<PAGE>

--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                                       X

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

                   For the fiscal year ended December 31, 1997

                                       OR

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

          For the transition period from __________ to _______________

                          Commission File No.: 0-28312

                   First Federal Bancshares of Arkansas, Inc.
         --------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                  Texas                                      71-0785261
     ---------------------------------                 ----------------------
       (State or other jurisdiction                       (I.R.S. Employer
     of incorporation or organization)                 Identification Number)

           200 West Stephenson
           Harrison, Arkansas                                  72601
         ----------------------                            --------------
                (Address)                                    (Zip Code)

       Registrant's telephone number, including area code: (870) 741-7641

           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)
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|

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

As of March 23, 1998, the aggregate value of the 4,544,061 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
352,002 shares held by all directors and officers of the Registrant as a group,
was approximately $116.7 million. This figure is based on the last sales price
of $25.6875 per share of the Registrant's Common Stock on March 23, 1998.

Number of shares of Common Stock outstanding as of March 23, 1998: 4,896,063

                       DOCUMENTS INCORPORATED BY REFERENCE

      List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.

(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2) Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 13 of this Form
10-K.
<PAGE>

PART I.

Item 1. Business

General

      First Federal Bancshares of Arkansas, Inc. First Federal Bancshares of
Arkansas, Inc. (the "Company") is a Texas corporation organized in January 1996
by First Federal Bank of Arkansas, FA ("First Federal" or the "Bank") for the
purpose of becoming a unitary holding company of the Bank. The only significant
assets of the Company are the capital stock of the Bank, the Company's loan to
the Employee Stock Ownership Plan ("ESOP"), and the portion of the net proceeds
retained by the Company in connection with the Bank's conversion to stock form
and the concurrent offering of the Company's common stock (the "Conversion").
The business and management of the Company consists of the business and
management of the Bank. The Company does not presently own or lease any
property, but instead uses the premises, equipment and furniture of the Bank. At
the present time, the Company does not employ any persons other than officers of
the Bank, and the Company utilizes the support staff of the Bank from time to
time. Additional employees will be hired as appropriate to the extent the
Company expands or changes its business in the future. At December 31, 1997, the
Company had $549.6 million in total assets, $466.7 million in total liabilities
and $82.9 million in stockholders' equity.

      The Company's executive office is located at the home office of the Bank
at 200 West Stephenson Avenue, Harrison, Arkansas 72601, and its telephone
number is (870) 741-7641.

      First Federal Bank of Arkansas, FA. The Bank is a federally chartered
stock savings and loan association which was formed in 1934. First Federal
conducts business from its main office and eleven full service branch offices,
all of which are located in a six county area in Northcentral and Northwest
Arkansas comprised of Benton, Marion, Washington, Carroll, Baxter and Boone
counties. First Federal's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), to the maximum extent permitted by law.

      The Bank is a community oriented savings institution which has
traditionally offered a wide variety of savings products to its retail customers
while concentrating its lending activities on the origination of loans
collateralized by one- to four-family residential dwellings. To a significantly
lesser extent, the Bank's activities have also included origination of
multi-family residential loans, commercial real estate loans, construction
loans, commercial loans and consumer loans. In addition, the Bank maintains a
significant portfolio of investment securities. In addition to interest and
dividend income on loans and investments, the Bank receives other income from
loan fees and various service charges. The Bank's goal is to continue to serve
its market area as an independent community oriented financial institution
dedicated primarily to financing home ownership while providing financial
services to its customers in an efficient manner.

      The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank is also regulated by the FDIC, the administrator
of the SAIF. The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of Dallas, which is one of
the 12 regional banks comprising the FHLB System.


                                        1
<PAGE>

      This Form 10-K and the Company's Annual Report to Stockholders contain
certain forward-looking statements and information relating to the Company that
are based on the beliefs of management as well as assumptions made by and
information currently available to management. In addition, in those and other
portions of this document and the Company's Annual Report to Stockholders, the
words "anticipate, "believe," "estimate," "expect," "intend," "should" and
similar expressions, or the negative thereof, as they relate to the Company or
the Company's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.

