<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 [FEE REQUIRED]

     For the Fiscal Year Ended September 30, 1998

                                      OR

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 [NO FEE REQUIRED]

     For the transition period from _______________ to  ______________________


                           COMMISSION FILE #0-23969

                           POCAHONTAS BANCORP, INC.
                           ------------------------
            (Exact name of registrant as specified in its charter)

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

              203 WEST BROADWAY, POCAHONTAS, ARKANSAS    72455
              ---------------------------------------    -----
              (Address of Principal Executive Offices)  Zip Code

                                (870) 892-4595
                        -------------------------------
                        (Registrant's telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:  NONE

Securities Registered Pursuant to Section 12(g) of the Act:  

                    COMMON STOCK, PAR VALUE $.01 PER SHARE
                    --------------------------------------
                               (Title of Class)

     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
requirements for the past 90 days.

     YES   X  .   NO      .
         -----       -----   

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

     As of December 15, 1998, there were issued and outstanding 6,217,467 shares
of the Registrant's Common Stock.  Such shares were listed on the NASDAQ
National Market System.

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the last sale price on December 15,
1998, was $40,957,008.  This amount does not include shares held by the Employee
Stock Ownership Plan of Pocahontas Federal Savings and Loan Association (the
Registrant's subsidiary), by executive officers and directors, and by the
Registrant or treasury stock.
<PAGE>
 
                                    PART I

ITEM 1    BUSINESS
------    --------

GENERAL

     Pocahontas Bancorp, Inc. (the "Registrant" or the "Company") was organized
in March 1998 to be the holding company for Pocahontas Federal Savings and Loan
Association (the "Bank"), a federally chartered savings and loan association
headquartered in Pocahontas, Arkansas.  The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF").  The Company is registered as a savings and loan
holding company with the Office of Thrift Supervision ("OTS").  The Company's
main office is located at 205 West Broadway, Pocahontas, Arkansas, and its
telephone number is 870-892-4595.

     The Company was organized in conjunction with the mutual-to-stock
conversion of the Bank's majority stockholder.  Pocahontas Bancorp, MHC, a
federal mutual holding company in March 1998.  In this "second step" conversion,
3,570,750 shares of the Company's common stock were sold in a subscription and
community offering at $10.00 per share, and the outstanding common stock of the
Bank was exchanged for Company common stock at a ratio of 4.0245 to one.  The
consolidated financial statements of the Company set forth herein reflect net
proceeds of approximately $34.8 million raised in conjunction with the second
step offering.

     The Bank is a community-oriented savings institution headquartered in
Pocahontas, Arkansas that operates eleven full-service offices in its market
area consisting of Northeast Arkansas. The Bank is primarily engaged in the
business of originating single family residential mortgage loans funded with
deposits, Federal Home Loan Bank ("FHLB") advances and securities sold under
agreements to repurchase.

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

     Based on the Bank's review of the Bank's internal bookkeeping practices and
the Bank's conferences with its third party service companies, the Bank does not
expect to incur significant additional bookkeeping, data processing or other
expenses, and in particular the Bank does not expect to encounter significant
difficulties with our data processing service provider, in connection with
issues related to the upcoming millennium (that is, "Year 2000" issues).

At September 30, 1998, the Company and its affiliates employed 93 persons.

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

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

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

                                       2
<PAGE>
 
LENDING ACTIVITIES

     Loan Portfolio Composition.  The Bank's net loan portfolio consists
primarily of first mortgage loans collateralized by single-family residential
real estate and, to a lesser extent, multifamily residential real estate,
commercial real estate and agricultural real estate loans.  At September 30,
1998, the Bank's net loan portfolio totaled $193.7 million, of which $163.9
million, or 84.6% were single-family residential real estate mortgage loans,
$3.1 million, or 1.6% were multifamily residential real estate loans, $10.3
million, or 5.3%, were commercial real estate loans (including land loans), and
$6.5 million, or 3.4%, were agricultural real estate loans.  The remainder of
the Bank's loans at September 30, 1998 included commercial business loans (i.e.,
crop production, equipment and livestock loans) which totaled $8.5 million, or
4.4%, of the Bank's total net loan portfolio as of September 30, 1998.  Other
loans, including automobile loans and loans collateralized by deposit accounts
totaled $7.1 million, or 3.7%, of the Bank's net loan portfolio as of September
30, 1998.

ANALYSIS OF LOAN PORTFOLIO

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


<TABLE>
<CAPTION>
                                                                           AT SEPTEMBER 30
                                 --------------------------------------------------------------------------------------------------
                                        1998                1997               1996                  1995                1994
                                 -----------------   -----------------    -----------------   -----------------   -----------------
                                  AMOUNT   PERCENT    AMOUNT   PERCENT     AMOUNT   PERCENT    AMOUNT   PERCENT    AMOUNT   PERCENT
                                 --------  -------   --------  -------    --------  -------   --------  -------   --------  -------
(Dollars in Thousands)                                                  
<S>                              <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>       <C>       <C>
Real estate loans:                                                                                               
  Single-family residential      $163,895     84.6%  $138,539     86.8%   $118,291     86.4%  $100,100     86.0%  $ 88,725     86.0%
  Multifamily residential           3,124      1.6      1,600      1.0       4,729      3.5      3,500      3.0      3,673      3.5
  Agricultural                      6,532      3.4      4,654      2.9       4,552      3.3      3,995      3.4      4,519      4.3
  Commercial                       10,268      5.3      9,606      6.0       6,703      4.9      5,246      4.5      4,781      4.6
                                 --------   ------   --------   ------    --------   ------   --------   ------   --------   ------
                                                                                                                 
    Total real estate loans       183,819     94.9    154,399     96.7     134,275     98.1    112,841     96.9    101,698     96.7
                                                                                                                 
Other loans:                                                                                                     
  Savings account loans             1,161      0.6      1,015      0.6         886      0.6        896      0.8        893      0.9
  Commercial business (1)           8,568      4.4      6,533      4.1       5,729      4.2      4,466      3.8      3,736      3.6
  Other (2)                         5,943      3.1      2,716      1.7       1,913      1.4      2,137      1.9      1,353      1.3
                                 --------   ------   --------   ------    --------   ------   --------   ------   --------   ------
                                                                                                                 
    Total other loans              15,672      8.1     10,264      6.4       8,528      6.2      7,499      6.5      5,982      5.8
                                 --------   ------   --------   ------    --------   ------   --------   ------   --------   ------
                                                                                                                 
    Total loans receivable        199,491    103.0    164,663    103.1     142,803    104.3    120,340    103.4    107,680    103.4
                                                                                                                 
Less:                                                                                                            
  Undisbursed loan proceeds         3,655      1.9      2,815      1.8       3,715      2.7      1,942      1.7      1,611      1.5
  Unearned discount and net                                                                                      
    deferred loan fees                424      0.2        467      0.3         482      0.4        594      0.5        656      0.6
  Allowance for loan losses         1,684      0.9      1,691      1.0       1,734      1.3      1,357      1.2      1,330      1.3
                                 --------   ------   --------   ------    --------   ------   --------   ------   --------   ------
                                                                                                                 
    Total loans receivable, net  $193,728    100.0%  $159,690    100.0%   $136,872    100.0%  $116,447    100.0%  $104,083    100.0%
                                 ========   ======   ========   ======    ========   ======   ========   ======   ========   ======
</TABLE>
____________________________________
(1) Includes crop-production loans, livestock loans and equipment loans.
(2) Includes second mortgage loans, unsecured personal lines of credit and
    automobile loans.

     Loan Maturity Schedule.  The following table sets forth certain information
as of September 30, 1998, regarding the dollar amount of gross loans maturing in
the Bank's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments, and overdrafts are reported as
due in one year or less.  Adjustable and floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.

<TABLE>
<CAPTION>
                                                                                           BEYOND
                                WITHIN        1-3         3-5      5-10         10-20       20
                                1 YEAR       YEARS       YEARS     YEARS        YEARS      YEARS       TOTAL
                                -------     -------     -------    ------      -------     ------     --------
                                                              (IN THOUSANDS)
<S>                             <C>         <C>         <C>        <C>         <C>         <C>        <C>
Fixed rate loans                $ 6,374     $ 8,249     $17,211    $5,534      $24,475     $9,460     $ 71,303
Variable rate loans              43,008      46,705      37,600       875            -          -      128,188
                                -------     -------     -------    ------      -------     ------     --------
    Total                       $49,382     $54,954     $54,811    $6,409      $24,475     $9,460     $199,491
                                =======     =======     =======    ======      =======     ======     ========
</TABLE>

                                       3
<PAGE>
 
     The following table sets forth at September 30, 1998, the dollar amount of
all fixed rate and adjustable rate loans due after September 30, 1999.


<TABLE>
<CAPTION>
                                                            FIXED          ADJUSTABLE          TOTAL
                                                       -------------    -------------     --------------
                                                                        (IN THOUSANDS)
<S>                                                      <C>              <C>               <C>
Single-family residential                                    $41,427          $84,116           $125,543
Multifamily residential                                          821            1,064              1,885
Agricultural                                                   9,333                -              9,333
Commercial                                                     8,331                -              8,331
Other                                                          5,017                -              5,017
                                                             -------          -------           --------
Total                                                        $64,929          $85,180           $150,109
                                                             =======          =======           ========
</TABLE>

     Single-Family Residential Real Estate Loans.  The Bank's primary lending
activity is the origination of single-family, owner-occupied, residential
mortgage loans collateralized by properties located in the Bank's market area.
The Bank generally does not originate single-family residential loans
collateralized by properties outside of its market area.  At September 30, 1998,
the Bank had $163.9 million, or 84.6%, of its total net loan portfolio invested
in single-family residential mortgage loans, substantially all of which were
collateralized by properties located in the Bank's market area or in counties
contiguous with the Bank's market area.

     The Bank's single-family, fixed rate, residential real estate loans
generally are originated and underwritten according to standards that qualify
such loans for resale in the secondary mortgage market.  The Bank generally
retains adjustable rate mortgage ("ARM") loans that it originates.  Whether the
Bank can or will sell fixed rate loans, however, depends on a number of factors
including the yield and the term of the loan, market conditions, and the Bank's
current interest rate gap position.  At September 30, 1998 and 1997, loans held
for sale were insignificant.  During the fiscal years ended September 30, 1998,
1997 and 1996, the Bank sold into the secondary market $4.3 million, $2.2
million, and $1.3 million, respectively, of single-family, fixed rate,
residential mortgage loans, generally from current period originations.  The
Bank generally does not retain the servicing rights on loans it has sold.

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

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

     The Bank's fixed rate loans are currently originated with terms ranging
from 10 to 30 years and amortize on a monthly basis with principal and interest
due each month.  Generally, fixed rate loans are sold in the secondary market.

     The Bank's ARM loans are generally for terms of 30 years, with interest
rates that adjust annually.  The Bank establishes various annual and life-of-
the-loan caps on ARM loan interest rate adjustments.  The Bank's current index
on its ARM loans is the one-year constant maturity treasury ("CMT") rate for
one-year ARM loans, a three-year CMT rate for three-year ARM loans, and a five-
year CMT rate for five-year ARM loans, plus a range of margin of 225 to 300
basis points, subject to change based on market conditions.  The Bank determines
whether a borrower qualifies for an ARM loan based on the fully indexed rate of
the ARM loan at the time the loan is originated.

                                       4
<PAGE>
 
     The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive.  ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase.  It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower.  Management believes
that the Bank's credit risk associated with its ARM loans is reduced because of
the lifetime interest rate adjustment limitations on such loans.  However,
interest rate caps and the changes in the CMT rate, which is a lagging market
index to which the Bank's ARM loans are indexed, may reduce the Bank's net
earnings in a period of rising market interest rates.

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

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

     Multifamily Residential Real Estate Loans.  Although the Bank does not
emphasize multifamily residential loans and has not been active recently in this
area, the Bank has originated loans collateralized by multifamily residential
real estate.  Such loans constituted approximately $3.1 million, or 1.6% of the
Bank's total net loan portfolio on September 30, 1998, compared to $1.6 million,
or 1.0%, of the Bank's total net loan portfolio at September 30, 1997, $4.7
million, or 3.5%, of the Bank's total net loan portfolio at September 30, 1996,
$3.5 million, or 3.0%, of the total net loan portfolio at September 30, 1995,
and $3.7 million, or 3.5%, of the total net loan portfolio as of  September 30,
1994.  The Bank's multifamily real estate loans are primarily collateralized by
multifamily residences, such as apartment buildings.   Multifamily residential
real estate loans are offered with fixed and adjustable interest rates and are
structured in a number of different ways depending upon the circumstances of the
borrower and the type of multifamily project.  Fixed interest rate loans
generally have five-to-seven-year terms with a balloon payment based on a 15 to
25 year amortization schedule.

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

     Agricultural Real Estate Loans.  In recent years the Bank has increased its
originations of agricultural real estate loans for the purchase of farmland in
the Bank's market area.  Loans collateralized by farmland constituted
approximately $6.5 million, or 3.4%, of the Bank's total net loan portfolio at
September 30, 1998, compared to $4.7 million, or 2.9%, $4.6 million, or 3.3%,
$4.0 million, or 3.4%, and $4.5 million, or 4.3%, of the Bank's total net loan
portfolio at September 30, 1997, 1996, 1995, and 1994, respectively.

     Agricultural mortgage loans have various terms up to 10 years with a
balloon payment based on a 20-year amortization schedule.  Such loans are
originated with fixed rates and generally include personal guarantees.  The
loan-to-value ratio on agricultural mortgage loans is generally limited to 75%.
The Bank earns higher yields on agricultural mortgage loans than on single-
family residential mortgage loans.  Agricultural related lending, however,
involves a greater degree of risk than single-family residential mortgage loans
because of the typically larger loan amounts and a somewhat more volatile
market.  In addition, repayments on agricultural mortgage loans are
substantially dependent on the successful operation or management of the farm
property collateralizing the loan, which is affected by many factors, such as
weather and changing market prices, outside the control of the borrower.

                                       5
<PAGE>
 
     Commercial Real Estate Loans.  Loans collateralized by commercial real
estate, including land loans, constituted approximately $10.3 million, or 5.3%
of the Bank's total net loan portfolio at September 30, 1998, compared to $9.6
million, or 6.0%, $6.7 million, or 4.9%, $5.2 million, or 4.5%, and $4.8
million, or 4.6% of the Bank's total net loan portfolio at September 30, 1997,
1996, 1995, and 1994, respectively. The Bank's commercial real estate loans are
collateralized by improved property such as office buildings, churches and other
nonresidential buildings.  At September 30, 1998, substantially all of the
Bank's commercial real estate loans were collateralized by properties located
within the Bank's market area.

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

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

     Other Loans.  The Bank originates various consumer loans, including
automobile, deposit account loans and second mortgage loans, principally in
response to customer demand.  As of September 30, 1998, such loans totaled $7.1
million, or 3.7% of the Bank's total net loan portfolio as compared to $3.7
million, or 2.3%, $2.8 million, or 2.0%, $3.0 million, or 2.7%, and $2.2
million, or 2.2 % of the Bank's total net loan portfolio as of September 30,
1997, 1996, 1995, and 1994, respectively.  Consumer loans are offered primarily
on a fixed rate basis with maturities generally of less than ten years.

     In recent years, the Bank has emphasized the origination of commercial
business loans, which principally include agricultural-related commercial loans
to finance the purchase of livestock, cattle, farm machinery and equipment,
seed, fertilizer and other farm-related products.  Such loans comprised $8.6
million, or 4.4% of the Bank's total net loan portfolio at September 30, 1998,
as compared to $6.5 million, or 4.1%, $5.7 million, or 4.2%, $4.5 million, or
3.8%, and $3.7 million, or 3.6% of the Bank's total net loan portfolio as of
September 30, 1994.

     As with agricultural real estate loans, agricultural operating loans
involve a greater degree of risk than residential mortgage loans because the
payments on such loans are dependent on the successful operation or management
of the farm property for which the operating loan is utilized.  See
"Agricultural Real Estate Loans" for the various risks associated with
agricultural operating loans.

                                       6
<PAGE>
 
     Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table below shows the Bank's originations, purchases and sales of loans and
mortgage-backed securities for the periods indicated.


<TABLE>
<CAPTION>
                                                                              YEAR ENDED SEPTEMBER 30
                                                                    ------------------------------------------------
                                                                      1998      1997      1996      1995      1994
                                                                    --------  --------  --------  --------  --------
                                                                                     (In Thousands)
<S>                                                                 <C>       <C>       <C>       <C>       <C>
Total loans receivable, net at beginning of year                    $159,690  $136,872  $116,447  $104,083  $100,695
Loans originated:                                                                                          
  Real estate:                                                                                             
    Single-family residential                                         66,988    49,215    48,568    28,295    21,046
    Multifamily residential                                              100        93         -         -         -
    Commercial                                                         2,010     3,467       299       552       667
    Agricultural                                                       3,429     2,863     1,596     1,654     1,648
Other:                                                                                                     
  Commercial business                                                  7,593     6,697     5,743     4,510     3,254
  Savings account loans                                                  908       926       826       682       688
  Other                                                                4,162     2,684     2,023     1,630     1,348
                                                                    --------  --------  --------  --------  --------
    Total loans originated                                            85,190    65,945    59,055    37,323    28,651
                                                                                                           
Loans purchased                                                            -         -         -       385        72
Loans sold                                                            (4,287)   (2,156)   (1,371)     (900)     (311)
Loans transferred to REO                                                (129)     (294)     (233)      (88)     (468)
Loans to facilitate the sale of REO                                        -      (349)     (145)     (205)     (472)
Loan repayments                                                      (46,478)  (40,004)  (36,470)  (24,350)  (23,961)
Other loan activity (net)                                               (258)     (324)     (411)      199      (123)
                                                                    --------  --------  --------  --------  --------
    Total loans receivable, net at end of year                      $193,728  $159,690  $136,872  $116,447  $104,083
                                                                    ========  ========  ========  ========  ========
Mortgage-backed securities, net at beginning of year                $168,836  $179,359  $163,287  $121,925  $ 48,830
Purchases                                                                  -         -    38,430    50,176    90,270
Sales                                                                      -         -   (10,020)        -         -
Fair value adjustment                                                  2,474         -         -         -         -
Repayments                                                           (19,598)  (10,669)  (13,575)   (8,978)  (17,270)
Discount amortization                                                    258       146     1,237       164        95
                                                                    --------  --------  --------  --------  --------
Mortgage-backed and related securities, net at end of year          $151,970  $168,836  $179,359  $163,287  $121,925
                                                                    ========  ========  ========  ========  ========
                                                                                                           
Total loans receivable, net, and mortage-backed                                                            
  and related securities, net, at end of year                       $345,698  $328,526  $316,231  $279,734  $226,008
                                                                    ========  ========  ========  ========  ========
</TABLE>

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

ASSET QUALITY

     When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment.  Depending upon the type of loan, late notices are sent and/or personal
contacts are made.  In most cases, deficiencies are cured promptly.  While the
Bank generally prefers to work with borrowers to resolve such problems, when a
mortgage loan becomes 90 days delinquent, the Bank generally institutes
foreclosure or other proceedings, as necessary, to minimize any potential loss.

     Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual.  When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income.  The
Bank generally does not accrue 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.

                                       7
<PAGE>
 
     Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned ("REO") until such time
as it is sold.  REO is initially recorded at its estimated fair value, less
estimated selling expenses.  Valuations are periodically performed by
management, and any subsequent decline in estimated fair value is charged to
operations.

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

<TABLE>
<CAPTION>
                                                                                             AT SEPTEMBER 30
                                                                             --------------------------------------------------
                                                                              1998       1997       1996       1995       1994
                                                                             ------     ------     ------     ------     ------
                                                                                          (DOLLARS IN THOUSANDS)
<S>                                                                          <C>        <C>        <C>        <C>        <C>
Nonperforming loans:                                                                            
  Single-family residential real estate                                      $2,240     $  422     $  766     $  409     $  253
  All other mortgage loans                                                       15                   195         32        178
  Other loans                                                                    41         31         62         55         66
                                                                             ------     ------     ------     ------     ------
    Total delinquent loans                                                    2,296        453      1,023        496        497
Total real estate owned                                                          16         17        111        190        130
                                                                             ------     ------     ------     ------     ------
    Total nonperforming assets                                               $2,312     $  470     $1,134     $  686     $  627
                                                                             ======     ======     ======     ======     ======
                                                                                                
Total loans delinquent 90 days or more                                                          
  to net loans receivable                                                      1.19%      0.28%      0.74%      0.43%      0.48%
                                                                                                
Total loans delinquent 90 days or more                                                          
  to total assets                                                              0.56%      0.12%      0.27%      0.14%      0.16%
                                                                                                
Total nonperforming loans and REO                                                               
  to total assets                                                              0.57%      0.12%      0.30%      0.20%      0.20%
</TABLE>

     Classification of Assets.  Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets.  An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected.  Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.  Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
Loans designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future.

