    |  | $                          | (446  | ) |                          | $ | (2,291 | )           |  | $ | 713    |   |  | $ | (2,024 | )
|Investment securities              |  |                            | 5,077 |   |                          |   | (1,902 | )           |  |   | (1,518 | ) |  |   | 1,657  |  
|                                   |  |                            |       |   |                          |   |        |             |  |   |        |   |  |   |        |  
|Total interest earning assets      |  |                            | 4,631 |   |                          |   | (4,193 | )           |  |   | (805   | ) |  |   | (367   | )
|Interest expense:                  |  |                            |       |   |                          |   |        |             |  |   |        |   |  |   |        |  
|Deposits                           |  |                            | (176  | ) |                          |   | (4,611 | )           |  |   | 1,207  |   |  |   | (3,580 | )
|Borrowed funds                     |  |                            | 4,552 |   |                          |   | (458   | )           |  |   | (2,412 | ) |  |   | 1,682  |  
|Trust Preferred                    |  |                            | 2     |   |                          |   | (37    | )           |  |   | 8      |   |  |   | (27    | )
|                                   |  |                            |       |   |                          |   |        |             |  |   |        |   |  |   |        |  
|Total interest bearing liabilities |  |                            | 4,378 |   |                          |   | (5,106 | )           |  |   | (1,197 | ) |  |   | (1,925 | )
|                                   |  |                            |       |   |                          |   |        |             |  |   |        |   |  |   |        |  
|Net change in net interest income  |  | $                          | 253   |   |                          | $ | 913    |             |  | $ | 392    |   |  | $ | 1,558  |  
|                                   |  |                            |       |   |                          |   |        |             |  |   |        |   |  |   |        |  



21



---

##### Table of Contents

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 June 2004 |         |          | Three Months Ended June 2003 |                   
|                                                                                 |  | AverageBalance               |         | Interest |                              | Average Yield/Cost |  |       | AverageBalance |  | Interest |         | AverageYield/Cost |  
|Interest-earning assets: (1)                                                     |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Loan receivable, net (2)                                                         |  | $                            | 386,123 |          | $                            | 5,881              |  | 6.09  | %              |  | $        | 384,739 |                   | $ | 6,408 |  | 6.66  | %
|Investment securities                                                            |  |                              | 264,789 |          |                              | 2,822              |  | 4.26  | %              |  |          | 260,043 |                   |   | 2,978 |  | 4.58  | %
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Total interest-earning assets                                                    |  |                              | 650,912 |          |                              | 8,703              |  | 5.35  | %              |  |          | 644,782 |                   |   | 9,386 |  | 5.82  | %
|Noninterest-earning cash                                                         |  |                              | 24,489  |          |                              |                    |  |       |                |  |          | 36,639  |                   |   |       |  |       |  
|Other noninterest-earning assets                                                 |  |                              | 43,451  |          |                              |                    |  |       |                |  |          | 43,089  |                   |   |       |  |       |  
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Total assets                                                                     |  |                              | 718,852 |          |                              |                    |  |       |                |  |          | 724,510 |                   |   |       |  |       |  
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Interest-bearing liabilities:                                                    |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Demand deposits                                                                  |  | $                            | 280,405 |          | $                            | 1,079              |  | 1.54  | %              |  | $        | 308,605 |                   | $ | 1,763 |  | 2.29  | %
|Time deposits                                                                    |  |                              | 231,922 |          |                              | 1,566              |  | 2.70  | %              |  |          | 316,004 |                   |   | 2,668 |  | 3.38  | %
|Borrowed funds (3)                                                               |  |                              | 135,241 |          |                              | 981                |  | 2.90  | %              |  |          | 20,538  |                   |   | 260   |  | 5.06  | %
|Trust Preferred                                                                  |  |                              | 16,935  |          |                              | 319                |  | 7.53  | %              |  |          | 16,914  |                   |   | 319   |  | 7.54  | %
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Total interest-bearing liabilities                                               |  |                              | 664,503 |          |                              | 3,945              |  | 2.37  | %              |  |          | 662,061 |                   |   | 5,010 |  | 3.03  | %
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Noninterest-bearing liabilities (4)                                              |  |                              | 4,428   |          |                              |                    |  |       |                |  |          | 10,448  |                   |   |       |  |       |  
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Total liabilities                                                                |  |                              | 668,931 |          |                              |                    |  |       |                |  |          | 672,509 |                   |   |       |  |       |  
|                                                                                 |  |                              |         |          |                              |                   
|Stockholders equity                                                             |  |                              | 49,921  |          |                              |                    |  |       |                |  |          | 52,001  |                   |   |       |  |       |  
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Total liabilities and stockholders equity                                       |  | $                            | 718,852 |          |                              |                    |  |       |                |  | $        | 724,510 |                   |   |       |  |       |  
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Net interest income                                                              |  |                              |         |          | $                            | 4,758              |  |       |                |  |          |         |                   | $ | 4,376 |  |       |  
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Net interest rate spread (5)                                                     |  |                              |         |          |                              |                    |  | 2.98  | %              |  |          |         |                   |   |       |  | 2.79  | %
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Interest-earning assets and net interest margin (6)                              |  | $                            | 650,912 |          |                              |                    |  | 2.92  | %              |  | $        | 644,782 |                   |   |       |  | 2.71  | %
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                              |         |          |                              |                    |  | 97.95 | %              |  |          |         |                   |   |       |  | 97.39 | %
|                                                                                 |  |                              |         |          |                              |                    |  |       |                |  |          |         |                   |   |       |  |       |  

