SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                     _______
(Mark One)                         FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
      OF 1934
For the fiscal year ended June 30, 2000
                                       OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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, 2000:  $3,317,022

As of September 20, 2000, the aggregate  market value of the 234,026 shares of
Common Stock of the registrant  issued and outstanding held by non-affiliates on
such date was  approximately  $1,638,182  based on the  closing  sales  price of
$7.00 per share of the  registrant's  Common  Stock on  September  20,  2000 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 20, 2000: 299,943

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  2000  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,
2000, the Company had total assets of $45.4 million,  deposits of $30.1 million,
net loans receivable of $28.3 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.

FINANCIAL MODERNIZATION LEGISLATION

     On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
("G-L-B") Act authorizes affiliations between banking,  securities and insurance
firms and  authorizes  bank holding  companies and national banks to engage in a
variety  of new  financial  activities.  Among the new  activities  that will be
permitted to bank holding  companies are  securities  and  insurance  brokerage,
securities  underwriting,  insurance  underwriting  and  merchant  banking.  The
Federal Reserve Board, in consultation  with the Secretary of the Treasury,  may
approve  additional  financial  activities.  The G-L-B Act,  however,  prohibits
future acquisitions of existing unitary savings and loan holding companies, like
the Company, by firms which are engaged in commercial  activities and limits the
permissible activities of unitary holding companies formed after May 4, 1999.

     The G-L-B Act imposes  new  requirements  on  financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six months of enactment.  The privacy provisions will become
effective in November 2000, with full compliance required by July 1, 2001.

     The G-L-B Act contains significant  revisions to the FHLB System. The G-L-B
Act imposes new capital  requirements  on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption  requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net  earnings  formula.  The G-L-B Act expands the  permissible  uses of FHLB
advances by community financial institutions (under $500 million in assets)

                                       2
<PAGE>

to  include   funding  loans  to  small   businesses,   small  farms  and  small
agri-businesses.  The G-L-B  Act  makes  membership  in the FHLB  voluntary  for
federal savings associations.

     The  G-L-B  Act  contains  a  variety  of  other  provisions   including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

     The  Company  is  unable  to  predict  the  impact  of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
with which may acquire  control of the Company,  it may facilitate  affiliations
with companies in the financial services industry.

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.


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, 2000, the
Bank's gross loans  totaled  $28.4  million of which $20.5 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.

                                       3

<PAGE>


     The following  table sets forth  information  concerning the types of loans
held by the Bank at the dates indicated. At June 30, 2000, the Bank did not have
any  concentrations  of loans  exceeding  10% of total loans except as disclosed
below.
<TABLE>
<CAPTION>

                                                               AT JUNE 30,
                                         --------------------------------------------------------
                                                      2000                            1999
                                         -----------------------       --------------------------
                                         AMOUNT            %             AMOUNT            %
                                         ------          -----           ------           ---
                                                            (DOLLARS IN THOUSANDS)
<S>                                      <C>               <C>           <C>              <C>
Real estate loans:
  One- to four-family..................  $   20,537        72.42%        $  21,712        73.24%
  Multi-family.........................         275          .97               123          .41
  Non-residential......................       3,436        12.12             3,578        12.08
                                         ----------       ------         ---------       ------
     Total real estate loans...........      24,248        85.51            25,413        85.73
Consumer loans:
  Loans secured by deposits............         604         2.13               746         2.51
  Home improvement.....................         331         1.17               382         1.29
  Automobile...........................       1,827         6.44             1,918         6.47
  Other consumer.......................         634         2.24               597         2.01
Commercial.............................         713         2.51               590         1.99
                                         ----------       ------         ---------       ------
       Total loans.....................      28,357       100.00%           29,646       100.00%
                                         ----------       ======         ---------       ======

Less:
  Deferred fees and discounts..........           4                              1
  Allowance for losses.................         101                            105
                                         ----------                      ---------
       Loan portfolio, net.............  $   28,252                      $  29,540
                                         ==========                      =========
</TABLE>

     The following  table sets forth the  estimated  maturity of the Bank's loan
portfolio at June 30,  2000.  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 1
                                   DUE WITHIN ONE          THROUGH 5       DUE AFTER 5
                                     YEAR AFTER           YEARS AFTER     YEARS AFTER
                                   JUNE 30, 2000         JUNE 30, 2000   JUNE 30, 2000        TOTAL
                                   -------------         -------------   -------------      -------
                                                         (IN THOUSANDS)
<S>                              <C>                      <C>             <C>                <C>
Real estate loans:
  One- to four-family............$       929              $   2,711       $   16,897       $ 20,537
  Multi-family...................         --                    159              116            275
  Non-residential................        453                  2,257              726          3,436
Consumer loans:
  Loans secured by deposits......        551                     53               --            604
  Home improvement...............          2                    113              216            331
  Automobile.....................        282                  1,476               69          1,827
  Other consumer.................        205                    417               12            634
Commercial.......................        439                     --              274            713
                                 -----------              ---------       ----------       --------
     Total.......................$     2,861              $   7,186       $   18,310       $ 28,357
                                 ===========              =========       ==========       ========
</TABLE>

                                       4

<PAGE>


     The next table shows at June 30, 2000,  the dollar amount of all the Bank's
loans due one year or more after June 30, 2000 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..........................   $     4,596          $  15,012
   Multi-family.................................           159                116
   Non-residential..............................         2,097                886
Consumer loans:
   Loans secured by deposits....................            53                 --
   Home improvement.............................           329                 --
   Automobile...................................         1,545                 --
   Other consumer ..............................           429                 --
Commercial .....................................           274                 --
                                                   -----------          ---------
       Total ...................................   $     9,482          $  16,014
                                                   ===========          =========
</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, 2000,
$20.5  million,  or 72.42% 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, 2000,  approximately 73.09% 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.

     RESIDENTIAL  CONSTRUCTION  LOANS.  The  Bank  makes  a  limited  number  of
residential  construction loans on one- to four-family residential properties 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

                                       5

<PAGE>

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, 2000, the Bank's three largest  commercial  real estate loans consisted of a
loan on a commercial office building which had a balance of $485,000 at June 30,
2000,  a loan to a nursing  home which had a balance of $356,000 and a loan to a
doctors'  office  building  which had a balance of $228,000 at June 30, 2000. At
June 30, 2000, 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.

     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 $3.4
million,  or 11.98% of the  Bank's  total  loans at June 30,  2000.  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 also offers personal lines of credit.  The Bank offers both
unsecured  lines of credit that are granted based upon the borrower's  financial
strength and secured lines of credit.

                                       6
<PAGE>

     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, 2000,  commitments to cover  originations  of
mortgage loans were $55,000.  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, 2000, 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  $662,000 at June 30, 2000. At June 30, 2000,
the Bank's  largest loan  outstanding  had a balance of $485,000.  This loan was
secured by a commercial office building.

     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 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,  2000,  the Bank's loans past due between 30 and 89 days
totaled $277,000.

     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.

                                       7
<PAGE>

     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 $47,000 in loans  which were 90 days or more past due and still  accruing
interest.

<TABLE>
<CAPTION>

                                                                         AT JUNE 30,
                                                                ----------------------------
                                                                  2000                1999
                                                                --------            --------
                                                                       (IN THOUSANDS)
<S>                                                            <C>                  <C>
Loans accounted for on a non-accrual basis:
  Real estate:
    One- to four-family........................................$        5           $      36
    Multi-family...............................................        --                  --
    Non-residential............................................        --                  --
                                                               ----------           ---------
     Total real estate loans...................................         5                  36
Consumer loans:
   Loans secured by deposits...................................        --                  --
   Home improvement............................................         5                   1
   Automobile..................................................        --                  --
   Other consumer..............................................        --                  --
Commercial.....................................................        --                  --
                                                               ----------           ---------
        Total nonperforming loans..............................        10                  37
                                                               ----------           ---------

Repossessed automobiles........................................        --                  --
Foreclosed real estate.........................................        26                 379
                                                               ----------           ---------
Total nonperforming assets.....................................$       36           $     416
                                                               ==========           =========
Total nonperforming assets as a
  percentage of total net loans................................       .13%               1.41%
                                                               ==========            ========
Total nonperforming assets as a
  percentage of total assets...................................       .07%               .867%
                                                               ==========           =========
</TABLE>


     During  the  year  ended  June  30,  2000,  the Bank  would  have  recorded
additional  interest income of approximately  $1,000 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 no 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 $26,000 at June 30, 2000 consisted of one single
family residential  property.  During fiscal year 2000, a 625-room hotel located
in Oklahoma City in which the Bank had acquired an interest through  foreclosure
was sold. This property had been held as real estate owned since 1998.

