<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                             --------------------
(Mark One)                        FORM 10-KSB

[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
For the fiscal year ended June 30, 1999
                                      OR

[_]  TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________

                          Commission File No. 0-23525
                                              -------

                        NORTH ARKANSAS BANCSHARES, INC.
          -----------------------------------------------------------
          (Name of small business issuer as specified in its charter)

           Tennessee                                             71-0800742
---------------------------------                             ------------------
  (State or other jurisdiction                                (I.R.S. employer
of incorporation or organization)                            identification no.)

  200 Olivia Drive, Newport, Arkansas                               72112
 --------------------------------------                           ----------
(Address of principal executive offices)                          (Zip Code)

        Issuer's telephone number, including area code:  (870) 523-3611

          Securities registered pursuant to Section 12(b) of the Act:
                                 Not Applicable

          Securities registered pursuant to Section 12(g) of the Act:
                    Common stock, par value, $.01 per share
                    ---------------------------------------

Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes   X       No _______
                                                    -----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]

Registrant's revenues for the fiscal year ended June 30, 1999: $3,277,126

As of September 22, 1999, the aggregate market value of the 264,219 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $2,113,752 based on the closing sales price of
$8.00 per share of the registrant's Common Stock on September 22, 1999 as
reported on the OTC Electronic Bulletin Board.  For purposes of this
calculation, it is assumed that directors, executive officers and the ESOP are
affiliates.

Number of shares of Common Stock outstanding as of September 24, 1999: 333,270

Transitional Small Business Disclosure Format   Yes ________     No    X
                                                                    -------

                      DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:

     1.   Portions of Proxy Statement for the 1999 Annual Meeting of
          Stockholders. (Part III)
<PAGE>

                                    PART I

Item 1.  Description of Business
--------------------------------

General

     The Company.  North Arkansas Bancshares, Inc. (the "Company"), a Tennessee
corporation, was organized at the direction of the Board of Directors of Newport
Federal Savings Bank ("Newport Federal" or the "Bank") in September 1997 to
acquire all of the capital stock to be issued by the Bank in its conversion from
mutual to stock form (the "Conversion").  The Conversion was completed on
December 18, 1997, with the Company issuing 370,300 shares of its common stock,
par value $0.01 per share (the "Common Stock") to the public, and the Bank
issuing all of its issued and outstanding common stock to the Company.  Prior to
the Conversion, the Company did not engage in any material operations.  The
Company does not have any significant assets other than the outstanding capital
stock of the Bank, cash and investment securities and a note receivable from the
ESOP.  The Company's principal business is the business of the Bank.  At June
30, 1999, the Company had total assets of $48.0 million, deposits of $34.7
million, net loans receivable of $29.6 million and stockholders' equity of $4.9
million.

     Newport Federal Savings Bank.  The Bank is a federal stock savings bank
operating through one office in Newport, Arkansas.  Newport Federal was founded
in 1934 as a federally chartered institution and is a member of the Federal Home
Loan Bank ("FHLB") System.  The Bank's principal business consists of attracting
deposits from the general public and originating residential mortgage loans.
The Bank also offers various types of consumer loans and commercial business
loans.  The Bank's deposits are insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF").

     Both the Company's and Newport Federal's executive offices are located at
200 Olivia Drive, Newport, Arkansas 72112 and its main telephone number is (870)
523-3611.

Market Area

     The Bank considers its primary market area to be Jackson County in Northern
Arkansas.  The City of Newport, where the Bank is located, is the County Seat of
Jackson County.  Jackson County is primarily rural in nature.  According to 1990
Census data, approximately 26.6% of the households in Jackson County had incomes
below the poverty line.  Median household income was estimated to be $16,641.
The unemployment rate calculated based on the 1990 Census data was 5.40%,
slightly below the average for all of Arkansas of 5.98% and the U.S. average of
6.24%.  Major employers in the Bank's market area are Arkansas State University-
Beebe/Newport, which is located in Newport, two hospitals, also based in
Newport, Arkansas Steel and the Noranda Aluminum Rolling Plant. Two privately-
owned prisons opened in January 1998 which have added approximately 284 new jobs
to the market area according to the companies that own the prisons.  The
principal sources of employment in Jackson County as a whole are manufacturers,
trade, public administration and services.

Proposed Legislative and Regulatory Changes

     Legislation has been reintroduced in the U.S. Congress which calls for the
modernization of the banking system and which would significantly affect the
operations and regulatory structure of the financial services industry,
including savings institutions like the Bank.  At this time, management does not
know what form the final legislation might take, or if enacted into law, how the
legislation would affect the Company's and Bank's business and operations and
competitive environment.  For additional information on the provisions of this
legislation, see "Regulation of the Bank -- Proposed Legislative and Regulatory
Changes."

                                       2
<PAGE>

Lending Activities

    Most of the Bank's loans are mortgage loans which are secured by one- to
four-family residences.  The Bank also makes consumer, residential construction
and commercial real estate and commercial  business loans.  At June 30, 1999,
the Bank's gross loans totaled $29.6 million of which $21.7 million were
mortgage loans secured by one-to four-family residences.  The Bank originates
both fixed-rate mortgage and adjustable-rate mortgage ("ARM") loans. Generally,
all of the consumer loans the Bank originates have fixed rates.

    The following table sets forth information concerning the types of loans
held by the Bank at the dates indicated. At June 30, 1999, the Bank did not have
any concentrations of loans exceeding 10% of total loans except as disclosed
below.

<TABLE>
<CAPTION>
                                                At June 30,
                                 --------------------------------------------
                                     1999                          1998
                                 ----------------           -----------------
                                 Amount      %               Amount      %
                                 -------  -------           --------  -------
                                            (Dollars in thousands)

<S>                              <C>       <C>              <C>       <C>
Real estate loans:
  One- to four-family..........  $21,712   73.24%           $18,018   69.88%
  Multi-family.................      123     .41                129     .50
  Non-residential..............    3,578   12.08              3,128   12.13
                                 -------   -----            -------   -----
     Total real estate loans...   25,413   85.73             21,275   82.51
Consumer loans:
  Loans secured by deposits....      746    2.51                694    2.69
  Home improvement.............      382    1.29                517    2.01
  Automobile...................    1,918    6.47              2,174    8.43
  Other consumer...............      597    2.01                632    2.45
Commercial.....................      590    1.99                492    1.91
                                 -------  ------            -------  ------
       Total loans.............   29,646  100.00%            25,784  100.00%
                                 -------  ======            -------  ======

Less:
  Deferred fees and discounts..        1                          2
  Allowance for losses.........      105                        189
                                 -------                    -------
       Loan portfolio, net.....  $29,540                    $25,593
                                 =======                    =======
</TABLE>

     The following table sets forth the estimated maturity of the Bank's loan
portfolio at June 30, 1999.  The table does not include the effects of possible
prepayments or scheduled repayments.  All mortgage loans are shown as maturing
based on the date of the last payment required by the loan agreement.

<TABLE>
<CAPTION>

                                                 Due After
                                 Due Within      1 Through      Due After
                               One Year After  5 Years After  5 Years After
                               June 30, 1999   June 30, 1999  June 30, 1999    Total
                               --------------  -------------  -------------  ---------
                                               (In thousands)
<S>                                <C>            <C>            <C>            <C>
Real estate loans:
  One- to four-family........      $1,067         $2,928         $17,717        $21,712
  Multi-family...............          --             --             123            123
  Non-residential............         950          1,218           1,410          3,578
Consumer loans:
  Loans secured by deposits..         652             94              --            746
  Home improvement...........           5            116             261            382
  Automobile.................         140          1,742              36          1,918
  Other consumer.............         161            399              37            597
Commercial...................         290            229              71            590
                                   ------         ------         -------        -------
     Total...................      $3,265         $6,726         $19,655        $29,646
                                   ======         ======         =======        =======
</TABLE>

                                       3
<PAGE>

     The next table shows at June 30, 1999, the dollar amount of all the Bank's
loans due one year or more after June 30, 1999 which have fixed interest rates
and have floating or adjustable interest rates.

<TABLE>
<CAPTION>

                                                               Floating or
                                            Fixed Rate      Adjustable Rates
                                            ----------      ----------------
                                                 (In thousands)
<S>                                           <C>               <C>
            Real estate loans:
                One- to four-family.......    $4,503            $16,142
                Multi-family..............        --                123
                Non-residential...........     1,784                844
            Consumer loans:
               Loans secured by deposits..        94                 --
               Home improvement...........       377                 --
               Automobile.................     1,778                 --
               Other consumer.............       436                 --
            Commercial...................        300                 --
                                              ------            -------
                    Total.................    $9,272            $17,109
                                              ======            =======

</TABLE>

     Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments.  In
addition, the Bank's mortgage loans generally give the Bank the right to declare
a loan due and payable in the event, among other things, that a borrower sells
the real property subject to the mortgage and the loan is not repaid.

     One-to Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of one-to four-family residential mortgage loans
secured by property located in the Bank's primary market area.  At June 30,
1999, $21.8 million, or 73.65% of the Bank's gross loan portfolio consisted of
residential mortgage loans. The Bank generally originates one-to four-family
residential mortgage loans in amounts up to 80% of the lesser of the appraised
value or purchase price, with private mortgage insurance or additional
collateral required on loans with a loan-to-value ratio in excess of 80%. The
maximum loan-to-value ratio on mortgage loans secured by nonowner occupied
properties generally is limited to 80%. The Bank primarily originates and
retains fixed-rate balloon loans having terms of up to five years, with
principal and interest payments calculated using up to a 25-year amortization
period.

     The Bank also offers ARM loans. The interest rate on ARM loans is based on
an index plus a stated margin. ARM loans provide for periodic interest rate
adjustments upward or downward of up to 2% per year. The interest rate may not
increase above a "ceiling rate" established at the time the loan is originated
and may not decrease below the original interest rate.  ARM loans typically
reprice every one, three or five years and provide for terms of up to 30 years
with most loans having terms of between 15 and 30 years.

     ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates. At June 30, 1999, approximately 75.03% of the
one-to four-family residential loans the Bank holds had adjustable rates of
interest.

     Mortgage loans originated and held by the Bank generally include due-on-
sale clauses. This gives the Bank the right to deem the loan immediately due
and payable in the event the borrower transfers ownership of the property
securing the mortgage loan without the Bank's consent.

                                       4
<PAGE>

     Residential Construction Loans.  The Bank makes a limited number of
residential construction loans on one-to four-family residential property to the
individuals who will be the owners and occupants upon completion of
construction. Loan proceeds are disbursed according to a draw schedule and the
Bank inspects the progress of the construction before additional funds are
disbursed. The Bank charges a fixed rate of interest on the Bank's construction
loans. While the Bank occasionally agrees to convert the balance of
construction loans to a permanent mortgage upon completion of the construction
phase, the Bank will not commit to do so at the same time as the construction
loan is granted. Any permanent mortgage would be granted on the same terms as
other one-to four-family mortgage loans the Bank originates.

     Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Bank's risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and the
estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project proves to be
inaccurate, the Bank may be compelled to advance additional funds to complete
the construction. Furthermore, if the final value of the completed property is
less than the estimated amount, the value of the property might not be
sufficient to assure the repayment of the loan.

     Commercial and Multi-Family Loans.  The Bank's commercial real estate loans
are secured by churches, office buildings, and other commercial properties.
Multi-family loans are secured by apartment and condominium buildings. At June
30, 1999, the Bank's three largest commercial real estate loans consisted of a
loan on a commercial office building which had a balance of $495,000 at June 30,
1999, a loan to a nursing home which had a balance of $370,000 and a loan to a
doctors office building which had a balance of $247,000 at June 30, 1999. At
June 30, 1999, all three of these loans were performing in accordance with their
terms.

     Multi-family and commercial real estate loans are made in amounts of up to
80% of the appraised value of the property and may be on a fixed or adjustable-
rate basis for terms of up to five years. Prior to committing to make a multi-
family or commercial real estate loan, the Bank requires that the prospective
borrower provide a cash flow statement indicating sufficient cash flow from the
property to service the loan. The Bank reviews any tenant leases and requires
that the payments under such leases be assigned to the Bank.

     Commercial and multi-family real estate lending entails significant
additional risks compared to residential property lending. These loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The repayment of these loans typically is dependent on the successful
operation of the real estate project securing the loan. These risks can be
significantly affected by supply and demand conditions in the market for office
and retail space and may also be subject to adverse conditions in the economy.
To minimize these risks, the Bank generally limits this type of lending to the
Bank's market area and to borrowers who are otherwise well known to the Bank.

     Commercial Business Loans.  The Bank offers commercial business loans to
benefit from the higher fees and interest rates and the shorter term to
maturity. The Bank's commercial business loans consist of equipment, lines of
credit and other business purpose loans, which generally are secured by either
the underlying properties or by the personal guarantees of the borrower.
Commercial business loans are generally written for a term of five years or less
although they may be renewed by the Bank at maturity. Interest payments are
made at least semi-annually and the rate may be changed annually in accordance
with market rates.

     Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself and the general economic environment.

                                       5
<PAGE>

     Consumer Loans.  The Bank offers consumer loans in order to provide a wider
range of financial services to the Bank's customers. Consumer loans totaled
$3.6 million, or 12.28% of the Bank's total loans at June 30, 1999. The Bank's
consumer loans consist of automobile, home improvement, share account and
personal loans. The Bank's home improvement loans are primarily originated
under a program whereby the U.S. Government guarantees 90% of the principal
balance of such loans.  The Bank began offering personal lines of credit in
1997. The Bank offers both unsecured lines of credit that are granted based
upon the borrower's financial strength and secured lines of credit.

     Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.

     Loan Solicitation and Processing.  Loan originations are derived from a
number of sources, including walk-in customers and referrals by realtors,
depositors and borrowers.

     The Bank's President may approve all one-to four-family mortgage loans that
conform to all of the Bank's policy requirements up to $50,000, and may approve
all consumer loans. The Executive Committee of the Bank's board which consists
of three directors may approve loans with principal balances of up to $100,000.
All other loans require the approval of the Bank's board of directors.

     Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are prepared by outside fee appraisers
who are approved by the board of directors.

     Either title insurance or a title opinion is generally required on all real
estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.

     Written commitments are given to prospective borrowers on all approved real
estate loans. Generally, the commitment requires acceptance within 30 days of
the date of issuance. At June 30, 1999, commitments to cover originations of
mortgage loans were $350,000. The Bank believes that virtually all of the
Bank's commitments will be funded.

     Loan Originations, Purchases and Sales.  Most of the loans the Bank
originates are intended to be held in the Bank's portfolio rather than sold in
the secondary mortgage market. The Bank occasionally purchases loan
participations from other financial institutions. These participation interest
purchases are reflected in the above table. Generally, the purchase of
participation interests involves the same risks as would the origination of the
same types of loans as well as the additional risk that results from the fact
that the Bank has less control over the origination and subsequent
administration of such loans. At June 30, 1999, all of the Bank's participation
loans were performing in accordance with their terms.

     Loans to One Borrower.  The maximum amount of loans which the Bank may make
to any one borrower may not exceed the greater of $500,000 or 15% of the Bank's
unimpaired capital and unimpaired surplus. The Bank may lend an additional 10%
of the Bank's unimpaired capital and unimpaired surplus if the loan is fully
secured by readily marketable collateral. The Bank's maximum loan-to-one
borrower limit was approximately $640,000 at June 30, 1999. At June 30, 1999,
the Bank's largest loan outstanding had a balance of $500,000. This loan was
secured by a one- to four-family dwelling.

     Loan Delinquencies.  Generally when a mortgage loan becomes 15 days past
due, a late charge is assessed. If, after 30 days, a payment is still
delinquent, the borrower will receive a computer-generated notice and a letter
and/or telephone call from the Bank and may receive a visit from one of the
Bank's representatives. If the loan continues in

                                       6
<PAGE>

a delinquent status for 60 days, a letter is sent giving the borrower 10 days in
which to cure the delinquency or risk having the loan called. If no payment is
received after that 10 day period, the loan is called and appropriate legal or
foreclosure action is initiated. At June 30, 1999, the Bank's loans past due
between 30 and 89 days totaled $325,271.

     Loans are reviewed on a monthly basis and are generally placed on a non-
accrual status when the loan becomes more than 90 days' delinquent or when, in
the Bank's opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.

    Nonperforming Assets.  The following table sets forth information regarding
nonaccrual loans and real estate owned.  As of the dates indicated, the Bank had
no loans categorized as troubled debt restructurings within the meaning of SFAS
15 and no loans which were 90 days or more past due and still accruing interest.