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

                                       8
<PAGE>
 
     The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.

<TABLE>
<CAPTION>
                                                                            SEPTEMBER 30,
                                                 1998            1997            1996            1995            1994
                                                ------          ------          ------          ------          ------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                             <C>             <C>             <C>             <C>             <C>
Substandard assets                              $2,572          $1,640          $3,515          $3,074          $3,991
Doubtful assets                                     18               -               -               -              26
Loss assets                                          -              25              89             155             212
                                                ------          ------          ------          ------          ------
 
    Total classified assets (1)                 $2,590          $1,665          $3,604          $3,229          $4,229
                                                ======          ======          ======          ======          ======
</TABLE>

(1) With respect to assets classified "doubtful" and "loss," the Bank has
    established aggregate specific loan loss reserves of $0, $25,000 $89,000,
    $155,000, and $212,000 (in actual dollars) for the years ended September 30,
    1998, 1997, 1996, 1995, and 1994, respectively.


     Allowance for Loan Losses.  It is management's policy to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the potential losses that may be incurred.  The Bank regularly reviews its
loan portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses.  Such evaluation, which includes a review of all loans for which full
collection of interest and principal may not be reasonably assured, considers,
among other matters, the estimated fair value of the underlying collateral.
Other factors considered by management include the size and risk exposure of
each segment of the loan portfolio, present indicators such as delinquency rates
and the borrower's current financial condition, and the potential for losses in
future periods.  Management calculates the general allowance for loan losses in
part based on past experience, and in part based on specified percentages of
loan balances.  While both general and specific loss allowances are charged
against earnings, general loan loss allowances are added back to capital,
subject to a limitation of 1.25% of risk-based assets, in computing risk-based
capital under OTS regulations.

     During the fiscal year ended September 30, 1998, 1997, 1996, 1995, and
1994, the Bank added $0, $60,000, $411,200, $0, and $0, respectively, to its
allowance for loan losses.  The Bank's allowance for loan losses totaled $1.7
million, $1.7 million, $1.7 million,  $1.4 million, and $1.3 million at
September 30, 1998, 1997, 1996, 1995, and 1994, respectively.

                                       9
<PAGE>
 
     Analysis of the Allowance for Loan Losses.  The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                                                           YEAR ENDED SEPTEMBER 30,
                                                       ----------------------------------------------------------------
                                                         1998          1997         1996           1995          1994
                                                       --------      --------      --------      --------      --------
                                                                                (IN THOUSANDS)  
<S>                                                    <C>           <C>           <C>           <C>           <C>
Total loans outstanding                                $199,491      $164,663      $142,803      $120,340      $107,680
Average net loans outstanding                           176,295       147,316       124,609       109,658       102,368
                                                                                
Allowance balances (at beginning of year)              $  1,691      $  1,734      $  1,357      $  1,330      $  1,349
Provision for losses:                                                           
  Real estate loans                                           -            30             -             -             -
  Other loans                                                 -            30           411             -             -
Charge-offs:                                                                    
  Real estate loans                                          (7)          (11)          (17)          (19)          (19)
  Other loans                                                 -           (93)          (32)           (4)            -
Recoveries:                                                                     
  Real estate loans                                           -             1            15            50             -
  Other loans                                                 -             -             -             -             -
                                                       --------      --------      --------      --------      --------
Allowance balance (at end of year)                     $  1,684      $  1,691      $  1,734      $  1,357      $  1,330
                                                       ========      ========      ========      ========      ========
                                                                                
Allowance for loan losses as a percent                                          
  of total loans receivable at end of year                 0.84%         1.03%         1.21%         1.13%         1.24%
Net loans charged off as a percent                                                        
  of average net loans outstanding                         0.00%         0.07%         0.04%        (0.02)%        0.02%
Ratio of allowance for loan losses                                                        
  to total nonperforming loans                                                            
  at end of year                                          73.34%       373.45%       169.50%       273.59%       267.60%
Ratio of allowance for loan losses to                                                     
  total nonperforming loans and                                                           
  REO at end of year                                      72.84%       359.79%       152.91%       197.81%       212.12%
</TABLE>

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

<TABLE>
<CAPTION>
                                1998                    1997                 1996                  1995                 1994
                          -------------------  --------------------  -------------------  --------------------  -------------------
                                   % OF LOANS            % OF LOANS           % OF LOANS            % OF LOANS           % OF LOANS
                                    IN EACH               IN EACH              IN EACH               IN EACH              IN EACH
                                  CATEGORY TO           CATEGORY TO          CATEGORY TO           CATEGORY TO          CATEGORY TO
                          AMOUNT  TOTAL LOANS  AMOUNT   TOTAL LOANS  AMOUNT  TOTAL LOANS  AMOUNT   TOTAL LOANS  AMOUNT  TOTAL LOANS
                          ------- -----------  -------  -----------  ------  -----------  -------  -----------  ------- -----------
<S>                       <C>     <C>          <C>      <C>          <C>     <C>          <C>      <C>          <C>     <C>
Balance at end of period                                                                                                
  applicable to:                                                                                                        
    Mortgage loans         $  958        94.9%  $  927         96.7% $  903         93.9%  $  894         93.8%  $  863        94.4%
    Non-mortgage loans        726         5.1      764          3.3     831          6.1      463          6.2      467         5.6
                           ------      ------   ------       ------  ------       ------   ------       ------   ------      ------
                                                                                                                        
    Total allowance for                                                                                                 
      loan losses          $1,684       100.0%  $1,691        100.0% $1,734        100.0%  $1,357        100.0%  $1,330       100.0%
                           ======      ======   ======       ======  ======       ======   ======       ======   ======      ======
</TABLE>

INVESTMENT ACTIVITIES

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

                                       10
<PAGE>
 
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as the prepayment risk, are passed on to the
certificate holder.  The Bank invests in mortgage-backed securities to
supplement local single-family loan originations as well as to reduce interest
rate risk exposure, because mortgage-backed securities are more liquid than
mortgage loans.

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

<TABLE>
<CAPTION>
                                                                        SEPTEMBER 30, 
                                        1998              1997               1996               1995                 1994
                                 ----------------   ----------------   ----------------   ----------------   ------------------
                                    $         %        $         %     $            %        $         %        $           %
                                 --------  ------   --------  ------   --------  ------   --------  ------   --------    ------
                                                                     (Dollars In Thousands)    
<S>                              <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>     <C>          <C>
Mortgage-backed securities:                                                                                 
  Adjustable                     $139,528    92.0%  $151,766    89.9%  $155,949    86.9%  $126,654    77.6%  $ 80,380      65.9%
  Fixed                            12,442     8.0     17,070    10.1     23,410    13.1     36,633    22.4     41,545      34.1
                                 --------  ------   --------  ------   --------  ------   --------  ------   --------    ------
                                                                                                            
    Total mortgage-backed                                                                                   
      securities, net            $151,970   100.0%  $168,836   100.0%  $179,359   100.0%  $163,287   100.0%  $121,925     100.0%
                                 ========  ======   ========  ======   ========  ======   ========  ======   ========    ======
</TABLE>

     At September 30, 1998, mortgage-backed securities aggregated $151,970, or
37%, of the Bank's total assets.  At September 30, 1998, all of the Bank's
mortgage-backed securities were classified as available-for-sale.

     Other Investment Securities The Bank's investment portfolio, excluding
mortgage-backed securities and FHLB stock, consists of obligations of the United
States Government and agencies thereof, municipal bonds, interest-earning
deposits in other institutions and equity investments (principally in other
financial institutions).  The carrying value of this portion of the Bank's
investment portfolio totaled $32.7 million, $31.7 million, $40.3 million, $51.1
million, and $75.7 million at September 30, 1998, 1997, 1996, 1995 and 1994,
respectively.  At September 30, 1998, $9.1 million, or 5.0%, of the Bank's
investment securities, excluding mortgage-backed securities, had a remaining
term to maturity of one year or less, and $17.5 million, or 9.6%, had a
remaining term to maturity of five years or less.

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

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,
                                                    ------------------------------------------------------------
                                                      1998         1997         1996         1995         1994
                                                    --------     --------     --------     --------     --------
                                                                         (DOLLARS IN THOUSANDS)      
<S>                                                 <C>          <C>          <C>          <C>          <C>
Investment securities:                                                      
  Mortgage-backed securities                        $151,970     $168,836     $179,359     $163,287     $121,925
  U.S. Government treasury obligations                     -            -        1,000        2,948        3,148
  U.S. Government agency obligations                  21,656       26,858       38,872       47,721       72,445
  Municipal bonds                                      9,425        4,859          459          469          150
  Equity securities                                    1,588            -            -            -            -
                                                    --------     --------     --------     --------     --------
    Total investment securities                      184,639      200,553      219,690      214,425      197,668
FHLB stock                                            10,060       10,053       11,608       10,549        2,496
                                                    --------     --------     --------     --------     --------
    Total investments                               $194,699     $210,606     $231,298     $224,974     $200,164
                                                    ========     ========     ========     ========     ========
</TABLE>

                                       11
<PAGE>
 
     INVESTMENT PORTFOLIO MATURITIES  The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at September 30, 1998.

<TABLE>
<CAPTION>
                                                                        AT SEPTEMBER 30, 1998
                                        --------------------------------------------------------------------------------------
                                             ONE YEAR         ONE TO FIVE YEARS       FIVE TO TEN YEARS     OVER TEN YEARS       
                                        -------------------  -------------------  -------------------   ---------------------- 
                                                 ANNUALIZED           ANNUALIZED           ANNUALIZED               ANNUALIZED 
                                                   WEIGHTED             WEIGHTED             WEIGHTED                 WEIGHTED 
                                        CARRYING    AVERAGE  CARRYING    AVERAGE  CARRYING    AVERAGE     CARRYING     AVERAGE 
                                           VALUE      YIELD     VALUE      YIELD     VALUE      YIELD        VALUE       YIELD 
                                        -------- ----------  -------- ----------  -------- ----------     --------  ---------- 
                                                                         (DOLLARS IN THOUSANDS)                    
<S>                                     <C>      <C>         <C>      <C>         <C>      <C>            <C>       <C>    
Investment securities:                                                                                                         
  U.S. Government agency securities       $9,193       6.39%  $ 8,371       6.17%  $ 4,092       7.84%    $      0           0%
  State and municipal obligations (1)         10       5.25%       20       5.55%      400       5.36%       8,995        5.15%
  CMOs (2)                                   375       7.98%        0          0%    4,242       6.27%     123,765        6.77%
  Mortgage-backed securities                 119       6.13%    9,039       6.57%    2,723       7.16%      11,707        7.34%
                                          ------      -----   -------      -----   -------      -----     --------       ----- 
                                                                                                                               
    Total investment securities            9,697       6.45%   17,430       6.38%   11,457       7.01%     144,467        6.72%
                                                      =====                =====                =====                    ===== 
                                                                                                                               
Equity securities                                                                                                              
FHLB stock                                                                                                                     
                                                                                                                               
Accrued interest on investments               52                  175                   48                     545             
                                          ------              -------              -------                --------             
                                                                                                                               
    Total investment securities,                                                                                               
      including accrued interest          $9,749              $17,605              $11,505                $145,012             
                                          ======              =======              =======                ========             

<CAPTION>
                                                         AT SEPTEMBER 30, 1998
                                            ----------------------------------------------
                                                                TOTAL
                                            -----------------------------------------------
                                                                                 ANNUALIZED
                                                                       AVERAGE     WEIGHTED
                                             CARRYING     MARKET       LIFE IN      AVERAGE
                                                VALUE      VALUE        YEARS         YIELD
                                             --------     --------     -------   ----------
                                                         (DOLLARS IN THOUSANDS)                  
<S>                                          <C>         <C>           <C>       <C>
Investment securities:                  
  U.S. Government agency securities          $ 21,656     $ 21,656       0.80          6.58%
  State and municipal obligations (1)           9,425        9,568       6.86          5.16%
  CMOs (2)                                    128,382      128,382      23.86          6.75%
  Mortgage-backed securities                   23,588       23,588      12.68          6.99%
                                             --------     --------                    -----
                                        
    Total investment securities               183,051      183,194                     6.68%
                                                                                      =====
                                        
Equity securities                               1,588        1,588
FHLB stock                                     10,060       10,060                     6.00%
                                                                                      =====
Accrued interest on investments                   820          820
                                             --------     --------
                                        
    Total investment securities,        
      including accrued interest             $195,519     $195,662
                                             ========     ========
</TABLE>

(1) The yield on these tax-exempt obligations has not been compiled on a tax-
    equivalent basis.
(2) The average life in years is based on actual stated maturities; however,
    management anticipates a shorter life on these securities.

                                       12
<PAGE>
 
SOURCES OF FUNDS

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

     Deposits.  Consumer and commercial deposits are received principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook savings, money market
deposit accounts, term certificate accounts and individual retirement accounts.
The Bank also markets term certificate accounts nationally to attract deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors.  The maximum rate of interest the Bank must pay is not
established by regulatory authority.  The Bank regularly evaluates its internal
cost of funds, surveys rates offered by competing institutions, reviews the
Bank's cash flow requirements for lending and liquidity, and executes rate
changes when deemed appropriate.  As of September 30, 1998, the Bank did not
have any brokered deposits.

     TIME DEPOSIT RATES.  The following table sets forth the certificates of
deposit of the Bank classified by rates as of the dates indicated:

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,
                                      1998                1997               1996             1995            1994
                                    --------            --------           -------           -------         -------
                                                                        (In Thousands)
<S>                                 <C>                 <C>                <C>               <C>             <C>
Rate
 
0.00-3.99%                          $    275            $     16           $    17           $   126         $35,529
4.00-5.99%                           111,713              76,094            75,615            51,125          42,154
6.00-7.99%                            25,225              32,170             6,205            32,916             817
8.00-9.99%                                 -                   -                20                20             836
                                    --------            --------           -------           -------         -------
 
            Total                   $137,213            $108,280           $81,857           $84,187         $79,336
                                    ========            ========           =======           =======         =======
</TABLE>

     Time Deposit Maturities.  The following table sets forth the amount and
maturities of certificates of deposit at September 30, 1998.

<TABLE>
<CAPTION>
                                                                                  MATURITY
                                                          ---------------------------------------------------------
                                                          3 MONTHS     3 TO 6      6 TO 12     OVER 12
                                                          OR LESS      MONTHS      MONTHS      MONTHS       TOTAL
                                                          --------     -------     -------     -------     --------
<S>                                                       <C>         <C>         <C>         <C>         <C>
Certificate of Deposit less than $100,000                  $36,570     $38,146     $25,268     $14,605     $114,589
Certificate of Deposit greater than $100,000                 6,239       9,126       5,471       1,788       22,624
                                                           -------     -------     -------     -------     --------
 
Total Certificates of Deposit                              $42,809     $47,272     $30,739     $16,393     $137,213
                                                           =======     =======     =======     =======     ========
</TABLE>

BORROWINGS

     Deposits of the Bank are a significant source of funds as is short term and
long term advances from the FHLB.  FHLB advances are collateralized by the
Bank's stock in the FHLB, investment securities and a blanket lien on the Bank's
mortgage portfolio.  Such advances are made pursuant to different credit
programs, each of which has its own

                                       13
<PAGE>
 
interest rate and range of maturities.  The maximum amount that the FHLB will
advance to member institutions, including the Bank, for purposes other than
meeting withdrawals, fluctuates from time to time in accordance with the
policies of the FHLB.  The maximum amount of FHLB advances to a member
institution generally is reduced by borrowings from any other source.  At
September 30, 1998, the Bank's FHLB advances totaled $143.7 million.

     The Bank sells securities under agreements to repurchase with selected
dealers (reverse repurchase agreements) as a means of obtaining short-term funds
as market conditions permit.  In a reverse repurchase agreement, the Bank sells
a fixed dollar amount of securities to a dealer under an agreement to repurchase
the securities at a specific price within a specific period of time, typically
not more than 180 days.  Reverse repurchase agreements are treated as a
liability of the Bank.  The dollar amount of securities underlying the
agreements remain an asset of the Bank.  At September 30, 1998, the Bank's
securities sold under agreements to repurchase totaled $2.1 million.

     The following table sets forth certain information regarding borrowings by
the Bank during the periods indicated.

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED SEPTEMBER 30,
                                                             1998           1997          1996           1995          1994
                                                            --------      --------       --------      --------      --------
                                                                                   (DOLLARS IN THOUSANDS)          
<S>                                                         <C>           <C>            <C>           <C>           <C>
Weighed average rate paid on: (1)                                                      
  FHLB advances                                                 5.75%         5.54%          5.64%         6.17%         3.78%
  Other borrowings (2)                                          4.97%         5.81%          5.59%         5.75%         4.48%
                                                                                       
                                                                                       
FHLB advances:                                                                         
  Maximum balance                                           $210,325      $230,317       $239,686      $210,987      $ 49,369
  Average balance                                           $173,812      $203,835       $224,719      $167,766      $ 31,254
Other borrowings: (2)                                                                  
  Maximum balance                                           $ 21,850      $ 21,060       $ 10,306      $131,500      $119,430
  Average balance                                           $  6,215      $ 17,684       $  2,940      $ 67,000      $ 53,784
</TABLE>

(1) Calculated using monthly weighted average interest rates.
(2) Includes borrowings under reverse repurchase agreements.

SUBSIDIARIES' ACTIVITIES

     The Bank is the wholly owned subsidiary of the Company.  The Bank has two
wholly owned subsidiaries, Sun Realty, Inc. and P.F. Service, Inc.  Both are
Arkansas corporations and both are substantially inactive.

REGULATION

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

                                       14
<PAGE>
 
     REGULATORY CAPITAL REQUIREMENTS.  Federally insured savings institutions
are required to maintain minimum levels of regulatory capital.  The OTS has
established capital standards applicable to all savings institutions.  These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks.  The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a case-
by-case basis.

     Under the tangible capital requirement, a savings association must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital generally includes common stockholders' equity including
retained earnings and certain noncumulative perpetual preferred stock and
related earnings.  In addition, all intangible assets, other than a limited
amount of purchased mortgage-servicing rights, must be deducted from tangible
capital for calculating compliance with the requirement.  Further, the valuation
allowance applicable to the write-down of investments and mortgage-backed
securities in accordance with SFAS No. 115 is excluded from the regulatory
capital calculation.  At September 30, 1998, the Bank had no intangible assets
or unrealized loss, net of tax under SFAS No. 115.

     The leverage limit adopted by the OTS requires that savings associations
maintain "core capital" in an amount equal to at least 3% of adjusted total
assets.  Core capital generally consists of tangible capital plus certain
intangible assets, including supervisory goodwill (which is phased out over a
five-year period) and up to 25% of other intangibles that meet certain separate
salability and market valuation tests.  As a result of the prompt corrective
action provisions described below, however, a savings association must maintain
a core capital ratio of at least 4% of to be considered adequately capitalized
unless its supervisory condition is such to allow it to maintain a 3% ratio.  At
September 30, 1998, the Bank had no goodwill or other intangibles.

     Under the risk-based capital requirement, a savings association must
maintain total capital equal of at least 8% of risk-weighted assets.  Total
capital consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital.  The OTS is also authorized to require a savings
association to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities.  At
September 30, 1998, the Bank had no capital instruments that qualify as
supplementary capital and $1.7 million of general loss reserves, which was less
than 1.25% of risk-weighted assets.

     Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital.  Such exclusions consist of equity investments (as
defined by regulation) and that portion of land loans and nonresidential
construction loans in excess of an 80% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments.  The Bank had no such exclusions
from capital and assets at September 30, 1998.

     In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight based on
the risks inherent in the type of assets.  The risk weights assigned by the OTS
for principal categories of assets are (i) 0% for cash and securities issued by
the U.S. Government or unconditionally backed by the full faith and credit of
the U.S. Government; (ii) 20% for securities (other than equity securities)
issued by U.S. Government sponsored agencies and mortgage-backed securities
issued by, or fully guaranteed as to principal and interest by, the FNMA or the
FHLMC except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent one-
to-four-family first lien mortgage loans not more than 90

                                       15
<PAGE>
 
days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC; and (iv) 100% for all other loans and investments, including consumer
loans, commercial loans, repossessed assets, and loans more than 90 days past
due.