     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,

                                       8
<PAGE>

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, 2000,  $30,000 of the Bank's assets were classified as doubtful
and loans classified as substandard  totaled $205,000.  In addition,  the Bank's
real estate owned of $26,000 was also classified as  substandard.  There were no
loans classified as special mention.

     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,
2000, the Bank's only real estate owned consisted of one single family property.

     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  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.

                                       9

<PAGE>


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

                                                   YEAR ENDED JUNE 30,
                                             -----------------------------
                                               2000                 1999
                                             ---------           ---------
                                                   (DOLLARS IN THOUSANDS)


Balance at beginning of period..............$      105           $     189
                                            ----------           ---------
Charge-offs:

  One-to-four-family........................        --                  --
  Multi-family..............................        --                  --
  Non-residential...........................        --                (107)
                                            ----------           ---------
  Total real estate loans...................        --                (107)
  Consumer loans............................       (14)                (41)

Recoveries:

  One-to-four-family........................        --                  --
  Multi-family..............................        --                  --
  Non-residential...........................        --                  --
                                            ----------           ---------

Net recoveries (charge-offs)................       (14)               (148)
                                            ----------           ---------

Additions charged to operations.............        10                  64
                                            ----------           ---------

Balance at end of period....................$      101           $     105
                                            ==========           =========

Allowance for loan losses to total
  nonperforming assets at end of period.....    280.56%              25.24%
                                            ==========           =========

Allowance for loan losses to net loans
  at end of period..........................       .36%                .36%
                                            ==========           =========

Ratio of net charge-offs to average
  loans outstanding during the period.......       .05%                .55%
                                            ==========           =========

                                       10

<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,
                                                    ----------------------------------------------------------
                                                              2000                          1999
                                                    ---------------------------   ----------------------------

                                                                     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..............................  $    73           72.42%     $    77             73.24%
  Multi-family.....................................        1             .97            1               .41
  Non-residential..................................       12           12.12           13             12.08
                                                     -------        --------      -------            ------
     Total real estate loans.......................       86           85.51           91             85.73
Consumer loans:
   Loans secured by deposits.......................        2            2.13            2              2.51
   Home improvement................................        1            1.17            1              1.29
   Automobile......................................        7            6.44            7              6.47
   Other consumer..................................        2            2.24            2              2.01
Commercial.........................................        3            2.51            2              1.99
                                                     -------        --------      -------            ------
    Total allowance for loan losses................  $   101          100.00%     $   105            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, 2000, 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,  2000  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  certificates  are  guaranteed  by those
agencies only. The Bank's mortgage-backed securities portfolio was classified as
"held to maturity" at June 30, 2000.

                                       11
<PAGE>

     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, 2000, the Bank's  investment in FHLB stock
amounted to $515,692. 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,
                                              ----------------------------
                                                2000                1999
                                              --------            --------
                                                     (IN THOUSANDS)

<S>                                          <C>                  <C>
  U.S. Government agencies...................$    2,725           $   2,725
  Mortgage-backed securities.................     9,489              10,852
  Federal Home Loan Bank stock...............       516                 435
  Municipal securities.......................        12                  30
                                             ----------           ---------
      Total..................................$   12,742           $  14,042
                                             ==========           =========
</TABLE>

                                       12

<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,
2000.

<TABLE>
<CAPTION>



                                           ONE YEAR OR LESS        ONE TO FIVE YEARS     FIVE TO TEN YEARS
                                           ----------------     --------------------     -----------------
                                                    WEIGHTED                 WEIGHTED              WEIGHTED
                                           BOOK     AVERAGE      BOOK         AVERAGE     BOOK      AVERAGE
                                           VALUE     YIELD       VALUE         YIELD      VALUE      YIELD
                                           -----     -----       -----        -----      -----      -----
                                                                              (DOLLARS IN THOUSANDS)
<S>                                      <C>        <C>         <C>             <C>       <C>         <C>
Securities held to maturity:
  U.S. Government and agencies.......... $     --       --%      $      --        --%     $   725     6.08%
  Mortgage-backed securities  (1).......       --       --              --        --           --       --
  Municipal securities..................        2     9.50              10      9.50           --       --
                                         --------                 --------                -------
     Total.............................. $      2                 $     10                $   725
                                         ========                 ========                =======

<CAPTION>

                                         MORE THAN TEN YEARS    TOTAL INVESTMENT PORTFOLIO
                                         -------------------    --------------------------
                                                    WEIGHTED                  WEIGHTED
                                          BOOK      AVERAGE      BOOK         AVERAGE
                                          VALUE      YIELD       VALUE         YIELD
                                          -----      -----       -----         -----


<S>                                         <C>       <C>           <C>       <C>
Securities held to maturity:
  U.S. Government and agencies.......... $  2,000   6.75%        $ 2,725       6.51%
  Mortgage-backed securities  (1).......    9,489   7.21           9,489       7.21
  Municipal securities..................       --     --              12       9.50
                                         --------                -------
     Total.............................. $ 11,489                $12,226
                                         ========                =======
</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.


                                       13


<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 $3.3 million
or 10.80% of the deposit portfolio. The majority of these certificates represent
deposits  from  long-standing  customers.  As of June 30, 2000,  the Bank had no
brokered deposits.

     At June 30, 2000, 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 DEPOSITS
-------        ----                       --------                    ------       ---------      --------------
<S>           <C>                   <C>                            <C>           <C>              <C>
2.78%          None                 Passbook accounts              $     500     $  2,027              6.73%
2.37           None                 NOW accounts                         500        2,276              7.56
2.52           None                 Money market accounts              2,500          272               .90
               None                 Other non-interest bearing           100        1,450              4.81

                                    CERTIFICATES OF DEPOSIT
                                    -----------------------

4.07           31 days              Fixed-Term, Fixed-Rate               500           81               .27
4.58           91 days              Fixed-Term, Fixed-Rate               500           40               .13
6.11           5 months             Fixed-Term, Fixed-Rate               500        2,270              7.54
5.83           6 months             Fixed-Term, Fixed-Rate               500        3,991             13.24
6.14           12 months            Fixed-Term, Fixed-Rate               500        5,419             17.99
6.66           13 months            Fixed-Term, Fixed-Rate               500          711              2.36
6.19           15 months            Fixed-Term, Fixed-Rate               500        1,420              4.71
6.24           18 months            Fixed-Term, Fixed-Rate               500          818              2.72
6.35           24 months            Fixed-Term, Fixed-Rate               500          791              2.62
6.56           36 months            Fixed-Term, Fixed-Rate               500        1,355              4.50
6.66           60 months            Fixed-Term, Fixed-Rate               500        7,205             23.92
                                                                                 --------            ------

                                        Total certificates of deposit              24,101             80.00
                                                                                 --------            ------
                                        Total deposits                           $ 30,126            100.00%
                                                                                 ========            ======

<FN>
__________________
(1)       Indicates weighted average interest rate at June 30, 2000.
</FN>
</TABLE>

                                       14
<PAGE>


     The  following  table sets forth the Bank's  time  deposits  classified  by
interest rate at the dates indicated.

<TABLE>
<CAPTION>
                                                                        AT JUNE 30,
                                                                ----------------------------
                                                                  2000                1999
                                                                --------            --------
                                                                        (IN THOUSANDS)

                    <S>                                          <C>               <C>
                     2 -  3.99%................................  $       27        $      369
                     4 -  5.99%................................      17,408            25,098
                     6 -  7.99%................................       6,666             3,108
                                                                 ----------        ----------
                          Total ............................... $    24,101        $   28,575
                                                                ===========        ==========
</TABLE>




     The following table sets forth the amount and maturities of the Bank's time
deposits at June 30, 2000.
<TABLE>
<CAPTION>

                                                                  AMOUNT DUE
                                   ------------------------------------------------------------------------
                                    LESS THAN        ONE TO         TWO TO         AFTER
  RATE                              ONE YEAR        TWO YEARS    THREE YEARS     THREE YEARS         TOTAL
  ----                              --------        ---------    -----------     -----------         -----
                                                                  (IN THOUSANDS)

<S>                               <C>             <C>            <C>             <C>              <C>
 2 -  3.99%.....................  $      27       $       --     $       --      $       --       $       27
 4 -  5.99%.....................     11,964            2,074          1,198           2,172           17,408
 6 -  7.99%.....................      5,167              867             95             537            6,666
                                  ---------       ----------     ----------      ----------       ----------
                                  $  17,158       $    2,941     $    1,293      $    2,709       $   24,101
                                  =========       ==========     ==========      ==========       ==========
</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,
2000.