<TABLE>
<CAPTION>

                                                        At June 30,
                                                ---------------------------
                                                 1999                 1998
                                                ------               ------
                                                       (In thousands)
<S>                                              <C>                 <C>
Loans accounted for on a non-accrual basis:
  Real estate:
    One- to four-family......................    $  36               $  13
    Multi-family.............................       --                  --
    Non-residential..........................       --                  23
                                                 -----               -----
     Total real estate loans.................       36                  36
Consumer loans:
   Loans secured by deposits.................       --                  --
   Home improvement..........................        1                  11
   Automobile................................       --                  --
   Other consumer............................       --                  --
Commercial...................................       --                  --
                                                 -----               -----
        Total nonperforming loans............       37                  47
                                                 -----               -----

Repossessed automobiles......................       --                  69

Foreclosed real estate.......................      379                 536
                                                 -----               -----
Total nonperforming assets...................    $ 416               $ 652
                                                 =====               =====
Total nonperforming assets as a
  percentage of total net loans..............     1.41%               2.55%
                                                 =====               =====
Total nonperforming assets as a
  percentage of total assets.................     .867%               1.49%
                                                 =====               =====
</TABLE>

                                       7
<PAGE>

     During the year ended June 30, 1999, the Bank would have recorded
additional interest income of approximately $2,000 on nonaccrual loans if such
loans had been current throughout the period.  The Bank did not include any
income on nonaccrual loans during the year.  In addition, the Bank had $108,000
in loans which were not classified as nonaccrual, 90 days past due or
restructured, but where known information causes the Bank to have serious
concerns as to the ability of these borrowers to comply with their current loan
terms.

     Foreclosed real estate of $379,000 at June 30, 1999 consisted of the Bank's
participation interest in a 625-room hotel located in Oklahoma City.  During the
year ended June 30, 1998, the property was transferred to other real estate
owned in connection with the acceptance of the deed in lieu of foreclosure.
During the year ended June 30, 1999, the carrying value of the property was
reduced by $157,000, based on the anticipated sale price of the property. While
the property currently generates sufficient cash flow to cover the costs of
upkeep and is being marketed for sale there can be no assurance that further
write downs in connection with this property will not be required.

     Classified Assets.  OTS regulations provide for a classification system for
problem assets of savings associations which covers all problem assets.  Under
this classification system, problem assets of savings associations such as the
Bank's are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the borrower or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that the savings association 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 may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.

     When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management.  General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets.  When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount.  A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances.  A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings association's regulatory capital.  Specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.

     At June 30, 1999, none  of the Bank's assets were classified as special
mention or doubtful and loans classified as substandard totaled $145,000.  In
addition, the Bank's real estate owned of $379,000 was also classified as
substandard.

     Foreclosed Real Estate.  Real estate acquired by the Bank as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less estimated disposal
costs.  Any write down of real estate owned is charged to operations.  At June
30, 1999, the Bank's only real estate owned consisted of its interest in a 625-
room hotel located in Oklahoma City.  See " -- Nonperforming Assets."

     Allowance for Loan Losses.  The Bank's policy is to provide for losses on
unidentified loans in the Bank's loan portfolio.  A provision for loan losses is
charged to operations based on management's evaluation of the potential losses
that may be incurred in the Bank's loan portfolio.  The evaluation, including a
review of all loans on which full

                                       8
<PAGE>

collectibility of interest and principal may not be reasonably assured,
considers: (i) the Bank's past loan loss experience, (ii) known and inherent
risks in the Bank's portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.

     The Bank monitors its allowance for loan losses and makes additions to the
allowance as economic conditions dictate.  Although the Bank maintains the
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in the Bank's loan portfolio, actual losses could exceed the
balance of the allowance for loan losses and additional provisions for loan
losses could be required.  In addition, the Bank's determination as to the
amount of its allowance for loan losses is subject to review by the OTS, as part
of its examination process.  After a review of the information available, the
OTS might require the establishment of an additional allowance.

     The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.

<TABLE>
<CAPTION>

                                             Year Ended June 30,
                                           ------------------------
                                               1999         1998
                                           ------------  ----------
                                            (Dollars in thousands)
<S>                                        <C>           <C>
Balance at beginning of period...........       $  189      $  150
                                                ------      ------

Charge-offs:
  One-to-four-family.....................           --          (5)
  Multi-family...........................           --          --
  Non-residential........................         (107)       (112)
                                                ------      ------
     Total real estate loans.............         (107)       (117)
  Consumer loan..........................          (41)         --
Recoveries:
  One-to-four-family.....................           --          --
  Multi-family...........................           --          --
  Non-residential........................           --          --
                                                ------      ------
Net recoveries (charge-offs).............         (148)       (117)
                                                ------      ------
Additions charged to operations..........           64         156
                                                ------      ------
Balance at end of period.................          105         189
                                                ------      ------

Allowance for loan losses to total
  nonperforming assets at end of period..        25.24%      32.41%
                                                ======      ======
Allowance for loan losses to net loans
  at end of period.......................          .36%        .74%
                                                ======      ======
Ratio of net charge-offs to average
  loans outstanding during the period....          .55%        .37%
                                                ======      ======
</TABLE>

                                       9
<PAGE>

     The following table illustrates the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the Bank's use of the allowance to absorb losses in other
loan categories.

<TABLE>
<CAPTION>
                                                          June 30,
                                       -------------------------------------------------
                                                1999                       1998
                                       ----------------------     ----------------------
                                                  Percent of                 Percent of
                                                   Loans in                  Loans in
                                                 Category to                Category to
                                       Amount    Total Loans      Amount    Total Loans
                                       ------    ------------     ------    ------------
                                                     (Dollars in thousands)
<S>                                    <C>       <C>              <C>       <C>
Real estate loans:
  One- to four-family................   $  77          73.24%       $132          69.88%
  Multi-family.......................       1            .41           1            .50
  Non-residential....................      13          12.08          23          12.13
                                        -----         ------        ----         ------
     Total real estate loans.........      91          85.73         156          82.51
Consumer loans:
   Loans secured by deposits.........       2           2.51           5           2.69
   Home improvement..................       1           1.29           4           2.01
   Automobile........................       7           6.47          16           8.43
   Other consumer....................       2           2.01           5           2.45
Commercial...........................       2           1.99           3           1.91
                                        -----         ------        ----         ------
    Total allowance for loan losses..   $ 105         100.00%       $189         100.00%
                                        =====         ======        ====         ======
</TABLE>

Investment Activities

    Investment Securities.  The Bank is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments.  See "Regulation --
Regulation of the Bank -- Federal Home Loan Bank System."  The level of liquid
assets varies depending upon several factors, including: (i) the yields on
investment alternatives, (ii) the Bank's judgment as to the attractiveness of
the yields then available in relation to other opportunities, (iii) expectation
of future yield levels, and (iv) the Bank's projections as to the short-term
demand for funds to be used in loan origination and other activities.  The Bank
classifies all the Bank's investment securities as "held to maturity" in
accordance with SFAS No. 115.  At June 30, 1999, the Bank's investment portfolio
policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage-backed securities, (v) bankers'
acceptances, (vi) certificates of deposit, (vii) federal funds, including FHLB
overnight and term deposits (up to six months), and (viii) investment grade
corporate bonds, commercial paper and mortgage derivative products.   See " --
Mortgage-Backed Securities."   The Board of Directors may authorize additional
investments.

    The Bank's investment securities at June 30, 1999 did not contain securities
of any issuer with an aggregate book value in excess of 10% of the Bank's
equity, excluding those issued by the United States Government or its agencies.

     Mortgage-Backed Securities.  To supplement lending activities, the Bank has
invested in residential mortgage-backed securities.  Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity.  Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages.  Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us.  The
Bank's mortgage-backed securities portfolio consists of participations or pass-
through certificates issued by the Federal Home Loan Mortgage Corporation (the
"FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA").  GNMA certificates are guaranteed as to
principal and interest by the full faith and credit of the United States, while
FHLMC and FNMA

                                       10
<PAGE>

certificates are guaranteed by those agencies only. The Bank's mortgage-backed
securities portfolio was classified as "held to maturity" at June 30, 1999.

     Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.

     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 set range and have varying maturities.  The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans.  Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates.  The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder.  The life of a mortgage-backed pass-through security is equal to the
life of the underlying mortgages.

     The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages.  Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security.  The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security.  Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using the
interest method.  The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect the actual prepayment.  The actual prepayments of the underlying
mortgages depend on many factors, including the type of mortgage, the coupon
rate, the age of the mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates.  The difference between the interest rates on the underlying mortgages
and the prevailing mortgage interest rates is an important determinant in the
rate of prepayments.  During periods of falling mortgage interest rates,
prepayments generally increase, and, conversely, during periods of rising
mortgage interest rates, prepayments generally decrease.  If the coupon rate of
the underlying mortgage significantly exceeds the prevailing market interest
rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages.  Prepayment experience
is more difficult to estimate for adjustable-rate mortgage-backed securities.

     As a member of the FHLB of Dallas, the Bank is required to maintain an
investment in FHLB Stock.  At June 30, 1999, the Bank's investment in FHLB stock
amounted to $435,000.  No ready market exists for such stock and it has no
quoted market value.

     The following table sets forth the carrying value of the Bank's investment
securities and mortgage-backed portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                           At June 30,
                                           -----------
                                     1999           1998
                                    ------         ------
                                         (In thousands)
<S>                                 <C>          <C>
  U.S. Government agencies......    $ 2,725       $ 3,000
  Mortgage-backed securities....     10,852         7,895
  Federal Home Loan Bank stock..        435           301
  Municipal securities..........         30            48
                                    -------       -------
      Total.....................    $14,042       $11,244
                                    =======       =======
</TABLE>

                                       11
<PAGE>

     The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment portfolio at June 30,
1999.

<TABLE>
<CAPTION>
                              One Year or Less  One to Five Years  Five to Ten Years  More than Ten Years Total Investment Portfolio
                              ----------------  ------------------ ------------------ ------------------- --------------------------
                                       Weighted           Weighted           Weighted           Weighted               Weighted
                              Book     Average  Book      Average  Book      Average  Book       Average   Book         Average
                              Value     Yield   Value      Yield   Value       Yield  Value       Yield    Value         Yield
                              -----     -----   -----      -----   -----       -----  -----       -----    -----         -----
                                                    (Dollars in thousands)
<S>                           <C>      <C>      <C>       <C>      <C>       <C>      <C>       <C>        <C>         <C>
Securities held to
 maturity:
  U.S. Government and
    agencies................  $  --      -- %   $  --       -- %   $ 725      6.08%   $ 2,000       6.75%  $ 2,725         6.57%
  Mortgage-backed
    securities  (1).........     --      --        --       --        --        --     10,852       6.44    10,852         6.44
  Municipal securities......      3    9.50        10      9.50       17      9.50         --         --        30         9.50
                              -----             -----              -----              -------              -------
                              $   3             $  10              $ 742              $12,852              $13,607
                              =====             =====              =====              =======              =======
</TABLE>

_______________
(1)  For purposes of the maturity table, mortgage-backed securities, which are
     not due at a single maturity date, have been allocated to maturity groups
     based on the weighted average estimated life of the underlying collateral.

                                       12
<PAGE>

Sources of Funds

     Deposits are the Bank's major external source of funds for lending and
other investment purposes. Funds are also derived from the receipt of payments
on loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.

     Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. IRA accounts are also offered. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate. The interest rates paid by the
Bank on deposits are set weekly at the direction of the Bank's senior
management. Interest rates are determined based on the Bank's liquidity
requirements, interest rates paid by the Bank's competitors, and the Bank's
growth goals and applicable regulatory restrictions and requirements.

     Certificates of deposit in amounts of $100,000 or more totaled $4.3 million
or 12.36% of the deposit portfolio. The majority of these certificates represent
deposits from long-standing customers. As of June 30, 1999, the Bank had no
brokered deposits.

     At June 30, 1999, the Bank's deposits were represented by the various types
of savings programs described below.

<TABLE>
<CAPTION>
Interest            Minimum                                         Minimum     Balances in   Percentage of
Rate(1)              Term          Category                         Amount       Thousands    Total Savings
------              -------        --------                         -------     -----------   -------------
<S>                 <C>            <C>                              <C>         <C>            <C>
2.78%               None           Passbook accounts                $   500       $ 2,204           6.34%
2.37                None           NOW accounts                         500         2,439           7.01
2.52                None           Money market accounts              2,500           261            .75
 --                 None           Other non-interest bearing           100         1,305           3.75

                                   Certificates of Deposit
                                   --------------------------

3.56                31 days        Fixed-Term, Fixed-Rate               500            91            .26
4.06                91 days        Fixed-Term, Fixed-Rate               500           195            .56
4.65                6 months       Fixed-Term, Fixed-Rate               500         6,046          17.38
4.78                12 months      Fixed-Term, Fixed-Rate               500         8,122          23.35
4.34                15 months      Fixed-Term, Fixed-Rate               500         2,300           6.61
4.94                18 months      Fixed-Term, Fixed-Rate               500         1,068           3.07
4.94                24 months      Fixed-Term, Fixed-Rate               500         1,259           3.62
4.99                36 months      Fixed-Term, Fixed-Rate               500         1,506           4.33
5.20                60 months      Fixed-Term, Fixed-Rate               500         7,988          22.97
                                                                                  -------         ------

                                       Total certificates of deposit               28,575          82.15
                                                                                  -------         ------
                                       Total savings deposits                     $34,784         100.00%
                                                                                  =======         ======
</TABLE>
-------------------------
(1)  Indicates weighted average interest rate at June 30, 1999.

                                       13
<PAGE>

     The following table sets forth the Bank's time deposits classified by
interest rate at the dates indicated.
<TABLE>
<CAPTION>
                                               At June 30,
                                         -----------------------
                                          1999            1998
                                         ------          -------
<S>                                      <C>            <C>
                                              (In thousands)

          2 -  3.99%................     $   369         $   178
          4 -  5.99%................      25,098          24,629
          6 -  7.99%................       3,108           3,359
                                         -------         -------
                                         $28,575         $28,166
                                         =======         =======
 </TABLE>

     The following table sets forth the amount and maturities of the Bank's time
deposits at June 30, 1999.

<TABLE>
<CAPTION>
                                            Amount Due
                     -------------------------------------------------------
                     Less Than   One to      Two to        After
Rate                 One Year   Two Years  Three Years  Three Years   Total
----                 ---------  ---------  -----------  -----------  -------
<S>                  <C>        <C>        <C>          <C>          <C>
                                          (In thousands)

 2 -  3.99%........  $     369  $      --   $       --   $       --  $    369
 4 -  5.99%........     18,379      1,831        1,509        3,379    25,098
 6 -  7.99%........        214      2,358          486           50     3,108
                     ---------  ---------   ----------   ----------  --------
                     $  18,962  $   4,189   $    1,995   $    3,429  $ 28,575
                     =========  =========   ==========   ==========  ========
</TABLE>

     The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1999.

<TABLE>
<CAPTION>
                                                  Certificates
          Maturity Period                         of Deposit
          ---------------                        --------------
                                                 (In thousands)
          <S>                                    <C>

          Three months or less...........           $    477
          Over three through six months..              1,061
          Over six through 12 months.....              1,613
          Over 12 months.................              1,188
                                                    --------
            Total........................           $  4,339
                                                    ========
</TABLE>

     Borrowings. Advances (borrowings) may be obtained from the FHLB of Dallas
to supplement the Bank's supply of lendable funds. Advances from the FHLB of
Dallas are typically secured by a pledge of the Bank's stock in the FHLB of
Dallas, a portion of the Bank's first mortgage loans and other assets. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. At June 30, 1999, borrowings from the FHLB of Dallas
totaled $8.1 million and consisted of five long-term obligations and one
short-term obligation totaling $5.9 million and $2.2 million, respectively.

                                       14
<PAGE>

     The following table sets forth certain information regarding the Bank's
borrowings.

<TABLE>
<CAPTION>
                                                   At or for the
                                                Year Ended June 30,
                                              ------------------------
                                               1999             1998
                                              ------           -------
                                                (Dollars in thousands)
<S>                                           <C>              <C>
Amounts outstanding at end of period:
  FHLB advances.............................   $8,090          $3,970

Weighted average rate paid on:
  FHLB advances.............................    5.645           5.786%

Maximum amount of borrowings outstanding
  at any month end:
  FHLB advances.............................    8,090           4,008

Approximate average short-term borrowings
  outstanding with respect to:
  FHLB advances.............................    1,073             783

Approximate weighted average rate paid on:
  FHLB advances.............................    5.739%          5.769%
</TABLE>

Performance Ratios

     The table below sets forth certain performance ratios of the  Company at or
for the years indicated.