     On September 30, 1998, the Bank had total risk-based capital of $42.7
million (including $41.1 million in core capital and $1.6 million in qualifying
supplementary capital) and risk-weighted assets of $188.9 million; or total
capital of 22.62% of risk-weighted assets.  This amount was $27.6 million above
the current 8% requirement.

     Under FDICIA, all the federal banking agencies, including the OTS, must
revise their risk-based capital requirements to ensure that such requirements
account for interest rate risk, concentration of credit risk and the risks of
non-traditional activities, and that they reflect the actual performance of and
expected loss on multifamily loans.

     Pursuant to FDICIA, the federal banking agencies, including the OTS, have
also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities.  No assurance can be
given as to the final form of any such regulation.

     The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal  to 50% of its interest-rate risk exposure multiplied by the present value
of its assets.  This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in greater decline).  Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts.  The rule provides for a two-quarter lag between
calculating interest rate risk and recognizing any deduction from capital.   The
OTS has indefinitely postponed the effective date of the rule.   However, if
effective, this new rule will have no effect on the Bank's ability to comply
with its risk-based capital requirement.

     The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet capital
requirements.  Effective December 19, 1992, the federal banking agencies,
including the OTS, were given additional enforcement authority over
undercapitalized depository institutions.  The OTS is generally required to take
action to restrict the activities of an "undercapitalized association"
(generally defined to be one with less than either a 4% core ratio, a Tier 1
risk-based capital ratio or an 8% risk-based capital ratio).  Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions.  The OTS is authorized to impose the additional
restrictions, discussed below, that are applicable to significantly
undercapitalized associations.

     As a condition to the approval of the capital restoration plan, any company
controlling any undercapitalized association must agree that it will enter into
a limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.

     Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 8%) must be subject
to one or more of additional specified actions and operating restrictions
mandated by FDICIA.  These actions and restrictions include requiring the
issuance of additional voting securities; limitations on asset growth; mandated
asset reduction; changes in senior management; divestiture, merger or
acquisition of the association; restrictions on executive compensation; and any
other action the OTS deems appropriate.

     An association that becomes "critically undercapitalized" (i.e., a tangible
capital ratio of 2% or less) is subject to further restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations.  The FDIC must restrict the activities of a critically
undercapitalized association and, among other things, prohibit any

                                       16
<PAGE>
 
material transaction outside the ordinary course of business or engaging in
certain transactions with affiliates, without the approval of the FDIC.  The OTS
must be appointed as a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized.

     Any undercapitalized association is also subject to other possible
enforcement actions by the OTS or the FDIC.  Such actions could include a
capital directive, a cease-and-desist order, civil money penalties, the
establishment of restrictions on all aspects of the association's operations or
the appointment of a receiver or conservator or a forced merger into another
institution.  The grounds for appointment of a conservator or receiver include
substantially insufficient capital and losses or likely losses that will deplete
substantially all capital with no reasonable prospect for replenishment of
capital without federal assistance.

     If the OTS determines that an association is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice it is authorized to
reclassify a well-capitalized association as an adequately capitalized
association and if the association is adequately capitalized, to impose the
restrictions applicable to an undercapitalized association.  If the association
is undercapitalized, the OTS is authorized to impose the restrictions applicable
to a significantly undercapitalized association.

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

     The OTS regulations establish special capitalization requirements for
savings associations that own service corporations and other subsidiaries,
including subsidiary savings associations.  According to these regulations,
certain subsidiaries are consolidated for capital purposes and others are
excluded from assets and capital.  In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks, engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to the
association's level of ownership, including the assets of includable
subsidiaries in which the association has a minority interest that is not
consolidated for GAAP purposes.  For excludable subsidiaries, the debt and
equity investments in such subsidiaries are deducted from assets and capital,
with a five-year transition period beginning on July 1, 1990, for investments
made before April 12, 1989.  During the transition period, the assets of the
subsidiary are consolidated for capital purposes in inverse proportion to the
level of investment that is excluded.  All of the Bank's subsidiaries are
includable subsidiaries.

     QUALIFIED THRIFT LENDER TEST.  All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations.  This test requires a savings
association to have at least 65% of its portfolio assets (which consists of
total assets less intangibles, properties used to conduct the savings
association's business and liquid assets not exceeding 20% of total assets) in
qualifying thrift investments on a monthly average for nine out of every twelve
months on a rolling basis.  At September 30, 1998, the Bank met the test.

     Loans and mortgage-backed securities collateralized by domestic residential
housing and FHLB stock, as well as certain obligations of the FDIC and certain
other related entities may be included in qualifying thrift investments without
limit.  FHLMC and FNMA stock and certain other housing-related and non-
residential real estate loans and investments, including loans to develop
churches, nursing homes, hospitals and schools, and consumer loans and
investments to subsidiaries engaged in housing-related activities may also be
included, in varying amounts, to the extent of 20% of portfolio assets.

     A savings institution that fails to become or maintain a qualified thrift
lender must either become a bank (other than a savings bank) or be subject to
restrictions specified in FIRREA.  A savings institution that converts to a bank
must pay applicable exit and entrance fees involved in converting from one
insurance fund to another.  A savings institution that fails to meet the QTL
test and does not convert to a bank will be: (1) prohibited from making any
investment or

                                       17
<PAGE>
 
engaging in activities that would not be permissible for national banks; (2)
prohibited from establishing any new branch office where a national bank located
in the savings institution's home state would not be able to establish a branch
office; (3) ineligible to obtain new advances from any FHLB; and (4) subject to
limitations on the payment of dividends comparable to the statutory and
regulatory dividend restrictions applicable to national banks.  Also, beginning
three years after the date on which the savings institution ceases to be a
qualified thrift lender, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
Federal Home Loan Bank.  A savings institution may requalify as a qualified
thrift lender if it thereafter complies with the QTL test.

     COMMUNITY REINVESTMENT ACT.  Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with CRA. The CRA requires the OTS, in connection with the
examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.  The federal banking agencies, including
the OTS, have recently revised the CRA regulations and the methodology for
determining an institution's compliance with the CRA. The Bank was examined for
CRA compliance in June 1997 and received a rating of satisfactory.

     LIQUIDITY REQUIREMENTS.  Federally insured savings associations are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of average daily balances of net withdrawable
deposit accounts and borrowings payable in one year or less.  The liquidity
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations.  At the
present time, the minimum liquid asset ratio is 5%.  At September 30, 1998, the
Bank's liquidity ratio exceeded regulatory requirements.

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

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

     INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC.  The Bank's deposits are
insured up to $100,000 per insured member (as defined by law and regulation) by
the SAIF.  This insurance is backed by the full faith and credit of the United
States Government.  The SAIF is administered and managed by the FDIC.  As
insurer, the FDIC is authorized to conduct examinations of and to require
reporting by SAIF-insured associations.  It also may prohibit any SAIF-insured
association from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the SAIF.  The FDIC also has the authority to
initiate enforcement actions against savings associations, after first giving
the OTS an opportunity to take such action.

     FDICIA also authorizes the FDIC to implement a risk-based deposit insurance
assessment system.  Pursuant to this requirement, the FDIC adopted a
transitional risk-based assessment system, effective January 1, 1993, under
which all insured depository institutions are placed into one of nine categories
based upon their level of capital and supervisory evaluation.  Under the system,
institutions classified as well-capitalized (i.e., a core capital ratio of at
least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1
risk-based capital") of at least 6% and a risk-based capital ratio of at least
10%) and considered healthy would pay the lowest premium while institutions that
are less than adequately

                                       18
<PAGE>
 
capitalized (i.e., core and Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern would pay the highest premium.  Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period.

The financing corporations created by FIRREA and the Competitive Equality
Banking Act of 1987 are also empowered to assess premiums on savings
associations to help fund the liquidation or sale of troubled associations.
Such premiums cannot, however, exceed the amount of SAIF assessments and are
paid in lieu thereof.

     The FDIC has proposed regulations that generally prohibit payments to
directors, officers and employees contingent upon termination of their
affiliation with an FDIC-insured institution or its holding company (i.e.,
"golden parachute payments") if the payment is received after or in
contemplation of, among other things, insolvency or a determination that the
institution or holding company is in "troubled condition."  Certain types of
employee benefit plans are not subject to the prohibition.  The proposed
regulations would also generally prohibit certain indemnification payments for
civil money penalties or other enforcement action.  No assurance can be given as
to the final form of any such regulation, the date of its effectiveness or its
effect on the Bank.

     LIMITATIONS ON CAPITAL DISTRIBUTIONS.  OTS regulations impose limitations
on all capital distributions by savings institutions. Capital distributions
include cash dividends, payments to repurchase or otherwise acquire the savings
association's shares, payments to shareholders of another institution in a cash-
out merger and other distributions charged against capital. The rule establishes
three tiers of institutions. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution ("Tier 1
association") may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of 100% of its
net income to date during the calendar year plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. Any additional capital distributions would require prior regulatory
approval. An institution that meets its regulatory capital requirement before
and after its capital distribution ("Tier 2 association") may, after prior
notice but without the approval of the OTS, make capital distributions of up to
75% of its net income over the most recent four quarter period.  A savings
institution that does not meet its current regulatory capital requirement before
or after payment of a proposed capital distribution ("Tier 3 association") may
not make any capital distributions without the prior approval of the OTS, unless
such distribution is consistent with an approved capital plan. In addition, the
OTS would prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. Also, an
institution meeting the Tier 1 capital criteria which has been notified that it
needs more than normal supervision will be treated as a Tier 2 or Tier 3
association unless the OTS deems otherwise.  As of September 30, 1998, the Bank
was a Tier 1 association, and had not been notified of a need for more than
normal supervision.

     The OTS has proposed regulations that would revise the current capital
distribution restrictions.  The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations.  Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately capitalized (as defined in the OTS prompt corrective action
regulations) following the proposed distribution.  Savings associations that
would remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution.  The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year.  A savings association may not make a capital distribution
without prior approval of the OTS and the FDIC if it is undercapitalized before,
or as a result of, such a distribution.  As under the current rule, the OTS may
object to a capital distribution if it would constitute an unsafe or unsound
practice.  No assurance may be given as to whether or in what form the
regulations may be adopted

                                       19
<PAGE>
 
     EQUITY RISK LIMITATIONS.  Certain OTS regulations limit the Registrant's
investment in "equity risk investments," which include investments in equity
securities, real estate, service corporations and operating subsidiaries, as
well as land loans and non-residential construction loans with loan-to-value
ratios in excess of 80%. Equity risk investments increase the capital
requirements of the Bank. Federal laws and regulations also impose certain
limitations on operations, including restrictions on loans-to-one-borrower,
transactions with affiliates and affiliated persons and liability growth. They
also impose requirements for the retention of housing and thrift-related
investments. See "Qualified Thrift Lender Test."

TRANSACTIONS WITH AFFILIATES

     Section 11 of the HOLA provides that transactions between an insured
subsidiary of a holding company and an affiliate thereof will be subject to the
restrictions that apply to transactions between associations that are members of
the Federal Reserve System and their affiliates pursuant to Sections 23A and 23B
of the Federal Reserve Act. Generally, Sections 23A and 23B: (i) limit the
extent to which a financial institution or its subsidiaries may engage in
"covered transactions" with an "affiliate," to an amount equal to 10% of the
institution's capital and surplus, and limit all "covered transactions" in the
aggregate with all affiliates to an amount equal to 20% of such capital and
surplus; and (ii) require that all transactions with an affiliate, whether or
not "covered transactions," be on terms substantially the same, or at least as
favorable to the institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions. In addition to the
restrictions that apply to financial institutions generally under Sections 23A
and 23B, Section 11 of the HOLA places several other restrictions on savings
associations, including those that are part of a holding company organization.
First, savings associations may not make any loan or extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies. Second, savings associations may not purchase or invest
in affiliate securities except for those of a subsidiary. Finally, the OTS is
granted authority to impose more stringent restrictions when justifiable for
reasons of safety and soundness.

     Extensions of credit by the Bank to executive officers are subject to
Section 12(g) of the Federal Reserve Act, and extensions of credit to executive
officers, directors and principal stockholders and related interests of such
persons are subject to Section 22(h) of the Federal Reserve Act, which prohibits
loans to any such individual where the aggregate amount exceeds an amount equal
to 15% of a bank's unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully
collateralized by readily marketable collateral. Section 22(h) provides that no
institution shall make any loan or extension of credit in any manner to any of
its executive officers or directors, or to any person who directly or acting
through or in concert with one or more persons, owns, controls, or has the power
to vote more than 10% of any class of voting securities of such institution, or
to any company controlled by such executive officer, director, or person, or to
any political or campaign committee the funds or services of which will benefit
such executive officer, director, or person or which is controlled by such
executive officer, director, or person, unless such loan or extension of credit
is made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and does not involve more than the normal risk of repayment or
present other unfavorable features. A savings association is therefore
prohibited from making any new loans or extensions of credit to the savings
association's executive officers, directors and 10% stockholders at different
rates or terms than those offered to the general public.

THE FEDERAL RESERVE SYSTEM

     Federal Reserve Board regulations require all depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At September 30, 1998, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "Federal Regulations -- Liquidity Requirements."

                                       20
<PAGE>
 
HOLDING COMPANY REGULATION

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

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

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

     Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or in concert with one or more
persons, may acquire "control," as that term is defined in OTS regulations, of a
federally insured savings institution without giving at least 60 days written
notice to the OTS and providing the OTS an opportunity to disapprove of the
proposed acquisition.  Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings institution or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person.

FEDERAL SECURITIES LAWS

     At the time of the Conversion, the Company filed with the Securities and
Exchange Commission (the "SEC") a registration statement under the Securities
Act for the registration of the Common Stock to be issued pursuant to the
Conversion.  Upon completion of the Conversion, the Company's Common Stock was
registered with the SEC under the Exchange Act.  The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.

                                       21
<PAGE>
 
     The registration under the Securities Act of shares of the Common Stock
that were issued in the Conversion did not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration.  Shares purchased by an affiliate of
the Company are subject to the resale restrictions of Rule 144 under the
Securities Act.  If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Company
who complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons) is
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks.  Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.

EXECUTIVE OFFICERS OF THE REGISTRANT

     Listed below is information, as of September 30, 1996, concerning the
Company's executive officers.  Such executive officers also serve in the same
positions with the Savings Bank.  There are no arrangements or understandings
between the Company and any of the persons named below with respect to which he
or she was or its to be selected as an officer.

     The following individuals hold positions as executive officers of the
Company as is set forth below opposite their names.

     Name                                Position With the Company
     ----                                -------------------------

     Skip Martin........................ President and Chief Executive Officer
     James Edington..................... Executive Vice President and Secretary
     Dwayne Powell...................... Senior Vice President and Treasurer

     The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.

     Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.

     Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from the Federal Reserve Bank.

                                       22
<PAGE>
 
                          FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     Tax Bad Debt Reserves.  The Bank is subject to the rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code of
1986, as amended (the "Code").  Most corporations are not permitted to make
deductible additions to bad debt reserves under the Code.  However, savings and
loan associations and savings associations such as the Bank, which meet certain
tests prescribed by the Code may benefit from favorable provisions regarding
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which generally are loans collateralized by
interests in real property, and non-qualifying loans, which are all other loans.
The bad debt reserve deduction with respect to non-qualifying loans must be
based on actual loss experience.  The amount of the bad debt reserve deduction
with respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").

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

     Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, "large"
associations, i.e., the quarterly average of the association's total assets or
the consolidated group of which it is a member, exceeds $500 million for the
year, may no longer be entitled to use the experience method of computing
additions to their bad debt reserve.  A "large" association must use the direct
write-off method for deducting bad debts, under which charge-offs are deducted
and recoveries are taken into taxable income as incurred.  If the Bank is not a
"large" association, the Bank will continue to be permitted to use the
experience method.  The Bank will be required to recapture (i.e., take into
income) over a six year period its applicable excess reserves, i.e. the balances
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would have been the balance of such reserves as of the close of the
last tax year beginning before January 1, 1996, had the bank always computed the
additions to its reserves using the experience method.  Postponement of the
recapture is possible for a two-year period if an association meets a minimum
level of mortgage lending for 1996 and 1997.  As of September 30, 1998, the
Bank's bad debt reserve subject to recapture over a six-year period totaled
approximately $1,178,000.  The Bank has established a deferred tax liability of
approximately $477,000 for this recapture.

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

                                       23
<PAGE>
 
     Distributions.  To the extent that (i) the Bank's tax bad debt reserve for
losses on qualifying real property loans exceeds the amount that would have been
allowed under an experience method and (ii) the Bank makes "non-dividend
distributions" to stockholders that are considered to result in distributions
from the excess tax bad debt reserve or the reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income.  Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation.  However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's tax bad debt reserves.
Thus, any dividends to the Holding Company that would reduce amounts
appropriated to the Bank's tax bad debt reserves and deducted for federal income
tax purposes would create a tax liability for the Bank.  The amount of
additional taxable income created from an Excess Distribution is an amount that
when reduced by the tax attributable to the income is equal to the amount of the
distribution.  Thus, if certain portions of the Bank's accumulated tax bad debt
reserve are used for any purpose other than to absorb qualified tax bad debt
losses, such as for the payment of dividends or other distributions with respect
to the Bank's capital stock (including distributions upon redemption or
liquidation), approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state taxes). See "Regulation--
Limitations on Capital Distributions" for limits on the payment of dividends of
the Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserves.

     Corporate Alternative Minimum Tax.  The Bank is subject to the corporate
alternative minimum tax which is imposed to the extent it exceeds the Bank's
regular income tax for the year.  The alternative minimum tax will be imposed at
the rate of 20% of a specially computed tax base.  Included in this base will be
a number of preference items, including the following: (i) 100% of the excess of
a thrift  institution's bad debt deduction over the amount that would have been
allowable on the basis of actual experience; (ii) interest on certain tax-exempt
bonds issued after August 7, 1986; and (iii) for years beginning in 1988 and
1989 an amount equal to one-half of the amount by which a institution's "book
income" (as specially defined) exceeds its taxable income with certain
adjustments, including the addition of preference items (for taxable years
commencing after 1989 this adjustment item is replaced with a new preference
item relating to "adjusted current earnings" as specially computed).  In
addition, for purposes of the new alternative minimum tax, the amount of
alternative minimum taxable income that may be offset by net operating losses is
limited to 90% of alternative minimum taxable income.

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

ARKANSAS TAXATION

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

     The Company is a Delaware business corporation is required to file annual
income tax returns and an annual franchise tax returns in the states of Arkansas
and Delaware.  These taxes and fees are not expected to be material.

                                       24
<PAGE>
 
ITEM 2    PROPERTIES
------    ----------

     The Bank conducts its business through its main office and 10 full-service
branch offices located in seven counties in Northeast Arkansas.  Each office is
owned by the Bank.  The following table sets forth certain information
concerning the main office and each branch office of the Bank at September 30,
1998.  The aggregate net book value of the Bank's premises and equipment was
$3.3 million at September 30, 1998.

MAIN OFFICE:                                    Brinkley Branch         
                                                ---------------         
203 W. Broadway                                 811 West Cedar          
Pocahontas, Arkansas                            Brinkley, Arkansas      
(Opened 1935)                                   (Opened 1998)           
                                                                        
BRANCH OFFICES:                                 England Branch          
                                                --------------          
Walnut Ridge Branch                             100 Stuttgart Hwy.      
-------------------                             England, Arkansas       
120 W. Main Street                              (Opened 1998)           
Walnut Ridge, Arkansas                                                  
(Opened 1968)                                   Carlisle Branch         
                                                ---------------         
Jonesboro Branch                                124 West Main           
----------------                                Carlisle, Arkansas      
700 S.W. Drive                                  (Opened 1998)           
Jonesboro, Arkansas                                                     
(Opened 1976)                                   Lake City Branch        
                                                ----------------        
Corning Branch                                  100 Colbine             
--------------                                  Lake City, Arkansas     
309 Missouri Avenue                             (Opened 1998)           
Corning, Arkansas                                                       
(Opened 1983)                                   Hardy Branch            
                                                ------------            
Highland Branch                                 530 Main Street         
---------------                                 Hardy, Arkansas         
Highway 62                                      (Opened 1998)            
Hardy, Arkansas
(Opened 1983)

Jonesboro Branch
----------------
2213 Caraway Road
Jonesboro, Arkansas
(Opened 1996)

                                       25
<PAGE>
 
ITEM 3      LEGAL PROCEEDINGS
------      -----------------

     There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.