                                                       CERTIFICATES
           MATURITY PERIOD                              OF DEPOSIT
           ---------------                               ----------
                                                      (IN THOUSANDS)

           Three months or less.......................  $      477
           Over three through six months..............         898
           Over six through 12 months.................       1,062
           Over 12 months.............................         816
                                                        ----------
                 Total................................  $    3,253
                                                        ==========


     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,  2000,  borrowings  from the FHLB of  Dallas
totaled  $10.2  million and  consisted  of five  long-term  obligations  and two
short-term obligations totaling $5.7 million and $4.5 million, respectively.

                                       15
<PAGE>



     The  following  table sets forth certain  information  regarding the Bank's
borrowings.
<TABLE>
<CAPTION>


                                                                        AT OR FOR THE
                                                                     YEAR ENDED JUNE 30,
                                                                ----------------------------
                                                                   2000                1999
                                                                ---------           ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                            <C>                  <C>
Amounts outstanding at end of period:
  FHLB advances................................................$   10,159           $   8,090


Weighted average rate paid on:
  FHLB advances................................................     6.217%              5.645%


Maximum amount of borrowings outstanding at any month end:
  FHLB advances................................................    10,159               8,090


Approximate average short-term borrowings outstanding with
  respect to:
  FHLB advances................................................     1,448               1,073


Approximate weighted average rate paid on:
  FHLB advances ...............................................     5.880%              5.739%
</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,
                                                                ----------------------------
                                                                   2000                1999
                                                                ---------           ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                                  <C>             <C>
   Return on assets (net earnings divided by
      average total assets)....................................      .3%               * %
   Return on average stockholders' equity (net earnings
      divided by average stockholders' equity).................     2.85              .02
   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)..............................     2.39             2.11
   Ratio of average interest-earning assets to
      average interest-bearing liabilities.....................   106.24           105.92
   Ratio of non-interest expense to average total assets.......     2.35             2.41
<FN>
---------
* = Not meaningful.
</FN>
</TABLE>
                                      16
<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, 2000,  the Bank had 11 full-time and two  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
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

                                       17
<PAGE>
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 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
                                       18
<PAGE>

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  ss.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 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.

                                       19

<PAGE>

     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.  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 as an
agent for customers or in mortgage banking activities and subsidiary  depository
institutions or their holding  companies.  At June 30, 2000, 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, 2000,
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,
2000, the Bank's risk-weighted assets were approximately $20.7 million.

     The table  below  presents  the Bank's  capital  position  relative  to its
various regulatory capital requirements at June 30, 2000.

                                       20

<PAGE>

                                                                PERCENT OF
                                                 AMOUNT         ASSETS (1)
                                                 ------         ----------
                                                  (DOLLARS IN THOUSANDS)

  Tangible capital............................  $   4,245            9.43%
  Tangible capital requirement................        675            1.50
                                                ---------         -------
  Excess......................................  $   3,570            7.93%
                                                =========         =======

  Core capital................................  $   4,245            9.43%
  Core capital requirement....................      1,801            4.00
                                                ---------         -------
  Excess......................................  $   2,444            5.43%
                                                =========         =======

  Total capital (i.e., core and
    supplementary capital) ...................  $   4,341           20.97%
  Risk-based capital requirement..............      1,656            8.00
                                                ---------         -------
  Excess......................................  $   2,685           12.97%
                                                =========         =======
     ________________
(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.

     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 FDICIA,  the federal banking
regulators  are  required  to  take  prompt  corrective  action  if  an  insured
depository  institution  fails to satisfy certain minimum capital  requirements,
including a leverage  limit,  a risk-based  capital  requirement,  and any other
measure deemed  appropriate by the federal banking  regulators for measuring the
capital  adequacy  of  an  insured  depository  institution.  All  institutions,
regardless  of their  capital  levels,  are  restricted  from making any capital
distribution or paying any
                                       21
<PAGE>

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 does 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 may 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
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 provisions.  If an institution's ratio
of tangible  capital to total assets falls below the  "critical  capital  level"
established by the appropriate  federal banking regulator,  the institution will
be subject to conservatorship or receivership within specified time periods.

     Under  the  implementing  regulations,   the  federal  banking  regulators,
including the OTS,  generally  measure an institution's  capital adequacy on the
basis of its 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).  The following table shows the capital ratios
required for the various prompt corrective action categories.

<TABLE>
<CAPTION>

                                                     ADEQUATELY                                   SIGNIFICANTLY
                           WELL CAPITALIZED          CAPITALIZED         UNDERCAPITALIZED        UNDERCAPITALIZED
                           ----------------          -----------         ----------------        ----------------
<S>                        <C>                       <C>                 <C>                    <C>
Total risk-based
    capital ratio           10.0% or more            8.0% or more        Less than 8.0%          Less than 6.0%
Tier 1 risk-based
    capital ratio            6.0% or more            4.0% or more        Less than 4.0%          Less than 3.0%
Leverage ratio               5.0% or more            4.0% or more *      Less than 4.0% *        Less than 3.0%
<FN>
-----------
*  3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>

A "critically undercapitalized" savings institution is defined as an 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  undercapitalized) 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.

     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

                                       22
<PAGE>

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 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,  2000,  approximately  83.65% 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

                                       23
<PAGE>

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 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.

     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.

     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,  were  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 were assessed for these obligations at
the rate of 1.3 basis points. Since December 31, 1999, both BIF and SAIF members
are being 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

                                       24
<PAGE>

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 2000 was 25.71%.

     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,  2000,  of
$516,000.  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, 2000, the Bank had
$10.2  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  up to  $44.3  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,  2000,  the  Bank  met  its  reserve
requirements.

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,  2000,  the  Bank had no  post-1987
bad-debt reserves.

                                       25
<PAGE>

     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, 2000 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 it self of the  percentage  of taxable  income bad debt  deduction
method.

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

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               2000 (1)       SQUARE FOOTAGE          2000
                          ------           ------             ------------     --------------        -------
                                                   (DOLLARS IN THOUSANDS)

<S>                         <C>             <C>                  <C>                <C>              <C>
Main Office:                1995            Owned                $1,175             6,000            $30,125
<FN>
________________
(1)      Cost less accumulated depreciation and amortization.
</FN>
</TABLE>

                                       26


<PAGE>

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 2000.

                                     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 299,943
shares of the Common  Stock  outstanding.  The number of  registered  holders of
Common Stock on September 15, 2000 was 145. The  following  table sets forth the
high and low sales prices for the Common Stock for each quarter  during the past
two fiscal years. The source for this information was MSN Money Central.


  QUARTER ENDED                       HIGH                      LOW
  -------------                       ----                      ---

  September 30, 1998                 $12.25                    $ 9.50
  December 31, 1998                  $10.00                    $ 9.250
  March 31, 1999                     $10.938                   $ 9.313
  June 30, 1999                      $10.375                   $ 8.313

  September 30, 1999                 $ 8.625                   $ 7.00
  December 31, 1999                  $ 8.625                   $ 6.250
  March 31, 2000                     $ 8.750                   $ 6.78
  June 30, 2000                      $ 8.750                   $ 7.50


     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

                                       27
<PAGE>

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.


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 and the effect of certain recent accounting pronouncements.

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 than
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 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.

                                       28

<PAGE>


     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, 2000, as calculated by
the OTS, which is based upon  quarterly  information  that the Bank  voluntarily
provided to the OTS.

<TABLE>
<CAPTION>



                                 NET PORTFOLIO VALUE                           NPV AS % OF PORTFOLIO VALUE OF ASSETS
      CHANGE             ---------------------------------------               -------------------------------------
      IN RATES           $ AMOUNT        $ CHANGE       % CHANGE               NPV RATIO       BASIS  POINT  CHANGE
      --------           --------        --------       --------               ---------       --------------------
                                 (DOLLARS IN THOUSANDS)

      <S>              <C>             <C>                <C>                    <C>                    <C>
      + 300 bp           $ 3,861         $  (984)           (20)%                  9.0 %                 (174)bp
      + 200 bp             4,261            (585)           (12)                   9.8                    (99)
      + 100 bp             4,590            (255)            (5)                  10.4                    (41)
          0 bp             4,846              --             --                   10.77                    --
      - 100 bp             5,034             188              4                   11.0                     26
      - 200 bp             5,146             300              6                   11.1                     37
      - 300 bp             5,287             442              9                   11.3                     52
</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.