<TABLE>
<CAPTION>
                                                                     At or for the
                                                                  Year Ended  June 30,
                                                              ------------------------
                                                               1999              1998
                                                              ------           -------
<S>                                                           <C>              <C>
 Return on assets (net earnings divided by
  average total assets)................................            * %            .06%
 Return on average stockholders' equity (net earnings
  divided by average stockholders' equity).............          .02              .65
 Dividend payout ratio (dividends declared per share
  divided by net earnings per share)...................          N/A              N/A
 Interest rate spread (combined weighted average
  interest rate earned less combined weighted
  average interest rate cost)..........................         2.11             3.31
 Ratio of average interest-earning assets to
  average interest-bearing liabilities.................       105.92           102.97
 Ratio of noninterest expense to average total assets..         2.41             2.74
</TABLE>

---------
* = Not meaningful.

                                       15
<PAGE>

Competition

     The Bank competes for deposits with other insured financial institutions
such as commercial banks, thrift institutions, credit unions, finance companies,
and multi-state regional banks in the Bank's market area.   The Bank also
competes for funds with insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers.  Loan competition varies depending upon market conditions. The Bank's
competition comes from commercial banks, thrift institutions, credit unions and
mortgage bankers, many of whom have greater resources than the Bank has.

Personnel

     At June 30, 1999, the Bank had 13 full-time and one part-time employees.
None of the Bank's employees are represented by a collective bargaining group.
The Bank believes that the Bank's relationship with its employees is good.

Regulation of the Company

     General.  The Company is a savings and loan holding company within the
meaning of the Home Owners' Loan Act, as amended ("HOLA").  As such the Company
is registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements.  As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof.

     Activities Restrictions.  The Board of Directors of the Company presently
operates the Company as a unitary savings and loan holding company.  There are
generally no restrictions on the activities of a unitary savings and loan
holding company.  However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk
including limiting: (i) payment of dividends by the savings institution, (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution.  Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") Test, then such unitary holding company shall also
presently become subject to the activities restrictions applicable to multiple
holding companies and unless the savings association requalifies as a QTL within
one year thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company.  See "Regulation of the Bank -- Qualified
Thrift Lender Test."

     If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions.  Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than (i) furnishing or performing
management services for a subsidiary savings institution, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the Director of
OTS by regulation prohibits or limits such activities for savings and loan

                                       16
<PAGE>

holding companies.  Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.

     Transactions with Affiliates.  Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act.  An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution.  In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such 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 other types of
transactions.  In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution.  Savings associations are
also subject to the anti-tying provisions of Section 106(b) of the Bank Holding
Company Act of 1956 ("BHCA") which prohibits a depository institution from
extending credit to or offering any other services, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution, subject to
certain exceptions.

     Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders.  Under Section 22(h), loans to an
executive officer and to a greater than 10% stockholder of a savings
institution, and certain affiliated entities of either, may not exceed, together
with all other outstanding loans to such person and affiliated entities the
institution's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral) and all loans to such persons may not exceed the institution's
unimpaired capital and unimpaired surplus unless the institution has less than
$100 million in deposits in which case the aggregate limit may be increased to
no more than two times unimpaired capital and surplus.   Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
savings institution, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of the institution
with any "interested" director not participating in the voting.  The Federal
Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000).  Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons unless the loan is made pursuant to a benefit or
compensation plan that is widely available to other employees and does not give
preference to insiders. Section 22(h) also generally prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.

     Savings institutions are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act and Regulation on loans to executive
officers and the restrictions of Section 106(b) of the BHCA on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval for such extensions of credit by the board of
directors of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers.  Section 1972 prohibits (i) a depository institution from extending
credit to or offering any other services, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution, subject to

                                       17
<PAGE>

certain exceptions, and (ii) extensions of credit to executive officers,
directors, and greater than 10% stockholders of a depository institution by any
other institution which has a correspondent banking relationship with the
institution, unless such extension of credit is on substantially the same terms
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.

     Restrictions on Acquisitions.  The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary.  Under certain circumstances, a registered savings and loan holding
company is permitted to acquire, with the approval of the Director of OTS, up to
15% of the voting shares of an undercapitalized savings institution pursuant to
a "qualified stock issuance" without that savings institution being deemed
controlled by the holding company.  In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act.  Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary savings institution, or of any other savings and loan holding
company.

     The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if:  (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).

     The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories.  Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a "domestic building and loan
association" under (S)7701(a)(19) of the Code and the total assets attributable
to all branches of the association in the state would qualify such branches
taken as a whole for treatment as a domestic building and loan association and
(ii) such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies.  Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements.  The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.

     Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings association.  Pursuant to rules promulgated by
the Federal Reserve Board, owning, controlling or operating a savings
institution is a permissible activity for bank holding companies, if the savings
institution engages only in deposit-taking activities and lending and other
activities that are permissible for bank holding companies.  A bank holding
company that controls a savings institution may merge or consolidate the assets
and liabilities of the savings institution with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the Federal Reserve
Board.  The resulting bank will be required to continue to pay assessments to
the SAIF at the rates prescribed for SAIF members on the deposits attributable
to the merged savings

                                       18
<PAGE>

institution plus an annual growth increment. In addition, the transaction must
comply with the restrictions on interstate acquisitions of commercial banks
under the BHCA.

Regulation of the Bank

     General.  As a federally chartered savings institution, Newport Federal is
subject to extensive regulation by the OTS.  The lending activities and other
investments of Newport Federal must comply with various state and federal
regulatory requirements.  The OTS periodically examines the Bank for compliance
with various regulatory requirements.  The FDIC also has the authority to
conduct special examinations of the Bank because its deposits are insured by
SAIF.  The Bank must file reports with these agencies describing its activities
and financial condition.  The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.  This supervision and
regulation is intended primarily for the protection of depositors.  Certain of
these regulatory requirements are referred to below or appear elsewhere herein.

     Proposed Legislative and Regulatory Changes.  The U.S. Congress is in the
process of drafting legislation which may have a profound effect on the
financial services industry.  In January 1999 legislation restructuring the
activities and regulations oversight of the financial services industry was
reintroduced in both houses of the U.S. Congress.  The stated purposes of the
legislation are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition and would permit affiliations between commercial banks,
securities firms, insurance companies and, subject to certain limitations, other
commercial enterprises allowing holding companies to offer new services and
products.  In particular, the legislation repeals the Glass-Steagall Act
prohibitions on bank affiliating with securities firms and thereby allow holding
companies to engage in securities underwriting and dealing without limits and to
sponsor and act as distributor for mutual funds. The legislation also removes
the BHCA's prohibitions on insurance underwriting allowing holding companies to
underwrite and broker any type of insurance product, calls for a new regulatory
framework for financial institutions and their holding companies and preserves
the thrift charter and all existing thrift powers.  The Senate version (S.900)
was approved by the Senate on May 6, 1999.  The House version (H.R.10) was
approved by the House on July 1, 1999. A conference committee has been appointed
to reconcile the differences between the two bills.  The two versions differ
principally with respect to the powers of operating subsidiaries, permissible
activities of well-managed holding companies and restrictions on nonfinancial
activities of unitary thrift holding companies.  At this time, it is unknown how
the legislation will be modified, or if enacted, what form the final version of
the legislation might take and how it will affect the Company's and the Bank's
business and operations and competitive environment.

     Regulatory Capital Requirements.  Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 4.0% (or 3.0% if the association is rated
composite 1 CAMELS under the OTS examination rating system) of adjusted total
assets and a combination of core and "supplementary" capital equal to 8.0% of
"risk-weighted" assets.  In addition, the OTS has adopted regulations which
impose certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated composite 1 CAMELS under
the OTS examination rating system).  See " -- Prompt Corrective Regulatory
Action."  For purposes of this regulation, Tier 1 capital has the same
definition as core capital which is defined as common shareholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill."  Core capital is generally reduced by the
amount of the savings association's intangible assets for which no market
exists.  Limited exceptions to the deduction of intangible assets are provided
for purchased mortgage servicing rights and qualifying supervisory goodwill.
Tangible capital is given the same definition as core capital but does not
include an exception for qualifying supervisory goodwill and is reduced by the
amount of all the savings association's intangible assets with only a limited
exception for purchased mortgage servicing rights and purchased credit card
relationships.  Both core and tangible capital are further reduced by an amount
equal to the savings association's debt and equity investments in subsidiaries
engaged in activities not permissible to national banks other than subsidiaries
engaged in activities undertaken solely

                                       19
<PAGE>

as an agent for customers or in mortgage banking activities and subsidiary
depository institutions or their holding companies. At June 30, 1999, Newport
Federal had no such investments.

     Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments.  Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings association's investments in subsidiaries that must be netted against
capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.

     In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital.  Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments, a portion of the savings association's general loss
allowances and up to 45% of unrealized gains on equity securities.  Total core
and supplementary capital are reduced by the amount of capital instruments held
by other depository institutions pursuant to reciprocal arrangements, all equity
investments and that portion of the association's land loans and non-residential
construction loans in excess of an 80% loan-to-value ratio. At June 30, 1999,
the Bank had no high ratio land or non-residential construction loans and had no
equity investments for which OTS regulations require deduction from total
capital.

     The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios at origination not exceeding 80% are
assigned a risk weight of 50%.  Consumer and non-qualifying single family,
multi-family and residential construction loans are assigned a risk weight of
100%.  Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by FNMA and the FHLMC and the book value of FHLB stock are
assigned a 20% risk weight.  Cash and U.S. Government securities backed by the
full faith and credit of the U.S. Government are given a 0% risk weight.  As of
June 30, 1999, the Bank's risk-weighted assets were approximately $21.7 million.

     The table below presents the Bank's capital position relative to its
various regulatory capital requirements at June 30, 1999.

<TABLE>
<CAPTION>
                                                                             Percent of
                                                               Amount        Assets (1)
                                                               ------        ----------
                                                                 (Dollars in Thousands)
     <S>                                                       <C>           <C>
     Tangible capital......................................     $4,102           8.8%
     Tangible capital requirement..........................        697           1.5
                                                                ------          ----
       Excess..............................................     $3,405           7.3%
                                                                ======          ====

     Core capital..........................................     $4,102           8.8%
     Core capital requirement..............................      1,393           3.0
                                                                ------          ----
       Excess..............................................     $2,709           5.8%
                                                                ======          ====

      Total capital (i.e., core and supplementary capital)..    $4,207          19.4%
      Risk-based capital requirement........................     1,733           8.0
                                                                ------          ----
        Excess..............................................    $2,474          11.4%
                                                                ======          ====
</TABLE>

______________

(1)  Based upon adjusted total assets for purposes of the tangible, core and
     Tier 1 capital requirements, and risk-weighted assets for purposes of the
     risk-based capital requirements.

                                       20
<PAGE>

     OTS regulations require savings institutions with more than a "normal"
level of interest rate risk to maintain additional total capital.  A savings
institution's interest rate risk is measured in terms of the sensitivity of its
"net portfolio value" to changes in interest rates.  Net portfolio value is
defined, generally, as the present value of expected cash inflows from existing
assets and off-balance sheet contracts less the present value of expected cash
outflows from existing liabilities.  A savings institution will be considered to
have a "normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is required to deduct
from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.

     The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS.  The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier.  Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports.  However, the OTS will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis.  The OTS has not yet
implemented these requirements.  The Bank has determined that, on the basis of
current financial data, it will not be deemed to have more than normal level of
interest rate risk under the new rule and does not expect that it will be
required to increase its total capital as a result of the rule upon its
implementation.

     In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution.  The OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the OTS to submit and adhere to a plan for increasing capital.  Such
an order may be enforced in the same manner as an order issued by the FDIC.

     Prompt Corrective Regulatory Action.  Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements.  All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements.  An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan.  A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution.  Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt.  In their
discretion, the federal banking

                                       21
<PAGE>

regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective action provisions. If an institution's
ratio of tangible capital to total assets falls below a "critical capital
level," the institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized. If a savings institution is in compliance with an approved
capital plan on the date of enactment of FDICIA, however, it will not be
required to submit a capital restoration plan if it is undercapitalized or
become subject to the statutory prompt corrective action provisions applicable
to significantly and critically undercapitalized institutions prior to July 1,
1994.

     The federal banking regulators, including the OTS, generally measure a
depository institution's capital adequacy on the basis of the institution's
total risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-
weighted assets) and leverage ratio (the ratio of its core capital to adjusted
total assets).  Under the regulations, a savings institution that is not subject
to an order or written directive to meet or maintain a specific capital level
will be deemed "well capitalized" if it also has: (i) a total risk-based capital
ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or
greater; and (iii) a leverage ratio of 5.0% or greater.  An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 CAMELS rating).  An "undercapitalized institution"
is a savings institution that has (i) a total risk-based capital ratio less than
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1
CAMELS rating).  A "significantly undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%.  A "critically undercapitalized" savings
institution  is defined as a savings institution that has a ratio of "tangible
equity" to total assets of less than 2.0%.  Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased
mortgage servicing rights.  The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category (but may not
reclassify a significantly undercapitalized institution as critically under-
capitalized) if the OTS determines, after notice and an opportunity for a
hearing, that the savings institution is in an unsafe or unsound condition or
that the institution has received and not corrected a less-than-satisfactory
rating for any CAMELS rating category.  The Bank is classified as "well
capitalized" under these regulations.

     Qualified Thrift Lender Test.  A savings institution that does not meet the
Qualified Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank.  Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity, and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).

     To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, the value of
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of total assets.  Qualified Thrift Investments
consist of: (i) loans, equity positions, or securities related to domestic,
residential real estate or manufactured housing, and

                                       22
<PAGE>

educational, small business and credit card loans; (ii) shares of stock issued
by an FHLB. Subject to a 20% of portfolio assets limit, however, savings
institutions are able to treat the following as Qualified Thrift Investments:
(i) 50% of the dollar amount of residential mortgage loans subject to sale under
certain conditions but do not include any intangible assets; (ii) investments,
both debt and equity, in the capital stock or obligations of and any other
security issued by a service corporation or operating subsidiary, provided that
such subsidiary derives at least 80% of its annual gross revenues from
activities directly related to purchasing, refinancing, constructing, improving
or repairing domestic residential housing or manufactured housing; (iii) 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas; (iv) loans
for the purchase, construction, development or improvement of community service
facilities, (v) loans for personal, family or household purposes; and (vi)
shares of stock issued by FNMA or FHLMC.

     A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL Test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired.  Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System.  Upon failure to qualify as
a QTL for two years, a savings association must convert to a commercial bank. At
June 30, 1999, approximately 85.77% of the Bank's assets were invested in
Qualified Thrift Investments.

     Dividend Limitations.  Under OTS regulations, the Bank is not permitted to
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form.  Under the OTS' prompt corrective action regulations, the Bank is
also prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%.  The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.

     OTS regulations require that savings institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution, (b) the distribution would result in the retirement of
any of the institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A savings institution must make application to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution's total distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS.  If neither the savings
institution nor the proposed capital distribution meet any of the foregoing
criteria, then no notice or application is required to be filed with the OTS
before making a capital distribution.  The OTS may disapprove or deny a capital
distribution if in the view of the OTS, the capital distribution would
constitute an unsafe or unsound practice.

     Safety and Soundness Standards.  Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority.  The final rule and the
guidelines went into effect on August 9, 1995.  The guidelines require savings
institutions to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
institution's business.  The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk exposure, and
asset growth.  The guidelines further provide that savings institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into

                                       23
<PAGE>

account factors such as comparable compensation practices at comparable
institutions. If the OTS determines that a savings institution is not in
compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines. A savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions. Management believes that the Bank already meets substantially all the
standards adopted in the interagency guidelines, and therefore does not believe
that implementation of these regulatory standards will materially affect the
Bank's operations.

     Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate.  On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings.  Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.