ITEM 4      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------      ---------------------------------------------------

     No matters were submitted during the fourth quarter of fiscal 1998 to a
vote of security holders.

                                       26
<PAGE>
 
                                 PART II

ITEM 5    MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
------    --------------------------------------------------------------------

TRADING IN COMMON STOCK AND RELATED MATTERS

The Registrant's Common Stock is traded on the NASDAQ National Market System
using the symbol "PFSL."

The following table shows the quarterly range of bid prices for the Company's
common stock during fiscal 1998 and 1997, as adjusted to reflect the exchange of
Bank common stock for Company common stock in the second step conversion of
March 1998.  For funds prior to March 1998, the data is for common stock of the
Bank.  These quotations represent prices between dealers and do not include
retail markups, markdowns, or commissions and do no reflect actual transactions.
This information has been obtained from monthly statistical stock summaries
provided by the Nasdaq Stock Market.  As of December 15, 1998, there were
6,217,467 shares of common stock outstanding and 856 stockholders of record.


<TABLE>
<CAPTION>
                                                         HIGH                       LOW
QUARTER ENDED                                             BID                       BID
-------------                                         -----------               ------------
<S>                                                   <C>                       <C>
December 31, 1997                                         $ 11.43                     $ 8.08
March 31, 1998                                              11.37                       9.94
June 30, 1998                                              10.375                      9.625
September 30, 1998                                          9.875                       6.75

                                                         HIGH                       LOW
QUARTER ENDED                                             BID                       BID
-------------                                         -----------               ------------
December 31, 1996                                         $  4.35                     $ 3.54
March 31, 1997                                               4.97                       4.16
June 30, 1997                                                5.16                       4.41
September 30, 1997                                           8.95                       4.97
</TABLE>

Cash Dividends Declared in Fiscal 1998:

<TABLE>
<CAPTION>
                    RECORD                           PAYMENT                     DIVIDEND
                     DATE                             DATE                       PER SHARE
                    ------                            ----                       --------- 
<S>                                             <C>                             <C>
December 15, 1997                               January 3, 1998                     $0.056
March 15, 1998                                  April 3, 1998                        0.056
June 15, 1998                                   July 3, 1998                         0.060
September 15, 1998                              October 3, 1998                      0.060
</TABLE>

Cash Dividends Declared in Fiscal 1997:

<TABLE>
<CAPTION>
                    RECORD                           PAYMENT                     DIVIDEND
                     DATE                             DATE                       PER SHARE
                    ------                            ----                       --------- 
<S>                                             <C>                             <C>
December 15, 1996                               January 3, 1997                     $0.052
March 15, 1997                                  April 3, 1997                        0.056
June 15, 1997                                   July 3, 1997                         0.056
September 15, 1997                              October 3, 1997                      0.056
</TABLE>
                                                                                

                                       27
<PAGE>
 
ITEM 6    SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
------    ----------------------------------------------

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

SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
                                                                        SEPTEMBER 30,
                                        -----------------------------------------------------------------------
                                              1998           1997          1996          1995          1994
                                                                        (In Thousands)
<S>                                       <C>            <C>           <C>           <C>           <C>
Total assets                                  $406,981       $383,417      $381,562      $348,554      $311,416
Cash and cash equivalents                        3,781          2,805         2,046         1,860         2,318
Cash surrender value of life insurance           5,822          5,639         5,439             -             -
Investment securities                          184,640        200,553       219,690       214,425       197,668
Loans receivable, net                          193,728        159,690       136,872       116,447       104,083
Federal Home Loan Bank Stock                    10,060         10,053        11,608        10,549         2,496
Deposits (3)                                   195,537        143,354       116,283       112,458       113,407
FLHB advances (2)                              143,670        190,601       227,221       210,987        49,222
Securities sold under agreements to
  repurchase                                     2,107         20,685        10,100             -       119,430
Stockholders' equity (2)                        60,567         24,246        22,689        21,008        19,420
</TABLE>

SUMMARY OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   YEARS ENDED SEPTEMBER 30,
                                                --------------------------------------------------------------------
                                                 1998           1997            1996           1995           1994
                                                                         (IN THOUSANDS)
<S>                                             <C>            <C>            <C>             <C>            <C>
Interest income                                 $27,854        $26,093        $25,417         $23,300        $14,964
Interest expense                                 18,401         18,699         18,628          17,241          8,354
                                                -------        -------        -------         -------        -------
 
            Net interest income before
              provision for loan losses           9,453          7,394          6,789           6,059          6,610
 
Provision for loan losses                             -             60            411               -              -
                                                -------        -------        -------         -------        -------
 
            Net interest income after
              provision for loan losses           9,453          7,334          6,378           6,059          6,610
 
Noninterest income                                  920          1,351          1,526             911            574
Noninterest expense:
  Compensation and benefits                       3,825          2,954          2,704           2,624          2,478
  Occupancy and equipment                           662            566            439             377            410
  Federal deposit insurance premiums (1)            104            108          1,198             279            277
  Other                                           1,600          1,337          1,210             746            743
                                                -------        -------        -------         -------        -------
            Total noninterest expense             6,191          4,965          5,551           4,026          3,908
                                                -------        -------        -------         -------        -------
Income before income taxes                        4,182          3,720          2,353           2,944          3,276
Income tax provision                              1,294          1,344            386           1,001          1,339
                                                -------        -------        -------         -------        -------
            Net income                          $ 2,888        $ 2,376        $ 1,967         $ 1,943        $ 1,937
                                                =======        =======        =======         =======        =======
</TABLE>
 
(1)  Includes nonrecurring SAIF Premium Assessment of approximately $937,000 in
     the fiscal year ended September 30, 1996.
 
(2)  Includes effect of second step offering during the year ended September 30,
     1998. See equity section of Management's Discussion and Analysis of
     Financial Condition and Results of Operations.
 
(3)  Increase during the year ended September 30, 1998, was due mainly to
     acquisition of branches. See Management's Discussion and Analysis of
     Financial Condition and Results of Operations.

                                       28
<PAGE>
 
KEY FINANCIAL RATIOS AND OTHER DATA

CERTAIN RATIOS AND OTHER DATA:  (2)
<TABLE>
<CAPTION>
                                                                    AT OR FOR THE YEAR ENDED SEPTEMBER 30,
                                                    ------------------------------------------------------------------------
                                                           1998           1997           1996           1995           1994
<S>                                                 <C>            <C>            <C>            <C>            <C>
PERFORMANCE RATIOS:                      
  Return on average equity                                  6.16%         10.07%          8.98%          9.58%         12.63%
  Return on average assets                                  0.67           0.63           0.54           0.58           0.85
  Interest rate spread (3)                                  1.93           1.83           1.65           1.57           2.73
  Net interest margin (3)                                   2.45           2.04           1.89           1.85           2.95
  Noninterest expense to average assets                     1.55           1.32           1.52           1.20           1.77
  Net interest income after provision    
    for loan losses to noninterest expense                152.69         147.68         114.89         150.49         163.94
  Efficiency (6)                                           59.69          57.17          70.23          57.77          54.40
                                         
ASSET QUALITY RATIOS:                    
  Average interest-earning assets to     
    average interest-bearing liabilities                  110.93         104.09         104.61         105.49         106.21
  Nonperforming loans to net loans (4) (5)                  1.19           0.28           0.74           0.43           0.47
  Nonperforming assets to total assets (4) (5)              0.57           0.12           0.30           0.20           0.35
  Allowance for loan losses to           
    nonperforming loans (4) (5)                            73.34         373.45         169.50         273.59         270.88
  Allowance for loan losses to           
    nonperforming loan assets (4) (5)                      72.84         359.79         152.91         197.81         120.47
  Allowance for loan losses to total loans (4)              0.86           1.03           1.21           1.13           1.24
                                         
CAPITAL, EQUITY AND DIVIDEND RATIOS:     
  Tangible capital (4)                                     10.24           6.32           5.97           6.02           6.20
  Core capital (4)                                         10.24           6.32           5.97           6.02           6.20
  Risk-based capital (4)                                   22.62          16.22          16.75          18.80          18.50
  Average equity to average assets ratio                   10.87           6.26           5.98           6.06           6.72
  Dividend payout ratio (1)                                43.20          60.74          63.46          48.90              -
                                         
PER SHARE DATA:                          
  Dividends per share                                      0.232          0.220          0.191          0.147          0.880
  Book value per share (7)                                  9.46           3.82           3.62           3.41           3.14
  Basic earnings per share (8)                              0.45           0.38           0.32           0.32           0.31
  Diluted earnings per share (9)                            0.44           0.37           0.31           0.31           0.30
                                         
  Number of full service offices                              11              6              5              5              5
</TABLE>
 
(1)  The fiscal year ended September 30, 1995, was the first full year that the
     Bank was a publicly traded company. Dividend payout ratio is the total
     dividends declared divided by net income.
(2)  With the exception of period end ratios, ratios are based on average
     monthly balances.
(3)  Interest rate spread represents the difference between the weighted average
     yield on average interest earning assets and the weighted average cost of
     average interest bearing liabilities, and net interest margin represents
     net interest income as a percent of average interest earning assets.
(4)  End of period ratio.
(5)  Nonperforming assets consists of nonperforming loans and real estate owned.
     Nonperforming loans consist of non-accrual loans while REO consists of real
     estate acquired in settlement of loans.
(6)  The efficiency ratio is the ratio of noninterest expense to the sum of net
     interest income and noninterest income.
(7)  This calculation is based on 6,399,623, 6,341,553, 6,267,905, 6,167,055,
     and 6,167,055 shares outstanding at September 30, 1998, 1997, 1996, 1995,
     and 1994, respectively.
(8)  This calculation is based on weighted average shares outstanding of
     6,388,906, 6,327,798, 6,240,231, 6,167,055, and 6,167,055 for the fiscal
     years ended September 30, 1998, 1997, 1996, 1995, and 1994, respectively.
(9)  This calculation is based on weighted average shares outstanding of
     6,535,068; 6,486,058, 6,382,328, 6,367,886, 6,367,886 and 6,367,886 for the
     fiscal years ended September 30, 1998, 1997, 1996, 1995, and 1994,
     respectively.

                                       29
<PAGE>
 
ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------    ---------------------------------------------------------------
          RESULTS  OF OPERATIONS
          ----------------------

GENERAL

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

Certain statements in this report which relate to the Company's plans,
objectives or future performance may be deemed to be forward-looking statements
within the meaning of Private Securities Litigation Act of 1995. Such statements
are based on management's current expectations.  Actual strategies and results
in future periods may differ materially from those current expected because of
various risks and uncertainties.  Additional discussion of factors affecting the
Company's business and prospects is contained in periodic filings with the
Securities and Exchange Commission.

MARKET RISK ANALYSIS

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-earnings 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.

                                       30
<PAGE>
 
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 set
forth, quantitatively, as of September 30, 1998, the OTS estimate of the
projected changes in NPV in the event of a 100, 200, 300, and 400 basis point
instantaneous and permanent increase and decrease in market interest rates:

<TABLE>
<CAPTION>
                                                                                       CHANGE IN NPV 
                                                                                           AS A      
                                                                                       PERCENTAGE OF 
     CHANGE IN                                                                           ESTIMATED   
  INTEREST RATES              NET PORTFOLIO VALUE                                         MARKET     
  IN BASIS POINTS    -----------------------------------------                           VALUE OF    
   (RATE SHOCK)         AMOUNT       $ CHANGE       % CHANGE         RATIO                ASSETS     
-------------------  ------------  -------------  ------------  ---------------        -------------  
                               (Dollars in Thousands)
<S>                  <C>           <C>            <C>           <C>                    <C>
       +400               $42,360      $(12,354)         (23)%            10.89               (2.33)%
       +300                48,890        (5,824)         (11)%            12.28               (0.95)%
       +200                54,645           (69)           0%             13.43                0.20%
       +100                58,425         3,711            7%             14.11                0.89%
        +0                 54,714             -            -              13.22                   -
       -100                53,552        (1,162)          (2)%            12.87               (0.36)%
       -200                53,536        (1,178)          (2)%            12.74               (0.48)%
       -300                54,226          (488)          (1)%            12.76               (0.47)%
       -400                55,042           328            1%             12.79               (0.44)%
</TABLE>

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

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

                                       31
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------

DISCUSSION OF CHANGES IN FINANCIAL CONDITION

General.  The Company's total assets increased $23.6 million, or 6.2%, from
$383.4 million at September 30, 1997 to $407.0 million at September 30, 1998.
Total assets increased $1.8 million, or 0.5%, from $381.6 million at September
30, 1996 to $383.4 million at September 30, 1997.

Loans receivable, net.  The Company's net loans receivable increased
approximately $34.0 million, or 21.3%, and $22.8 million, or 16.7%, in fiscal
years 1998 and 1997, respectively from the prior years.   The increases in both
periods were due to continued strong loan demand within the Company's market
area and the addition of a commercial loan officer, which accompanied an
increase of $2.0 million or $31.1% in commercial business loans.

Investment securities.  The investment securities portfolio decreased
approximately $17.4 million or 8.7% from September 30, 1997, to $183.2 million
at September 30, 1998.  In accordance with the Company's present strategy, the
principal paydowns and maturities of investments were used to fund loan growth.
The investment securities portfolio decreased $19.1 million, or 8.7% to $200.6
million at September 30, 1997, compared to $219.7 million at September 30, 1996.

Cash surrender value of life insurance.  During the year ended September 30,
1996, the Company purchased life insurance on the lives of executive officers
and members of the board of directors.  Such life insurance had cash surrender
value of approximately $5.8 million and $5.6 million at September 30, 1998 and
1997, respectively.  The increase in fiscal 1998 was due to earnings on the cash
surrender value, net of premiums.

Deposits.  Historically, deposits have provided the Company with a stable source
of relatively low cost funding. The market for deposits is competitive, which
has caused the Company to utilize primarily certificate accounts that are more
responsive to market interest rates rather than passbook accounts.  The Company
offers a traditional line of deposit products that currently includes checking,
interest-bearing checking, savings, certificates of deposit, commercial checking
and money market accounts.  The $52.2 million, or 36.4%, increase in deposits
during the year ended September 30, 1998, was primarily due to the purchase of
six branches (deposits only) during fiscal 1998.

FHLB advances and reverse repurchase agreements.  The Company also relies upon
FHLB advances and reverse repurchase agreements as a source to fund assets.
Approximately 48.0% and 55.1% of the Company's assets were funded with FHLB
advances and reverse repurchase agreements as of September 30, 1998 and 1997,
respectively.  At September 30, 1998, FHLB advances and reverse repurchase
agreements totaled $145.8 million, a decrease of $65.5 million, or 31.0%, from
1997, reflecting, in part, the increased deposits resulting from the Company's
acquisition of branches during 1998 and the proceeds from Company's second step
stock offering.  FHLB advances and reverse repurchase agreements totaled $211.3
million at September 30, 1997, a decrease of $26.0, or 11.0% from 1996.

Stockholders' Equity.  Stockholders' equity increased $36.4 million, or 60.0%,
from $24.2 million to $50.6 million at September 30, 1998.  This was primarily
due to the second step conversion completed on March 31, 1998.  Concurrent with
the second step conversion, the Company sold 3,570,750 additional shares to
members of the Mutual Holding Company, employees of the Bank and the public at a
price of $10.00 per share.  Reorganization and stock offering costs of
approximately $919,000 resulted in net proceeds from the offering of
approximately $34,800,000.

Stockholders' equity increased by $1.6 million or 6.9%, to $24.2 million at
September 30, 1997.  The increase was primarily attributable to net income of
$2.4 million for the fiscal year ended September 30, 1997.

                                       32
<PAGE>
 
DISCUSSION OF RESULTS OF OPERATIONS

Overview.  Net income was $2.7 million for fiscal 1998, compared to $2.4 million
and $2.0 million for fiscal 1996 and 1995, respectively.  The Company's average
interest earning assets have increased over the three year period ended
September 30, 1998, which has resulted in higher levels of interest income.  The
Company's net interest rate spread increased to 1.93% for the year ended
September 30, 1998, from 1.83% for the year ended September 30, 1997, and 1.65%
for the year ended September 30, 1996.  The increase in net interest rate spread
was a result of an increase in average loans outstanding, a decrease in average
investments outstanding, a decrease in the average cost of borrowed funds and,
in fiscal 1998, an increase in deposits and a decrease in borrowed funds.  The
Company's strategy has been to utilize principal repayments from investment
securities to fund loan growth within the Company's local market.  Such loans
generally result in higher yields than investment securities.

Net Interest Income.  The Company's results of operations depend primarily on
its net interest income, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The Company's net interest rate spread is impacted by changes in general market
interest rates, including changes in the relation between short- and long-term
interest rates (the "yield curve"), and the Company's interest rate sensitivity
position.  While management seeks to manage its business to limit the exposure
of net interest income to changes in interest rates, different aspects of its
business nevertheless remain subject to risk from interest rate changes.  Net
interest income was $9.5 million for fiscal 1998 compared to $7.4 million and
$6.8 million, for fiscal 1997 and 1996, respectively.  The tables below analyze
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.

The Company's interest-earning assets are primarily comprised of single family
mortgage loans and investment securities, which are primarily mortgage-backed
securities.  Interest-bearing liabilities primarily include deposits and FHLB
advances.  The increases in average interest-earning assets during fiscal 1998,
1997, and 1996 can be attributed to increases in the loan portfolio, funded
primarily with deposits and FHLB advances and increases in capital.  See
"Discussion of Changes in Financial Condition" for a discussion of the Company's
asset portfolio and "Capital Resources and Liquidity" for discussion of
borrowings.

Increased net interest income resulted from higher average loans outstanding and
improved net interest rate spreads during fiscal 1998, and 1997.  The average
balance of interest earning assets increased $23.8 million, $5.4 million and
$29.4 million in fiscal 1998, 1997, and 1996, respectively.  The net interest
rate spread increased 10 basis points, 18 basis points and 8 basis points in
fiscal 1998, 1997, and 1996, respectively.  Average loans receivable increased
to 45.7% of average total interest earning assets in fiscal 1998 from 40.7% in
1997 and 34.9% in 1996.

The majority of the Company's interest-earning assets are comprised of
adjustable-rate assets.  The Company's adjustable-rate loans and investment
securities are subject to periodic interest rate caps.  Periodic caps limit the
amount by which the interest rate on a particular mortgage loan may increase at
its next interest rate reset date.  In a rising rate environment, the interest
rate spread could be negatively impacted when the repricing of interest-earning
assets is delayed or prohibited, compared to market interest rate movements, as
a result of periodic interest rate caps.

Fiscal 1998 also benefited from the proceeds of the sale of stock which provided
approximately $34 million to purchase investment securities or repay borrowings.