Lending Activities

      General. At December 31, 1997, the Bank's total portfolio of loans
receivable ("total loan portfolio"), amounted to $446.0 million or 81.1% of the
Company's $549.6 million of total assets at such time. The Bank has
traditionally concentrated its lending activities on conventional first mortgage
loans collateralized by single-family (one- to four-family) residential
property. Consistent with such approach, $371.0 million or 83.18% of the Bank's
total loan portfolio consisted of one- to four-family residential loans at
December 31, 1997. To a significantly lesser extent, the Bank also originates
multi-family residential loans, commercial real estate loans, construction
loans, commercial loans and consumer loans. At December 31, 1997, such loan
categories amounted to $1.3 million, $18.6 million, $20.8 million, $5.6 million
and $28.7 million, respectively, or .29%, 4.17%, 4.66%, 1.27% and 6.43% of the
total loan portfolio, respectively. The Bank currently does not offer loans
which are insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Office of Veterans Affairs ("VA").


                                        2
<PAGE>

      Loan Composition. The following table sets forth certain data relating to
the composition of the Bank's loan portfolio by type of loan at the dates
indicated.

<TABLE>
<CAPTION>
                                                                               December 31,
                                 ---------------------------------------------------------------------------------------------------
                                           1997                      1996                      1995                     1994       
                                 -----------------------   -----------------------   -----------------------   ---------------------
                                              Percentage                Percentage                Percentage              Percentage
                                  Amount       of Loans     Amount       of Loans     Amount       of Loans     Amount     of Loans 
                                  ------      ----------    ------      ----------    ------      ----------    ------    ----------
                                                                           (Dollars in Thousands)
<S>                              <C>             <C>       <C>             <C>       <C>             <C>       <C>            <C>
Real estate loans:
 Single-family residential       $370,955        83.18%    $338,349        82.36%    $287,872        82.54%    $237,724       82.96%
 Multi-family residential           1,303          .29        1,555          .38        1,060          .30          800        0.28
 Commercial real estate            18,593         4.17       19,136         4.66       19,723         5.66       17,529        6.12
 Construction                      20,753         4.66       20,053         4.88       11,603         3.33        7,468        2.61
                                 --------       ------     --------       ------     --------       ------     --------      ------
   Total real estate loans        411,604        92.30      379,093        92.28      320,258        91.83      263,521       91.97
                                 --------       ------     --------       ------     --------       ------     --------      ------
                                                                                                                            
Commercial loans                    5,649         1.27        4,348         1.06        4,014         1.15        3,192        1.11
                                 --------       ------     --------       ------     --------       ------     --------      ------
                                                                                                                            
Consumer loans:                                                                                                             
 Home equity and second                                                                                                     
  mortgage loans                   13,023         2.92       12,549         3.06       10,466         3.00        8,752        3.05
 Automobile                         8,307         1.86        7,556         1.84        6,993         2.01        5,154        1.80
 Other                              7,372         1.65        7,244         1.76        7,021         2.01        5,938        2.07
                                 --------       ------     --------       ------     --------       ------     --------      ------
   Total consumer loans            28,702         6.43       27,349         6.66       24,480         7.02       19,844        6.92
                                 --------       ------     --------       ------     --------       ------     --------      ------
                                                                                                                            
    Total loans receivable        445,955       100.00%     410,790       100.00%     348,752       100.00%     286,557      100.00%
                                 --------       ======     --------       ======     --------       ======     --------      ======
                                                                                                                          
Less:
 Undisbursed loan funds            (7,305)                   (8,670)                   (4,298)                   (3,318)          
 Unearned discounts and net
  deferred loan fees               (3,512)                   (4,361)                   (3,721)                   (2,322)          
 Allowance for loan losses         (1,196)                   (1,251)                   (1,228)                   (1,134)          
                                 --------                  --------                  --------                  --------           
   Total loans receivable, net   $433,942                  $396,508                  $339,505                  $279,783           
                                 ========                  ========                  ========                  ========           
</TABLE>

                                      ------------------------
                                            December 31,
                                      ------------------------
                                                1993
                                      ------------------------
                                                    Percentage
                                       Amount        of Loans
                                       ------       ----------
(Dollars in Thousands)
Real estate loans:
 Single-family residential            $ 197,833       81.11%
 Multi-family residential                 1,622        0.66
 Commercial real estate                  18,645        7.64
 Construction                             7,098        2.91
                                      ---------      ------
   Total real estate loans              225,198       92.32
                                      ---------      ------