     The federal banking agencies have also established Year 2000 readiness
safety and soundness guidelines requiring all insured depository institutions to
implement procedures by specified key dates to ensure the institution can
continue business operations after January 1, 2000.  Every institution must
identify its  internal and external "mission-critical" systems (i.e., those
systems vital to the continuance of a core business activity) and develop a
written plan establishing priorities, oversight and reasonable deadlines to
complete the testing and renovation of mission-critical systems.  In  addition,
an institution must prepare a written business resumption contingency plan that
(i) defines scenarios where mission-critical systems might fail, (ii) evaluates
contingency options to keep business operations going, and (iii) provides for
testing of the contingency plan by an independent party.  Every depository
institution must also identify among its customers those persons that represent
a material risk to the institution in the event the customer is not Year 2000
compliant and implement appropriate risks controls to manage and mitigate the
customer's Year 2000 risk to the institution.  The federal banking agencies will
examine the institution's overall progress in meeting the Year 2000 readiness
guidelines.  In the event an institution has failed to renovate its mission-
critical systems or is not on schedule with key dates, the institution must
draft a remediation contingency plan outlining alternative strategies to comply
with the guidelines and locate available third party providers.  The agencies,
in their sole discretion, may take actions under the FDICIA, the safety and
soundness guidelines or any other action available to them, including
enforcement action, to ensure an institution's Year 2000 readiness.

     Deposit Insurance.  The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF.  Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

     Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations.  Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations.  See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.

                                       24
<PAGE>

     The FDIC has adopted an assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings is zero and institutions in the lowest risk
assessment classification are assessed at the rate of 0.27% of insured deposits.
Until December 31, 1999, SAIF-insured institutions, will be required to pay
assessments to the FDIC at the rate of 6.5 basis points to help fund interest
payments on certain bonds issued by the Financing Corporation ("FICO"), an
agency of the federal government established to finance takeovers of insolvent
thrifts.  During this period, BIF members will be assessed for these obligations
at the rate of 1.3 basis points.  After December 31, 1999, both BIF and SAIF
members will be assessed at the same rate for FICO payments.

     The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings.  The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate.  Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries.  Insured depository institutions with Tier 1
capital equal to or greater than 2% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state non-
member banks of 4% of total assets.

     Liquidity Requirements.  The Bank is required to maintain average daily
balances of liquid assets (cash, deposits maintained pursuant to the Federal
Reserve Board requirements, time and savings deposits in certain institutions,
obligations of states and political subdivisions thereof, shares in mutual funds
with certain restricted investment policies, highly rated corporate debt and
mortgage loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) in each calendar quarter of not
less than a specified percentage (currently 4%) of its net withdrawable savings
deposits plus the average daily balance of short-term borrowings during the
preceding calendar quarter.  Monetary penalties may be imposed for failure to
meet liquidity requirements.  The average daily liquidity ratio of the Bank for
the month of June 1999 was 9.92%.

     Federal Home Loan Bank System.  The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB").  The Federal Home Loan Banks provide
a central credit facility primarily for member institutions.  As a member of the
FHLB of Dallas, the Bank is required to acquire and hold shares of capital stock
in the FHLB of Dallas in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances from the FHLB
of Dallas, whichever is greater.  The Bank was in compliance with this
requirement with investment in FHLB of Dallas stock at June 30, 1999, of
$435,000. The FHLB of Dallas is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System.  It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Dallas.  As of June 30, 1999, the Bank had
$8.1 million in advances and other borrowings from the FHLB of Dallas.  See
"Sources of Funds -- Borrowings."

     Federal Reserve System.  Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
transaction accounts of between $4.9 million and $46.5 million, plus 10% on the
remainder.  This percentage is subject to adjustment by the Federal Reserve
Board.  Because required reserves must be maintained in the form of vault cash
or in a non-interest bearing account at a Federal Reserve Bank, the effect of
the reserve requirement is to reduce the amount of the institution's interest-
earning assets.  As of June 30, 1999, the Bank met its reserve requirements.

                                       25

<PAGE>

Taxation

     The Bank is subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as the Bank, which met
certain definitional tests and certain other conditions prescribed by the Code
could benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of the
bad debt deduction that a qualifying savings institution could claim for tax
purposes with respect to additions to its reserve for bad debts for "qualifying
real property loans" could be based upon the Bank's actual loss experience (the
"experience method") or as a percentage of the Bank's taxable income (the
"percentage of taxable income method").  Historically, the Bank used the method
that would allow the Bank to take the largest deduction.

     In August 1996, the Code was revised to equalize the taxation of savings
institutions and banks.  Savings institutions, such as us, no longer have a
choice between the percentage of taxable income method and the experience method
in determining additions to bad debt reserves.  Thrifts with $500 million of
assets or less may still use the experience method, which is generally available
to small banks currently.  Larger thrifts may only take a tax deduction when a
loan is actually charged off.  Any reserve amounts added after 1987 will be
taxed over a six year period beginning in 1996; however, bad debt reserves set
aside through 1987 are generally not taxed.  A savings institution may delay
recapturing into income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test.  This law is not expected to have
a material impact on the Bank.  At June 30, 1999, the Bank had no post-1987 bad-
debt reserves.

     Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction including the Bank's supplemental reserves for losses will not be
available for the payment of cash dividends or for distribution (including
distributions made on dissolution or liquidation), unless the Bank includes the
amount in income, along with the amount deemed necessary to pay the resulting
federal income tax.  If such amount is used for any purpose other than bad debt
losses, including a dividend distribution or a distribution in liquidation, it
will be subject to federal income tax at the then current rate.  Retained
earnings at June 30, 1999 included approximately $552,435 for which no deferred
Federal income tax liability has been recognized.  This amount represents such
allocation of income to tax bad debt deduction for income tax purposes.

     The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method.  Only 90% of AMTI can be offset by net operating loss
carryovers of which the Bank currently has none. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds the Bank's AMTI (determined
without regard to this adjustment and prior to reduction for net operating
losses).  In addition, for taxable years beginning after December 31, 1986 and
before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2 million is imposed on corporations,
including us, whether or not an AMT is paid. The Company is not subject to AMT
if it has average gross receipts of $5,000,000 or less for the three-year period
beginning after December 31, 1994 and average gross receipts for the latest
three-year period thereafter of $7,500,000 or less.

     The Company may exclude from its income 100% of dividends received from the
Bank as a member of the same affiliated group of corporations.  A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend.  The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which the
Bank availed itself of the percentage of taxable income bad debt deduction
method.

     The Bank's federal income tax returns have not been audited by the IRS.

                                       26
<PAGE>

State Taxation

     The Bank is subject to Arkansas corporation income tax at increasing rates
up to 6.5% of all taxable earnings in excess of $100,000.  The Company is
incorporated under Tennessee law and qualified to do business in Arkansas as a
foreign corporation.

Item 2.  Description of Property
--------------------------------

     The following table sets forth certain information regarding the Bank's
main office which is the Bank's only branch location.

<TABLE>
<CAPTION>
                                                            Book Value at                      Deposits at
                                   Year        Owned or       June 30,       Approximate         June 30,
                                  Opened        Leased        1999 (1)      Square Footage         1999
                                  ------       --------       ---------     --------------       --------
                                                    (Dollars in thousands)
<S>                               <C>          <C>          <C>             <C>                <C>
Main Office:                        1995       Owned          $  1,205               6,000        $34,680
</TABLE>

-------------------------
(1)  Cost less accumulated depreciation and amortization.


     The Bank also owns land that was adjacent to an office building that
previously served as the Bank's main office.  The office building was sold in
December 1998.  The book value of the land at June 30, 1999 was approximately
$95,000.

Item 3. Legal Proceedings.
-------------------------

     The Bank is, from time to time, a party to legal proceedings arising in the
ordinary course of the Bank's business, including legal proceedings to enforce
the Bank's rights against borrowers.  The Bank is not currently a party to any
legal proceedings which are expected to have a material adverse effect on the
Bank's financial statements.

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

     There were no matters submitted to a vote of the security holders during
the fourth quarter of fiscal year 1999.

                                       27
<PAGE>

                                    PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholders'
----------------------------------------------------------------------------
Matters
-------

     The Common Stock is listed  in the over-the-counter through the OTC
"Electronic Bulletin Board" under the symbol "NARK"  There are currently 333,270
shares of the Common Stock outstanding.  The number of registered holders of
Common Stock on September 17, 1999 was 152.  The following table sets forth
the high and low bid prices for the Common Stock for each quarter since the
issuance of the Common Stock on December 18, 1997.  No dividends have been
declared or paid on the Common Stock.

<TABLE>
<CAPTION>

               Quarter Ended             High               Low
               -------------             ----               ---
               <S>                      <C>                <C>
               December 31, 1997        $12.75             $12.25
               March 31, 1998           $12.75             $12.50
               June 30, 1998            $12.00             $10.00

               September 30, 1998       $12.25             $ 9.50
               December 31, 1998        $9.3125            $10.00
               March 31, 1999           $10.5625           $10.125
               June 30, 1999            $10.375            $8.3125
</TABLE>

     The income of the Company consists of interest on investment and related
securities and dividends which may periodically be declared and paid by the
Board of Directors of the Bank on the common shares of the Bank held by the
Company.

     In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings institutions.  Under OTS regulations applicable to converted savings
institutions, the Bank is not permitted to pay a cash dividend on its common
shares if the Bank's regulatory capital would, as a result of the payment of
such dividend, be reduced below the amount required for the liquidation account
established in connection with the Conversion or applicable regulatory capital
requirements prescribed by the OTS.

     OTS regulations require that savings institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution, (b) the distribution would result in the retirement of
any of the institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A savings institution must make application to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution's total distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS.  If neither the savings
institution nor the proposed capital distribution meet any of the foregoing
criteria, then no notice or application is required to be filed with the OTS
before making a capital distribution.  The OTS may disapprove or deny a capital
distribution if in the view of the OTS, the capital distribution would
constitute an unsafe or unsound practice.

     The Bank currently meets all of its regulatory requirements and therefore,
the Bank may pay dividends in accordance with the foregoing provisions of the
OTS regulations.

                                       28
<PAGE>

Item 6.  Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

     The Company's principal business is that of the Bank.  Therefore, this
discussion relates primarily to the Bank.

     The profitability of the Bank depends primarily on its net interest income,
which is the difference between interest and dividend income on its interest-
earning assets, principally loans, mortgage-backed securities and investment
securities, and interest expense on its interest-bearing deposits and
borrowings.  The Bank's net earnings also are dependent, to a lesser extent, on
the level of its non-interest income (including servicing fees and other fees)
and its non-interest expenses, such as compensation and benefits, occupancy and
equipment, insurance premiums, and miscellaneous other expenses, as well as
federal income tax expense.


Forward-Looking Statements

     In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties.  Economic circumstances, the Company's operations and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements.  Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Company's market area generally.   Some
of the forward-looking statements included herein are the statements regarding
management's determination of the amount and adequacy of the allowance for
losses on loans, the effect of certain recent accounting pronouncements and the
Company's projected effects related to the year 2000 compliance issue.


Year 2000 Readiness Disclosure

     Like most financial institutions, the Company's principal subsidiary relies
extensively on computers in conducting its business.  It has been widely
reported that many computer programs currently in use were designed without
adequately considering the impact of the upcoming change in century on their
date codes.  If these design flaws are not corrected, these computer
applications may malfunction in the year 2000.  The Company's mission-critical
processing systems are provided by a third party.  The third party provider has
converted its hardware and software to a new year 2000 compliant system.  The
service provider tested its new system at selected sites (not including the
Bank) in September 1998. The Bank has been provided with the results of such
testing and has evaluated the results.  Based on extensive review and analysis
of the results, the Bank has determined that the on-site testing originally
scheduled for February 1999, is not considered necessary.  System connectivity
testing has been successfully completed.

     The Bank has developed a contingency plan to address the possibility that
its efforts to become year 2000 compliant are not successful. The contingency
plan provides that the Bank would process information manually.  The Bank's
third party provider has also adopted a contingency plan which calls for the
recovery of processing and information at a back-up site, using  back-up
hardware.  The Bank has also made arrangements to use an alternative third-party
if its provider is not successful.

     The Bank has also evaluated its non-critical applications and has made
necessary changes and/or the third party provider has made necessary changes.
Testing for non-mission critical systems is substantially complete.  The Bank
has also evaluated its nontechnological systems to determine if any such systems
may have embedded technology that could be affected by the year 2000 issue.  As
of the date hereof, the Bank does not anticipate that any such systems will be
materially affected by the year 2000.

     The Bank anticipates that its expenses associated with year 2000 will not
exceed $10,000.

Market Risk Disclosure

     Asset/Liability Management.  The Company's assets and liabilities may be
analyzed by examining the extent to which its assets and liabilities are
interest-rate sensitive and by monitoring the expected effects of interest rate
changes on the Company's net portfolio value.

     An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period.  If assets mature
or reprice more quickly or to a greater extent than liabilities, the Company's
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates.  Conversely, if assets mature or reprice more slowly or to a lesser
extent liabilities, net portfolio value and net interest income would tend
to decrease during periods of rising interest rates but increase during periods
of falling interest rates.  The Company's policy has been to mitigate the
interest rate risk inherent in the

                                       29
<PAGE>

historical savings institution business of originating long-term loans funded by
short-term deposits by pursuing certain strategies designed to decrease the
vulnerability of earnings to material and prolonged changes in interest rates.

     To manage the interest rate risk of this type of loan portfolio, the Bank
limits maturities of fixed-rate loans to no more than five years and emphasizes
the origination of ARM loans.

     Net Portfolio Value.  In recent years, the Bank has measured its interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the OTS.  However, the OTS now measures an institution's interest rate risk
by computing the amount by which the net present value of cash flow from assets,
liabilities and off-balance sheet items (the institution's net portfolio value
or "NPV") would change in the event of a range of assumed changes in market
interest rates.  These computations estimate the effect on an institution's NPV
from instantaneous and permanent 1% to 3% (100 to 300 basis points) increases
and decreases in market interest rates. The following table presents the
interest rate sensitivity of the Bank's NPV at June 30, 1999, as calculated by
the OTS, which is based upon quarterly information that the Bank voluntarily
provided to the OTS.

<TABLE>
<CAPTION>
      Change                Net Portfolio  Value               NPV as % of Portfolio Value of Assets
                   ------------------------------------       ---------------------------------------
     in Rates      $ Amount     $ Change       % Change       NPV Ratio           Basis Point Change
     --------      --------     --------       --------       ---------           ------------------
                                        (Dollars in thousands)
     <S>           <C>          <C>            <C>            <C>                 <C>
     + 300 bp       $4,972       $(460)           (8)%           10.72%              (50)  bp
     + 200 bp        5,223        (209)           (4)            11.08               (14)  bp
     + 100 bp        5,371         (61)           (1)            11.23                 1   bp
         0 bp        5,432          --            --             11.22                --   bp
     - 100 bp        5,428          (4)           --             11.08               (14)  bp
     - 200 bp        5,432          --            --             10.96               (26)  bp
     - 300 bp        5,502          69             1             10.95               (27)  bp
</TABLE>

     While one cannot predict future interest rates or their effects on NPV or
net interest income, the Company does not expect current interest rates to have
a material adverse effect on its NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and should not be relied upon as
indicative of actual results.  Certain shortcomings are inherent in such
computations.  Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates.  The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates.  Certain assets, such as ARM loans,
generally have features which restrict changes in interest rates on a short-term
basis and over the life of the loan.  In the event of a change in interest
rates, prepayments and early withdrawal levels could deviate significantly from
those assumed in making calculations set forth above. Additionally, an increased
credit risk may result as the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase.

     The Bank's board of directors reviews its asset and liability policies.
The board of directors meets regularly to review interest rate risk and trends,
as well as liquidity and capital ratios and requirements.  Management
administers the policies and determinations of the board of directors with
respect to its asset and liability goals and strategies.  The Bank expects that
its asset and liability policies and strategies will continue as described so
long as competitive and regulatory conditions in the financial institution
industry and market interest rates continue as they have in recent years.

                                       30
<PAGE>

Average Balances, Interest and Average Yields

     The following table sets forth certain information relating to the
Company's average statement of financial condition and reflects the average
yield on assets and average cost of liabilities for the periods indicated and
the average yields earned and rates paid at the date and for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from quarter-end balances. The
Company does not believe that the use of quarter-end balances instead of daily
balances has caused any material difference in the information presented.