---

|(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.
|--- | ----------------------------------------------------------------------------------------------------------



22



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##### Table of Contents

Average Balance Sheets (Dollars in Thousands)



|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | -------- | ----------------------------- | ------------------ |  | ------------------------------- | -------------- |  | -------- | ------- | ------------------ | - | ------ | -------------- | ----- | -------- |  | ----------------- | ------- |  | - | ------ |  | ----- | -
|                                                                                  |  | Nine Months Ended June 30, 2004 |         |          | Year Ended September 30, 2003 |                    |  | Nine Months Ended June 30, 2003 |               
|                                                                                  |  | AverageBalance                  |         | Interest |                               | Average Yield/Cost |  |                                 | AverageBalance |  | Interest |         | Average Yield/Cost |   |        | AverageBalance |       | Interest |  | AverageYield/Cost |        
|Interest-earning assets: (1)                                                      |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Loan receivable, net (2)                                                          |  | $                               | 388,440 |          | $                             | 18,041             |  | 6.18                            | %              |  | $        | 391,588 |                    | $ | 26,260 |                | 6.71  | %        |  | $                 | 395,031 |  | $ | 20,065 |  | 6.76  | %
|Investment securities                                                             |  |                                 | 271,992 |          |                               | 9,258              |  | 4.53                            | %              |  |          | 221,182 |                    |   | 10,784 |                | 4.88  | %        |  |                   | 181,162 |  |   | 7,601  |  | 5.58  | %
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total interest- earning assets                                                    |  |                                 | 660,432 |          |                               | 27,299             |  | 5.50                            | %              |  |          | 612,770 |                    |   | 37,044 |                | 6.05  | %        |  |                   | 576,193 |  |   | 27,666 |  | 6.39  | %
|Noninterest-earning cash                                                          |  |                                 | 33,088  |          |                               |                    |  |                                 |                |  |          | 29,453  |                    |   |        |                |       |          |  |                   | 28,271  |  |   |        |  |       |  
|Other noninterest- earning assets                                                 |  |                                 | 43,835  |          |                               |                    |  |                                 |                |  |          | 43,452  |                    |   |        |                |       |          |  |                   | 49,632  |  |   |        |  |       |  
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total assets                                                                      |  |                                 | 737,355 |          |                               |                    |  |                                 |                |  |          | 685,675 |                    |   |        |                |       |          |  |                   | 654,096 |  |   |        |  |       |  
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest-bearing liabilities:                                                     |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Demand deposits                                                                   |  | $                               | 298,095 |          | $                             | 3,708              |  | 1.65                            | %              |  | $        | 278,990 |                    | $ | 5,436  |                | 1.95  | %        |  | $                 | 248,311 |  | $ | 4,077  |  | 2.18  | %
|Time deposits                                                                     |  |                                 | 251,622 |          |                               | 5,345              |  | 2.83                            | %              |  |          | 298,290 |                    |   | 11,232 |                | 3.77  | %        |  |                   | 307,220 |  |   | 8,556  |  | 3.70  | %
|Borrowed funds (3)                                                                |  |                                 | 112,836 |          |                               | 2,525              |  | 2.98                            | %              |  |          | 32,764  |                    |   | 1,281  |                | 3.91  | %        |  |                   | 22,338  |  |   | 843    |  | 5.02  | %
|Trust Preferred                                                                   |  |                                 | 16,930  |          |                               | 948                |  | 7.45                            | %              |  |          | 16,911  |                    |   | 1,292  |                | 7.64  | %        |  |                   | 16,906  |  |   | 975    |  | 7.67  | %