                                       33
<PAGE>
 
AVERAGE BALANCE SHEETS (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     YEARS ENDED SEPTEMBER 30:

                                              1998                            1997                              1996
                                   ---------------------------     ----------------------------     -----------------------------
                                                       AVERAGE                          AVERAGE                           AVERAGE
                                   AVERAGE             YIELD/      AVERAGE              YIELD/      AVERAGE                YIELD/
                                   BALANCE  INTEREST    COST       BALANCE  INTEREST     COST       BALANCE    INTEREST     COST
                                   -------- -------- ---------     -------- ---------  --------     --------  ---------  --------
<S>                                <C>      <C>         <C>        <C>        <C>      <C>          <C>         <C>        <C>
Interest-earning assets:  (1)                                                                     
  Loan receivable, net    (6)      $176,295  $14,240      8.08%    $147,317   $12,007      8.15%    $124,609    $10,517      8.44%
  Investment securities             209,799   13,614      6.49      214,953    14,086      6.55      232,291     14,900      6.41
                                   -------- -------- ---------     -------- ---------  --------     --------  ---------  --------
           Total interest-                                                                        
           earning assets           386,094   27,854      7.21      362,270    26,093      7.20      356,900     25,417      7.11
                                                                                                  
Noninterest-earning cash                685                             775                              723
Other noninterest-                                                                                
  earning assets                     11,863                          14,041                            8,770
                                   --------                        --------                         --------
                                                                                                  
           Total assets            $398,642                        $377,086                         $366,393
                                   ========                        ========                         ========
                                                                                                  
Interest-bearing liabilities:                                                                     
  Demand deposits                  $ 45,513  $ 1,056      2.32     $ 33,919   $   857      2.53     $ 30,757    $   799      2.60
  Time deposits                     121,232    6,797      5.61       93,428     5,082      5.44       83,022      4,581      5.52
  Borrowed funds (5)                181,319   10,548      5.82      220,690    12,760      5.78      227,403     13,248      5.83
                                   -------- -------- ---------     -------- ---------  --------     --------  ---------  --------
                                                                                                  
           Total interest-                                                                        
           bearing liabilities      348,064   18,401      5.29      348,037    18,699      5.37      341,182     18,628      5.46
                                            -------- ---------              ---------  --------               ---------  --------
                                                                                                  
Noninterest-bearing                                                                               
  liabilities (2)                     7,233                           5,447                            3,302
                                   --------                        --------                         --------
                                                                                                  
           Total liabilities        355,297                         353,484                          344,484
                                                                                                  
Stockholders' equity                 43,345                          23,602                           21,909
                                   --------                        --------                         --------
                                                                                                  
           Total liabilities and                                                                  
           stockholders' equity    $398,642                        $377,086                         $366,393
                                   ========                        ========                         ========
                                                                                                  
Net interest income                          $ 9,453                          $ 7,394                           $ 6,789
                                            ========                        =========                         =========
                                                                                                  
Net interest rate spread (3)                              1.92%                            1.83%                             1.65%
                                                     =========                         ========                          ========
                                                                                                  
Interest-earning assets and                                                                       
  net interest margin (4)          $386,094               2.45%    $362,270                2.04%    $356,900                 1.89%
                                   ========          =========     ========            ========     ========             ========
                                                                                                  
Ratio of average interest-                                                                        
  earning assets to average                                                                       
  interest-bearing liabilities                          110.93%                          104.09%                           104.61%
                                                     =========                         ========                          ========
</TABLE>
 
(1)  All interest-earning assets are disclosed net of loans in process,
     unamortized yield adjustments, and valuation allowances.
(2)  Escrow accounts are noninterest-bearing and are included in noninterest-
     bearing liabilities.
(3)  Net interest rate spread represents the difference between the average
     yield on interest-earning assets and the average cost of interest-bearing
     liabilities.
(4)  Net interest margin represents the net interest income as a percentage of
     average interest-earning assets.
(5)  Includes FHLB advances and securities sold under agreements to repurchase.
(6)  Does not include interest on nonaccrual loans. Non-performing loans are
     included in loans receivable, net.

                                       34
<PAGE>
 
RATE/VOLUME ANALYSIS (IN THOUSANDS)

<TABLE>
<CAPTION>
                                        1998 VS 1997                            1997 VS 1996                 1996 VS 1995
                            -----------------------------------  ---------------------------------  -------------------------------
                                 INCREASE/(DECREASE)               INCREASE/(DECREASE)              INCREASE/(DECREASE)
                                      DUE TO                             DUE TO                           DUE TO           
                            -------------------------   TOTAL    ----------------------   TOTAL     ---------------------   TOTAL 
                                               RATE/   INCREASE                  RATE/   INCREASE                  RATE/  INCREASE
                            VOLUME    RATE     VOLUME (DECREASE) VOLUME    RATE  VOLUME  (DECREASE) VOLUME   RATE  VOLUME (DECREASE)
                            -------  -------  ------- ---------  -------  -----  ------  ---------  ------  -----  ------ ---------
<S>                         <C>      <C>      <C>     <C>        <C>      <C>    <C>     <C>        <C>     <C>    <C>    <C>
Interest income:                                                                                                          
  Loans receivable          $ 2,059  $  (442) $   616   $ 2,233  $ 1,908  $(312)  $(106)    $1,490  $1,242  $ 143  $  24    $1,409
  Investment securities        (357)    (473)     358      (472)  (1,112)   325     (27)      (814)    943   (218)   (17)      708
                            -------  -------  -------   -------  -------  -----   -----     ------  ------  -----  -----    ------
      Total interest-                                                                                                     
        earning assets      $ 1,702  $  (915) $   974   $ 1,761  $   796  $  13   $(133)    $  676  $2,185  $ (75) $   7    $2,117
                            =======  =======  =======   =======  =======  =====   =====     ======  ======  =====  =====    ======
Interest expense:                                                                                                         
  Deposits                  $ 1,663  $  (840) $ 1,091   $ 1,914  $   642  $ (80)  $ 559     $  559  $ (312) $ 109  $  (6)   $ (209)
  Borrowed funds             (2,362)   2,295   (2,145)   (2,212)    (391)  (114)   (488)      (488)  2,302   (589)  (117)    1,596
                            -------  -------  -------   -------  -------  -----   -----     ------  ------  -----  -----    ------
                                                                                                                          
      Total interest-                                                                                                     
        bearing liabilities $  (699) $ 1,455  $(1,054)  $  (298) $   251  $(194)  $  71     $   71  $1,990  $(480) $(123)   $1,387
                            =======  =======  =======   =======  =======  =====   =====     ======  ======  =====  =====    ======
                                                                                                                          
Net change in net                                                                                                         
  interest income           $ 2,401  $(2,370) $ 2,028   $ 2,059  $   545  $ 207   $(147)    $  605  $  195  $ 405  $ 130    $  730
                            =======  =======  =======   =======  =======  =====   =====     ======  ======  =====  =====    ======
</TABLE>

                                       35
<PAGE>
 
During fiscal 1998, loan demand remained relatively strong, resulting in an
increase in mortgage loans outstanding, an increase in the net interest rate
spread and an increase of $2.1 million, or 27.8%, in net interest income.  The
average yield on interest earning assets increased to 7.21% in fiscal 1998
compared to 7.20% and 7.11% in fiscal 1997 and fiscal 1996, respectively, while
the average cost of interest bearing liabilities decreased to 5.29% from 5.37%
and 5.46% in fiscal 1997 and fiscal 1996, respectively.  The increase in the
average yield on interest earning assets was largely due to an increase in
average loans receivable, net and a decrease in average investments receivable.
The decrease in average cost of interest bearing liabilities was primarily due
to an increase in average deposits and decrease in average borrowed funds.

The increase in average deposits was primarily due to the acquisition of
approximately $27.9 million of deposits in January of 1998 and the acquisition
of approximately $28.0 million of deposits in September, 1998.

Provision for Loan Losses.  The Bank provided for loan losses of $0, $60,000 and
$411,200, respectively, in the fiscal years ended September 30, 1998, 1997, and
1996.  Management considered several factors in determining the necessary level
of its allowance for loan losses and as a result of the process, the necessary
provision for loan losses including but not limited to historical loan losses
and current delinquency rates.

Noninterest Income.  Non-interest income totaled $0.9 million for the fiscal
year ended September 30, 1998, compared to $1.4 million for the fiscal year
ended September 30, 1997, and $1.5 million for the fiscal year ended September
30, 1996.  The decrease in 1998 was primarily due to a loss on equity securities
classified as trading of approximately $427,000 before income tax benefit.  See
discussion of equity position in management's discussion of financial condition.

Noninterest Expense.  Non-interest expense consisting primarily of salaries and
employee benefits, premises and equipment, data processing and federal deposit
insurance premiums totaled $6.2 million for the fiscal year ended September 30,
1998, compared to $5.0 million for the fiscal year ended September 30, 1997, an
increase of 24.0%.  Such increase was primarily attributable to an increase in
the number of employees in due to the acquisition of new branches and
redeployment of personnel in connection with the second step stock offering.

Income Taxes.  Income tax expense for the year ended September 30, 1998, was
$1.3 million compared to $1.3 million for the year ended September 30, 1997.
Income tax expense for the fiscal year ended September 30, 1997, was $1.3
million, an increase of $958,108, or 248.0% from 1996.  The increase was
primarily due to an increase in income before tax, a decrease in tax exempt
income and a change in an estimate in the year ended September 30, 1996.  Income
tax expense for the year ended September 30, 1996, was $386,382, a decrease of
$614,399, or 61.3%.  The decrease in income tax expense was due to change in an
estimate and removal of a valuation allowance on certain deferred tax assets in
the year ended September 30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations.  This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings.  The required ratio is currently 4%. The
Bank adjusts liquidity as appropriate to meet its asset and liability management
objectives.  At September 30, 1998, the Bank was in compliance with such
liquidity requirements.

                                       36
<PAGE>
 
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities, FHLB
advances, and funds provided from operations.  While scheduled principal
repayments on loans, and mortgage-backed securities are a relatively predictable
source of funds, deposit flows, loan prepayments and mortgage-backed securities
are greatly influenced by general interest rates, economic conditions, and
competition.  The Bank manages the pricing of its deposits to maintain a desired
deposit balance.  For additional information about cash flows from the Bank's
operating, financing, and investing activities, see Consolidated Statements of
Cash Flows included in the Consolidated Financial Statements.

At September 30, 1998, the Bank exceeded all of its regulatory capital
requirements.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time due to inflation.  The
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Bank are monetary.  As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation.  Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.

FDIC INSURANCE PREMIUMS AND ASSESSMENT

In September 1996, Congress enacted legislation to recapitalize the SAIF by a
one-time assessment on all SAIF-insured deposits held as of March 31, 1995.  The
assessment was 65.7 basis points per $100 in deposits, payable on November 30,
1996.  For the Bank, the assessment amounted to $937,000 (or $618,000 after
consideration of tax benefits), based on the Bank's SAIF-insured deposits of
$142.6 million.  In addition, beginning  January 1, 1997, pursuant to the
legislation, interest payments on FICO bonds issued in the late 1980's  by the
Financing Corporation  to recapitalize the now defunct Federal Savings and Loan
Insurance Corporation were paid jointly by BIF-insured institutions and SAIF-
insured institutions.  The FICO assessment will be 1.29 basis points per $100 in
BIF deposits and 6.44 basis points per $100 in SAIF deposits.  Beginning in
January 1, 2000, the FICO interest payments will be paid pro-rata by banks and
thrifts based on deposits (approximately 2.4 basis points per $100 in deposits).
The BIF and SAIF will be merged on January 1, 1999, provided the saving
association charter is eliminated by that date.  In that event, pro-rata FICO
sharing will begin on January 1, 1999.

IMPACT OF NEW ACCOUNTING STANDARDS

In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components.  SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.  The Company will be required
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial condition.  Also in June 1997, the FASB
issued Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information, establishing standards for the way public enterprises
report information about operating segments in interim financial reports issued
to shareholders.  It

                                       37
<PAGE>
 
also establishes standards for related disclosures about products and services,
geographic areas, and major customers.  SFAS 130 and 131 are effective for
fiscal years beginning after December 15, 1997, with reclassification of earlier
periods.  The adoption of SFAS 130 and 131 is not expected to have a material
effect on the Company's consolidated financial statements.

In February 1998, the FASB issued Statement No. 132, Employer's Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88 and 106 ("SFAS 132").  The statement revises employers'
disclosures about pensions and other postretirement benefits.  It does not
change the measurement or recognition of those plans.  It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, No. 88, and No. 106 were issued.  The
Statement suggests combined formats for presentation of pension and other
postretirement benefit disclosures.  This Statement is effective for fiscal
years beginning after December 15, 1997.  The adoption of SFAS 132 is not
expected to have a material effect on the Company's consolidated financial
statements.

The Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") on
July 1, 1998.  As permitted by SFAS No. 133, on July 1, 1998, the Company
transferred securities previously classified as held-to-maturity with a carrying
value of approximately $177,800,000 and a fair value of approximately
$182,400,000 into the available-for-sale category, where their carrying value
became their fair value.  This transfer resulted in a approximately $2,900,000
unrealized gain, net of tax, at July 1, 1998.  The other provisions of SFAS No.
133 had no material effect on the Company.

YEAR 2000

During the year ended September 30, 1998, the Company completed its year 2000
compliance assessment of all significant systems.  As a result of this
assessment, the Company changed computer service bureaus, replaced substantially
all of its personal computers and upgraded other less pervasive systems.  All
non-compliant computers were written off in the fourth quarter of 1998.  The
expenses related to these changes was not material.  The Company is continuing
to evaluate all systems for year 2000 compliance and in management's opinion,
the Company will not incur significant additional expenses related to year 2000
compliance.  Management is currently developing a contingency plan, in the event
a system fails to operate after December 31, 1999.  However, in the event a
major vendor of the Bank is unable to fulfill its contractual obligation to the
Bank, the Company, and the Bank could experience material cost.

                                       38
<PAGE>
 
ITEM 8 FINANCIAL STATEMENTS
       --------------------                                                


INDEPENDENT AUDITORS' REPORT

The Board of Directors of
Pocahontas Bancorp, Inc.:

We have audited the accompanying consolidated statements of financial condition
of Pocahontas Bancorp, Inc. (the "Company") and subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1998.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, on July 1,
1998, the Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities.


/s/ Deloitte & Touche LLP

Little Rock, Arkansas
November 11, 1998

                                       39
<PAGE>
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                1998                 1997   
<S>                                                                   <C>                  <C>
ASSETS 

Cash and due from banks                                                     $  3,781,077         $  2,805,273
Cash surrender value of life insurance                                         5,821,800            5,639,161
Securities held-to-maturity, at amortized cost
  (fair value of $9,568,105 and $202,897,745 in 1998 and
  1997, respectively)                                                          9,425,080          200,552,569
Securities available-for-sale, at fair value (amortized
  cost of $170,804,700)                                                      173,626,023                    -
Securities-trading, at fair value (amortized cost of $2,015,655)               1,588,535                    -
Loans receivable, net                                                        193,727,664          159,690,201
Accrued interest receivable                                                    2,407,273            2,229,531
Premises and equipment, net                                                    3,327,076            1,804,832
Federal Home Loan Bank stock                                                  10,059,900           10,052,700
Core deposit premium                                                           2,576,908                    -
Other assets                                                                     639,762              642,947
                                                                            ------------         ------------
 
TOTAL                                                                       $406,981,098         $383,417,214
                                                                            ============         ============
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
LIABILITIES:
  Deposits                                                                  $195,536,708         $143,354,096
  Federal Home Loan Bank advances                                            143,670,000          190,601,038
  Securities sold under agreements to repurchase                               2,107,645           20,685,000
  Deferred compensation                                                          717,726              947,186
  Deferred income tax liability, net                                             889,844                    -
  Accrued expenses and other liabilities                                       3,492,377            3,583,625
                                                                            ------------         ------------
 
          Total liabilities                                                  346,414,300          359,170,945
 
STOCKHOLDERS' EQUITY:
  Common stock, $0.01 par value, 8,000,000 shares authorized;
    6,685,283 and 6,669,185 shares issued and outstanding in
    1998 and 1997, respectively                                                   66,853               66,692
  Additional paid-in capital                                                  50,094,461           15,010,041
  Unearned ESOP shares                                                        (2,856,600)            (103,644)
  Unrealized gain on available-for-sale securities, net of tax                 1,805,645
  Retained earnings                                                           11,456,439            9,273,180
                                                                            ------------         ------------
 
           Total stockholders' equity                                         60,566,798           24,246,269
                                                                            ------------         ------------
 
TOTAL                                                                       $406,981,098         $383,417,124
                                                                            ============         ============
 
</TABLE>


See notes to consolidated financial statements.

                                       40

<PAGE>
 
POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                1998                1997               1996
 
<S>                                                     <C>                 <C>                <C>
INTEREST INCOME:
  Loans receivable                                            $14,239,771         $12,006,825        $10,517,365
  Securities                                                   13,613,686          14,086,352         14,899,664
                                                              -----------         -----------        -----------
            Total interest income                              27,853,457          26,093,177         25,417,029
 
INTEREST EXPENSE:
  Deposits                                                      7,852,334           5,939,098          5,380,077
  Borrowed funds                                               10,548,315          12,759,704         13,248,265
                                                              -----------         -----------        -----------
            Total interest expense                             18,400,649          18,698,802         18,628,342
                                                              -----------         -----------        -----------
 
NET INTEREST INCOME BEFORE PROVISION
  FOR LOAN LOSSES                                               9,452,808           7,394,375          6,788,687
PROVISION FOR LOAN LOSSES                                               -              60,000            411,200
                                                              -----------         -----------        -----------
 
NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES                                               9,452,808           7,334,375          6,377,487
OTHER INCOME:
  Dividends on FHLB stock                                         627,676             626,422            828,505
  Fees and service charges                                        484,419             398,234            314,437
  Unrealized loss on trading securities                          (427,120)
  Other                                                           234,912             326,526            383,263
                                                              -----------         -----------        -----------
            Total other income                                    919,887           1,351,182          1,526,205
OTHER EXPENSES:
  Compensation and benefits                                     3,824,786           2,954,912          2,704,000
  Occupancy and equipment                                         662,486             566,229            438,870
  Deposit insurance                                               104,020             108,136          1,197,722
  Professional fees                                               231,714             276,149            209,270
  Data processing                                                 294,837             237,995            205,369
  Advertising                                                     220,862             184,456            171,044
  OTS assessment                                                   93,629              92,034             87,564
  Other                                                           758,791             545,639            536,930
                                                              -----------         -----------        -----------
            Total other expenses                                6,191,125           4,965,550          5,550,769
                                                              -----------         -----------        -----------
INCOME BEFORE INCOME TAXES                                      4,181,570           3,720,007          2,352,923
INCOME TAX PROVISION                                            1,294,239           1,344,490            386,382
                                                              -----------         -----------        -----------
NET INCOME                                                    $ 2,887,331         $ 2,375,517        $ 1,966,541
                                                              ===========         ===========        ===========
Basic earnings per share                                            $0.45               $0.38              $0.32
                                                              ===========         ===========        ===========
Diluted earnings per share                                          $0.44               $0.37              $0.31
                                                              ===========         ===========        ===========
</TABLE>


See notes to consolidated financial statements.

                                       41
<PAGE>
 
POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                             UNREALIZED 
                                                                                               GAIN ON                            
                                          COMMON STOCK        ADDITIONAL       UNEARNED       AVAILABLE-                TOTAL
                                       ---------------------   PAID-IN           ESOP         FOR-SALE     RETAINED  STOCKHOLDERS'
                                          SHARES     AMOUNT     CAPITAL         SHARES       SECURITIES    EARNINGS     EQUITY
                                                                                                                     
<S>                                      <C>        <C>       <C>           <C>            <C>          <C>          <C>
BALANCE, OCTOBER 1, 1995                 6,578,939   $65,790   $14,673,551   $  (313,950)                $ 6,582,794   $21,008,185
  Repayment of ESOP loan and related
    increase in share value                                         47,747       104,650                                   152,397
  Options exercised                         58,734       587       145,353                                                 145,940
  Net income                                                                                               1,966,541     1,966,541
  Dividends                                                                                                 (583,862)     (583,862)
                                         ---------  --------  ------------  ------------   -----------   -----------   -----------
BALANCE, SEPTEMBER 30, 1996              6,637,673    66,377    14,866,651      (209,300)                  7,965,473    22,689,201
  Repayment of ESOP loan and related
    increase in share value                                         65,405       105,656                                   171,061
  Options exercised                         31,512       315        77,985                                                  78,300
  Net income                                                                                               2,375,517     2,375,517
  Dividends                                                                                               (1,067,810)   (1,067,810)
                                         ---------  --------  ------------  ------------   -----------   -----------   -----------
BALANCE, SEPTEMBER 30, 1997              6,669,185    66,692    15,010,041      (103,644)                  9,273,180    24,246,269
  Repayment of ESOP loan and related
    increase in share value                                        256,356       103,644                                   360,000
  Options exercised                         16,098       161        39,839                                                  40,000
  Proceeds from stock offering                                  34,788,225    (2,856,600)                    449,424    32,381,049
  Cumulative effect of adoption
    of SFAS 133                                                                            $ 2,944,822                   2,944,822
   Change in unrealized gain on
    available-for-sale securities, net                                                      (1,139,177)                 (1,139,177)
     of tax
  Net income                                                                                               2,887,331     2,887,331
  Dividends                                                                                               (1,153,496)   (1,153,496)
                                         ---------  --------  ------------  ------------   -----------   -----------   -----------
BALANCE, SEPTEMBER 30, 1998              6,685,283   $66,853   $50,094,461   $(2,856,600)  $ 1,805,645   $11,456,439   $60,566,798
                                         =========  ========   ===========  ============   ===========   ===========   ===========

</TABLE>


See notes to consolidated financial statements.