<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                               -------------------------------------------------------------------------
                                                             1999                                   1998
                                               -------------------------------------    --------------------------------
                                                                             Average                            Average
                                                Average                      Yield/     Average                  Yield/
                                                Balance        Interest       Cost      Balance     Interest      Cost
                                                -------        --------     --------    -------     --------    --------
                                                                       (Dollars in thousands)
<S>                                             <C>            <C>          <C>         <C>         <C>         <C>
Interest-earning assets:
  Interest-bearing deposits..................    $ 3,116        $   215        6.90%    $ 4,063      $   167       4.11%
  Mortgage-backed securities.................     11,698            686        5.86       6,378          394       6.18
  Investment securities......................      2,278            138        6.06       1,599           89       5.57
  Loans (1)..................................     27,050          2,091        7.73      25,259        2,092       8.28
                                                 -------        -------                 -------      -------
Total interest-earning assets................     44,142          3,130        7.09      37,299        2,742       7.35
                                                                -------                              -------
Non-interest-earning assets..................      2,903                                  2,374
                                                 -------                                -------
Total assets.................................    $47,045                                $39,673
                                                 =======                                =======

Interest-bearing liabilities:
  Deposits...................................    $34,588        $ 1,684        4.87     $32,504      $ 1,618       4.98%
  FHLB advances..............................      7,086            390        5.50       2,450           99       4.04
                                                 -------        -------                 -------      -------
Total interest-bearing liabilities...........     41,674          2,074        4.98      34,954        1,717       4.91
                                                                -------                              -------
Non-interest bearing liabilities.............        208                                    142
                                                 -------                                -------
Total liabilities............................     41,882                                 35,096
Retained earnings............................      5,163                                  4,577
                                                 -------                                -------
Total liabilities and retained earnings......    $47,045                                $39,673
                                                 =======                                =======

Net interest income..........................                   $ 1,056                              $ 1,025
                                                                =======                              =======
Net interest rate spread (2).................                                  2.11%                               2.44%
                                                                             =======                               ====
Net interest-earning assets..................    $ 2,468                                $ 2,345
                                                 =======                                =======
Net interest margin (3)......................                                  2.39%                               2.75%
                                                                             =======                               ====
Ratio of average interest-earning assets to
  average interest-bearing liabilities.......                    105.92%                              106.28%
                                                                =======                              =======
</TABLE>

__________________
(1)  Includes nonaccrual loans.
(2)  Net interest rate spread represents the difference between the average
     yield on interest-earning assets and the average rate on interest-bearing
     liabilities.
(3)  Net interest margin represents net interest income divided by average
     interest-earning assets.

                                       31
<PAGE>

Rate/Volume Analysis

     The table shows certain information regarding changes in the Company's
interest income and interest expense for the periods indicated.  For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate); and (ii) changes in rates (change in rate multiplied by
old volume); and (iii) change in rate-volume (changes in rate multiplied by the
changes in volume).

<TABLE>
<CAPTION>
                                                                        Year Ended June 30,
                                         ----------------------------------------------------------------------------
                                           1999          vs.            1998       1998           vs.            1997
                                         ------------------------------------     -----------------------------------
                                                   Increase (Decrease)                   Increase (Decrease)
                                                       Due to                                  Due to
                                         ------------------------------------     -----------------------------------
                                                              Rate/                                   Rate/
                                         Volume    Rate      Volume     Total     Volume     Rate    Volume     Total
                                         ------    ----      ------     -----     ------     ----    -------    -----
                                                                            (In thousands)
<S>                                      <C>       <C>       <C>        <C>       <C>        <C>     <C>        <C>
Interest-earning assets:
  Interest-bearing deposits...........   $ (39)    $ 113      $ (26)     $  48       $ 93    $   1     $  1      $ 95
  Mortgage-backed securities..........     329       (20)       (17)       292         63       (6)      (2)       55
  Investment securities...............      38         8          3         49         45      (17)     (10)       18
  Loans...............................     148      (139)       (10)        (1)        83       (1)      (1)       81
                                         -----     -----      -----      -----       ----    -----     ----      ----
      Total interest-earning
       assets.........................     476       (38)       (50)       388        284      (23)     (12)      249
                                         -----     -----      -----      -----       ----    -----     ----      ----

Interest-bearing liabilities:
  Deposits............................     104       (36)        (2)        66        146      (62)      (7)       77
  FHLB advances.......................     187        36         68        291         55       (6)      (6)       43
                                         -----     -----      -----      -----       ----    -----     ----      ----
      Total interest-bearing
       liabilities....................     291        --         66        357        201      (68)     (13)      120
  Increase (decrease) in net
   interest income....................   $ 185     $ (38)     $(116)     $  31       $ 83    $  45     $  1      $129
                                         =====     =====      =====      =====       ====    =====     ====      ====
</TABLE>

                                       32
<PAGE>

Comparison of Financial Condition at June 30, 1999 and June 30, 1998

     Total assets increased by $4.2 million, or 9.78%, from $43.7 million at
June 30, 1998 to $47.9 million at June 30, 1999.   Asset growth during the year
was primarily funded by FHLB advances which totaled $8.1 million at June 30,
1999, up from $4.0 million at June 30, 1998 for an increase of 103.79% and cash
and cash equivalents which decreased by $1.8 million, or 85.30%, during the
fiscal year from $2.1 million at June 30, 1998 to $308,000 at June 30, 1999. The
increase in assets for the period was primarily centered in increased levels of
loans and, to a lesser extent, securities. Loans receivable, net, totaled $29.5
million at June 30, 1999 as compared to $25.6 million at June 30, 1998 for a net
increase of $3.9 million or 15.42%. The growth in the loan portfolio during
fiscal 1999 was attributable to the purchase of $2.0 million in whole loans
during the period as well as new loan originations. The growth in the loan
portfolio consisted mainly of one- to four-family mortgage loans which amounted
to $21.7 million at June 30, 1999 as compared to $18.0 million at June 30, 1998
for an increase of $3.7 million or 20.5%. Investment securities totaled $14.0
million at June 30, 1999, up from $11.2 million at June 30, 1998 for a net
increase of $2.8 million or 25.03%. All of the Company's investment securities
are classified as held to maturity. At June 30, 1999, the Company's investment
portfolio consisted primarily of mortgage-backed securities and U.S. Government
agency obligations.

     Total liabilities increased $4.6 million, or 12.14%, from $38.4 million at
June 30, 1998 to $43.0 million at June 30, 1999 with the increase attributable
primarily to the $4.1 million increase in FHLB advances.  Total deposits
increased by $409,000 from $34.3 million at June 30, 1998 to $34.7 million June
30, 1999.   FHLB advances at June 30, 1999 consisted mainly of long-term
advances and were used to purchase investment securities with similar
maturities and to fund loan growth.

     Total stockholders' equity amounted to $4.9 million at June 30, 1999 as
compared to $5.3 million at June 30, 1998.  This $383,000 or 7.20% decrease was
attributable to the approximately $425,000 used to repurchase 10% of the
outstanding shares of Common Stock during the fiscal year.

Comparison of Results of Operations for the Years Ended June 30, 1999 and 1998

     Net Income.  Net income for the year ended June 30, 1999 decreased by
$24,000, or 96.88%, to $1,000 from net income of $25,000 for the year ended June
30, 1998.  The decrease was due primarily to an increased level of non-interest
expense, partially offset by increased levels of non-interest income and net
interest income as well as a decrease in the provision for loan losses.

     Net Interest Income.  Net interest income increased by $31,000, or 3.03%,
from $1.0 million for the year ended June 30, 1998 to $1.1 million for the year
ended June 30, 1999 with the increase attributable to an increase in the balance
of interest-earning assets during the period which was offset by an increase in
the balance of interest-bearing liabilities, primarily FHLB advances and a
narrowing of the interest rate spread.  Average interest earning assets during
fiscal year 1999 amounted to $44.1 million up from $37.3 million for fiscal year
1998 with the increase primarily centered in mortgage-backed securities and, to
a lesser extent, loans.  Average interest bearing liabilities during fiscal year
1999 amounted to $41.7 million, up from $35.0 million during fiscal year 1998 as
the Company utilized FHLB advances to fund asset growth.  The Company's interest
rate spread narrowed by 33 basis points from 2.44% in fiscal year 1998 to 2.11%
in fiscal year 1999 due to the combined effects of a 26 basis point decline in
the average yield on interest-earning assets and a seven basis point increase in
the average cost of interest-bearing liabilities.  The decreased asset yield was
primarily due to a decreased yield on the Company's loan portfolio with the 55
basis point decline attributable to a period of declining rates that prevailed
through the first half of fiscal 1999.  The increase in the average cost of
interest-bearing liabilities reflected higher borrowing costs on FHLB advances.
The ratio of average interest earning assets to average interest-bearing
liabilities decreased from 106.28% for fiscal year 1998 to 105.92% for fiscal
year 1999.

     Interest Income.  Interest income totaled $3.1 million for the year ended
June 30, 1999, an increase of $388,000, or 14.15%, from fiscal year 1998's level
of $2.7 million.  The increase resulted from the increased volume of interest-
earning assets as the average yield on the Company's mortgage-backed securities
and loan portfolios (which comprise a significant portion o the Company's
interest earning assets) declined during the period.  Interest income from
loans, mortgage-backed securities and interest-bearing deposits accounted for
most of the increase in interest income reflecting the growth in those
portfolios during the period.

     Interest Expense.  Total interest expense increased by $357,000, or 20.79%,
due to the combined effects of increased average balances of both deposits and
FHLB advances and a seven basis point increase in the average rate paid on such
liabilities.  Average interest-bearing liabilities rose by $6.7 million from
$35.0 million for fiscal 1998 to $41.7 million for fiscal 1999 with increased
levels of FHLB borrowings accounting for $4.6 million of the increase.

     Provision for Loan Losses.  The provision for loan losses decreased by
$92,000, or 59.14% from $156,000 for the year ended June 30, 1998 to $64,000 for
the year ended June 30, 1999.  During fiscal year 1998, the Bank transferred to
other real estate owned the Bank's participation interest in a $5.8 million loan
secured by a 625-room hotel located in Oklahoma City.  A deed in lieu of
foreclosure was accepted by the lead lender on this loan during the third
quarter of fiscal 1998.  Based on an updated appraisal of the property, the Bank
wrote down the value of its interest with such write-down being charged against
the allowance for loan losses.  The additional provision in fiscal year 1998 was
deemed necessary to replenish the reserve to a level deemed adequate by
management for the risk in its loan portfolio. There can be no assurance,
however, that additional  provisions to the allowance for loan losses will not
be necessary in the future. The allowance for loan losses as a percentage of net
loans at fiscal year end 1999 was 0.36% as compared to 0.74% at fiscal year end
1998.

     Non-interest Income.  Non-interest income totaled $148,000 for the year
ended June 30, 1999, an increase of $80,000, or 117.44%, from $68,000 for the
year ended June 30, 1998.  The increase was primarily attributable to growth in
transaction accounts which generate additional fee income.

     Non-interest Expense.  Non-interest  expense increased $235,000 or 26.11%,
from $899,000 for the year ended June 30, 1998 to $1.1 million for the year
ended June 30, 1999.  Increased levels of other expenses, legal and professional
fees, data processing and salaries and employees benefits accounted for the
increase.  Other expense totaled $276,000 for fiscal year 1999, up from $135,000
for fiscal year 1998.  Included within the $141,000 increase was a $55,000
write-down in the carrying value of the remaining piece of the real estate on
which the Bank's former headquarters had been located.  During the second
quarter of fiscal 1999, the Bank sold the property that had formerly housed its
main office but retained an adjacent lot.  During the third quarter of fiscal
1999, the Bank accepted an offer to purchase the lot at a price below its then
carrying value.  Although such purchase was ultimately not consummated, the Bank
reduced its carrying value to the offer price to reflect  the market value.
Such reduction in value amounted to $55,000.  The Bank also recorded an
additional reduction in the carrying value of its interest in the Oklahoma City
hotel held as real estate owned by an additional $50,000 to reflect further
reductions in the estimated market value of the property.    Legal and
professional fees rose by  $55,000, or 74.67%, from $74,000 in fiscal year 1998
to $129,000 in fiscal year 1999.  The increased level of expenses reflects a
full fiscal year as a public company as well as the additional professional fees
incurred as a result of the termination of the Company's former accountant and
the appointment of a successor, professional fees associated with the
implementation of various stock benefit plans and in connection with obtaining
OTS approval to repurchase 10% of the outstanding shares of Common Stock.
Salaries and employee benefit expenses increased by $15,000, or 3.29%, from
$454,000 for fiscal year 1998 to $469,000 for fiscal year 1999 reflecting the
addition of a new loan officer in November, 1998, the additional compensation
expense resulting from the implementation of the Company's management
recognition plan and general salary increases.

     Income Tax Expense.  Income tax expense decreased by $8,000 from $13,000
for fiscal year 1998 to $5,000 for fiscal year 1999.  The decrease in income tax
expense is due directly to the decreased level of earnings during fiscal year
1999.  The effective tax rates for fiscal years 1999 and 1998 were 86.75% and
34.0%, respectively.  The variations in the effective tax rate are attributable
to the composition of the income base, the amount of tax exempt income, non-
deductible expenses and the related impact of these items relative to net
income.

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 the
Bank's deposits and short-term borrowings. The required ratio currently is 4%
and the Bank's liquidity ratio for the month ended June 30, 1999 was 9.92%.

     The primary sources of funds are deposits, repayment of loans and mortgage-
backed securities, maturities of investments and interest-bearing deposits,
funds provided from operations and advances from the FHLB of Dallas. While
scheduled repayments of loans and mortgage-backed securities and maturities of
investment securities are predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by the general level of interest rates,
economic conditions and competition.  The Bank uses its liquidity resources
principally to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.

     Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry, and similar matters.  Further, the disparity in FICO Bond
interest payments, as described herein, could result in the Bank losing deposits
to BIF members that have lower costs of funds and, therefore, are able to pay
higher rates of interest on deposits. Management monitors projected liquidity
needs and determines the level desirable, based in part on the Company's
commitments to make loans and management's assessment of the Company's ability
to generate funds.

                                       33
<PAGE>

    The Bank is subject to federal regulations that impose certain minimum
capital requirements.  At June 30, 1999 the Bank was in compliance with all
applicable capital requirements.

Impact of Inflation and Changing Prices

    The Company's financial statements and the accompanying notes presented
elsewhere in this document, 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 and
due to inflation.  The impact of inflation is reflected in the increased cost of
the Company's operations.  As a result, interest rates have a greater impact on
the Company'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 prices of goods and services.

Recent Pronouncements

    During the year ended June 30, 1999, the Company adopted SFAS 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of financial statements.  The Company did not have any items of other
comprehensive income for the two years ended June 30, 1999.

    During the year ended June 30, 1999, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."  This
Statement establishes standards for the way that public business enterprises
report information about operating segments.  The Statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers.

    The FASB recently adopted SFAS 133, "Accounting for Derivative Financial
Instruments and Hedging Activities."  This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.  SFAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000, may be adopted early for periods beginning after issuance of the Statement
and may not be adopted retroactively.  The Company does not expect to adopt SFAS
133 early. Management believes that the adoption of SFAS 133 will not have a
material impact on the Company's financial statements.

Segment Information

    The principal business of the Company is overseeing the business of the
Bank.  The Company has no significant assets other than its investments in the
Bank and certificates of deposit in other financial institutions.  The banking
operation is the Company's only reportable segment.  The banking segment is
principally engaged in the business of originating mortgage loans secured by
one- to four-family residences and, to a lesser extent, multi-family,
construction and commercial real estate loans and consumer loans.  These loans
are funded primarily through the attraction of deposits from the general public
and borrowings from the FHLB. Selected information is not presented separately
for the Company's reportable segment, as there is no material difference between
that information and the corresponding information in the consolidated financial
statements.

                                       34
<PAGE>

                          [INTENTIONALLY LEFT BLANK]

                                       35
<PAGE>

Item 7.  Financial Statements
-----------------------------

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                         Page

                                                                         ----
<S>                                                                      <C>
Independent Accountants' Reports........................................   37

Consolidated Financial Statements

    Balance Sheets......................................................   39
    Statements of Income................................................   40
    Statements of Changes in Stockholders' Equity.......................   41
    Statements of Cash Flows............................................   42
    Notes to Consolidated Financial Statements..........................   43
</TABLE>

                                       36
<PAGE>


                         Independent Auditors' Report


The Board of Directors and Stockholders
North Arkansas Bancshares, Inc.:

We have audited the accompanying consolidated balance sheet of North Arkansas
Bancshares, Inc. and subsidiary (the "Company") as of June 30, 1998, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the year then ended. These consolidated 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
Arkansas Bancshares, Inc. and subsidiary as of June 30, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

                                                            /s/ KPMG LLP

Little Rock, Arkansas
August 7, 1998

                                       37
<PAGE>

        [LETTERHEAD OF BAIRD, KURTZ & DOBSON, INDEPENDENT ACCOUNTANTS]

                        Independent Accountants' Report
                        -------------------------------

Board of Directors
North Arkansas Bancshares, Inc.
Newport, Arkansas

     We have audited the accompanying consolidated balance sheet of NORTH
ARKANSAS BANCSHARES, INC. as of June 30, 1999, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

     We conducted our audit 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 audit provides a reasonable basis for our opinion.