                                       29

<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.  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,
                                                      -----------------------------------------------------------------------
                                                                   2000                                     1999
                                                      --------------------------------      ---------------------------------
                                                                              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........................  $    2,171    $       98    4.51%     $    3,116    $      215     6.90%
  Mortgage-backed securities.......................       9,925           644    6.49          11,698           686     5.86
  Investment securities............................       3,226           214    6.63           2,278           138     6.06
  Loans (1)........................................      28,561         2,218    7.77          27,050         2,091     7.73
                                                     ----------    ----------              ----------    ----------
Total interest-earning assets .....................      43,883         3,174    7.24          44,142         3,130     7.09
                                                                   ----------                            ----------
Non-interest-earning assets........................       2,564                                 2,903
                                                     ----------                            ----------
Total assets.......................................  $   46,447                            $   47,045
                                                     ==========                            ==========
INTEREST-BEARING LIABILITIES:
  Deposits.........................................  $   32,616    $    1,519    4.66      $   34,588    $    1,684     4.87
  FHLB advances....................................       8,691           483    5.56           7,086           390     5.50
                                                     ----------    ----------              ----------    ----------
Total interest-bearing liabilities.................      41,307         2,002    4.85          41,674         2,074     4.98
                                                                   ----------                            ----------
Non-interest bearing liabilities...................         186                                   208
                                                     ----------                            ----------
Total liabilities..................................      41,493                                41,882
Stockholders' equity...............................       4,954                                 5,163
                                                     ----------                            ----------
Total liabilities and stockholders' equity.........  $   46,447                            $   47,045
                                                     ==========                            ==========
Net interest income ...............................                $    1,172                            $    1,056
                                                                   ==========                            ==========
Net interest rate spread (2).......................                              2.39%                                  2.11%
                                                                                =====                                =======
Net interest-earning assets........................  $    2,576                            $    2,468
                                                     ==========                            ==========
Net interest margin (3) ...........................                              2.67%                                  2.39%
                                                                                =====                                =======
Ratio of average interest-earning assets to
  average interest-bearing liabilities.............                    106.24%                               105.92%
                                                                   ==========                            ==========
<FN>
--------------------
(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.
</FN>
</TABLE>

                                       30

<PAGE>


RATE/VOLUME ANALYSIS

     The table shows  certain  information  regarding  changes in the  Company's
interest income and interest expense for the periods  indicated.  The changes in
interest  rate and volume have been  allocated to changes in average  volume and
changes in average rates,  in proportion to the  relationship of absolute dollar
amounts of the changes in rates and volume.  Changes due to mix (both volume and
rate) have been  allocated  to volume  and rate  changes  in  proportion  to the
relationship of the absolute dollar amounts to the changes in each.
<TABLE>
<CAPTION>


                                                                   YEAR ENDED JUNE 30,
                                         ----------------------------------------------------------------------------
                                             2000        VS.          1999          1999        VS.          1998
                                         ----------------------------------     -------------------------------------
                                                 INCREASE (DECREASE)                     INCREASE (DECREASE)
                                                       DUE TO                                 DUE TO
                                         ----------------------------------     -------------------------------------
                                         VOLUME       RATE         TOTAL         VOLUME       RATE          TOTAL
                                         --------     -------      -------     -------        ------      --------
                                                                     (IN THOUSANDS)
<S>                                      <C>          <C>          <C>         <C>            <C>         <C>
INTEREST-EARNING ASSETS:
  Interest-bearing deposits..............$    (55)    $   (62)     $  (117)    $   (46)       $   94      $     48
  Mortgage-backed securities.............    (110)         68          (42)        313           (21)          292
  Investment securities..................      62          14           76          40             9            49
  Loans..................................     117          10          127         143          (144)           (1)
                                         --------     -------      -------     -------        ------      --------
      Total interest-earning assets......      14          30           44         450           (62)          388
                                         --------     -------      -------     -------        ------      --------

INTEREST-BEARING LIABILITIES:
  Deposits...............................     (94)        (71)        (165)        102           (36)           66
  FHLB advances..........................      89           4           93         244            47           291
                                         --------     -------      -------     -------        ------      --------
      Total interest-bearing
         liabilities ....................      (5)        (67)         (72)        346            11           357
                                         --------     -------      -------     -------        ------      --------
  Increase (decrease) in net interest
    income...............................$     19     $    97      $   116     $   104        $  (73)     $     31
                                         ========     =======      =======     =======        ======      ========
</TABLE>


COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND JUNE 30, 1999

     Total assets  decreased by $2.6  million,  or 5.43%,  from $47.9 million at
June 30, 1999 to $45.4  million at June 30,  2000.  The decrease in total assets
was primarily due to the $1.3 million,  or 9.26%,  decrease in  held-to-maturity
securities,  the $1.3 million, or 4.36%,  decrease in net loans receivable,  the
$500,000,  or 29.45%,  decrease in certificates of deposit at other institutions
and the  $352,000  decrease in  foreclosed  real estate,  partially  offset by a
$929,000, or 301.59%, increase in cash and cash equivalents.

     Net loans at June 30, 2000  amounted to $28.3  million,  a decrease of $1.3
million from $29.5 million at June 30, 1999.  The decrease was  attributable  to
slower than normal loan  originations  coupled with several  large loan payoffs.
During  the year  ended  June 30,  2000,  the Bank  originated  $3.7  million in
mortgage  loans  and  $1.5  million  in  consumer  loans.  The  decrease  in the
held-to-maturity   securities   portfolio  reflects   maturities  and  principal
repayments on such securities.  The decreased balance of certificates of deposit
at other  institutions  reflects the  Company's  decision  not to renew  certain
certificates upon maturity due to the Company's higher than normal cash needs as
a result of a decrease in deposits.

     Total liabilities  decreased by $2.5 million,  or 5.89%, from $43.0 million
at June  30,  1999  to  $40.5  million  at  June  30,  2000  with  the  decrease
attributable  primarily  to the $4.6  million  decrease in  deposits,  partially
offset by the $2.1 million  increase in FHLB advances.  The decrease in deposits
was primarily  attributable  to a decrease in certificate  of deposit  accounts.
Deposits in checking and other  transactional  accounts were  comparable year to
year.  FHLB  advances at June 30, 2000 totaled $10.2 million as compared to $8.1
million at June 30, 1999 with the $2.1 million, or 25.58%, increase used to fund
loan originations.

     Total  stockholders'  equity  amounted to $4.9  million at June 30, 2000, a
$69,000 or 1.40% decrease from June 30, 1999. This decrease was  attributable to
the approximately $249,000 used to repurchase

                                       31
<PAGE>

30,200 shares of the outstanding  shares of Common Stock during the fiscal year,
offset by the retention of earnings from the period.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

     NET  INCOME.  Net  income for the year ended  June 30,  2000  increased  by
$140,000 to $141,000 from net income of $1,000 for the year ended June 30, 1999.
The  increase was due  primarily  to the combined  effects of an increase in net
interest income and decreases in the provision for loan losses and  non-interest
expense.

     NET INTEREST INCOME. Net interest income increased by $117,000,  or 11.04%,
from $1.0  million for the year ended June 30, 1999 to $1.1 million for the year
ended June 30, 2000 with the increase attributable to an increase in the average
yield  on  interest-earning  assets  and a  decrease  in  the  average  cost  of
interest-bearing  liabilities,  partially  offset by a decrease  in the  average
balance of  interest-earning  assets. The Company's interest rate spread widened
by 28 basis  points  from 2.11% in fiscal year 1999 to 2.39% in fiscal year 2000
due to the combined effects of a 15 basis point increase in the average yield on
interest-earning  assets and a 13 basis point  decrease  in the average  cost of
interest-bearing  liabilities. The increased asset yield was primarily due to an
increased  yield on the Company's  adjustable  rate  mortgage-backed  securities
portfolio  with the 63 basis point  increase  attributable  to higher rates as a
result  of  interest  rate  increases.  The  decrease  in the  average  cost  of
interest-bearing  liabilities  reflected  decreases in deposit rates,  partially
offset by higher  borrowing  costs on FHLB advances.  Average  interest  earning
assets  during  fiscal year 2000  amounted to $43.9 million as compared to $44.1
million  for  fiscal  year  1999  with  the  decrease   primarily   centered  in
mortgage-backed securities and, to a lesser extent, interest-bearing deposits at
other institutions. Average interest bearing liabilities during fiscal year 2000
amounted to $41.3  million,  down from $41.7 million  during fiscal year 1999 as
the  Company  utilized  FHLB  advances to fund loan  originations.  The ratio of
average  interest  earning  assets  to  average   interest-bearing   liabilities
increased from 105.92% for fiscal year 1999 to 106.24% for fiscal year 2000.