                                       42
<PAGE>
 
POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                1998                  1997                  1996
 
OPERATING ACTIVITIES:
<S>                                                     <C>                   <C>                   <C>
  Net income                                                   $  2,887,331          $  2,375,517          $  1,966,541
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation of premises and equipment                          298,725               199,576               180,025
    Deferred income tax provision (benefit)                         (59,617)              414,295              (146,428)
    Amortization of deferred loan fees                             (103,001)             (183,648)             (183,649)
    Amortization of premiums and discounts, net                    (269,489)             (116,045)             (180,379)
    Amortization of core deposit premium                            126,228
    Adjustment of ESOP shares and release of
      shares under recognition and retention plan                   256,356                65,405                47,747
    Provision for loan losses                                             -                60,000               411,200
    Net gains (losses) on sales of assets                           (60,597)              (47,600)               79,811
    Increase in cash surrender value of life
      insurance policies                                           (182,639)             (200,301)             (118,860)
    Changes in operating assets and liabilities:
      Trading securities                                         (1,588,535)                    -                     -
      Accrued interest receivable                                  (177,742)               48,053               237,936
      Other assets                                                  132,014               253,596              (581,240)
      Deferred compensation                                        (229,460)               87,186               267,146
      Special SAIF assessment payable                                     -              (937,000)              937,000
      Accrued expenses and other liabilities                        (53,819)              217,310                24,400
                                                               ------------          ------------          ------------
 
            Net cash provided by operating activities               975,755             2,236,344             2,941,250
 
INVESTING ACTIVITIES:
  Purchases of investment securities held-to-maturity            (4,571,962)           (8,460,626)          (57,973,899)
  Proceeds from sale of securities available-for-sale                     -                     -            15,788,567
  Proceeds from maturities and principal repayments
    of investment securities                                     25,157,038            29,268,937            35,962,923
  Increase in loans, net                                        (34,002,694)          (24,817,073)          (22,163,548)
  Core deposit premium paid                                      (2,703,136)
  Proceeds from sale of loans                                                           2,155,506             1,320,713
  Proceeds from sale of foreclosed real estate                                            410,101               163,059
  Purchase of life insurance policies                                                           -            (5,320,000)
  Purchases of premises and equipment                            (1,820,969)              (81,161)             (297,335)
                                                               ------------          ------------          ------------
            Net cash provided by (used in)
              investing activities                              (17,941,723)           (1,524,316)          (32,519,520)
</TABLE>


                                                                     (Continued)

                                       43
<PAGE>
 
POCAHONTAS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                          1998                    1997                    1996
FINANCING ACTIVITIES:
<S>                                              <C>                     <C>                     <C>
Net increase (decrease) in deposits other
    than in acquisitions                               $    (4,351,344)        $    27,071,488         $     3,824,696
  Deposits assumed in acquisitions                          56,533,956                       -                       -
  Federal Home Loan Bank advances                        1,580,034,000           2,037,150,900           1,479,348,400
  Repayment of Federal Home Loan Bank
    advances                                            (1,626,965,038)         (2,073,770,768)         (1,463,114,691)
  Net increase (decrease) in repurchase
    agreements                                             (18,577,355)             10,585,000              10,100,000
  Proceeds from stock offering                              32,381,049                                               -
  Exercise of stock options                                     40,000                  78,300                 145,940
  Dividends paid                                            (1,153,496)             (1,067,810)               (539,685)
                                                       ---------------         ---------------         ---------------
            Net cash provided by financing
              activities                                    17,941,772                  47,110              29,764,660
NET INCREASE IN CASH AND
  DUE FROM BANKS                                               975,804                 759,138                 186,390
CASH AND DUE FROM BANKS,
  BEGINNING OF YEAR                                          2,805,273               2,046,135               1,859,745
                                                       ---------------         ---------------         ---------------
CASH AND DUE FROM BANKS,
  END OF YEAR                                          $     3,781,077         $     2,805,273         $     2,046,135
                                                       ===============         ===============         ===============
SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest                                           $    18,832,896         $    18,426,591         $    18,528,748
                                                       ===============         ===============         ===============
    Income taxes                                       $     1,201,232         $       825,000         $       870,000
                                                       ===============         ===============         ===============
SUPPLEMENTAL DISCLOSURES OF
  NONCASH INVESTMENT ACTIVITIES:
  Transfers from loans to real estate acquired,
    or deemed acquired, through foreclosure            $       128,829         $       294,241         $       233,293
                                                       ===============         ===============         ===============
  Loans originated to finance the sale of real
    estate acquired through foreclosure                $             -         $       349,446         $       145,393
                                                       ===============         ===============         ===============
  Securities transferred from held-to-maturity
    to available-for-sale                              $   177,800,000
                                                       ===============
</TABLE>



                                                                     (Concluded)

See notes to consolidated financial statements.

                                       44
<PAGE>
 
POCAHONTAS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997, AND 1996
--------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   ORGANIZATION AND PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
   financial statements include the accounts of Pocahontas Bancorp, Inc. (the
   "Company"), its wholly owned subsidiary, Pocahontas Federal Savings and Loan
   Association (the "Bank"), as well as the Bank's subsidiaries, P.F. Service,
   Inc. and Sun Realty, Inc. which provide real estate services.  All
   significant intercompany transactions have been eliminated in consolidation.
   The Bank operates 12 branches in northern and eastern Arkansas as a federally
   chartered savings and loan.

   On March 31, 1998, the Bank and Pocahontas Federal Holding Company (the
   "Mutual Holding Company") completed a second step conversion (the
   "Reorganization").  As part of the Reorganization, the Company was formed as
   a first-tier wholly owned subsidiary of the Bank.  The Mutual Holding Company
   was converted to an interim federal stock savings association and
   simultaneously merged with and into the Bank, at which point the Mutual
   Holding Company ceased to exist and 862,500 shares or 54% of the outstanding
   Bank common stock held by the Mutual Holding Company was canceled.  A second
   interim savings and loan association ("Interim") formed by the Company solely
   for the Reorganization was then merged with and into the Bank.  As a result
   of the merger of Interim with and into the Bank, the Bank became a wholly
   owned subsidiary of the Company.  Pursuant to an exchange ratio of 4.0245
   shares for each share of the Bank stock, which provided the public
   shareholders of the Bank a maintenance of their 46% ownership of the Company,
   the 769,924 outstanding shares held by the public shareholders of the Bank
   were exchanged for approximately 3,100,000 shares of the Company.  Concurrent
   with the Reorganization, the Company sold 3,570,750 (essentially the
   equivalent of shares held by the Mutual Holding Company) additional shares to
   members of the Mutual Holding Company, employees of the Bank and the public
   at a price of $10.00 per share.  Reorganization and stock offering costs of
   approximately $919,000 resulted in net proceeds from the offering of
   approximately $34,800,000.

   Each depositor of the Bank as of the effective date of the Conversion will
   have, in the event of liquidation of the Bank, a right to his pro rata
   interest in a liquidation account established for the benefit of such
   depositors.  Records are maintained to ensure such rights receive statutory
   priority as required by Office of Thrift Supervision ("OTS") regulations.
   The Reorganization was accounted for as a change in corporate form with the
   historic basis of accounting for the Bank unchanged.

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

   CASH EQUIVALENTS - For the purpose of presentation in the consolidated
   statements of cash flows, cash, and cash equivalents are defined as those
   amounts included in the statement of financial condition caption "cash and
   due from banks."

                                       45
<PAGE>
 
   TRADING SECURITIES - Equity securities held principally for resale in the
   near term are classified as trading account securities and recorded at their
   fair values.  Unrealized gains and losses on trading account securities are
   included in other income.

   SECURITIES HELD-TO-MATURITY - Bonds, notes, and debentures for which the
   Company has the positive intent and ability to hold to maturity are reported
   at cost, adjusted for the amortization of premiums and the accretion of
   discounts, which are recognized in income using the level-yield method over
   the assets' remaining lives, adjusted for anticipated prepayments.  Should
   other than a temporary decline in the fair value of a security occur, the
   carrying value of such security would be written down to current market value
   by a charge to operations.

   SECURITIES AVAILABLE-FOR-SALE - Available-for-sale securities consist of
   bonds, notes and debentures.  Unrealized holding gains and losses, net of
   tax, on available-for-sale securities are reported as a net amount in a
   separate component of stockholders' equity until realized.  Gains and losses
   on the sale of available-for-sale securities are determined using the
   specific-identification method.  Declines in the fair value of individual
   held-for-maturity and available-for-sale securities below their cost that are
   other than temporary would result in write-downs of the individual securities
   to their fair value.  The related write-downs would be included in earnings
   as realized losses.  As of September 30, 1998, no securities were determined
   to have other than a temporary decline in fair value below cost.

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

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

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

   ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is increased by
   charges to income and decreased by charge-offs (net of recoveries).  Loan
   principal is charged against the allowance for loan losses when management
   believes that the loss of the principal is probable.  If, as a result of
   loans charged off or increases in the size or risk characteristics of the
   loan portfolio, the allowance is below the level considered by management to
   be adequate to absorb future loan losses on existing loans, a provision for
   loan losses is made and the allowance for loan losses is increased to the
   level considered necessary to provide an adequate allowance to absorb
   estimated losses on existing loans that may become uncollectible, based on
   evaluations of the collectibility of the loans.  The evaluations take into
   consideration such factors as changes in the nature and volume of the loan
   portfolio, overall portfolio quality, review of specific problem loans and
   current economic conditions that may affect the borrowers' ability to pay.
   Economic conditions may result in the necessity to change the allowance
   quickly in order to react to deteriorating financial conditions of the
   Company's borrowers.  As a result, additional provisions on existing loans
   may be required in the future if borrowers' financial conditions deteriorate
   or if real estate values decline.

                                       46

<PAGE>
 
   Estimates of anticipated loan losses involve judgment.  While in particular
   periods the Company may sustain losses which are substantial relative to the
   allowance for loan losses, it is the judgment of management that the
   allowances for loan losses reflected in the consolidated statements of
   financial condition are adequate to absorb estimated losses which may exist
   in the current loan portfolio.

   FORECLOSED REAL ESTATE - Real estate properties acquired through, or in lieu
   of, loan foreclosure are initially recorded at fair value at the date of
   foreclosure establishing a new cost basis.  After foreclosure, valuations are
   periodically performed by management and the real estate is carried at the
   lower of carrying amount or fair value less cost to sell.  Revenue and
   expenses from operations and changes in the valuation allowance are included
   in loss on foreclosed real estate.

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

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

   INCOME TAXES - Deferred tax assets and liabilities are recorded for temporary
   differences between the carrying value and tax bases of assets and
   liabilities.  Such amounts are reflected at currently enacted income tax
   rates applicable to the period in which the deferred tax assets or
   liabilities are expected to be realized or settled.  As changes in tax laws
   or rates are enacted, deferred tax assets and liabilities are adjusted
   through the provision for income taxes.

   STOCK COMPENSATION - The Company applies the provisions of Accounting
   Principles Board Opinion No. 25 in accounting for its stock option plans.  At
   September 30, 1998, all stock options outstanding were granted in April 1994.

   IMPACT OF NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued Statement
   No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
   standards for reporting and display of comprehensive income and its
   components.  SFAS 130 requires that all items that are required to be
   recognized under accounting standards as components of comprehensive income
   be reported in a financial statement that is displayed with the same
   prominence as other financial statements.  The Association will be required
   to classify items of other comprehensive income by their nature in a
   financial statement and display the accumulated balance of other
   comprehensive income separately from retained earnings and additional paid-in
   capital in the equity section of the statement of financial condition.  Also
   in June 1997, the FASB issued Statement No. 131, Disclosures about Segments
   of an Enterprise and Related Information, establishing standards for the way
   public enterprises report information about operating segments in interim
   financial reports issued to shareholders.  It also establishes standards for
   related disclosures about products and services, geographic areas, and major
   customers.  SFAS 130 and 131 are effective for fiscal years beginning after
   December 15, 1997, with reclassification of earlier periods.  The adoption of
   SFAS 130 and 131 is not expected to have a material effect on the Company's
   consolidated financial statements.

                                       47

<PAGE>
 
   In February 1998, the FASB issued Statement No. 132, Employer's Disclosures
   about Pensions and Other Postretirement Benefits, an amendment of FASB
   Statements No. 87, 88 and 106 ("SFAS 132").  The statement revises employers'
   disclosures about pensions and other postretirement benefits.  It does not
   change the measurement or recognition of those plans.  It standardizes the
   disclosure requirements for pensions and other postretirement benefits to the
   extent practicable, requires additional information on changes in the benefit
   obligations and fair values of plan assets that will facilitate financial
   analysis, and eliminates certain disclosures that are no longer as useful as
   they were when FASB Statements No. 87, No. 88 and No. 106 were issued.  The
   Statement suggests combined formats for presentation of pension and other
   postretirement benefit disclosures.  This Statement is effective for fiscal
   years beginning after December 15, 1997.  The adoption of SFAS 132 is not
   expected to have a material effect on the Company's consolidated financial
   statements.

   The Company adopted Statement of Financial Accounting Standards No. 133,
   Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133")
   on July 1, 1998.  As permitted by SFAS No. 133, on July 1, 1998, the Company
   transferred securities previously classified as held-to-maturity with a
   carrying value of approximately $177,800,000 and a fair value of
   approximately $182,400,000 into the available-for-sale category, where their
   carrying value became their fair value.  This transfer resulted in an
   unrealized gain, net of tax of approximately $2,900,000 at July 1, 1998.  The
   other provisions of SFAS No. 133 had no significant effect on the Company at
   July 1 or September 30, 1998, or for the year ended September 30, 1998.

   RECLASSIFICATIONS - Certain 1997 and 1996 amounts have been reclassified to
   conform to the 1998 presentation.

2. FAIR VALUES OF FINANCIAL INSTRUMENTS

   The estimated fair value amounts of financial instruments have been
   determined by the Company using available market information and appropriate
   valuation methodologies.  However, considerable judgment is required to
   interpret market data to develop the estimates of fair value.  Accordingly,
   the estimates presented herein are not necessarily indicative of the amounts
   the Company could realize in a current market exchange.  The use of different
   market assumptions and/or estimation methodologies may have a material effect
   on the estimated fair value amounts.  The carrying amounts and estimated fair
   values of financial instruments at September 30, 1998 and 1997, were as
   follows (items which are not financial instruments are not included):


<TABLE>
<CAPTION>
                                                   1998                                    1997
                                       CARRYING           ESTIMATED            CARRYING           ESTIMATED
                                       AMOUNTS            FAIR VALUE           AMOUNTS            FAIR VALUE
Financial assets and liabilities:
<S>                            <C>                 <C>                 <C>                 <C>
  Cash and due from banks            $  3,781,077        $  3,781,077        $  2,805,273        $  2,805,273
  Cash surrender value of
    life insurance                      5,821,800           5,821,800           5,639,161           5,639,161
  Securities held-to-maturity           9,425,080           9,568,105         200,552,569         202,897,745
  Securities-available-for                                                                                    
   sale                               173,626,023         173,626,023                   -                   - 
  Securities-trading                    1,588,535           1,588,535                   -                   -
  Loans receivable, net               193,727,664         198,673,095         159,690,201         167,482,954
  Accrued interest receivable           2,407,273           2,407,273           2,229,531           2,229,531
  Federal Home Loan Bank
    stock                              10,059,900          10,059,900          10,052,700          10,052,700
  Demand and savings deposits          58,324,117          58,324,117          35,073,337          35,073,337
  Time deposits                       137,212,591         142,484,562         108,280,759         108,379,913
  Federal Home Loan Bank
    advances                          143,670,000         143,670,000         190,601,038         190,304,592
  Securities sold under
    agreements to repurchase            2,107,645           2,107,645          20,685,000          20,685,000
</TABLE>

                                       48
<PAGE>
 
   For purposes of the above disclosures of estimated fair value, the following
   assumptions were used.  The estimated fair value for cash and due from banks,
   cash surrender value of life insurance, accrued interest receivable, and
   Federal Home Loan Bank ("FHLB") stock is considered to approximate cost.  The
   estimated fair values for securities are based on quoted market values for
   the individual securities or for equivalent securities.  The fair value for
   loans is estimated by discounting the future cash flows using the current
   rates the Company would charge for similar such loans at the applicable date.
   The estimated fair value for demand and savings deposits is based on the
   amount for which they could be settled on demand.  The estimated fair values
   for time deposits, FHLB advances and securities sold under agreement to
   repurchase are based on estimates of the rate the Company would pay on such
   deposits and borrowed funds at the applicable date, applied for the time
   period until maturity.  The estimated fair values for other financial
   instruments and off-balance sheet loan commitments approximate cost and are
   not considered significant to this presentation.

3. INVESTMENT SECURITIES

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


<TABLE>
<CAPTION>
                                                            1998
                                                   GROSS            GROSS           ESTIMATED
                                    AMORTIZED    UNREALIZED       UNREALIZED           FAIR
       HELD-TO-MATURITY                COST         GAINS           LOSSES            VALUE
 
<S>                             <C>            <C>              <C>             <C>
U.S. Government agencies           $        -  $             -  $            -   $               -
State and municipal securities      9,425,080          143,025                           9,568,105
Mortgage backed securities                  -                -               -                   -
                                   ----------  ---------------  --------------  ------------------
              Total                $9,425,080  $       143,025  $            -  $        9,568,105
                                   ==========  ===============  ==============  ==================
</TABLE>

<TABLE>
<CAPTION>
                                                                 1998
                                                          GROSS            GROSS            ESTIMATED
                                     AMORTIZED         UNREALIZED        UNREALIZED            FAIR
     AVAILABLE-FOR-SALE                 COST              GAINS            LOSSES             VALUE
 
<S>                            <C>                 <C>              <C>               <C>
U.S. Government agencies             $ 21,308,638       $  347,809  $             -         $ 21,656,447
State and municipal                                                                                      
 securities                                     -                -                -                    - 
Mortgage backed securities            149,496,062        2,582,802         (109,288)         151,969,576
                                     ------------       ----------  ---------------         ------------
           Total                     $170,804,700       $2,930,611  $      (109,288)        $173,626,023
                                     ============       ==========  ===============         ============
</TABLE>
<TABLE>
<CAPTION>
                                                                  1997
                                                        GROSS            GROSS            ESTIMATED
                                       AMORTIZED      UNREALIZED        UNREALIZED            FAIR
      HELD-TO-MATURITY                    COST           GAINS            LOSSES             VALUE
 
<S>                            <C>                 <C>              <C>               <C>
U.S. Government agencies             $ 26,857,998       $  229,148        $ (10,679)        $ 27,076,467
State and municipal                     4,859,006           89,216                -            4,948,222
 securities
Mortgage backed securities            168,835,565        2,794,249         (756,758)         170,873,056
                                     ------------       ----------        ---------         ------------
             Total                   $200,552,569       $3,112,613        $(767,437)        $202,897,745
                                     ============       ==========        =========         ============
</TABLE>

                                       49
<PAGE>
 
   The amortized cost and estimated fair value of debt securities at September
   30, 1998, by contractual maturity, are shown below.  Expected maturities will
   differ from contractual maturities because borrowers may have the right to
   call or prepay obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
                                      HELD-TO-MATURITY           AVAILABLE-FOR-SALE
                                ------------------------   ------------------------------
                                               ESTIMATED                      ESTIMATED
                                   Amortized      FAIR       AMORTIZED          FAIR
                                      Cost       VALUE          COST            VALUE
                                                                          
<S>                               <C>         <C>          <C>            <C>
Due in one year or less           $    5,010  $    5,077   $  9,146,232      $  9,192,697
Due from one year to five years       20,078      20,631      8,164,274         8,371,250
Due from five years to ten years      90,000      92,976      3,998,133         4,092,500
Due after ten years                9,309,992   9,449,421                  
Mortgage backed securities                                  149,496,061       151,969,576
                                  ----------  ----------   ------------      ------------
                                                                          
            Total                 $9,425,080  $9,568,105   $170,804,700      $173,626,023
                                  ==========  ==========   ============      ============
 
</TABLE>


   Securities with a carrying value of $5,558,024 and $3,670,456 and a fair
   value of $5,570,874 and $3,788,296, respectively, at September 30, 1998 and
   1997, were pledged to collateralize public and trust deposits.