     In our opinion, the 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of NORTH
ARKANSAS BANCSHARES, INC. as of June 30, 1999, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.

/s/ Baird, Kurtz & Dobson

Little Rock, Arkansas
July 30, 1999

                                      38
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                          CONSOLIDATED BALANCE SHEETS

                            JUNE 30, 1999 AND 1998

                                     ASSETS

<TABLE>
<CAPTION>
                                                                           1999                 1998
                                                                        -----------          -----------
<S>                                                                     <C>                  <C>
 Cash and due from banks                                                $   224,093          $   926,326
 Interest bearing deposits in other financial institutions                   83,814            1,167,778
                                                                        -----------          -----------
   Cash and cash equivalents                                                307,907            2,094,104

 Certificates of deposit in other financial institutions                  1,698,000            1,990,000
 Held-to-maturity securities                                             14,042,074           11,243,627

 Loans receivable, net                                                   29,539,448           25,592,938

 Premises and equipment, net                                              1,412,301            1,623,226
 Foreclosed assets held for sale, net                                       378,560              535,700
 Interest receivable                                                        330,729              313,422
 Other assets                                                               253,078              295,608
                                                                        -----------          -----------

      Total Assets                                                      $47,962,097          $43,688,625
                                                                        ===========          ===========

                     LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

 Deposits                                                               $34,679,628          $34,270,664
 Federal Home Loan Bank advances                                          8,089,501            3,969,525
 Accrued interest and other liabilities                                     249,961              122,202
                                                                        -----------          -----------
      Total Liabilities                                                  43,019,090           38,362,391
                                                                        -----------          -----------

STOCKHOLDERS' EQUITY
 Common stock, par value $.01 a share, authorized 9,000,000
  shares; 333,270 and 370,300 shares issue and outstanding at
  June 30, 1999 and 1998, respectively                                        3,333                3,703
 Additional paid-in capital                                               2,907,754            3,298,267
 Retained earnings, substantially restricted                              2,291,647            2,290,880
 Unearned ESOP shares                                                      (236,992)            (266,616)
                                                                        -----------          -----------
                                                                          4,965,742            5,326,234

 Unearned MRP Shares, 1999 - 2,165 shares                                   (22,735)
                                                                        -----------          -----------
      Total Stockholders' Equity                                          4,943,007            5,326,234
                                                                        -----------          -----------

      Total Liabilities and Stockholders' Equity                        $47,962,097          $43,688,625
                                                                        ===========          ===========
</TABLE>

See Notes to Consolidated Financial Statements

                                     -39-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                       CONSOLIDATED STATEMENTS OF INCOME

                      YEARS ENDED JUNE 30, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                1999               1998
                                                                             ----------         ----------
<S>                                                                          <C>                <C>
INTEREST INCOME
 Loans                                                                       $2,090,860         $2,091,614
 Deposits in other financial institutions                                       215,099            167,336
 Mortgage-backed securities                                                     685,895            393,568
 Investment securities                                                          137,526             88,896
                                                                             ----------         ----------
   Total Interest Income                                                      3,129,380          2,741,414
                                                                             ----------         ----------

 INTEREST EXPENSE
  Deposits                                                                    1,683,603          1,617,847
  Federal Home Loan Bank advances                                               389,930             98,750
                                                                             ----------         ----------
   Total Interest Expense                                                     2,073,533          1,716,597
                                                                             ----------         ----------

 NET INTEREST INCOME                                                          1,055,847          1,024,817

 PROVISION FOR LOAN LOSSES                                                       63,887            156,341
                                                                             ----------         ----------

 NET INTEREST INCOME AFTER PROVISION FOR LOAN
  LOSSES                                                                        991,960            868,476
                                                                             ----------         ----------

 NON-INTEREST INCOME - OTHER                                                    147,746             67,948
                                                                             ----------         ----------

 NON-INTEREST EXPENSE
  Salaries and employee benefits                                                469,253            454,293
  Legal and professional fees                                                   128,775             73,723
  Data processing fees                                                          125,624            110,261
  Federal insurance expense                                                      19,518             19,539
  Occupancy expense                                                              78,558             57,678
  Furniture and equipment expense                                                36,069             48,325
  Other expense                                                                 276,120            135,323
                                                                             ----------         ----------
   Total Non-Interest Expense                                                 1,133,917            899,142
                                                                             ----------         ----------

 INCOME BEFORE INCOME TAXES                                                       5,789             37,282

 PROVISION FOR INCOME TAXES                                                       5,022             12,671
                                                                             ----------         ----------

 NET INCOME                                                                  $      767         $   24,611
                                                                             ==========         ==========

 BASIC AND DILUTED EARNINGS PER COMMON SHARE                                 $      .00         $      .12
                                                                             ==========         ==========
</TABLE>

See Notes to Consolidated Financial Statements

                                     -40-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                      YEARS ENDED JUNE 30, 1999 AND 1998

<TABLE>
<CAPTION>
                                                   Additional                 Unearned
                                         Common      Paid-       Retained      ESOP        Unearned
                                         Stock     In Capital    Earnings      Shares     MRP Shares      Total
                                        -------    ----------   -----------  ----------   ----------    ----------
<S>                                     <C>       <C>           <C>          <C>          <C>           <C>
 BALANCE, JUNE 30, 1997                 $         $              $2,266,269  $            $             $2,266,269

 ISSUANCE OF 370,300 SHARES
   OF COMMON STOCK                        3,703     3,298,267                                            3,301,970

 LOAN TO EMPLOYEE STOCK
   OWNERSHIP PLAN                                                              (296,240)                  (296,240)

 LOAN PRINCIPAL
   REPAYMENT FOR
   EMPLOYEE STOCK
  OWNERSHIP PLAN                                                                 29,624                     29,624


 NET INCOME                                                          24,611                                 24,611
                                        -------    ----------   -----------  ----------   ----------    ----------

 BALANCE, JUNE 30, 1998                   3,703     3,298,267     2,290,880    (266,616)                 5,326,234

 LOAN PRINCIPAL
   REPAYMENT FOR
   EMPLOYEE STOCK
   OWNERSHIP PLAN                                                                29,624                     29,624

 REPURCHASE 37,030 SHARES OF
   COMMON STOCK                            (370)     (389,657)                                            (390,027)

  REPURCHASE OF 3,300
   SHARES UNDER MRP PLAN                                                                     (34,653)      (34,653)

ISSUANCE OF 1,135 SHARES
   UNDER MRP PLAN                                        (856)                                11,918        11,062

 NET INCOME                                                             767                                    767
                                        -------   -----------   -----------  ----------   ----------    ----------

 BALANCE, JUNE 30, 1999                  $3,333    $2,907,754    $2,291,647   $(236,992)    $(22,735)   $4,943,007
                                        =======    ==========    ==========   =========   ==========    ==========
</TABLE>

See Notes to Consolidated Financial Statements

                                      -41-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                      YEARS ENDED JUNE 30, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                           1999                1998
                                                                        -----------         -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                     <C>                 <C>
 Net income                                                             $       767         $    24,611
 Items not requiring (providing) cash:
   Depreciation and amortization                                             65,729              63,162
   Amortization of premiums and discounts on securities                      37,787              15,893
   Gain on sale of real estate owned                                            (79)
   Loss on sale of premises and equipment                                     5,946
   Provision for loan losses                                                 63,887             156,341
   FHLB stock dividends                                                     (19,700)
 Changes in:
   Deferred income taxes                                                    (45,725)              9,038
   Provision for foreclosed asset                                            50,000
   Impairment loss on premises and equipment                                 54,988
   Management recognition plan expense                                       11,062
   Release of unearned ESOP shares                                           29,624
   Interest receivable                                                      (17,307)            (86,066)
   Other assets                                                              83,883              (1,514)
   Accrued interest and other liabilities                                   127,759            (264,949)
                                                                        -----------         -----------
      Net cash provided by (used in) operating activities                   448,621             (83,484)
                                                                        -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Net originations of loans                                              (1,790,957)         (1,365,785)
  Purchase of premises and equipment                                         (5,766)            (33,847)
  Proceeds from maturities and principal repayments of
   held-to-maturity securities                                            6,612,344           1,789,731
  Purchases of held-to-maturity securities                               (9,429,478)         (7,126,295)
  Net (increase) decrease in certificates of deposit in
   other financial institutions                                             292,000          (1,299,000)
  Purchase of loans                                                      (2,017,221)
                                                                        -----------         -----------
      Net cash used in investing activities                              (6,339,078)         (8,035,196)
                                                                        -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES
 Net increase (decrease) in demand, NOW, and savings
  accounts                                                                  408,964            (895,667)
 Net cash received for assumption of liabilities                                              3,837,959
 Net increase in FHLB advances                                            4,119,976           3,351,136
 Cash received from stock issue                                                               3,703,000
 Cash paid for cost of stock conversion                                                        (401,030)
 Repurchase of common stock                                                (390,027)
 Repurchase of common stock under MRP Plan                                  (34,653)
 Increase in loan to employee stock ownership plan                                             (266,616)
                                                                        -----------         -----------
      Net cash provided by financing activities                           4,104,260           9,328,782
                                                                        -----------         -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         (1,786,197)          1,210,102

  CASH AND CASH EQUIVALENTS,
  BEGINNING OF YEAR                                                       2,094,104             884,002
                                                                        -----------         -----------

  CASH AND CASH EQUIVALENTS, END OF YEAR                                $   307,907         $ 2,094,104
                                                                        ===========         ===========
</TABLE>

See Notes to Consolidated Financial Statements

                                      -42-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations
--------------------

  North Arkansas Bancshares, Inc. (the "Company"), through its wholly-owned
subsidiary (Newport Federal Savings Bank, Newport, Arkansas) (the "Bank"),
provides a full range of banking and mortgage services to individual and
corporate customers in Northeast Arkansas. The Bank is subject to competition
from other financial institutions. The Company and Bank are also subject to the
regulation of certain federal agencies and undergo periodic examinations by
those regulatory authorities.

  The Company was incorporated in September 1997, in connection with the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank.

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.

  Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and the valuation of foreclosed assets held for sale, management
obtains independent appraisals for significant properties.

  Management believes that the allowances for losses on loans and valuation of
foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revision of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans and valuation of foreclosed assets held for sale. Such agencies
may require the Company to recognize additional losses based on their judgments
of information available to them at the time of their examination.

                                      -43-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

Principles of Consolidation
---------------------------

  The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank.  Significant intercompany accounts and
transactions have been eliminated in consolidation.

Cash Equivalents
----------------

  The Company considers all liquid interest-bearing deposits in other financial
institutions with original maturities of three months or less to be cash
equivalents.

Investments in Debt and Equity Securities
-----------------------------------------

  Held-to-maturity securities, which include any security for which the Company
has the positive intent and ability to hold until maturity are carried at
historical cost adjusted for amortization of premiums and accretion of
discounts.  Premiums and discounts are amortized and accreted, respectively, to
interest income using the level-yield method over the period to maturity.

  Interest and dividends on investments in debt and equity securities are
included in income when earned.

Loans
------

  Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-offs 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 and discounts on
purchased loans.

Allowance for Loan Losses
-------------------------

  The allowance for loan losses is increased by provisions charged to expense
and reduced by loans charged off, net of recoveries.  The allowance is
maintained at a level considered adequate to provide for potential loan losses,
based on management's evaluation of the loan portfolio, as well as on prevailing
and anticipated economic conditions and historical losses by loan category.
General allowances have been established, based upon the aforementioned factors,
and allocated to the individual loan categories.  Allowances are accrued on
specific loans evaluated for impairment for which the basis of each loan,
including accrued interest, exceeds the discounted amount of expected future
collections of interest and principal or, alternatively, the fair value of
collateral.

                                      -44-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

Allowance for Loan Losses (Continued)
-------------------------------------

  A loan is considered impaired when it is probable that the Company will not
receive all amounts due according to the contractual terms.  This includes loans
that are delinquent 90 days or more (nonaccrual loans) and certain other loans
identified by management.  Accrual of interest is discontinued, and interest
accrued and unpaid is removed, at the time such amounts are delinquent 90 days.
Interest is recognized for nonaccrual loans only upon receipt, and only after
all principal amounts are current according to the terms of the contract.

Fee Income
----------

  Loan origination fees, net of direct origination costs, are recognized as
income using the level-yield method over the term of the loans.

Premises and Equipment
----------------------

  Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.

Foreclosed Assets Held for Sale
-------------------------------

  Assets acquired by foreclosure or in settlement of debt and held for sale are
valued at estimated fair value as of the date of foreclosure, and a related
valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in estimated
fair value.  Changes in the valuation allowance and gain/losses on sales are
included in non-interest expense, net.

  Activity in the allowance for losses on foreclosed assets was as follows:

                                                      1999
                                                     ------

Balance, beginning of year                          $
Provision charged to expense                         50,000
Charge-offs, net of recoveries
                                                    -------
Balance, end of year                                $50,000
                                                    =======

                                      -45-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

Income Taxes
------------

  Deferred tax liabilities and assets are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities.  A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.

Earnings per Share
------------------

  Basic earnings per share is computed based on the weighted average number of
shares outstanding during each year.  Diluted earnings per share is computed
using the weighted average common shares and all potential dilutive common
shares outstanding during the period.  Because of the conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank on December 18, 1997, the weighted average shares outstanding at June 30,
1998, have been weighted for the time that the common shares were outstanding to
the total time in the 1998 year.  The weighted average shares outstanding in
June 30, 1999, have been adjusted for weighted average unearned ESOP shares of
26,662.

  The computation of per share earnings is as follows:

<TABLE>
<CAPTION>
                                              1999               1998
                                             --------          --------
<S>                                          <C>               <C>
Net Income                                   $    767          $ 24,611
                                             --------          --------

Average common shares outstanding             332,354           199,551
                                             --------          --------

Effect of dilutive securities
             Stock options                         --                --
             MRP shares                            --                --

Average diluted common shares                 332,354           199,551
                                             --------          --------

Basic earnings per share                     $    .00          $    .12
                                             ========          ========

Diluted earnings per share                   $    .00          $    .12
                                             ========          ========
</TABLE>

                                      -46-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   (Continued)

Impact of Recent Accounting Pronouncements
------------------------------------------

  During the year ended June 30, 1999, the Company adopted SFAS 130, "Reporting
Comprehensive Income".  This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements.  The Company did not have any items of other comprehensive income
for the two years ended June 30, 1999.

  During the year ended June 30, 1999, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."  This
Statement establishes standards for the way that public business enterprises
report information about operating segments.  The Statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers.

  The FASB recently adopted SFAS 133, "Accounting for Derivative Financial
Instruments and Hedging Activities."  This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
may be adopted early for periods beginning after issuance of the Statement and
may not be adopted retroactively.  The Company does not expect to adopt SFAS 133
early.  Management believes that the adoption of SFAS 133 will not have a
material impact on the Company's financial statements.

Segment Information
-------------------

  The principal business of the Company is overseeing the business of the Bank.
The Company has no significant assets other than its investment in the Bank and
certificates of deposit in other financial institutions.  The banking operation
is the Company's only reportable segment.  The banking segment is principally
engaged in the business of originating mortgage loans secured by one-to-four
family residences and, to a lesser extent, multi-family, construction and
commercial real estate loans and consumer loans.  These loans are funded
primarily through the attraction of deposits from the general public and
borrowings from the Federal Home Loan Bank.  Selected information is not
presented separately for the Company's reportable segment, as there is no
material difference between that information and the corresponding information
in the consolidated financial statements.

Reclassifications
-----------------

  Various items within the accompanying financial statements for the previous
year has been reclassified to provide more comparative information.  These
reclassifications had no effect on net earnings.

                                      -47-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 2:  ACQUISITIONS

  Effective January 22, 1998, the Company purchased certain non-earning assets
and assumed certain deposit liabilities of a Newport, Arkansas branch.  In
accordance with the terms of the purchase and assumption agreement, the Company
received cash of $3,837,959 and assumed certain deposits and other liabilities
of $4,050,536.  This acquisition has been accounted for under the purchase
method of accounting for business combinations.  The results of the branch
acquisition have been consolidated into the Company's results of operations from
the acquisition date forward. The total acquisition cost, as adjusted, exceeded
the fair value of the tangible assets and liabilities acquired by $77,454. The
intangible asset is being amortized using the straight-line method over 15
years. Amortization expense was $4,972 and $1,242 for 1999 and 1998,
respectively.