     INTEREST  INCOME.  Interest  income totaled $3.2 million for the year ended
June 30, 2000, an increase of $45,000,  or 1.44%,  from fiscal year 1999's level
of $3.1 million.  The increase resulted  primarily from the increased yield from
interest-earning assets (in particular,  loans and investment  securities).  The
average yield on the Bank's loan  portfolio  increased by four basis points from
7.73% in fiscal year 1999 to 7.77% in fiscal year 2000 while the average balance
of the loan  portfolio  increased by $1.5  million from $27.1  million in fiscal
year  1999  to  $28.6  million  in  fiscal  year  2000.   Interest  income  from
mortgage-backed  securities and interest bearing deposits  declined year to year
due to a decrease in the average balance of these  investments  and, to a lesser
extent, a decrease in the average yield on interest-bearing deposits.

     INTEREST EXPENSE.  Total interest expense  decreased by $71,000,  or 3.45%,
due to the  combined  effects of a decreased  average  balance of deposits and a
decrease in the average deposit rate paid,  partially offset by increases in the
average  balance of FHLB advances and a six basis point  increase in the average
rate paid on such liabilities.  Overall,  average  interest-bearing  liabilities
decreased by $367,000  from $41.7  million for fiscal 1999 to $41.3  million for
fiscal 2000. Interest expense on deposits declined by $164,000 from $1.7 million
in fiscal  year 1999 to $1.5  million in fiscal  year 2000  reflecting  the $2.0
million decrease in the average balance of deposits.

     PROVISION  FOR LOAN  LOSSES.  The  provision  for loan losses  decreased by
$54,000,  or 84.35% from $64,000 for the year ended June 30, 1999 to $10,000 for
the year ended June 30, 2000. While  management  believes that the allowance for
loan losses is adequate,  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
2000 was .36% comparable to fiscal year end 1999.

     NON-INTEREST  INCOME.  Non-interest  income  totaled  $143,000 for the year
ended June 30, 2000, a decrease of $5,000,  or 3.52%, from $148,000 for the year
ended June 30, 1999.

     NON-INTEREST  EXPENSE.  Non-interest expense decreased by $42,000 or 3.73%,
from the prior year. Decreased levels of other expenses,  legal and professional
fees and federal deposit  insurance  premiums,  partially offset by increases in
salaries  and  employee  benefit,  furniture  and  equipment  expense  and  data
processing fees accounted for the net decrease.  Other expense totaled  $211,000
for fiscal year 2000, down from $276,000 for fiscal year 1999, for a decrease of
$65,000.

                                       32
<PAGE>

The decrease was primarily  attributable to the absence of certain  nonrecurring
expense  items in fiscal  year 2000.  Other  expense  for  fiscal  year 1999 had
included 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.  In fiscal year 1999, the Bank also
recorded an  additional  reduction  in the  carrying  value of its interest in a
piece of real estate owned acquired through foreclosure by an additional $50,000
to reflect  further  reductions in the  estimated  market value of the property.
This property was sold in the last quarter of fiscal year 2000 and resulted in a
loss of $43,000.  Legal and  professional  fees decreased by $12,000,  or 8.94%,
from  $129,000 in fiscal  year 1999 to $117,000 in fiscal year 2000.  The higher
level of legal and accounting expenses in fiscal year 1999 reflected  additional
professional  fees  incurred  as a result of the  termination  of the  Company's
former  accountant  and the  appointment  of a successor.  Salaries and employee
benefit expenses  increased by $17,000,  or 3.64%, from $469,000 for fiscal year
1999 to $486,000 for fiscal year 2000 reflecting general salary increases.

     INCOME TAX EXPENSE. Income tax expense increased by $68,000 from $5,000 for
fiscal  year 1999 to $73,000 for fiscal  year 2000.  The  increase in income tax
expense is due directly to the  increased  level of earnings  during fiscal year
2000.  The  effective  tax rates for fiscal  years 2000 and 1999 were 34.02% and
86.75%, 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, 2000 was 25.71%.

     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.  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.

     The Bank is subject to federal  regulations  that  impose  certain  minimum
capital  requirements.  At June 30,  2000 the  Bank was in  compliance  with all
applicable capital requirements.

                                       33

<PAGE>


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

     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  did not 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>


       ITEM 7.  FINANCIAL STATEMENTS
       -----------------------------

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                          Page
                                                          ----

Independent Accountants' Reports...........................36

Consolidated Financial Statements

         Balance Sheets....................................37
         Statements of Income..............................38
         Statements of Changes in Stockholders' Equity.....39
         Statements of Cash Flows..........................40
         Notes to Consolidated Financial Statements........41






                                       35


<PAGE>

                     [LETTERHEAD OF BAIRD, KURTZ & DOBSON]


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


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


     We have  audited  the  accompanying  consolidated  balance  sheets of NORTH
ARKANSAS  BANCSHARES,  INC.  as of June  30,  2000  and  1999,  and the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows  for  the  years  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 audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position of NORTH
ARKANSAS  BANCSHARES,  INC. as of June 30, 2000 and 1999, and the results of its
operations  and its cash  flows for the years then  ended,  in  conformity  with
generally accepted accounting principles.


                                           /s/ Baird, Kurtz & Dobson

Little Rock, Arkansas
July 28, 2000


                                       36
<PAGE>


                         NORTH ARKANSAS BANCSHARES, INC.

                           CONSOLIDATED BALANCE SHEETS

                             JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>

                                           ASSETS

                                                                           2000                  1999
                                                                           ----                  ----

<S>                                                               <C>                    <C>
   Cash and due from banks                                        $       140,300        $       224,093
   Interest bearing deposits in other financial institutions            1,096,221                 83,814
                                                                   --------------         --------------
     Cash and cash equivalents                                          1,236,521                307,907

   Certificates of deposit in other financial institutions              1,198,000              1,698,000
   Held-to-maturity securities                                         12,741,700             14,042,074

   Loans receivable, net                                               28,251,774             29,539,448

   Premises and equipment, net                                          1,368,767              1,412,301
   Foreclosed assets held for sale, net                                    26,322                378,560
   Interest receivable                                                    321,787                330,729
   Other assets                                                           214,230                253,078
                                                                   --------------         --------------

       Total Assets                                               $    45,359,101        $    47,962,097
                                                                   ==============         ==============

                         LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

   Deposits                                                       $    30,125,720        $    34,679,628
   Federal Home Loan Bank advances                                     10,158,957              8,089,501
   Accrued interest and other liabilities                                 200,804                249,961
                                                                   --------------         --------------
       Total Liabilities                                               40,485,481             43,019,090
                                                                   --------------         --------------

STOCKHOLDERS' EQUITY
   Common stock, par value $.01 a share,  authorized
     9,000,000 shares;  303,100 and 333,270 shares issued
     and outstanding at June 30, 2000 and 1999, respectively                3,031                  3,333
   Additional paid-in capital                                           2,656,357              2,907,754
   Retained earnings, substantially restricted                          2,432,418              2,291,647
   Unearned ESOP shares                                                  (207,368)              (236,992)
                                                                   --------------         --------------
                                                                        4,884,438              4,965,742

   Unearned MRP Shares, 2000 - 1,136 shares; 1999 - 2,271 shares          (10,818)               (22,735)
                                                                   --------------         --------------
       Total Stockholders' Equity                                       4,873,620              4,943,007
                                                                   --------------         --------------

       Total Liabilities and Stockholders' Equity                  $   45,359,101         $   47,962,097
                                                                   ==============         ==============
</TABLE>

See Notes to Consolidated Financial Statements

                                       37
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                        CONSOLIDATED STATEMENTS OF INCOME