4.  LOANS RECEIVABLE

   Loans receivable at September 30 are summarized as follows:


<TABLE>
<CAPTION>
                                                                     1998                1997
Real estate loans:
<S>                                                           <C>                 <C>
  Single-family residential                                         $163,895,025        $138,539,462
  Multifamily residential                                              3,124,076           1,599,991
  Agricultural                                                         6,531,649           4,654,318
  Commercial                                                          10,268,000           9,606,087
                                                                    ------------        ------------
    Total real estate loans                                          183,818,750         154,399,858
 
Other loans:
  Savings account loans                                                1,160,744           1,015,124
  Commercial business                                                  8,568,416           6,533,067
  Other                                                                5,943,307           2,715,934
                                                                    ------------        ------------
    Total other loans                                                 15,672,467          10,264,125
                                                                    ------------        ------------
    Total loans receivable                                           199,491,217         164,663,983
 
Less:
  Undisbursed loan proceeds                                            3,656,283           2,814,982
  Unearned fees, net                                                     422,829             467,793
  Allowance for loan losses                                            1,684,441           1,691,007
                                                                    ------------        ------------
    Loans receivable, net                                           $193,727,664        $159,690,201
                                                                    ============        ============
</TABLE>


   The Company originates adjustable rate mortgage loans to hold for investment.
   The Company also originates 15 year and 30 year fixed rate mortgage loans and
   sells substantially all new originations of such loans to outside investors.
   Loans held for sale at September 30, 1998 and 1997, are considered by
   management to be immaterial.  Such loans generally have market rates of
   interest.

   The Company is not committed to lend additional funds to debtors whose loans
   have been modified.

                                       50
<PAGE>
 
   The Company grants real estate loans, primarily single-family residential
   loans, and consumer and agricultural real estate loans, primarily in north
   and east Arkansas.  Substantially all loans are collateralized by real estate
   or consumer assets.  Loans collateralized by real estate mortgages comprise
   approximately 85% of the net loan portfolio as of September 30, 1998.

5. ACCRUED INTEREST RECEIVABLE

   Accrued interest receivable at September 30 is summarized as follows:


<TABLE>
<CAPTION>
                                                   1998              1997
                                       
<S>                                           <C>              <C>
Securities                                         $  819,490        $  938,070
Loans receivable                                    1,587,783         1,291,461
                                                   ----------        ----------
                                       
TOTAL                                              $2,407,273        $2,229,531
                                                   ==========        ==========
</TABLE>


6. ALLOWANCE FOR LOAN AND FORECLOSED REAL ESTATE LOSSES

   Activity in the allowance for losses on loans and foreclosed real estate for
   the years ended September 30, 1998, 1997, and 1996, is as follows:



<TABLE>
<CAPTION>
                                                                FORECLOSED
                                                   LOANS        REAL ESTATE
                                      
<S>                                           <C>               <C>
BALANCE, OCTOBER 1, 1995                           $1,356,709       $45,195
                                                                   
  Provision for losses                                411,200             -
  Charge-offs, net of recoveries                      (33,929)        3,332
                                                   ----------       -------
                                                                   
BALANCE, SEPTEMBER 30, 1996                         1,733,980        48,527
                                                                   
  Provision for losses                                 60,000             -
  Charge-offs, net of recoveries                     (102,973)       (5,240)
                                                   ----------       -------
                                                                   
BALANCE, SEPTEMBER 30, 1997                         1,691,007        43,287
                                                                   
  Charge-offs, net of recoveries                       (6,566)       (1,195)
                                                   ----------       -------
                                                                   
BALANCE, SEPTEMBER 30, 1998                        $1,684,441       $42,092
                                                   ==========       =======
</TABLE>


   Gross charge-offs and recoveries are not material.

                                       51
<PAGE>
 
7. PREMISES AND EQUIPMENT

   Premises and equipment at September 30 are summarized as follows:


<TABLE>
<CAPTION>
                                                 1998                 1997
                                          
Cost:                                     
<S>                                       <C>                  <C>
  Land                                       $   455,976          $   332,476
  Buildings and improvements                   3,053,658            1,937,912
  Furniture, fixtures, and equipment           1,151,634            1,373,813
                                             -----------          -----------
                                             
                                               4,661,268            3,644,201
                                             
Less accumulated depreciation                 (1,334,192)          (1,839,369)
                                             -----------          -----------
                                             
TOTAL                                        $ 3,327,076          $ 1,804,832
                                             ===========          ===========
</TABLE>


8. DEPOSITS

   Deposits at September 30 are summarized as follows:

<TABLE>
<CAPTION>
                                                                     1998                1997
 
Checking accounts, including noninterest-bearing deposits
<S>                                                           <C>                 <C>
  of $5,934,688 and $2,697,858 in 1998 and 1997,                    $ 45,407,816        $ 26,417,875
   respectively
Passbook savings                                                      12,916,301           8,655,462
Certificates of deposit                                              137,212,591         108,280,759
                                                                    ------------        ------------
 
TOTAL                                                               $195,536,708        $143,354,096
                                                                    ============        ============
</TABLE>


   The aggregate amount of short-term jumbo certificates of deposit with a
   minimum denomination of $100,000 was approximately $20,835,427 and
   $20,411,446 at September 30, 1998 and 1997.

   At September 30, 1998, scheduled maturities of certificates of deposit are as
   follows:


<TABLE>
<CAPTION>
Years ending September 30:                                      TOTAL
                                                     
<S>                                                       <C>
  1999                                                          $120,819,728
  2000                                                            12,006,387
  2001                                                             1,769,794
  2002                                                             1,229,169
  2003                                                             1,208,967
  Over 5 years                                                       178,546
                                                                ------------
                                                     
TOTAL                                                           $137,212,591
                                                                ============
</TABLE>



   Interest expense on deposits for the years ended September 30, 1998, 1997,
   and 1996, is summarized as follows:


<TABLE>
<CAPTION>
                                     1998            1997                1996
                              
<S>                              <C>              <C>                 <C>
Checking                         $  743,244       $  611,594          $  569,817
Passbook savings                    312,143          247,173             229,227
Certificates of deposit           6,796,947        5,080,331           4,581,033
                                 ----------       ----------          ----------
                                                  
TOTAL                            $7,852,334       $5,939,098          $5,380,077
                                 ==========       ==========          ==========
</TABLE>
                                                                                

                                       52
<PAGE>
 
9. FEDERAL HOME LOAN BANK ADVANCES

   The Company is required to purchase stock in the FHLB.  Such stock may be
   redeemed at par but is not readily marketable.  At September 30, 1998 and
   1997, the Company had stock of $10,059,900 and $10,052,700, respectively.
   Pursuant to collateral agreements with the FHLB, advances are collateralized
   by all of the Company's stock in the FHLB and by 75% of qualifying single-
   family first mortgage loans with a carrying value at September 30, 1998 and
   1997, of approximately $105,000,000 and $130,000,000, respectively, and
   investment securities having a carrying value of $36,990,641 and $117,370,552
   at September 30, 1998 and 1997, respectively.  Advances at September 30, 1998
   and 1997, have a maturity dates as follows:


<TABLE>
<CAPTION>
                                                1998
                                    ---------------------------------
                                       WEIGHTED
                                        AVERAGE
                                         RATE            AMOUNT
<S>                                   <C>          <C>
September 30:                       
  1999                                      5.54%    $105,670,000
  2000                                         -                -
  2001                                         -                -
  2002                                         -                -
  2003                                         -                -
  Greater than 5 years                      4.94%      38,000,000
                                                     ------------
                                                     
TOTAL                                                $143,670,000
                                                     ============
</TABLE>


   Interest expense on FHLB advances was $9,987,640, $11,732,367, and
   $13,128,761 for the years ended September 30, 1998, 1997, and 1996,
   respectively.

   The advances with maturities greater than five years as of September 30,
   1998, are callable quarterly at FHLB's option and may not be prepaid without
   penalty.

10.  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

   Securities sold under agreements to repurchase ("Reverse Repurchase
   Agreements" or "Reverse Repos") are as follows:

<TABLE>
<CAPTION>
                                                   1998           1997
                                                             
<S>                                            <C>            <C>
Balance outstanding at September 30             $ 2,107,645    $20,685,000
                                                             
Average balance during the year                   6,215,266     17,684,231
                                                             
Average interest rate during the year                  4.97%          5.81%
                                                             
Maximum month-end balance during the year        21,850,000     21,060,000
                                                             
Investment securities underlying the                         
  agreements at year-end:                                    
  Carrying value                                  2,203,840     21,155,072
  Estimated market value                          2,232,782     21,304,348
</TABLE>


   Interest expense on Reverse Repurchase Agreements was $309,048, $1,027,337,
   and $119,504 for the years ended September 30, 1998, 1997, and 1996,
   respectively.

                                       53
<PAGE>
 
11. DEFERRED COMPENSATION

   The Company has funded and unfunded deferred compensation agreements with an
   executive and non-officer members of the Board of Directors.  The plans limit
   the ability of the executive to compete with the Company and require that the
   directors continue to serve for a specified period of time.  The amount of
   expense related to such plans for the years ended September 30, 1998, 1997,
   and 1996, was approximately $179,000, $190,000 and $355,000, respectively.

12. RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN

   The Company has a defined contribution retirement plan.  The plan covers all
   employees who have accumulated two years with 1,000 hours of service in each
   year.  A flat percentage rate, selected by discretion of the Board of
   Directors is applied to the base salary of each eligible employee.  The
   retirement plan expense for the years ended September 30, 1998, 1997, and
   1996, was $170,000, $125,000, and $116,109, respectively.

   The Company established an Employee Stock Ownership Plan ("ESOP") on October
   1, 1993.  During 1994, the ESOP borrowed $523,250 which is collateralized by
   common stock of the Company and a guaranty of the Company.  The note payable
   is guaranteed by the Company and was paid off during the year ended September
   30, 1998.  In connection with the Reorganization on March 31, 1998, the
   Company established a new ESOP.  During 1998, the ESOP borrowed approximately
   $2.9 million from the Company to purchase shares of Company stock.  The loan
   is collateralized by the shares that were purchased with the proceeds of the
   loan.  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.  The Company contributed $104,650 to the ESOP
   in each of the three years ended September 30, 1998.

   The Company also has a supplemental retirement plan for three executive
   officers.  The plan requires that a set amount be deposited into a trust each
   year until the executive officers reach 60 years of age.  The amount of
   expense related to such plans was approximately $402,000, $235,000, and
   $213,000 for the years ended September 30, 1998, 1997, and 1996,
   respectively.

13. INCOME TAXES

   The Company and subsidiaries file consolidated federal income tax returns on
   a fiscal year basis.  During the year ended September 30, 1997, new
   legislation was enacted which provides for the recapture into taxable income
   of certain amounts previously deducted as additions to the bad debt reserves
   for income tax purposes.  The Company began changing its method of
   determining bad debt reserves for tax purposes following the year ended
   September 30, 1996.  The amounts to be recaptured for income tax reporting
   purposes are considered by the Company in the determination of the net
   deferred tax liability.

   Income tax provision (benefit) for the years ended September 30 is summarized
   as follows:


<TABLE>
<CAPTION>
                              1998             1997              1996
                  
<S>                        <C>               <C>              <C>
Current                    $1,353,856        $  930,195        $ 532,810
Deferred                      (59,617)          414,295         (146,428)
                           ----------        ----------        ---------
                    
TOTAL                      $1,294,239        $1,344,490        $ 386,382
                           ==========        ==========        =========
</TABLE>

                                       54
<PAGE>
 
   The net deferred tax asset, which is included in other assets, consisted of
   the following:



<TABLE>
<CAPTION>
                                                          1998          1997
                                                                   
Deferred tax assets:                                               
<S>                                                  <C>            <C>
  Deferred compensation                               $   472,452    $ 383,610
  Allowance for loan losses                               184,945      195,568
  Unrealized loss on securities - trading                 163,541  
  Deferred loan fees                                                    42,495
  Other                                                                 48,056
                                                      -----------    ---------
                                                                   
          Total deferred tax assets                       820,938      669,729
                                                                   
Deferred tax liabilities:                                          
  Unrealized gain on available-for-sale securities     (1,015,678) 
  FHLB stock dividends                                   (677,893)    (587,049)
  Other                                                   (17,211)     (16,465)
                                                      -----------    ---------
                                                                   
            Total deferred tax liabilities             (1,710,782)    (603,514)
                                                      -----------    ---------
                                                                   
Net deferred tax asset (liability)                    $  (889,844)   $  66,215
                                                      ===========    =========
</TABLE>


   The income tax provision differed from the amounts computed by applying the
   federal income tax rates as a result of the following:


<TABLE>
<CAPTION>
                                          1998                           1997                            1996
                             ----------------------------    ---------------------------    ---------------------------
<S>                            <C>         <C>                 <C>        <C>                 <C>         <C>
Expected income tax expense         34.0%      $1,421,734          34.0%      $1,264,802           34.0%      $ 799,994
Exempt income                       (2.6)        (107,103)         (1.5)         (54,618)          (6.1)       (143,203)
Cash surrender value of life
  insurance                         (1.5)         (62,098)         (2.0)         (73,096)
State tax, net of federal                                                                                               
 benefit                             4.3          179,389           4.0          147,312            4.3         101,176 
Reduction in valuation
  allowance                                                                                        (5.5)       (129,184)
ESOP contribution                    2.1           87,161
Change in estimate                  (4.3)        (179,892)         (0.3)         (12,688)         (10.3)       (242,401)
Other                               (1.1)         (44,952)          1.9           72,778
                                   -----       ----------         -----       ----------      ---------   -------------
TOTAL                               30.9%      $1,294,239          36.1%      $1,344,490           16.4%      $ 386,382
                                   =====       ==========         =====       ==========          =====       =========
 
</TABLE>


   The Company and the Bank provide for the recognition of a deferred tax asset
   or liability for the future tax consequences of differences in carrying
   amounts and tax bases of assets and liabilities.  Specifically exempted from
   this provision are bad debt reserves for tax purposes of U.S. savings and
   loan associations in the association's base year, as defined.  Base year
   reserves total approximately $2,979,000 at September 30, 1998.  Consequently,
   a deferred tax liability of approximately $1,141,000 related to such reserves
   is not provided for in the statement of financial condition at September 30,
   1998.

14. REGULATORY MATTERS

   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

                                       55
<PAGE>
 
   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).  Management believes, as of September 30, 1998,
   that the Bank meets all capital adequacy requirements to which it is subject.

   As of September 30, 1998 and 1997, the most recent notification from the OTS
   categorized the Bank as well capitalized under the regulatory framework for
   prompt corrective action.  To be categorized as well capitalized the Bank
   must maintain minimum total, tangible, and core capital ratios as set forth
   in the table below.  There are no conditions or events since that
   notification that management believes have changed the institution's
   category.

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


<TABLE>
<CAPTION>
                                                                                                 REQUIRED       
                                                                                           TO BE CATEGORIZED AS  
                                                                         REQUIRED         WELL CAPITALIZED UNDER 
                                                                        FOR CAPITAL          PROMPT CORRECTIVE   
                                                   ACTUAL            ADEQUACY PURPOSES       ACTION PROVISIONS   
                                               ----------------     --------------------  -----------------------
                                                AMOUNT    RATIO        AMOUNT      RATIO        AMOUNT      RATIO
<S>                                            <C>       <C>        <C>            <C>    <C>            <C>
As of September 30, 1998:
  Tangible capital to tangible assets           $41,082   10.24%          $ 6,019   1.50%             N/A     N/A
  Core capital to adjusted tangible assets       41,082   10.24            16,052   4.00           $20,060   5.00
  Total capital to risk weighted assets          42,739   22.62            15,118   8.00            18,894  10.00
  Tier I capital to risk weighted assests        41,082   21.74             7,559   4.00            11,338   6.00
 
As of September 30, 1997:
  Tangible capital to tangible assets           $24,246    6.32%          $ 5,754   1.50%             N/A     N/A
  Core capital to adjusted tangible assets       24,246    6.32            11,509   3.00           $19,182   5.00
  Total capital to risk weighted assets          25,913   16.22            12,781   8.00            15,976  10.00
  Tier I capital to risk weighted assests        24,246   15.18             6,389   4.00             9,581   6.00
</TABLE>

15. DIVIDENDS

   During the years ended September 30, 1998, 1997, and 1996, the Company
   declared dividends of $0.23, $0.21, and $0.18 per common share, respectively.
   Cash dividends of $1,153,496, $1,067,810, and $583,862 were paid or accrued
   in 1998, 1997, and 1996, respectively.

16. EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                                   YEAR ENDED SEPTEMBER 30
                                                         -------------------------------------------
                                                           1998             1997             1996
<S>                                                      <C>              <C>              <C>
Basic EPS weighted average shares                        6,388,906        6,327,798        6,240,231
Add dilutive effect of unexercised options                 146,162          158,260          142,097
                                                         ---------        ---------        ---------
            Dilutive EPS weighted average shares         6,535,068        6,486,058        6,382,328
                                                         =========        =========        =========
</TABLE>

                                       56
<PAGE>
 
17. COMMITMENTS AND CONTINGENCIES

   In the ordinary course of business, the Company and subsidiaries have various
   outstanding commitments and contingent liabilities that are not reflected in
   the accompanying consolidated financial statements.  In addition, 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 consolidated financial position of the
   Company and subsidiaries.

18. FINANCIAL INSTRUMENTS

   The Company is a party to financial instruments with off-balance sheet risk
   in the normal course of business to meet the financing needs of its customers
   and to reduce its own exposure to fluctuations in interest rates.  These
   financial instruments include commitments to extend credit, standby letters
   of credit and financial guarantees.  Those instruments involve, to varying
   degrees, elements of credit and interest-rate risk in excess of the amount
   recognized in the consolidated statements of financial condition.
   Instruments used to reduce exposure to fluctuations in interest rates are
   considered in the aggregate and individually immaterial.  The contract or
   notional amounts of those instruments reflect the extent of the Company's
   involvement in particular classes of financial instruments.

   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.

   COMMITMENTS TO EXTEND CREDIT AND FINANCIAL GUARANTEES - Commitments to extend
   credit are agreements to lend to a customer as long as there is no violation
   of any condition established in the contract.  Commitments generally have
   fixed expiration dates or other termination clauses and may require payment
   of a fee.  Since many of the commitments are expected to expire without being
   drawn upon, the total commitment amounts do not necessarily represent future
   cash requirements.  The Company evaluates each customer's creditworthiness on
   a case-by-case basis.  The amount of collateral obtained, if it is deemed
   necessary by the Company upon extension of credit, is based on management's
   credit evaluation of the counterparty.

   Standby letters of credit are conditional commitments issued by the Company
   to guarantee the performance of a customer to a third party.  The credit risk
   involved in issuing letters of credit is essentially the same as that
   involved in extending loan facilities to customers.  The Company holds
   marketable securities as collateral supporting these commitments for which
   collateral is deemed necessary.

                                       57
<PAGE>
 
   At September 30, 1998, the Company had the following outstanding commitments
   to extend credit:

<TABLE>
<CAPTION> 
<S>                                                      <C>
Undisbursed loans in process                                   $ 3,654,653
Unfunded lines of credit                                         1,564,172
Outstanding loan commitments                                     7,285,159
                                                               -----------
                                                         
            Total outstanding commitments                      $12,503,984
                                                               ===========
</TABLE>

   The Company has not incurred any losses on its commitments in any of the
   three years in the period ended September 30, 1998.

   At September 30, 1998, commitments to fund fixed rate loans totaled
   $2,961,800 with interest rates ranging from 6.375% to 8.50%.

19. RELATED PARTY TRANSACTIONS

   In the normal course of business, the Company has made loans to its
   directors, officers, and their related business interests.  In the opinion of
   management, related party loans are made on substantially the same terms,
   including interest rates and collateral, as those prevailing at the time for
   comparable transactions with unrelated persons and do not involve more than
   the normal risk of collectibility.  The aggregate dollar amount of loans
   outstanding to directors, officers, and their related business interests
   total approximately $755,909 and $857,176 at September 30, 1998 and 1997,
   respectively.

20. RESTRICTED STOCK AWARD PROGRAMS AND STOCK OPTION PLANS

   The 1994 Incentive Stock Option Plan for senior executives and key employees
   granted options to purchase 49,833 shares of common stock.  The plan
   authorizes the grant of incentive stock options, non-statutory stock options,
   and limited rights.  Under the plan, options become exercisable 20% after
   each of the five years following the grant.  The exercise price for incentive
   stock options may not be less than the fair market value of the underlying
   shares on the date of grant.  The plan is administered by a committee of the
   Board of Directors.  The committee has the authority to determine the
   employees to whom awards will be made, the amount of the awards, and the
   other terms and conditions of the awards.

   The Stock Option Plan for outside directors may grant non-qualified stock
   options to purchase shares of common stock for each outside director who was
   serving in such a capacity on the date of the Company's initial stock
   offering in 1994.  The purchase price of the common stock deliverable upon
   the execution of each non-qualified stock option shall be the price at which
   the common stock of the Company was offered in the initial offering ($10).
   The Company granted options on 20,643 shares of common stock (options on
   24,917 shares may be granted under the plan).  The plan also provides for
   subsequent grants of non-qualifying stock options to others who become
   outside directors after the date of the offering.  Options reserved for
   future grant shall vest ratably at 20% each year commencing on the first
   September 30th after the person becomes an outside director through September
   30, 2002, at which time all options shall become vested.