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total interest- bearing liabilities                                               |  |                                 | 679,483 |          |                               | 12,526             |  | 2.45                            | %              |  |          | 626,955 |                    |   | 19,241 |                | 3.07  | %        |  |                   | 594,775 |  |   | 14,451 |  | 3.23  | %
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Noninterest-bearing liabilities (4)                                               |  |                                 | 5,741   |          |                               |                    |  |                                 |                |  |          | 9,346   |                    |   |        |                |       |          |  |                   | 10,295  |  |   |        |  |       |  
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total liabilities                                                                 |  |                                 | 685,224 |          |                               |                    |  |                                 |                |  |          | 636,301 |                    |   |        |                |       |          |  |                   | 605,070 |  |   |        |  |       |  
|Stockholders equity                                                              |  |                                 | 52,131  |          |                               |                    |  |                                 |                |  |          | 49,374  |                    |   |        |                |       |          |  |                   | 49,026  |  |   |        |  |       |  
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total liabilities and stockholders equity                                        |  | $                               | 737,355 |          |                               |                    |  |                                 |                |  | $        | 685,675 |                    |   |        |                |       |          |  | $                 | 654,096 |  |   |        |  |       |  
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Net interest income                                                               |  |                                 |         |          | $                             | 14,773             |  |                                 |                |  |          |         |                    | $ | 17,803 |                |       |          |  |                   |         |  | $ | 13,215 |  |       |  
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Net interest rate spread (5)                                                      |  |                                 |         |          |                               |                    |  | 3.05                            | %              |  |          |         |                    |   |        |                | 2.98  | %        |  |                   |         |  |   |        |  | 3.16  | %
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest-earning assets and net interest margin (6)                               |  | $                               | 660,432 |          |                               |                    |  | 2.98                            | %              |  | $        | 612,770 |                    |   |        |                | 2.91  | %        |  | $                 | 576,193 |  |   |        |  | 3.05  | %
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Ratio of average interest- earning assets to average interest-bearing liabilities |  |                                 |         |          |                               |                    |  | 97.20                           | %              |  |          |         |                    |   |        |                | 97.74 | %        |  |                   |         |  |   |        |  | 96.88 | %
|                                                                                  |  |                                 |         |          |                               |                    |  |                                 |                |  |          |         |                    |   |        |                |       |          |  |                   |         |  |   |        |  |       |  

---

|(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.
|--- | ----------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

Other income - In addition to the decrease in gain on sale of loans, the decrease in loan
originations and deposits during the nine month period ended June 30, 2004 compared to the nine month period ended June 30, 2003, contributed to a decrease in income from fees and service charges. The decrease in the gain on the sale of branches for
the nine month period ended June 30, 2004 compared to the nine month period ended June 30, 2003 and decrease in the gain on the Companys trading account also contributed to the decrease in other income.



Operating expense Compensation expense decreased by $0.4 million due to
the recognition of additional expense in 2003 related to a deferred compensation agreement entered into with a retiring officer of the Company during the nine month period ended June 30, 2003. The decrease in advertising expenses during the nine
month period ended June 30, 2004 was the result of the Company handling the advertising campaign internally compared to outsourcing to an advertising firm during the nine month period ended June 30, 2003. Also, the decrease in total operating
expense was the result of managements ongoing efforts to monitor expenses and increase efficiency.