                       YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                            2000                 1999
                                                            ----                 ----
<S>                                                   <C>                   <C>
INTEREST INCOME
     Loans                                            $   2,218,925         $   2,090,860
     Deposits in other financial institutions                97,838               215,099
     Mortgage-backed securities                             643,512               685,895
     Investment securities                                  214,207               137,526
                                                       ------------          ------------
         Total Interest Income                            3,174,482             3,129,380
                                                       ------------          ------------

INTEREST EXPENSE
     Deposits                                             1,519,475             1,683,603
     Federal Home Loan Bank advances                        482,615               389,930
                                                       ------------          ------------
         Total Interest Expense                           2,002,090             2,073,533
                                                       ------------          ------------

NET INTEREST INCOME                                       1,172,392             1,055,847

PROVISION FOR LOAN LOSSES                                    10,000                63,887
                                                       ------------          ------------

NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES
                                                          1,162,392               991,960
                                                       ------------          ------------

NON-INTEREST INCOME - OTHER                                 142,540               147,746
                                                       ------------          ------------

NON-INTEREST EXPENSE
     Salaries and employee benefits                         486,315               469,253
     Legal and professional fees                            117,264               128,775
     Data processing fees                                   134,773               125,624
     Federal insurance expense                               16,398                19,518
     Occupancy expense                                       79,954                78,558
     Furniture and equipment expense                         45,824                36,069
     Other expense                                          211,047               276,120
                                                       ------------          ------------
         Total Non-Interest Expense                       1,091,575             1,133,917
                                                       ------------          ------------

INCOME BEFORE INCOME TAXES                                  213,357                 5,789

PROVISION FOR INCOME TAXES                                   72,586                 5,022
                                                       ------------          ------------

NET INCOME                                            $     140,771         $         767
                                                       ============          ============

BASIC AND DILUTED EARNINGS PER COMMON
   SHARE                                              $        .47          $         .00
                                                       ===========           ============
</TABLE>

See Notes to Consolidated Financial Statements


                                       38
<PAGE>
                      NORTH ARKANSAS BANCSHARES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                       YEARS ENDED JUNE 30, 2000 AND 1999
<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, 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
                                       -----------  -----------   -----------  ---------     -----------  -----------

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

REPURCHASE 30,200 SHARES
   OF COMMON STOCK                            (302)    (248,843)                                             (249,145)

ISSUANCE OF 1,135 SHARES
   UNDER MRP PLAN                                        (2,554)                                  11,917        9,363

NET INCOME                                                            140,771                                 140,771
                                       -----------  -----------   -----------  ---------     -----------  -----------

BALANCE, JUNE 30, 2000                 $     3,031  $ 2,656,357   $ 2,432,418  $(207,368)$   $   (10,818) $ 4,873,620
                                       ===========  ===========   ===========  =========     ===========  ===========
</TABLE>


See Notes to Consolidated Financial Statements

                                       39

<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                       YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                  2000                  1999
                                                                                  ----                  ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                          <C>                   <C>
   Net income                                                                $    140,771          $        767
   Items not requiring (providing) cash:
     Depreciation and amortization                                                 61,842                65,729
     Amortization of premiums and discounts on securities                          33,988                37,787
     Loss (gain) on sale of real estate owned                                      42,989                   (79)
     Loss on sale of premises and equipment                                                               5,946
     Provision for loan losses                                                     10,000                63,887
     FHLB stock dividends                                                         (34,000)              (19,700)
   Changes in:
     Deferred income taxes                                                         40,479               (45,725)
     Provision for foreclosed asset                                                                      50,000
     Impairment loss on premises and equipment                                                           54,988
     Management recognition plan expense                                            9,363                11,062
     Release of unearned ESOP shares                                               29,624                29,624
     Interest receivable                                                            8,942               (17,307)
     Other assets                                                                   2,091                83,883
     Accrued interest and other liabilities                                       (57,851)              127,759
                                                                              -----------           -----------
       Net cash provided by operating activities                                  288,238               448,621
                                                                              -----------           -----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Net repayments (originations) of loans                                       1,251,352            (1,790,957)
   Purchase of premises and equipment                                             (13,336)               (5,766)
   Proceeds from the sale of foreclosed assets                                    335,571
   Proceeds from maturities and principal repayments of held-to-
     maturity securities                                                        1,347,586             6,612,344
   Purchases of held-to-maturity securities                                       (47,200)           (9,429,478)
   Net decrease in certificates of deposit in other financial
     institutions                                                                 500,000               292,000
   Purchase of loans                                                                                 (2,017,221)
                                                                              -----------           -----------
       Net cash provided by (used in) investing activities                      3,373,973            (6,339,078)
                                                                              -----------           -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase (decrease) in demand, NOW, and savings accounts                (4,553,908)              408,964
   Net increase in FHLB advances                                                2,069,456             4,119,976
   Repurchase of common stock                                                    (249,145)             (390,027)
   Repurchase of common stock under MRP Plan                                                            (34,653)
       Net cash (used in) provided by financing activities                     (2,733,597)            4,104,260
                                                                              -----------           -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  928,614            (1,786,197)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                      307,907             2,094,104
                                                                              -----------           -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                       $  1,236,521          $    307,907
                                                                              ===========           ===========
</TABLE>

See Notes to Consolidated Financial Statements

                                       40
<PAGE>


                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

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.


                                       41
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

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.


                                       42
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

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:
<TABLE>
<CAPTION>

                                                 2000               1999
                                                 ----               ----

       <S>                                    <C>                 <C>
       Balance, beginning of year             $    50,000         $
       Provision charged to expense                                    50,000
       Charge-offs, net of recoveries             (50,000)
                                               ----------         -----------

       Balance, end of year                   $         0         $    50,000
                                               ==========          ==========
</TABLE>

                                       43
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

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. The weighted average shares outstanding in
June 30, 2000 and 1999,  have been adjusted for weighted  average  unearned ESOP
shares of 23,700 and 26,662, respectively.

     The computation of per share earnings is as follows:
<TABLE>
<CAPTION>

                                                  2000                1999
                                                  ----                ----

       <S>                                  <C>                 <C>
       Net Income                           $     140,771       $         767
                                             ============        ============

       Average common shares outstanding          297,898             332,354
                                             ------------        ------------

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

       Average diluted common shares              297,898             332,354
                                             ============        ============

       Basic earnings per share             $         .47       $         .00
                                             ============        ============

       Diluted earnings per share           $         .47       $         .00
                                             ============        ============
</TABLE>

                                       44
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

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

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------

     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  did not 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.


                                       45
<PAGE>


                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 2: INVESTMENT SECURITIES

     The  amortized  cost  and  approximate   fair  value  of   held-to-maturity
securities are as follows:
<TABLE>
<CAPTION>
                                                                          June 30, 2000
                                          --------------------------------------------------------------------------
                                                                    Gross              Gross            Approximate
                                               Amortized          Unrealized         Unrealized             Fair
                                                  Cost               Gains            (Losses)              Value
                                               ---------          ----------         ----------         ------------

<S>                                       <C>                  <C>                  <C>              <C>
U.S. Government Agencies                  $       2,725,000    $                    $    (206,632)   $       2,518,368
State and Political Subdivisions                     12,500                                                     12,500
Mortgage-backed securities                        9,488,508          18,924              (411,531)           9,095,901
Other securities                                    515,692                                                    515,692
                                            ---------------      ----------          ------------      ---------------
                                          $      12,741,700    $     18,924         $    (618,163)   $      12,142,461
                                            ===============      ==========          =============     ===============

<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 Subdivisions                     30,000                                                     30,000
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>


                                       46
<PAGE>


                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 2: INVESTMENT SECURITIES (CONTINUED)

     Maturities of held-to-maturity securities at June 30, 2000:

<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                                         725,000                686,488
       After ten years                                                          2,000,000              1,831,880
       Mortgage-backed securities not due on a single                           9,488,508              9,095,901
         maturity date
       Other                                                                      515,692                515,692
                                                                           --------------         --------------

                                                                          $    12,741,700        $    12,142,461
                                                                           ==============         ==============
</TABLE>

     The book  value of  securities  pledged  as  collateral,  to secure  public
deposits and for other purposes, amounted to $995,000 at June 30, 2000 and 1999.
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  ($515,692 and $434,492 at June 30, 2000 and
1999,  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.