NOTE 3: INVESTMENT SECURITIES

 The amortized cost and approximate fair value of held-to-maturity securities
are as follows:

<TABLE>
<CAPTION>
                                                                June 30, 1999
                                       -----------------------------------------------------------------
                                                         Gross            Gross              Approximate
                                        Amortized      Unrealized       Unrealized              Fair
                                           Cost          Gains            (Losses)             Value
                                       -----------     ----------       -------------        -----------
<S>                                    <C>             <C>              <C>                 <C>
 U.S. Government Agencies              $ 2,725,000         $                $(110,019)       $ 2,614,981
 State and Political                        30,000                                                30,000
  Subdivisions
 Mortgage-backed securities             10,852,582          24,421           (311,043)        10,565,960
 Other securities                          434,492                                               434,492
                                       -----------     -----------      -------------        -----------

                                       $14,042,074         $24,421          $(421,062)       $13,645,433
                                       ===========     ===========      =============        ===========
</TABLE>

                                      -48-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3: INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                                        June 30, 1998
                                        ----------------------------------------------------------------------
                                                              Gross             Gross             Approximate
                                         Amortized         Unrealized         Unrealized             Fair
                                           Cost               Gains             (Losses)             Value
                                        ------------       ------------      -------------       -------------
 <S>                                    <C>                <C>               <C>                 <C>
 U.S. Government Agencies                $ 3,000,000            $    36           $ (8,539)        $ 2,991,497
 State and Political Subdivisions             47,500                                                    47,500
 Mortgage-backed securities                7,895,435             50,735            (45,803)          7,900,367
 Other securities                            300,692                                                   300,692
                                         -----------       ------------      -------------       -------------

                                         $11,243,627            $50,771           $(54,342)        $11,240,056
                                         ===========       ============      =============       =============
</TABLE>

     Maturities of held-to-maturity securities at June 30, 1999:

<TABLE>
<CAPTION>
                                                                                             Approximate
                                                                          Amortized             Fair
                                                                            Cost               Value
                                                                         -----------         -----------
<S>                                                                      <C>                 <C>
One year or less                                                         $     2,500         $     2,500
After one year through five years                                             10,000              10,000
After five years through ten years                                           742,500             721,881
After ten years                                                            2,000,000           1,910,600
Mortgage-backed securities not due on a single maturity date              10,852,582          10,565,960
Other                                                                        434,492             434,492
                                                                         -----------         -----------

                                                                         $14,042,074         $13,645,433
                                                                         ===========         ===========
</TABLE>

  The book value of securities pledged as collateral, to secure public deposits
and for other purposes, amounted to $995,000 and $1,665,200 at June 30, 1999 and
1998, respectively.  The fair value of these securities approximated book value.

  As a member of the Federal Home Loan Bank System ("FHLB"), the Company is
required to maintain an investment ($434,492 and $300,692 at June 30, 1999 and
1998, respectively, included in other held-to-maturity securities) in the
capital stock of the Federal Home Loan Bank in an amount equal to 1% of its
outstanding home loans.  No ready market exists for such stock and it has no
quoted market value.

                                      -49-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 3:  INVESTMENT SECURITIES (Continued)

  The amortized cost and approximate fair values of held-to-maturity mortgage-
backed securites are as follows as of June 30, 1999.

<TABLE>
<CAPTION>
                                                             Gross               Gross            Approximate
                                      Amortized           Unrealized          Unrealized              Fair
                                         Cost                Gains             (Losses)              Value
                                      -----------         ----------          -----------         -----------

<S>                                   <C>                   <C>                <C>                  <C>
 GNMA                                 $ 6,429,040            $ 6,576           $(167,095)         $ 6,268,521
 FHLMC                                  1,618,318              9,547             (36,272)           1,591,593
 FNMA                                   2,805,224              8,298            (107,676)           2,705,846
                                      -----------            -------           ---------          -----------

                                      $10,852,582            $24,421           $(311,043)         $10,565,960
                                      ===========            =======           =========          ===========
</TABLE>


NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

 Categories of loans at June 30, 1999 and 1998, include:



<TABLE>
<CAPTION>
                                                                             1999                1998
                                                                             ----                ----

<S>                                                                      <C>                  <C>
 First mortgage loans                                                    $25,413,251          $21,274,807
 Loans to depositors, secured by savings                                     746,294              693,996
 Property improvement loans                                                  381,595              516,925
 Consumer loans                                                            2,514,784            2,806,855
 Commercial loans                                                            589,479              491,650
                                                                         -----------          -----------
     Total loans                                                          29,645,403           25,784,233
 Less: Unearned discounts on loans purchased                                   1,192                2,294
          Net deferred loan fees                                                  28                  132
          Allowance for loan losses                                          104,735              188,869
                                                                         -----------          -----------

     Net Loans                                                           $29,539,448          $25,592,938
                                                                         ===========          ===========
</TABLE>

 Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
                                                                              1999                  1998
                                                                              ----                  ----

<S>                                                                        <C>                   <C>
   Balance, beginning of year                                              $ 188,869             $ 149,795
     Losses charged off                                                     (148,021)             (117,267)
     Provision for loan losses                                                63,887               156,341
                                                                           ---------             ---------

   Balance, end of year                                                    $ 104,735             $ 188,869
                                                                           =========             =========
</TABLE>

                                      -50-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998


NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

  Impaired loans totaled $144,640 at June 30, 1999.  An allowance for loan
losses of $20,224 relates to impaired loans of $144,640 at June 30, 1999.

  Interest of $9,176 was recognized on average impaired loans of $145,705 for
1999.


NOTE 5: PREMISES AND EQUIPMENT

  Major classifications of premises and equipment, stated at cost, are as
follows:

<TABLE>
<CAPTION>
                                                                             1999                 1998
                                                                             ----                 ----

<S>                                                                       <C>                  <C>
  Land                                                                    $  225,578           $  320,866
  Buildings and improvements                                               1,153,802            1,375,257
  Furniture, fixtures and equipment                                          223,244              522,674
                                                                          ----------           ----------
                                                                           1,602,624            2,218,797
  Less accumulated depreciation                                             (190,323)            (595,571)
                                                                          ----------           ----------

          Net premises and equipment                                      $1,412,301           $1,623,226
                                                                          ==========           ==========
</TABLE>

  During 1999, the Company sold real property that was formerly being utilized
as their main bank location and recognized a loss of $5,946.  In addition, the
Company obtained an option to sell an adjacent lot for $95,000 with a net book
value of $149,988.  An impairment loss of $54,988 was recognized and is included
in other non-interest expense on the income statement.

                                      -51-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 6:    DEPOSITS

  Deposits consist of the following at June 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                               1999                 1998
                                                                               ----                 ----

<S>                                                                        <C>                  <C>
 Money market                                                              $   260,857          $   262,952
 NOW accounts (2.35% and 2.40% in 1999 and 1998, respectively)               2,438,592            2,179,945
 Passbook accounts (2.75% and 3.00% in 1999 and 1998,
   respectively)                                                             2,100,624            1,937,762
 Other noninterest bearing/checking                                          1,304,572            1,724,417
                                                                           -----------          -----------
                                                                             6,104,645            6,105,076
                                                                           -----------          -----------
 Certificates
  3.00% to 3.99%                                                               368,862              178,373
  4.00% to 4.99%                                                            12,336,392              876,409
  5.00% to 5.99%                                                            12,761,889           23,751,803
  6.00% to 6.99%                                                             3,107,840            3,359,003
                                                                           -----------          -----------
                                                                            28,574,983           28,165,588
                                                                           -----------          -----------

      Total                                                                $34,679,628          $34,270,664
                                                                           ===========          ===========

Weighted average cost of deposits                                                  4.6%                 4.9%
                                                                                 =====                =====
</TABLE>

  Interest bearing time deposits in denominations of $100,000 or more were
$4,339,000 on June 30, 1999, and $4,207,000 on June 30, 1998.

  At June 30, 1999 the scheduled maturities of certificates of deposit are
approximately as follows:

<TABLE>
<CAPTION>
                                                                                                1999
                                                                                                ----

<S>                                                                                          <C>
          2000                                                                               $18,962,000
          2001                                                                                 4,189,000
          2002                                                                                 1,995,000
          2003                                                                                 1,337,000
          2004 and thereafter                                                                  2,092,000
                                                                                             -----------

                                                                                             $28,575,000
                                                                                             ===========
</TABLE>

                                      -52-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 7: FEDERAL HOME LOAN BANK ADVANCES

  Federal Home Loan Bank advances consist of the following:

<TABLE>
<CAPTION>
                                                                              1999                1998
                                                                              ----                ----

<S>                                                                       <C>                 <C>
FHLB note, 5.07%, demand                                                  $2,200,000          $
FHLB note, 5.60%, demand                                                                         900,000
FHLB note, 5.70%, due August 1, 2003                                          84,609             102,951
FHLB note, 5.84%, due August 13, 2003                                      1,485,871
FHLB note, 5.89%, due August 13, 2003                                      1,486,003
FHLB note, 5.86%, due March 1, 2008                                        1,356,827           1,472,197
FHLB note, 5.86%, due February 24, 2003                                    1,476,191           1,494,377
                                                                          ----------          ----------

          Total FHLB advances                                             $8,089,501          $3,969,525
                                                                          ==========          ==========
</TABLE>

 Aggregate annual maturities of FHLB advances at June 30, 1999 are:

<TABLE>
<CAPTION>
          Year                                                     Amount
          ----                                                     ------

<S>                                                              <C>
          2000                                                   $2,401,006
          2001                                                      212,587
          2002                                                      225,354
          2003                                                    1,626,073
          2004                                                    2,957,425
          Thereafter                                                667,056
                                                                 ----------

                                                                 $8,089,501
                                                                 ==========
</TABLE>

  FHLB requires the Company to maintain collateral equal to outstanding balances
of advances.  FHLB values mortgage loans free of other pledges, liens and
encumbrances at 80% of their fair value, and investment securities free of other
pledges, liens and encumbrances at 95% of their fair value.

                                      -53-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 8: 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.

  Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of June 30, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.

  As of June 30, 1999, the most recent notification from the Office of Thrift
Supervision 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 risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.

                                       54
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998


NOTE 8: REGULATORY MATTERS (Continued)

  The Bank's actual capital amounts and ratios as of June 30, 1999 and 1998, are
also presented in the table.

<TABLE>
<CAPTION>
                                                                                              To Be Well Capitalized
                                                                 For Capital Adequacy         Under Prompt Corrective
                                          Actual                       Purposes                  Action Provisions
                                          ------                 --------------------         -----------------------
                                    Amount         Ratio          Amount         Ratio          Amount          Ratio
                                    ------         -----          ------         -----          ------          -----
<S>                              <C>               <C>         <C>              <C>          <C>               <C>
As of June 30, 1999:
Total Capital (to Risk
 Weighted Assets)                $ 4,207,000       19.4%       $ 1,733,000        8.0%       $ 2,166,000        10.0%

Tier I Capital (to Risk
 Weighted Assets)                  4,102,000       18.9%           866,000        4.0%         1,300,000         6.0%

Tier I Capital (to
 Average Assets)                   4,102,000        8.8%         1,858,000        4.0%         2,322,000         5.0%

As of June 30, 1998:
Total Capital (to Risk
 Weighted Assets)                $ 4,185,000       20.2%       $ 1,660,000        8.0%       $ 2,075,000        10.0%

Tier I Capital (to Risk
 Weighted Assets)                  4,109,000       19.8%           830,000        4.0%         1,245,000         6.0%

 Tier I Capital (to
  Average Assets)                  4,109,000        9.6%         1,714,000        4.0%         2,142,000         5.0%
</TABLE>

                                       55
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 8:  REGULATORY MATERS (Continued)

  The Bank's risk-based capital amounts at June 30, 1999 and 1998 are presented
below.

<TABLE>
<CAPTION>
                                                          1999                  1998
                                                          ----                  ----
<S>                                                     <C>                  <C>
Tier 1 capital
  Stockholders' equity                                  $ 4,173,000          $ 4,185,000
  Intangible assets                                         (71,000)             (76,000)
                                                        -----------          -----------
    Total Tier 1 capital                                  4,102,000            4,109,000
                                                        -----------          -----------

Tier 2 capital
  Qualifying allowance for loan losses                      105,000               76,000
                                                        -----------          -----------
    Total Tier 2 capital                                    105,000               76,000
                                                        -----------          -----------

    Total risk-based capital                            $ 4,207,000          $ 4,185,000
                                                        ===========          ===========

    Risk weighted assets                                $21,660,000          $20,718,000
                                                        ===========          ===========
</TABLE>

  The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At June 30, 1999, none of
retained earning were available for dividend declaration without prior
regulatory approval.

NOTE 9: INCOME TAXES

  The Company files a consolidated federal income tax return. In computing
federal income taxes for taxable years prior to July 1, 1986, the Bank has been
allowed an 8% deduction from otherwise taxable income as a statutory bad debt
deduction, subject to limitations based on aggregate loans and savings balances.
In August 1996, this statutory bad debt deduction was repealed and is no longer
available for thrifts. In addition, bad debt reserves accumulated after 1987,
which are presently included as a component of the net deferred tax liability,
must be recaptured in future years. The amount of bad debt reserves accumulated
since 1987 in excess of the statutory bad debt reserve was zero at June 30,
1999.

  As of June 30, 1999, and 1998, retained earnings included approximately
$552,435 for which no deferred income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $211,527 at June 30, 1999 and 1998.

                                       56
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 9: INCOME TAXES (Continued)

 The provision for income taxes consists of:

<TABLE>
<CAPTION>
                                                            1999                    1998
                                                            ----                    ----
<S>                                                       <C>                    <C>
Taxes currently payable                                   $ 50,747               $  3,633
Deferred income taxes                                      (45,725)                 9,038
                                                          --------                -------

                                                          $  5,022               $ 12,671
                                                          ========                =======
</TABLE>

  The tax effects of temporary differences related to deferred taxes included in
other assets and other liabilities on the June 30, 1999 and 1998, balance sheets
are:

<TABLE>
<CAPTION>
                                                            1999                    1998
                                                            ----                    ----
<S>                                                       <C>                    <C>
Deferred tax assets:
   Net operating loss carryforwards-state                 $ 19,074               $ 19,074
   Contribution carryforwards                                9,323                 13,876
   Allowance for losses on loans                            40,103                 36,644
   Valuation of foreclosed assets                           19,145
   Impairment of premises and equipment                     21,055
   Deferred compensation                                     4,237
   Other                                                       903                    903
                                                          --------               --------
                                                           113,840                 70,497
                                                          --------               --------

Deferred tax liabilities:
   Accumulated depreciation                                (29,600)               (41,493)
   Prepaid insurance                                        (9,973)                (8,063)
   FHLB stock dividends                                    (42,059)               (34,515)
   Other                                                      (423)                  (366)
                                                          --------               --------
                                                           (82,055)               (84,437)
                                                          --------               --------

         Net deferred tax asset (liability)               $ 31,785              $ (13,940)
                                                          ========               ========
</TABLE>

                                       57
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 9: INCOME TAXES (Continued)

  A reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below:

<TABLE>
<CAPTION>
                                                                  1999                  1998
                                                                  ----                  ----

<S>                                                           <C>                    <C>
Computed at the statutory rate (34%)                          $  1,968               $  12,675

Increase (decrease) resulting from:
   State income taxes - net of federal tax benefit                                      (1,732)
   Non-deductible expenses                                         328
   Other                                                         2,726                   1,728
                                                               -------                 -------

Actual tax provision                                          $  5,022               $  12,671
                                                               =======                 =======
</TABLE>


NOTE 10:    TRANSACTIONS WITH RELATED PARTIES

  At June 30, 1999 and 1998, the Company had loans outstanding to executive
officers, directors and companies in which the Company's executive officers or
directors were principal owners, in the amount of $954,848 and $939,697,
respectively.

A reconciliation of the activity in these loans for the years ended June 30,
1999 and 1998, is as follows:

<TABLE>
<CAPTION>
                                                                  1999                   1998
                                                                  ----                   ----
<S>                                                           <C>                    <C>
Balance, beginning of year                                    $  939,697             $  725,374
Loans originated                                                 197,915                416,775
Loans paid                                                      (182,764)              (202,452)
                                                                 -------                -------

Balance, end of year                                          $  954,848              $ 939,697
                                                                 =======                =======
</TABLE>

  In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same term (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons. Further,
in management's opinion, these loans did not involve more than normal risk of
collectibility or present other unfavorable features.