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 June 30, 2004, the
Companys off-balance sheet arrangements principally included lending commitments, which are described below. At June 30, 2004, the Company had no interests in non-consolidated special purpose entities. At June 30, 2004, commitments included:



Total approved loan origination commitments outstanding were
$10.5 million, including $4.1 million in loans committed to sell.



Rate lock agreements with customers of $4.1 million, all of which have been locked with an investor.



Undisbursed balances of construction loans of $2.0 million.



Total unused lines of credit of $33.1 million.



Outstanding letters of credit of $0.6 million.



Total certificates of deposit scheduled to mature in one
year or less of $135.8 million.



Total unfunded commitments to
originate loans for sale and the related commitments to sell of $4.1 million meet the definition of a derivative financial instrument; the related asset and liability are considered immaterial at June 30, 2004.



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.



24



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##### Table of Contents

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, 2003, 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 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                                                  |        | $                      | 51,356   |  | $     | (23,083  | ) |                                                                   | (31.0 | )% |  | 6.96 | % |  | (2.66 | )%
|+200                                                  |        |                        | 59,999   |  |       | (14,440  | ) |                                                                   | (19.4 | )% |  | 8.00 | % |  | (1.62 | )%
|+100                                                  |        |                        | 68,221   |  |       | (6,218   | ) |                                                                   | (8.4  | )% |  | 8.94 | % |  | (0.68 | )%
|0                                                     |        |                        | 74,439   |  |       |         |   |                                                                   | 0.0   | %  |  | 9.62 | % |  | 0.00  | % 
|-100                                                  |        |                        | 76,276   |  |       | 1,837    |   |                                                                   | 2.5   | %  |  | 9.77 | % |  | 0.15  | % 



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 three month period ended June 30, 2004 no shares were purchased by or on behalf
of the Company. The Company currently has no repurchase plans or programs outstanding. As reported in foot note nine of the Notes to Condensed Consolidated Financial Statements, the Company made a loan to the ESOP during the quarter ended June 30,
2004 to purchase an aggregate of up to $2 million of Company stock. The Employee Stock Ownership Plan, an affiliated purchaser, has made purchases of Company stock during the three month period ended June 30, 2004 as shown in the table below.



|                    |  |                                     |  |                                 |       |                                                                                  |     |                                                                                                           |   |            
|------------------- |  | ----------------------------------- |  | ------------------------------- | ----- | -------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------------------------------------- | - | -----------
|Period              |  | (a) Total Number ofShares Purchased |  | (b) Average PricePaid per Share |       | (c) Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |     | (d) MaximumNumber (orApproximate DollarValue) of Sharesthat May Yet BePurchased Underthe Plans orPrograms
|Month of April 2004 |  | 5,400                               |  | $                               | 16.67 |                                                                                  | N/A |                                                                                                           | $ | 1.6 Million
|Month of May 2004   |  | 40,600                              |  | $                               | 17.15 |                                                                                  | N/A |                                                                                                           | $ | 1.0 Million
|Month of June 2004  |  | 10,000                              |  | $                               | 17.16 |                                                                                  | N/A |                                                                                                           | $ | 0.8 Million
|                    |  |                                     |  |                                 |       |                                                                                  |     |                                                                                                           |   |            
|Total               |  | 56,000                              |  | $                               | 17.10 |                                                                                  | N/A |                                                                                                           | $ | 0.8 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 and Reports



(a) 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



(b) Reports -



On April 30, 2004, the Company filed with the Securities and Exchange Commission a Current
Report on Form 8-K. The report disclosed in Item 9 Regulation FD Disclosure that the Company had released earnings for the three and six month periods ended on March 31, 2004. Financial statements were filed as an exhibit to the report.



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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: August 12, 2004 |  | /s/ Dwayne Powell                    
|                      |  | Dwayne Powell                        
|                      |  | President and Chief Executive Officer
|                      | 
|Date: August 12, 2004 |  | /s/ Terry Prichard                   
|                      |  | Terry Prichard                       
|                      |  | Chief Financial Officer              



28