     The  amortized  cost  and  approximate  fair  values  of   held-to-maturity
mortgage-backed securites are as follows as of June 30, 2000.
<TABLE>
<CAPTION>
                                                            Gross                 Gross              Approximate
                                    Amortized             Unrealized            Unrealized               Fair
                                       Cost                 Gains                (Losses)               Value
                                    ---------             ----------            ----------           -----------
<S>                               <C>                     <C>                                    <C>
GNMA                              $     5,429,263         $                    $   (217,258)     $      5,212,005
FHLMC                                   1,559,341              12,055               (71,001)            1,500,395
FNMA                                    2,499,904               6,869              (123,272)            2,383,501
                                   --------------          ----------           -----------        --------------

                                  $     9,488,508         $    18,924          $   (411,531)     $      9,095,901
                                   ==============          ==========           ===========        ==============
</TABLE>


                                       47
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999


NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

     Categories of loans at June 30, 2000 and 1999, include:
<TABLE>
<CAPTION>

                                                                                2000                  1999
                                                                                ----                  ----

       <S>                                                                 <C>                   <C>
       First mortgage loans                                               $    24,248,886       $    25,413,251
       Loans to depositors, secured by savings                                    603,719               746,294
       Property improvement loans                                                 331,278               381,595
       Consumer loans                                                           2,460,561             2,514,784
       Commercial loans                                                           712,973               589,479
                                                                           --------------        --------------
         Total loans                                                           28,357,417            29,645,403
       Less: Unearned discounts on loans purchased                                  4,678                 1,192
           Net deferred loan fees                                                     147                    28
           Allowance for loan losses                                              100,818               104,735
                                                                           --------------        --------------

         Net Loans                                                        $    28,251,774       $    29,539,448
                                                                           ==============        ==============
</TABLE>

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

                                                                                2000                  1999
                                                                                ----                  ----

       <S>                                                                   <C>                   <C>
       Balance, beginning of year                                           $    104,735          $    188,869
         Losses charged off                                                      (13,917)             (148,021)
         Provision for loan losses                                                10,000                63,887
                                                                             -----------           -----------

       Balance, end of year                                                 $    100,818          $    104,735
                                                                             ===========           ===========
</TABLE>

     Impaired  loans  totaled  $261,300  and $144,640 at June 30, 2000 and 1999,
respectively.  An  allowance  for loan losses of $32,857 and $20,224  relates to
impaired loans of $261,300 and $144,640 at June 30, 2000 and 1999, respectively.

     Interest  of $19,430  and $9,176 was  recognized  and  received  on average
impaired loans of $244,084 and $145,705 for 2000 and 1999.


                                       48
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999


NOTE 4: PREMISES AND EQUIPMENT

     Major  classifications  of premises and  equipment,  stated at cost, are as
follows:
<TABLE>
<CAPTION>

                                                                                2000                  1999
                                                                                ----                  ----

       <S>                                                                   <C>                   <C>
       Land                                                                 $      225,578        $      225,578
       Buildings and improvements                                                1,153,802             1,153,802
       Furniture, fixtures and equipment                                           236,580               223,244
                                                                             -------------         -------------
                                                                                 1,615,960             1,602,624
       Less accumulated depreciation                                               247,193               190,323
                                                                             -------------         -------------

           Net premises and equipment                                       $    1,368,767        $    1,412,301
                                                                             =============         =============
</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
during  1999  and is  included  in  other  non-interest  expense  on the  income
statement.


NOTE 5: DEPOSITS

     Deposits consist of the following at June 30, 2000 and 1999:
<TABLE>
<CAPTION>

                                                                                2000                  1999
                                                                                ----                  ----

   <S>                                                                      <C>                   <C>
   Money market                                                            $      271,450        $      260,857
   NOW accounts (2.34% and 2.35% in 2000 and 1999,
     respectively)                                                              2,276,084             2,438,592
   Passbook accounts (2.74% and 2.75% in 2000 and 1999,
     respectively)                                                              2,027,256             2,100,624
   Other non-interest bearing/checking                                          1,450,113             1,304,572
                                                                            -------------         -------------
                                                                                6,024,903             6,104,645
                                                                            -------------         -------------
   Certificates
     3.00% to 3.99%                                                                27,095               368,862
     4.00% to 4.99%                                                             5,594,423            12,336,392
     5.00% to 5.99%                                                            11,813,185            12,761,889
     6.00% to 6.99%                                                             6,666,114             3,107,840
                                                                            -------------         -------------
                                                                               24,100,817            28,574,983
                                                                            -------------         -------------

         Total                                                             $   30,125,720        $   34,679,628
                                                                            =============         =============

   Weighted average cost of deposits                                                4.8%                  4.6%
                                                                                =======               =======
</TABLE>

                                       49
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999


NOTE 5: DEPOSITS (CONTINUED)

     Interest  bearing time deposits in  denominations  of $100,000 or more were
$3,253,000 on June 30, 2000, and $4,339,000 on June 30, 1999.

     At June 30, 2000 the scheduled  maturities of  certificates  of deposit are
approximately as follows:

                                                        2000
                                                        ----

       2001                                      $     17,157,344
       2002                                             2,941,286
       2003                                             1,292,917
       2004                                             1,721,704
       2005 and thereafter                                987,566
                                                  ---------------

                                                 $     24,100,817
                                                  ===============

NOTE 6:         FEDERAL HOME LOAN BANK ADVANCES

     Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
                                                              2000                1999
                                                              ----                ----

       <S>                                             <C>                   <C>
       FHLB note, 5.07%, demand                        $                     $    2,200,000
       FHLB note, 5.70%, due August 1, 2003                     65,732               84,609
       FHLB note, 5.84%, due August 13, 2003                 1,466,507            1,485,871
       FHLB note, 5.89%, due August 13, 2003                 1,466,354            1,486,003
       FHLB note, 5.86%, due March 1, 2008                   1,234,513            1,356,827
       FHLB note, 5.86%, due February 24, 2003               1,455,851            1,476,191
       FHLB note, 6.67%, demand                              4,220,000
       FHLB note, 6.68%, demand                                250,000
                                                        --------------        -------------

              Total FHLB advances                      $    10,158,957       $    8,089,501
                                                        ==============        =============
</TABLE>

                                       50
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999


NOTE 6: FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)

     Aggregate annual maturities of FHLB advances at June 30, 2000 are:

       Year                       Amount
       ----                       ------
       2001                 $      4,683,048
       2002                          225,354
       2003                        1,626,073
       2004                        2,957,426
       2005                          163,838
       Thereafter                    503,218
                             ---------------

                            $     10,158,957
                             ===============

     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.


NOTE 7: 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, 2000,  that the Bank
meets all capital adequacy requirements to which it is subject.


                                       51
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 7: REGULATORY MATTERS (CONTINUED)

     As of June 30, 2000, 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.

     The Bank's actual capital  amounts and ratios as of June 30, 2000 and 1999,
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, 2000:
Total Capital (to Risk
  Weighted Assets)               $   4,341,000    21.0%         $   1,656,000       8.0%       $   2,070,000      10.0%

Tier I Capital (to Risk
  Weighted Assets)                   4,245,000    20.5%               828,000       4.0%           1,242,000       6.0%

Tier I Capital (to Average
  Assets)                            4,245,000     9.4%             1,801,000       4.0%           2,251,000       5.0%

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%
</TABLE>

                                       52
<PAGE>


                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 7: REGULATORY MATTERS (CONTINUED)

     The  Bank's  risk-based  capital  amounts  at June  30,  2000  and 1999 are
presented below.
<TABLE>
<CAPTION>

                                                                                2000                  1999
                                                                                ----                  ----
       <S>                                                                <C>                   <C>
       Tier 1 capital
         Stockholders' equity                                             $     4,311,000       $     4,173,000
         Intangible assets                                                        (66,000)              (71,000)
                                                                           --------------        --------------
           Total Tier 1 capital                                                 4,245,000             4,102,000
                                                                           --------------        --------------

       Tier 2 capital
         Qualifying allowance for loan losses                                      96,000               105,000
                                                                           --------------        --------------
           Total Tier 2 capital                                                    96,000               105,000
                                                                           --------------        --------------

           Total risk-based capital                                       $     4,341,000       $     4,207,000
                                                                           ==============        ==============

           Risk weighted assets                                           $    20,704,000       $    21,660,000
                                                                           ==============        ==============
</TABLE>

     The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval.  At June 30, 2000, $138,000 of
retained  earnings  were  available  for  dividend   declaration  without  prior
regulatory approval.


NOTE 8: 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,
2000.

     As of June 30, 2000, and 1999,  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, 2000 and 1999.