Commercial loans                          2,052        0.84
                                      ---------      ------

Consumer loans:
 Home equity and second
  mortgage loans                          6,089        2.50
 Automobile                               4,771        1.96
 Other                                    5,805        2.38
                                      ---------      ------
   Total consumer loans                  16,665        6.84
                                      ---------      ------

    Total loans receivable              243,915      100.00%
                                      ---------      ======

Less:
 Undisbursed loan funds                  (3,798)
 Unearned discounts and net
  deferred loan fees                     (2,011)
 Allowance for loan losses               (1,447)
                                      ---------
   Total loans receivable, net        $ 236,659
                                      =========


                                        3
<PAGE>

      Loan Maturity and Interest Rates. The following table sets forth certain
information at December 31, 1997 regarding the dollar amount of loans maturing
in the Bank's loan portfolio based on their contractual terms to maturity.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. All other loans are included
in the period in which the final contractual repayment is due.

<TABLE>
<CAPTION>
                                                         After Three     After Five     After Ten
                                           One Year         Years           Years          Years        Beyond
                              Within        Through        Through       Through Ten      Through       Twenty
                             One Year     Three Years     Five Years        Years      Twenty Years      Years           Total
                             --------     -----------     ----------        -----      ------------      -----           -----
                                                                          (In Thousands)
<S>                          <C>            <C>            <C>            <C>            <C>            <C>            <C>     
Real estate loans:
 Single-family residential   $    744       $  1,022       $  3,207       $ 39,755       $146,823       $179,404       $370,955
 Multi-family residential         187             45            110            109            852             --          1,303
 Commercial real estate         4,688          4,051          2,201          6,299          1,354             --         18,593
 Construction                   6,301             --             --             --          5,102          9,350         20,753
Commercial loans                2,583          1,090          1,325            553             98             --          5,649
Consumer loans                  9,133          6,828         11,135          1,515             91             --         28,702
                             --------       --------       --------       --------       --------       --------       --------
     Total(1)                $ 23,636       $ 13,036       $ 17,978       $ 48,231       $154,320       $188,754       $445,955
                             ========       ========       ========       ========       ========       ========       ========
</TABLE>

----------
(1)   Gross of undisbursed loan funds, unearned discounts and net deferred loan
      fees and the allowance for loan losses.

      The following table sets forth the dollar amount of the Bank's loans at
December 31, 1997 due after one year from such date which have fixed interest
rates or which have floating or adjustable interest rates.

                                                  Floating or
                                  Fixed-Rates   Adjustable-Rates       Total
                                  -----------   ----------------     --------
                                                 (In Thousands)
Real estate loans:
  Single-family residential        $134,475        $235,736          $370,211
  Multi-family residential              664             452             1,116
  Commercial real estate             13,905              --            13,905
  Construction                        5,102           9,350            14,452
Commercial loans                      3,066              --             3,066
Consumer loans                       19,569              --            19,569
                                   --------        --------          --------
     Total                         $176,781        $245,538          $422,319
                                   ========        ========          ========
                                                                            
      Scheduled contractual maturities of loans do not necessarily reflect the
actual term of the Bank's portfolio. The average life of mortgage loans is
substantially less than their average contractual terms because of loan
prepayments and refinancing. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates substantially exceed rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans substantially exceed current mortgage loan rates.

      Origination, Purchase and Sale of Loans. The lending activities of the
Bank are subject to the written, non-discriminatory, underwriting standards and
loan origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
realtors, walk-in customers, branch managers and radio, television and newspaper
advertising. In its marketing, the Bank emphasizes its community ties and an
efficient underwriting and approval process. The Bank believes it can provide
its personalized service to its customers in a more efficient manner due in part
to the use of in-house appraisal and underwriting staff. The Bank requires
hazard, title and, to the extent applicable, flood insurance on all security
property.