                                       58
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 11:  ADDITIONAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                       1999                 1998
                                                                       ----                 ----
<S>                                                              <C>                 <C>
Noncash Investing and Financing Activities
------------------------------------------
 Sale and financing of foreclosed assets                         $      8,597        $
 Real estate acquired in settlement of loans                            8,518              535,700
 Sale and financing of premises and equipment                          95,000              125,000

Additional Cash Payment Information
-----------------------------------

 Interest paid                                                      2,053,791            1,601,733
 Income taxes paid (received)                                         (66,406)
</TABLE>


NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS

  Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Estimates related to the allowance for loan losses are reflected in the footnote
regarding loans. Current vulnerabilities due to certain concentrations of credit
risk are discussed in the footnote on commitments and credit risk.

  Like all entities, the Company is exposed to risks associated with the Year
2000 Issue, which affects computer software and hardware; transactions with
customers, vendors and other entities; and equipment dependent on microchips.
The Company has begun but not yet completed the process of identifying and
remediating potential Year 2000 problems. It is not possible for any entity to
guarantee the results of its own remediation efforts or to accurately predict
the impact of the Year 2000 Issue on third parties with which the Company does
business. If remediation efforts of the Company or third parties with which it
does business are not successful, the Year 2000 problem could have negative
effects on the Company's financial condition and results of operations in the
near term.


NOTE 13: COMMITMENTS AND CREDIT RISK

  The Company grants commercial, residential and consumer loans to customers in
Northeast Arkansas. Although the Company has a diversified loan portfolio, first
mortgage loans on 1-4 family residences in Jackson County, Arkansas comprised
approximately 76% and 65% of the loan portfolio as of June 30, 1999 and 1998,
respectively.

                                       59
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998


NOTE 13: COMMITMENTS AND CREDIT RISK (Continued)

  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 a portion of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate.

  At June 30, 1999 and 1998, the Bank had outstanding commitments to originate
loans aggregating approximately $350,000 and $180,000, respectively. The
commitment extended over varying periods of time with the majority being
disbursed within a one-year period. Loan commitments at fixed rates of interest
amounted to $218,000 and $97,000 at June 30, 1999 and 1998, respectively, with
the remainder at floating market rates.

  Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's credit worthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management used
the same credit policies in granting lines of credit as those for on-balance-
sheet instruments.

  The Company had granted unused lines of credit to borrowers aggregating
approximately $83,554 and $111,471 for commercial and open-end consumer lines at
June 30, 1999 and 1998, respectively.


NOTE 14: BENEFIT PLANS

Pension Plan
------------

  The Company is a participant in a multi-employer pension plan covering
substantially all employees. As a member of a multi-employer pension plan,
disclosures of plan assets and liabilities for individual employers are not
required or practicable. The retirement plan's actuarial value is such that no
contributions were required in 1999 or 1998.

                                       60
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 14: BENEFIT PLANS (Continued)

Director's Retirement Plan
--------------------------

Effective May 29, 1997, the Company adopted a retirement plan for directors.
Participants in the plan are individuals who serve on the Company's board on or
after the effective date. The Company contributed zero and $22,498 to the plan
in 1999 and 1998, respectively, based on a defined performance factor. The
Company plans to contribute additional amounts to the plan each year based on a
defined performance factor. During 1999, the Plan was amended to eliminate the
1999 contribution.

Management Recognition Plan
---------------------------

  In December 1998, the Company established a Management Recognition Plan (MRP)
for the benefit of directors, officers and employees of the Company. The MRP
provides directors, officers and employees of the Company with a proprietary
interest in the Company in a manner designed to encourage these individuals to
remain with the Company.

  A Committee consisting of members of the Company's Board of Directors
administers the Plan. Under the Plan, the committee can award up to 7,406 shares
of the Company's common stock to selected directors, officers and employees. As
of June 30, 1999, 3,406 shares have been awarded. The awards vest 33 1/3% on the
effective date with the remaining awards vesting at 33 1/3% each of the two
years of service after that date. Compensation expense is recognized based on
the Company's stock price on the date the shares were vested. The Company
recognized $11,062, of expense under the MRP in 1999. During 1999, 3,300 shares
to be issued under the MRP were purchased on the open market by the Company for
$34,653.

Stock Option and Incentive Plan
-------------------------------

  In December 1998, the Company established the 1998 Stock Option and Incentive
Plan for the benefit of certain directors, officers and employees of the
Company. The Plan is administered by the Company's Stock Option Committee. Under
the Plan, the Stock Option Committee may grant stock options or awards of up to
44,436 shares of the Company's common stock.

  The stock options may be either incentive stock options or nonqualified stock
options. Incentive stock options can be granted only to participants who are
employees of the Company. The option price must not be less than the market
value of the Company stock on the date of grant. All options expire no later
than ten years from the date of grant. The options vest at the date granted.

                                      -61-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 14: BENEFIT PLANS (Continued)

Stock Option and Incentive Plan (Continued)
-------------------------------------------

 The table below summarizes transactions under the Company's stock option plan:

<TABLE>
<CAPTION>
                                                                   June 30, 1999
                                                               ---------------------
                                                                                    Weighted-
                                                                                     Average
                                                                                    Exercise
                                                        Shares                        Price
                                                        ------                      ---------
<S>                                                     <C>                         <C>
Outstanding, Beginning of Year                                                      $
  Granted                                                20,442                         9.75
  Exercised
  Forfeited
                                                         ------                        -----

Outstanding, End of Year                                 20,442                        $9.75
                                                         ======                        =====

Options Exercisable, End of Year                         20,442                        $9.75
                                                         ======                        =====
</TABLE>

  The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes pricing model with the following weighted-average
assumptions:


<TABLE>
<CAPTION>
                                                                          June 30, 1999
                                                                          -------------

<S>                                                                       <C>
       Dividends per share                                                   $ 0.00
       Risk-free interest rate                                                 6.00%
       Expected life of options                                               10 years
       Expected stock price volatility                                        15.00%
       Weighted-average fair value of options
         Granted during year                                                 $ 4.52
</TABLE>

                                      -62-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 14:  BENEFIT PLANS (Continued)

Stock Option and Incentive Plan (Continued)
-------------------------------------------

  The following table summarizes information about stock options under the Plan
outstanding at June 30, 1999:

<TABLE>
<CAPTION>
                                     Options Outstanding                               Options Exercisable
                                 ---------------------------                     -----------------------------
                                                Weighted Average                                  Weighted Average
   Range of Exercise           Number              Remaining                    Number                Exercise
         Prices             Outstanding         Contractual Life             Exercisable               Price
   -----------------        -----------         ----------------             -----------               -----
<S>                         <C>                 <C>                          <C>                  <C>
         $9.75                 20,442               10 years                    20,442                 $9.75
</TABLE>

  The Company applies APB Opinion 25 and related Interpretations in accounting
for the plans and no compensation cost has been recognized. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted, net income and earnings per share would have been reduced as indicated
below:

<TABLE>
<CAPTION>
                                                          1999
                                                          ----
<S>                                                   <C>
Net income - as reported                              $     767
Net income (loss) - proforma                            (56,252)
Diluted earnings per share - as reported                    .00
Diluted earnings (loss) per share - proforma               (.17)
</TABLE>

  The above proforma amounts include only the effect of 1999 option grants and
therefore may not be representative of the proforma impact in future years.

                                      -63-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 14:  BENEFIT PLANS (Continued)
--------  -------------------------

Employee Stock Ownership Plan
-----------------------------

  On October 31, 1997, the Company established an internally-leveraged Employee
Stock Ownership Plan (ESOP) to provide stock awards to eligible employees of the
Company. The ESOP borrowed $296,240 from the Company and purchased 29,624 shares
of the common stock of the Company. The ESOP debt is secured by shares of the
Company. The loan will be repaid from contributions to the ESOP as approved
annually by the Company's Board of Directors. As the debt is repaid, shares are
released from collateral and allocated to employees' accounts. The shares
pledged as collateral are reported as unearned ESOP shares in the consolidated
balance sheet. When shares are released from collateral, the shares become
outstanding for Earnings Per Share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings and may be paid directly
to participants or credited to their account; dividends on unallocated ESOP
shares are recorded as a reduction of the unearned ESOP shares and accrued
interest. Compensation expense is recognized ratably based on the average fair
value of shares committed to be released. Compensation expense attributed to the
ESOP was $29,624 for the year ended June 30, 1999 and 1998. The following is a
summary of ESOP shares at June 30, 1999:

<TABLE>
<CAPTION>
        <S>                                <C>
        Allocated shares                      2,962
        Shares released for allocation        2,962
        Unreleased shares                    23,700
                                           --------

        Total ESOP shares                    29,624
                                           ========

        Fair value of unreleased shares   $ 246,175
                                           ========
 </TABLE>

NOTE 15:  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

  The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:

Cash and Cash Equivalents
-------------------------

 For these short-term instruments, the carrying amount approximates fair value.

                                      -64-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 15:  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
          (Continued)

Investment Securities
---------------------

  Fair values for investment securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are estimated
based on quoted market prices of similar securities.

Loans
-----

  The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit rating and for the same remaining maturities. Loans with similar
characteristics were aggregated for purposes of calculations. The carrying
amount of accrued interest approximates its fair value.

Deposits
--------

  The fair value of demand deposits, savings accounts, NOW accounts, and certain
money market deposits is the amount payable on demand at the reporting date
(i.e., their carrying amount). The fair value of fixed-maturity time deposits is
estimated using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities. The carrying
amount of accrued interest payable approximates its fair value.

Federal Home Loan Bank Advances
-------------------------------

  Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Letters of Credit and Lines of Credit
-------------------------------------------------------------------

  The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.

                                      -65-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998

NOTE 15:  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
          (Continued)

  The following table presents estimated fair values of the Company's financial
instruments. The fair values of certain of these instruments were calculated by
discounting expected cash flows, which method involves significant judgments by
management and uncertainties. Fair value is the estimated amount at which
financial assets or liabilities could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Because no
market exists for certain of these financial instruments and because management
does not intend to sell these financial instruments, the Company does not know
whether the fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate.

<TABLE>
<CAPTION>
                                                             June 30, 1999                            June 30, 1998
                                                             -------------                            -------------
                                                     Carrying               Fair               Carrying             Fair
                                                      Amount                Value               Amount              Value
                                                      ------                -----               ------              -----
<S>                                                  <C>                    <C>                <C>                  <C>
Financial assets:
   Cash and cash equivalents                         $   307,907          $   307,907         $ 2,094,104        $ 2,094,104
   Certificates of deposit in other
    financial institutions                             1,698,000            1,698,000           1,990,000          1,990,000
   Investment securities                              14,042,074           13,645,433          11,243,627         11,240,056
   Interest receivable                                   330,729              330,729             313,422            313,422
   Loans, net of allowance for loan losses            29,539,448           29,929,000          25,592,938         25,946,058

Financial liabilities:
   Deposits                                           34,679,628           34,600,000          34,270,664         34,330,657
   FHLB advances                                       8,089,501            7,960,000           3,969,525          3,969,525
   Interest payable                                       89,056               89,056              69,314             69,314
</TABLE>
  The fair value of commitments to extend credit and letters of credit is not
presented since management believes the fair value to be insignificant.

                                      -66-
<PAGE>

                        NORTH ARKANSAS BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1999 AND 1998


NOTE 16:  CONVERSION FROM MUTUAL TO STOCK ORGANIZATION

  On December 18, 1997, the Bank converted from a Federally chartered mutual
savings bank to a Federally chartered stock savings bank. In connection with
this conversion, the Bank issued all of its stock to the Parent and the Company
issued 370,300 shares of common stock and received gross proceeds of $3,703,000.
Costs associated with the conversion of $401,030 were accounted for as a
reduction of gross proceeds.

  At the time of conversion, the Bank established a liquidation account, which
is a memorandum account that does not appear on the statement of financial
condition, in a amount equal to its retained earnings as reflected in the latest
statement of financial condition used in the final conversion prospectus. The
liquidation account is maintained for the benefit of eligible account holders
who continue to maintain their deposit accounts in the Bank after conversion. In
the event of a complete liquidation of the Bank (and only in such an event),
eligible depositors who continue to maintain accounts shall be entitled to
receive a distribution from the liquidation account before any liquidation may
be made with respect to common stock.


NOTE 17:  SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

  During the fourth quarter of the year ended June 30, 1999, the Company
recorded adjustments to increase the allowance for loan losses and certain other
accrued expenses that in the aggregate reduced net income $99,309, net of income
taxes.

                                      -67-
<PAGE>

Item 8.  Changes in and Disagreements With Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

    Effective January 28, 1999, the Company, with the approval of its board of
directors, dismissed KPMG LLP and engaged Baird, Kurtz & Dobson, Certified
Public Accountants as the Company's independent public auditors. For additional
information, see the Company's Current Report on Form 8-K/A dated January 28,
1999, which is incorporated herein by reference (File No. 0-23525).


                                   PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act
---------------------------------------------------------------------------

    The information required by this item is incorporated by reference to
"Proposal I -- Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.

    The only executive officer of the Company is Brad Snider who serves as
President and Chief Executive Officer and a Director.  Biographical information
is incorporated by reference to "Proposal I -- Election of Directors" is the
Proxy Statement.

Item 10.  Executive Compensation
--------------------------------

    The information required by this item is incorporated by reference to
"Executive Compensation" in the Proxy Statement.

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

    The information required by this item is incorporated by reference to
"Voting Securities and Principal Holders Thereof" and "Proposal I -- Election of
Directors" in the Proxy Statement.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

    The information required by this item is incorporated herein by reference to
the section captioned "Transactions with Management" in the Proxy Statement.

Item 13.  Exhibits, Lists and Reports on Form 8-K.
-------------------------------------------------

    (a)  List of Documents Filed as Part of this Report
         ----------------------------------------------

    (1)  Financial Statements.  The following financial statements are
incorporated by reference from Item 7 hereof:

     Independent Accountants' Reports
     Consolidated Financial Statements
            Balance Sheets
            Statements of Income
            Statements of Changes in Stockholders' Equity
            Statements of Cash Flows
            Notes to Consolidated Financial Statements

                                       68
<PAGE>

    (2)  Exhibits.  The following is a list of exhibits filed as part of this
Annual Report on Form 10-KSB and is also the Exhibit Index.

<TABLE>
<CAPTION>

    No.  Description
    ---  ----------------------
    <C>  <S>                                                                                <C>

    3.1  Charter of North Arkansas Bancshares, Inc.                                         *
    3.2  Bylaws of North Arkansas Bancshares, Inc.                                          *
      4  Form of Common Stock Certificate of North Arkansas Bancshares, Inc.                *
   10.1  North Arkansas Bancshares, Inc. 1998 Stock Option and Incentive Plan               *+
   10.2  North Arkansas Bancshares, Inc. Management Recognition Plan and Trust Agreement    *+
   10.3  Newport Federal Savings Bank Retirement Plan for Directors                         *+
   10.4  Employment Agreement between North Arkansas Bancshares, Inc. and Brad Snider       *+
   10.5  Guaranty Agreement between North Arkansas Bancshares, Inc. and Brad Snider         *+
   21    Subsidiaries of Registrant
   23.1  Consent of KPMG LLP
   23.2  Consent of Baird, Kurtz & Dobson, Certified Public Accountants
   27    Financial Data Schedule (EDGAR only)
</TABLE>

-------------------------
(*)  Incorporated herein by reference from Registration Statement on Form SB-2
     filed (File No. 333-35985).
(+)  Management contract or compensatory plan or arrangement.

          (b)  Reports on Form 8-K.  There were no Current Reports on Form 8-K
               -------------------
filed by the Company during the fourth quarter of fiscal year 1999.

                                       69
<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.

                                       NORTH ARKANSAS BANCSHARES, INC.

September 24, 1999                     By: /s/ Brad Snider
                                          ------------------------------------
                                       Brad Snider
                                       President and Chief Executive Officer
                                       (Duly Authorized Representative)

     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.


/s/ Brad Snider                                               September 24, 1999
---------------------------------------------
Brad Snider
President and Chief Executive Officer
(Director and Principal Executive Officer)



/s/ O. E. Guinn, Jr.                                          September 24, 1999
---------------------------------------------
O. E. Guinn, Jr.
Vice Chairman of the Board
(Director)



---------------------------------------------
Kaneaster Hodges, Jr.
(Director)


/s/ John Minor                                                September 24, 1999
---------------------------------------------
John Minor
(Director)



---------------------------------------------
J. C. McMinn
(Director)