   On October 23, 1998, the Company's stockholders voted to approve a stock
   option plan and a recognition and retention plan.  Options were granted to
   officers and directors on 357,075 shares at $9.00 per share, the fair market
   value on the date of grant.  The options vest evenly over five years and
   expire in ten years.

                                       58
<PAGE>
 
   The recognition and retention plan included 142,830 shares which were granted
   to directors and executive officers.  Such shares will vest over five years.
   The allocation will be made January 3, 2000.

21. BRANCH ACQUISITIONS

   On January 22, 1998, the Bank consummated the purchase of deposits, premises,
   and equipment of three branches within its market area.  As a result of this
   transaction, deposits increased $27.9 million, fixed assets increased $0.9
   million, core deposit premium increased $1.8 million and cash increased $25.2
   million.  No loans were purchased.

   On September 18, 1998, the Bank consummated the purchase of deposits of three
   branches in markets contiguous to its existing market area.  As a result of
   this transaction deposits increased approximately $28.7 million, cash
   increased approximately $27.1 million, loans increased $0.2 million and core
   deposit premium increased approximately $0.9 million.  Loans purchased in
   this transaction were collateralized by deposits.

22. QUARTERLY FINANCIAL DATA (UNAUDITED)

   The following tables represent summarized data for each of the four quarters
   in the years ended September 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                  1998
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
  
                                                     FOURTH          THIRD         SECOND          FIRST
                                                    QUARTER         QUARTER        QUARTER        QUARTER
<S>                                                 <C>             <C>            <C>            <C>
Interest income                                       $6,977          $7,060         $7,002         $6,814
Interest expense                                       4,418           4,267          4,790          4,926
                                                      ------          ------         ------         ------
 
Net interest income                                    2,559           2,793          2,212          1,888
Provision for loan losses                                  -               -              -              -
                                                      ------          ------         ------         ------
Net interest income after
  provision for loan losses                            2,559           2,793          2,212          1,888
Non-interest income                                      (23)            270            361            311
Non-interest expense                                   1,754           1,619          1,522          1,296
                                                      ------          ------         ------         ------
Income before income taxes                               782           1,444          1,051            903
Income tax expense                                        73             513            383            325
                                                      ------          ------         ------         ------
Net income                                            $  709          $  931         $  668         $  578
                                                      ======          ======         ======         ======
Basic earnings per share                              $ 0.11          $ 0.15         $ 0.10         $ 0.09
Diluted earnings per share                            $ 0.11          $ 0.14         $ 0.10         $ 0.09
Cash dividends declared per
  common share                                        $0.060          $0.060         $0.056         $0.056
</TABLE>

                                       59
<PAGE>
 
<TABLE>
<CAPTION>
                                                                            1997
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                                                    FOURTH          THIRD         SECOND          FIRST
                                                    QUARTER        QUARTER        QUARTER        QUARTER
<S>                                            <C>            <C>            <C>            <C>
Interest income                                       $6,663         $6,592         $6,361         $6,475
Interest expense                                       4,831          4,711          4,540          4,615
                                                      ------         ------         ------         ------
 
Net interest income                                    1,832          1,881          1,821          1,860
Provision for loan losses                                  -                            30             30
                                                      ------         ------         ------         ------
 
Net interest income after
  provision for loan losses                            1,832          1,881          1,791          1,830
Non-interest income                                      392            291            315            352
Non-interest expense                                   1,388          1,179          1,116          1,283
                                                      ------         ------         ------         ------
 
Income before income taxes                               836            993            990            899
Income tax expense                                       309            371            348            315
                                                      ------         ------         ------         ------
 
Net income                                            $  527         $  622         $  642         $  584
                                                      ======         ======         ======         ======
 
Basic earnings per share                              $ 0.08         $ 0.09         $ 0.10         $ 0.11
 
Diluted earnings per share                            $ 0.08         $ 0.08         $ 0.08         $ 0.11
 
Cash dividends declared per
  common share                                        $0.056         $0.056         $0.056         $0.052
</TABLE>

                                *  *  *  *  *  *

                                       60
<PAGE>
 
ITEM 9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------    ---------------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------

     Not applicable.

                                       61
<PAGE>
 
                                   PART III

ITEM 10   DIRECTORS AND OFFICERS OF THE REGISTRANT
-------   ----------------------------------------

     The table below sets forth certain information, as of September 30, 1998,
regarding members of the Company's Board of Directors, including the terms of
office of Board members.

<TABLE>
<CAPTION>
                                                                                                   Shares of                  
                                                                                                  Common Stock                
                                          Positions                                               Beneficially                
                                         Held in the                     Served    Current Term     Owned on       Percent    
Name (1)                          Age      Company                      Since (2)   to Expire    Record Date (3)  Of Class    
--------                          ---  ----------------                 ---------  ------------  ---------------  ---------   
<S>                               <C>  <C>                              <C>        <C>           <C>              <C>         
NOMINEES                                                                                                                      
James A. Edington                  48  Executive Vice                       1994           1999         119,064        1.8%   
                                       President and Director                                                  
                                                                                                                              
Robert Rainwater                   63  Director                             1981           1999          25,782         *        
                                                                                                                              
DIRECTORS CONTINUING IN OFFICE                                                                                                
Ralph B. Baltz                     50  Chairman                             1986           2000         123,360        1.8%   
                                                                                                                              
Marcus Van Camp                    50  Director                             1990           2000          25,610         *        
                                                                                                                              
Skip Martin                        49  President, Chief                     1988           2001         155,887        2.3%   
                                                                                                                              
Charles R. Ervin                   61  Director                             1988           2001          53,935         *        
                                                                                                                              
N. Ray Campbell                    48  Director                             1992           2000          34,457         *        
                                                                                                                              
EXECUTIVE OFFICER                                                                                                             
Dwayne Powell                      34  Chief Financial Officer                                           23,164         *        
</TABLE>

-----------
*   Less than 1%
(1) The mailing address for each person listed is 203 West Broadway, Pocahontas,
    Arkansas 72455.  Each of the persons listed is also a director of Pocahontas
    Federal Savings and Loan Association (the "Bank"), the Company's wholly
    owned subsidiary.
(2) Reflects initial appointment to the Board of Directors of the Bank's mutual
    predecessor.
(3) See definition of "beneficial ownership" in the table "Beneficial Ownership
    of Common Stock."

                                       62
<PAGE>
 
     Skip Martin has been the President and Chief Executive Officer of the Bank
since 1990, and of the Company since its formation in 1998.  He has been a
member of the Board of Directors of the Bank since 1988 and of the Company since
its formation.  Prior to his appointment as President and Chief Executive
Officer, Mr. Martin served as Vice President of the Bank.  Mr. Martin has been
employed by the Bank since 1972 and has been an officer of the Bank since 1978.

     Ralph P. Baltz has been Chairman of the Board of the Bank since January
1997 and of the Company since its formation.  Mr. Baltz is a general contractor
and residential developer and is the President and owner/operator of Tri-County
Sand and Gravel, Inc.

     Marcus Van Camp is the Superintendent of Schools at Pocahontas Public
Schools, and has been employed by such schools for 25 years.

     James A. Edington has been Executive Vice President of the Bank since 1991
and of the Company since its formation.  He has been the Bank's compliance
officer, security officer, secretary, and treasurer.  Mr. Edington has been
employed in executive roles with the Bank since 1983.

     Charles R. Ervin is retired.  Prior to his retirement, Mr. Ervin was
President and owner of C.E.C., Inc., a construction company, since March 1992.
Prior to that, Mr. Ervin was President and part-owner of M.T.C., Inc., a general
contractor specializing in tenant construction in shopping centers nationally.

     N. Ray Campbell is the Owner and Operator of Big Valley Trailer
Manufacturing.  Prior to this, Mr. Campbell was the Plant Manager of Waterloo
Industries, an industrial firm located in Pocahontas, Arkansas.

     Robert Rainwater is semi-retired.  Prior to his retirement, Mr. Rainwater
was the owner of Sexton Pharmacy in Walnut Ridge, Arkansas.

     Dwayne Powell, CPA, has served as Chief Financial Officer of the Bank since
October 1996 and of the Company since its formation.  Prior to that, Mr. Powell
was an Audit Manager for Deloitte & Touche LLP, primarily serving financial
institution clients.

                                       63
<PAGE>
 
ITEM 11   EXECUTIVE COMPENSATION
-------   ----------------------

     The following table sets forth for the years ended September 30, 1998,
1997, and 1996, certain information as to the total remuneration paid by the
Company to the Chief Executive Officer and all other executive officers whose
salary and bonuses exceeded $100,000 ("Named Executive Officers").  For the
period prior to formation of the Company in 1998, the remuneration information
relates to that paid by the Bank to the Named Executive Officers.

<TABLE>
<CAPTION>
                                                                              LONG-TERM COMPENSATION
                                                                         -------------------------------  
                                             ANNUAL COMPENSATION                 AWARDS          PAYOUTS
                                        -------------------------------  ----------------------  -------  
                                YEAR                           OTHER     RESTRICTED   OPTIONS/                 ALL
NAME AND                       ENDED                         ANNUAL COM-   STOCK        SARS      LTIP        OTHER
PRINCIPAL POSITION           SEPT. 30,   SALARY (1)   BONUS   PENSATION  AWARDS (3)      (#)     PAYOUTS  COMPENSATION (2)
------------------           ---------  ------------  ------ ----------  -----------  ---------  -------  ----------------
<S>                          <C>        <C>           <C>    <C>         <C>          <C>        <C>      <C>
Skip Martin...................    1998     $196,000       --         --          --         --        --          $20,161
  President and Chief             1997      166,100   10,200         --          --         --        --           18,957
  Executive Officer               1996      141,100    9,900         --          --         --        --           20,551
 
James A. Edington.............    1998      171,000       --         --          --         --        --           20,161
  Executive Vice                  1997      140,000    9,700         --          --         --        --           19,778
  President and Secretary         1996       95,000    9,700         --          --         --        --           13,071
 
Dwayne Powell.................    1998      125,000       --         --          --         --        --           20,161
  Chief Financial Officer(4)      1997      100,000       --         --      53,047         --        --               88
</TABLE>

____________________________________
(1) Includes Board of Director and committee fees.
(2) Consists of payments made pursuant to the Bank's Profit Sharing Plan.  See
    "--Benefits for Employees and Officers."  Also includes the Bank's
    contributions or allocations (but not earnings) pursuant to the Bank's
    Employee Stock Ownership Plan.  Does not include benefits pursuant to the
    Bank's Pension Plan.  See "--Benefits for Employees and Officers."  The
    Company also provides its Chief Executive Officer with use of a Company-
    owned automobile, the value of which use did not exceed the lesser of
    $50,000 or 10% of such officer's cash compensation.
(3) Represents awards made pursuant to the Bank's Recognition and Retention Plan
    for Employees, which awards vest in five equal annual installments
    commencing on March 31, 1995, and the Company's Recognition and Retention
    Plan.  Dividends on such shares accrue and are paid to the recipient when
    the shares are granted.  The value of such shares was determined by
    multiplying the number of shares awarded by the price at which the shares of
    common stock were sold.  Pursuant to resolution of the Board of Directors
    adopted on January 21, 1998, all outstanding unvested awards were deemed
    earned as of January 21, 1998.
(4) Mr. Powell was not employed by the Bank in fiscal year 1996.

<TABLE>
<CAPTION>
==================================================================================================
                       AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                                  FISCAL YEAR-END OPTION VALUES
==================================================================================================
NAME                    SHARES      VALUE       NUMBER OF UNEXERCISED      VALUE OF UNEXERCISED
                       ACQUIRED    REALIZED          OPTIONS AT           IN-THE-MONEY OPTIONS AT
                         UPON                      FISCAL YEAR-END            FISCAL YEAR-END
                       EXERCISE               ----------------------------------------------------
                                              EXERCISABLE/UNEXERCISABLE  Exercisable/Unexercisable
==================================================================================================
<S>                   <C>         <C>         <C>                        <C>
Skip Martin               16,098    $123,182              64,121/20,055          $413,580/$120,355
 
James A. Edington             --          --              40,110/10,027          $ 258,710/$64,674
==================================================================================================
</TABLE>

                                       64
<PAGE>
 
ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------   --------------------------------------------------------------

     Persons and groups who beneficially own in excess of 5% of Common Stock are
required to file certain reports with the Securities and Exchange Commission
(the "SEC") regarding such ownership pursuant to the Securities Exchange Act of
1934 (the "Exchange Act").

     The following table sets forth, as of the Record Date, the shares of Common
Stock beneficially owned by the Company's directors, named executive officers
(as defined in "--Executive Compensation"), and executive officers and directors
as a group, as well as each person who was the beneficial owner of more than 5%
of the outstanding shares of Company Common Stock as of the Record Date.

<TABLE>
<CAPTION>
                                         AMOUNT OF SHARES
                                         OWNED AND NATURE   PERCENT OF SHARES
                                           OF BENEFICIAL     OF COMMON STOCK
HOLDER                                     OWNERSHIP (1)     OUTSTANDING (4)
------                                   -----------------  ------------------
<S>                                      <C>                <C>
 
All Directors and Executive Officers
as a Group (8 persons)                            561,259                 8.4
 
Pocahontas Federal Savings and Loan               536,582                 8.0
401(k) Savings and Employee Stock
Ownership Plan. (2)(3)
 
Drake Associates, L.P. and affiliates             501,224                 7.5
55 Brookville Road
Glen Head, New York  11545

</TABLE>

------------------
 *  Less than 1%.
(1) Based solely upon the filings made pursuant to the Exchange Act and
    information furnished by the respective persons.  In accordance with Rule
    13d-3 under the Exchange Act, a person is deemed to be the beneficial owner
    for purposes of this table, of any shares of Common Stock if he has sole or
    shared voting or investment power with respect to such shares, or has a
    right to acquire beneficial ownership at any time within 60 days from the
    date as to which beneficial ownership is being determined.  As used herein,
    "voting power" is the power to vote or direct the voting of shares and
    "investment power" is the power to dispose or direct the disposition of
    shares.  Includes all shares held directly as well as shares owned by
    spouses and minor children, in trust and other indirect ownership, over
    which shares the named individuals effectively exercise sole or shared
    voting or investment power.
(2) Under the Pocahontas Federal Savings and Loan Association 401(k) Savings and
    Employee Stock Ownership Plan (the "ESOP"), shares allocated to
    participants' accounts are voted in accordance with the participants'
    directions.  Unallocated shares held by the ESOP are voted by the ESOP
    Trustee in the manner calculated to most accurately reflect the instructions
    it has received from the participants regarding the allocated shares.  As of
    the Record Date, 215,035 shares of Common Stock were allocated under the
    ESOP.
(3) Excludes 44,123 shares of Common Stock or 0.66% of the shares of Common
    Stock outstanding, owned by the ESOP for the benefit of the named Executive
    Officers of the Bank.
(4) Total Common Stock outstanding includes shares that may be acquired pursuant
    to presently exercisable options.

                                       65
<PAGE>
 
ITEM 13   CERTAIN TRANSACTIONS
-------   --------------------

     The Bank has followed a policy of granting consumer loans and loans secured
by one to four family real estate to officers, directors and employees.  Loans
to directors and executive officers are made in the ordinary course of business
and on the same terms and conditions as those of comparable transactions with
the general public prevailing at the time, in accordance with the Bank's
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.

     All loans by the Bank to its directors and executive officers are subject
to OTS regulations restricting loan and other transactions with affiliated
persons of the Bank.  Federal law generally requires that all loans to directors
and executive officers be made on terms and conditions comparable to those for
similar transactions with non-affiliates, subject to limited exceptions.
However, recent regulations now permit executive officers and directors to
receive the same terms on loans through plans that are widely available to other
employees, as long as the director or executive officer is not given
preferential treatment compared to the other participating employees.  Loans to
all directors, executive officers, and their associates totaled $705,697 at
September 30, 1998, which was 1.2% of the Company's stockholders' equity at that
date.  There were no loans outstanding to any director, executive officer or
their affiliates at preferential rates or terms which in the aggregate exceeded
$60,000 during the three years ended September 30, 1998.  All loans to directors
and officers were performing in accordance with their terms at September 30,
1998.


                                    PART IV

ITEM 14   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
-------   -------------------------------------------------------
          FORM 8-K
          --------

     (a)(1)  Financial Statements
             --------------------

     Financial statements have been included in Item 8.

     (a)(2) Financial Statement Schedules
            -----------------------------

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

     (a)(3) Exhibits
            --------

<TABLE>
<CAPTION>
                                              Sequential Page
                                             Reference to Prior     Number Where
                                             Filing or Exhibit    Attached Exhibits
 Regulation S-K                               Number Attached    Are Located in This
 Exhibit Number           Document                 Hereto         Form 10-K Report
----------------  -------------------------  ------------------  -------------------
<S>               <C>                        <C>                 <C>
     2             Plan of Reorganization           None           Not Applicable
 
     3            Articles of Incorporation         None           Not Applicable
</TABLE>

                                       66
<PAGE>
 
<TABLE>
<CAPTION>
                                                  Sequential Page
                                                 Reference to Prior     Number Where
                                                 Filing or Exhibit    Attached Exhibits
 Regulation S-K                                   Number Attached    Are Located in This
 Exhibit Number             Document                   Hereto         Form 10-K Report
----------------  -----------------------------  ------------------  -------------------
<S>               <C>                            <C>                 <C>
       3                     Bylaws                     None           Not Applicable
 
       4            Instruments defining the            None           Not Applicable
                   rights of security holders,
                      including debentures
 
       9             Voting trust agreement             None           Not Applicable
 
       10              Material contracts               None           Not Applicable
 
       11           Statement re: computation           Not            Not Applicable
                      of per share earnings           Required
 
       12           Statement re: computation           Not            Not Applicable
                            of ratios                 Required
 
       13         Annual Report to Stockholders         None           Not Applicable
 
 
       16             Letter re: change in
                           certifying                   None           Not Applicable
                           accountants
 
       18             Letter re: change in
                      accounting principles             None           Not Applicable
 
       19              Previously unfiled
                            documents                   None           Not Applicable
 
       21          Subsidiaries of Registrant            21                Page 29
</TABLE>

                                       67
<PAGE>
 
<TABLE>
<CAPTION>
                                                 Sequential Page
                                                Reference to Prior     Number Where
                                                Filing or Exhibit    Attached Exhibits
 Regulation S-K                                  Number Attached    Are Located in This
 Exhibit Number             Document                  Hereto         Form 10-K Report
----------------  ----------------------------  ------------------  -------------------
<S>               <C>                           <C>                 <C>
       22          Published report regarding          None           Not Applicable
                  matters submitted to vote of
                        security holders
 
       23            Consent of Experts and            Not            Not Applicable
                            Counsel                  Required
 
       24              Power of Attorney               None           Not Applicable
 
       28           Information from reports           None           Not Applicable
                       furnished to state
                      insurance regulatory
                          authorities
 
       99             Additional Exhibits              None           Not Applicable
 
</TABLE>

     (b)  Reports on Form 8-K:

          None

                                       68
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: December 21, 1998                 By: /s/ Skip Martin
                                           ----------------------------------
                                                Skip Martin, President and
                                                Chief Executive Officer

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


By: /s/ Skip Martin                     By: /s/ Dwayne Powell
   ----------------------------------      ----------------------------------
   Skip Martin                             Dwayne Powell
   President, Chief Executive Officer,     Chief Financial Officer
   and Director                            (Principal Financial Officer)
   (Principal Executive Officer)

Date:  December 21, 1998                Date:  December 21, 1998


By: /s/ Ralph P. Baltz                  By: /s/ James A. Edington
   ----------------------------------      ----------------------------------
   Ralph P. Baltz                          James A. Edington
   Chairman of the Board and Director      Executive Vice President, Secretary,
   and Director

Date:  December 21, 1998                Date:  December 21, 1998



By:                                     By: /s/ Marcus Van Camp
   ----------------------------------      ----------------------------------
   Charles R. Ervin                        Marcus Van Camp
   Director                                Director

Date:  December 21, 1998                Date:  December 21, 1998



By: /s/ N. Ray Campbell                 By: /s/ Robert Rainwater
   ----------------------------------      ----------------------------------
   N. Ray Campbell                         Robert Rainwater
   Director                                Director

Date:  December 21, 1998                Date:  December 21, 1998

                                       69