                                        4
<PAGE>

      Loan applications are initially processed by branch managers or loan
officers and all real estate loans up to $500,000 must be approved by two
members of the Bank's Loan Committee, one of which must be a member of senior
management. Loans in excess of $500,000 up to $750,000 must be approved by three
members of the Bank's Loan Committee, two of which must be members of senior
management. Real estate loans in excess of $750,000 must be approved by the
Bank's Board of Directors. Consumer loans are initially processed by consumer
loan officers and are required to be approved by designated officers of the Bank
depending on the amount of the loan. All loans are ratified by the Board of
Directors.

      Historically, the Bank has not been an active purchaser or seller of loans
due to consistent loan demand and the Bank's desire and ability to originate
loans for retention in its portfolio. During 1995, the Bank purchased $3.2
million of loans. No loans were purchased during 1997 or 1996. In 1997 and 1996,
the Bank's loan sales were $2.2 million and $73,000, respectively. The Bank did
not engage in any loan sales in 1995.

      Set forth below is a table showing the Bank's originations, purchases,
sales and repayments of loans during the periods indicated.

                                                  Year Ended December 31,
                                          -------------------------------------

                                            1997          1996          1995
                                          ---------     ---------     ---------
                                                     (In Thousands)
Loans receivable at beginning
  of period                               $ 410,790     $ 348,752     $ 286,557
                                          ---------     ---------     ---------
Loan originations:
  Real estate:
    Single-family residential                92,684       102,214        90,014
    Multi-family residential                     --           556           135
    Commercial real estate                    3,633         4,866         2,542
    Construction                             20,587        25,537        15,167
  Commercial loans                            5,257         3,060         2,361
  Consumer:
    Home equity and second
      mortgage loans                          8,807        10,400         8,575
    Automobile                                7,311         7,235         6,633
    Other                                     6,798         7,225         7,578
                                          ---------     ---------     ---------
      Total loan originations               145,077       161,093       133,005
Purchases                                        --            --         3,235
                                          ---------     ---------     ---------
      Total loan originations and
        purchases                           145,077       161,093       136,240
Repayments                                 (106,408)      (98,540)      (73,739)
Loan sales                                   (2,244)          (73)           --
Other                                        (1,260)         (442)         (306)
                                          ---------     ---------     ---------
Net loan activity                            35,165        62,038        62,195
                                          ---------     ---------     ---------
Loans receivable
  at end of period                        $ 445,955     $ 410,790     $ 348,752
                                          =========     =========     =========


                                        5
<PAGE>

      Loans to One Borrower. A savings institution generally may not make
loans-to-one borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. At December 31,
1997, the Bank's limit on loans-to-one borrower was approximately $10.0 million.
At December 31, 1997, the Bank's largest loans or groups of loans-to-one
borrower, including persons or entities related to the borrower, amounted to
$5.2 million. Such amount consists of 20 loans, primarily commercial real estate
loans, all of which were current at December 31, 1997. The Bank's ten largest
loans or groups of loans to one borrower, including persons or entities related
to the borrower, amounted to $17.1 million at December 31, 1997. In addition,
the Bank's wholly owned subsidiary has extended a $3.4 million loan
collateralized by a hotel in Oklahoma City, Oklahoma which the Bank currently
anticipates accepting a deed in lieu of foreclosure in the first quarter of
1998. See "- Subsidiaries."

      One- to Four-Family Residential Real Estate Loans. The Bank has
historically concentrated its lending activities on the origination of loans
collateralized by first mortgage liens on existing one- to four-family
residences. At December 31, 1997, $371.0 million or 83.2% of the Bank's total
loan portfolio consisted of one- to four-family residential real estate loans.
The Bank originated $92.7 million, $102.2 million and $90.0 million of one- to
four-family residential loans in 1997, 1996, and 1995, respectively, and intends
to continue to emphasize the origination of permanent loans collateralized by
first mortgage liens on one- to four-family residential properties in the
future. Of the $371.0 million of such loans at December 31, 1997, $236.0 million
or 63.6% had adjustable-rates of interest (including $198.3 million in
seven-year adjustable rates) and $135.0 million or 36.4% had fixed-rates of
interest.