                                       53
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999


NOTE 8: INCOME TAXES (CONTINUED)

     The provision for income taxes consists of:
<TABLE>
<CAPTION>

                                                       2000              1999
                                                       ----              ----

<S>                                                  <C>               <C>
Taxes currently payable                              $ 32,107          $ 50,747
Deferred income taxes                                  40,479           (45,725)
                                                     --------          --------

                                                     $ 72,586          $  5,022
                                                     ========          ========
</TABLE>

     The tax effects of temporary differences related to deferred taxes included
in other  liabilities  and other  assets on the June 30, 2000 and 1999,  balance
sheets are:
<TABLE>
<CAPTION>

                                                            2000         1999
                                                            ----         ----
<S>                                                      <C>          <C>
Deferred tax assets:
    Net operating loss carryforwards-state               $  15,607    $  19,074
    Contribution carryforwards                               5,993        9,323
    Allowance for losses on loans                           38,603       40,103
    Valuation of foreclosed assets                                       19,145
    Impairment of premises and equipment                    20,970       21,055
    Deferred compensation                                                 4,237
    Other                                                      903          903
                                                         ---------    ---------
                                                            82,076      113,840
                                                         ---------    ---------

Deferred tax liabilities:
    Accumulated depreciation                               (27,276)     (29,600)
    Prepaid insurance                                       (7,949)      (9,973)
    FHLB stock dividends                                   (55,077)     (42,059)
    Other                                                     (468)        (423)
                                                         ---------    ---------
                                                           (90,770)     (82,055)
                                                         ---------    ---------

                Net deferred tax asset (liability)       $  (8,694)   $  31,785
                                                         =========    =========
</TABLE>

                                       54
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 8: 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>
                                                             2000         1999
                                                             ----         ----

<S>                                                        <C>          <C>
Computed at the statutory rate (34%)                       $ 72,541     $  1,968

Increase (decrease) resulting from:
    State income taxes - net of federal tax benefit           3,437
    Non-deductible expenses                                     785          328
    Other                                                     6,459        2,726
    Graduated rates                                         (10,636)
                                                           --------     --------

Actual tax provision                                       $ 72,586     $  5,022
                                                           ========     ========
</TABLE>


NOTE 9: TRANSACTIONS WITH RELATED PARTIES

     At June 30, 2000 and 1999,  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  $693,634  and  $954,848,
respectively.

     A  reconciliation  of the  activity in these loans for the years ended June
30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>

                                                      2000              1999
                                                      ----              ----
<S>                                                <C>                <C>
Balance, beginning of year                         $ 954,848          $ 939,697
Loans originated                                     152,300            197,915
Loans paid                                          (413,514)          (182,764)
                                                   ---------          ---------

Balance, end of year                               $ 693,634          $ 954,848
                                                   =========          =========
</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 terms (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.


                                       55
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 10: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>

                                                           2000         1999
                                                           ----         ----
<S>                                                    <C>          <C>
Noncash Investing and Financing Activities
------------------------------------------
   Sale and financing of foreclosed assets             $            $     8,597
   Real estate acquired in settlement of loans             26,322         8,518
   Sale and financing of premises and equipment                          95,000

Additional Cash Payment Information
-----------------------------------
   Interest paid                                        2,005,759     2,053,791
   Income taxes paid (received)                            75,353       (66,406)
</TABLE>

NOTE 11: 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.


NOTE 12: 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  73% and 76% of the loan  portfolio as of June 30, 2000
and 1999, respectively.

     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.


                                       56
<PAGE>


                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 12: COMMITMENTS AND CREDIT RISK (CONTINUED)

     At June  30,  2000  and  1999,  the Bank  had  outstanding  commitments  to
originate loans aggregating  approximately  $55,000 and $350,000,  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 zero and $218,000 at June 30, 2000 and 1999, 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 $263,636 and $83,554 for commercial and open-end consumer lines at
June 30, 2000 and 1999, respectively.


NOTE 13: 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 2000 or 1999.

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  $22,498 and zero to the plan
in 2000 and 1999,  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.


                                       57
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 13: BENEFIT PLANS (CONTINUED)

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, 2000, 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  $9,363  and  $11,062,  of  expense  under  the MRP in 2000 and 1999,
respectively.  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.


                                       58
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999


NOTE 13: BENEFIT PLANS (CONTINUED)

STOCK OPTION AND INCENTIVE PLAN (CONTINUED)
-------------------------------------------

     The table below  summarizes  transactions  under the Company's stock option
plan:
<TABLE>
<CAPTION>
                                                             2000                               1999
                                                    -------------------------          ---------------------------
                                                                    Weighted-                            Weighted-
                                                                     Average                              Average
                                                                     Exercise                            Exercise
                                                    Shares            Price             Shares             Price
                                                    ------          ---------           ------           ---------

<S>                                                   <C>             <C>               <C>              <C>
Outstanding, Beginning of Year                        20,442          $ 9.75
    Granted                                                                              20,442           $ 9.75
    Exercised
    Forfeited
                                                    --------           -----           --------            -----
Outstanding, End of Year                              20,442          $ 9.75             20,442           $ 9.75
                                                    ========           =====           ========            =====

Options Exercisable, End of Year                      20,442          $ 9.75             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>

                                                                    2000                  1999
                                                                    ----                  ----

   <S>                                                              <C>                <C>
   Dividends per share                                              N/A                $   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>

                                       59
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 13: BENEFIT PLANS (CONTINUED)

STOCK OPTION AND INCENTIVE PLAN (CONTINUED)
-------------------------------------------

     The following table  summarizes  information  about stock options under the
Plan outstanding at June 30, 2000:
<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               9 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>

                                                         2000         1999
                                                         ----         ----

<S>                                                      <C>        <C>
Net income - as reported                                  N/A           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 2000 and 1999 option
grants and therefore may not be  representative of the proforma impact in future
years.


                                       60
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999


NOTE 13: 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, 2000 and 1999.
The following is a summary of ESOP shares at June 30, 2000:

             Allocated shares                           5,924
             Shares released for allocation             2,962
             Unreleased shares                         20,738
                                                     --------

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

             Fair value of unreleased shares         $155,535
                                                     ========


NOTE 14: 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.


                                       61


<PAGE>


                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 14: 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.


                                       62
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 14: 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,  a  method  which  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, 2000                      June 30, 1999
                                                           -------------                      -------------
                                                    Carrying            Fair           Carrying            Fair
                                                     Amount            Value            Amount            Value
                                                     ------            -----            ------            ------
<S>                                                 <C>              <C>               <C>              <C>
Financial assets:
   Cash and cash equivalents                        $  1,236,521     $   1,236,521     $    307,907     $     307,907
   Certificates of deposit in other financial
     institutions                                      1,198,000         1,198,000        1,698,000         1,698,000
   Investment securities                              12,741,700        12,142,461       14,042,074        13,645,433
   Interest receivable                                28,251,774        27,842,000          330,729           330,729
   Loans, net of allowance for loan losses               321,787           321,787       29,539,448        29,929,000

Financial liabilities:
   Deposits                                           30,125,720        29,776,000       34,679,628        34,600,000
   FHLB advances                                      10,158,957         9,893,000        8,089,501         7,960,000
   Interest payable                                       85,387            85,387           89,056            89,056
</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.

                                       63
<PAGE>

                         NORTH ARKANSAS BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

NOTE 15: 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 an 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 16: 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.


                                       64


<PAGE>


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------


       Not applicable


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

                                       65
<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
---     -----------

<S>      <C>                                                                                       <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       Consent of Baird, Kurtz & Dobson, Certified Public Accountants
27       Financial Data Schedule (EDGAR only)
<FN>
________________
(*)     Incorporated herein by reference from Registration Statement on Form SB-2 filed (File No. 333-35985).
(+)     Management contract or compensatory plan or arrangement.
</FN>
</TABLE>

         (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 2000.



                                       66

<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 27, 2000                     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 27, 2000
--------------------------------------
Brad Snider
President and Chief Executive Officer
(Director and Principal Executive Officer)



/s/ O. E. Guinn, Jr.                                       September 27, 2000
--------------------------------------
O. E. Guinn, Jr.
Vice Chairman of the Board
(Director)



                                                           September __, 2000
--------------------------------------
Kaneaster Hodges, Jr.
(Director)



/s/ John Minor                                             September 27, 2000
--------------------------------------
John Minor
(Director)



/s/ J. C. McMinn                                           September 27, 2000
--------------------------------------
J. C. McMinn
(Director)