      The Bank currently originates both fixed-rate and adjustable-rate one- to
four-family residential mortgage loans. The Bank's fixed-rate loans for
portfolio are presently originated with maximum terms of 15 years and are fully
amortizing with monthly payments sufficient to repay the total amount of the
loan with interest by the end of the loan term. The Bank does offer fixed-rate
loans with terms exceeding fifteen years although such loans are typically sold
in the secondary market. The Bank's one- to four-family loans are typically
originated under terms, conditions and documentation which permit them to be
sold to U.S. Government sponsored agencies such as the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"). However, as stated above, such loans with terms of 15 years or less
are originated for portfolio while substantially all of such loans over 15 years
are sold in the secondary market. The Bank's fixed-rate loans typically include
"due on sale" clauses.

      The Bank's adjustable-rate mortgage loans typically provide for an
interest rate which adjusts every one-, three-, five- or seven-years in
accordance with a designated index plus a margin. Such loans are typically based
on a 25- or 30-year amortization schedule. The Bank generally does not offer
below market rates, and the amount of any increase or decrease in the interest
rate per one or three year period is generally limited to 2%, with a limit of 6%
over the life of the loan. The Bank's five-year adjustable rate loans provide
that any increase or decrease in the interest rate per period is limited to 3%,
with a limit of 6% over the life of the loan. The Bank's seven-year adjustable
rate loans provide that any increase or decrease in the interest rate per period
is limited to 5% with a limit of 5% over the life of the loan. The Bank's
adjustable-rate loans are assumable (generally without release of the initial
borrower), do not contain prepayment penalties and do not provide for negative
amortization. Such loans may be converted to a fixed-rate loan at the discretion
of the Bank. The Bank generally underwrites its one- and three-year
adjustable-rate loans on the basis of the borrowers' ability to pay at the rate
after the first adjustment. Adjustable-rate loans decrease the risks associated
with changes in interest rates but involve other risks, primarily because as
interest rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, thereby increasing the potential for default. At the
same time, the marketability of the underlying property may be adversely
affected by higher interest rates.

      The Bank's residential mortgage loans typically do not exceed 90% of the
appraised value of the security property. However, pursuant to underwriting
guidelines adopted by the Board of Directors, the Bank can lend up to 97% of the
appraised value of the property securing a one- to four-family residential loan,
and requires borrowers to obtain private mortgage insurance on the portion of
the principal amount of the loan that exceeds 90% of the appraised value of the
security property. At December 31, 1997, the Bank had $1.0 million of
nonperforming single-family residential loans. See "- Asset Quality."


                                        6
<PAGE>

      Multi-Family Residential Real Estate Loans. Although the Bank does not
emphasize multi-family residential loans and has not been active in this area,
the Bank offers mortgage loans for the acquisition and refinancing of existing
multi-family residential properties. At December 31, 1997, $1.3 million or .3%
of the Bank's total loan portfolio consisted of loans collateralized by existing
multi-family residential real estate properties.

      Multi-family loans are generally made on terms up to ten years with fixed
rates although the Bank will originate such loans with call provisions up to
five years. Loan to value ratios on the Bank's multi-family real estate loans
are currently limited to 80%. It is also the Bank's general policy to obtain
corporate or personal guarantees, as applicable, on its multi-family residential
real estate loans from the principals of the borrower.

      Multi-family real estate lending entails significant additional risks as
compared with one- to four-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is
sensitive to changes in supply and demand conditions in the market for
multi-family real estate as well as economic conditions generally. At December
31, 1997, the Bank did have one $109,000 nonperforming multi-family real estate
loan. See "- Asset Quality."

      Commercial Real Estate Loans. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At December
31, 1997, $18.6 million or 4.2% of the Bank's total loan portfolio consisted of
loans collateralized by existing commercial real estate properties. The Bank
does not actively market its commercial real estate loan products and offers
such loans primarily as an accommodation to its present customers. Management
does not expect the Bank's portfolio of commercial real estate loans to
significantly increase in the future.

      The majority of the Bank's commercial real estate loans are collateralized
by office buildings, convenience stores, service stations, mini-storage
facilities, hotels, churches and small shopping malls. The majority of the
Bank's commercial real estate loans are collateralized by property located in
the Bank's market area.

      At December 31, 1997, the Bank had approximately $6.8 million of loans
which are either for the construction of service station and convenience store
facilities or are collateralized by such facilities. The Bank requires that
construction loans for such facilities meet present standards established by the
Environmental Protection Agency. With respect to existing facilities, the Bank
requires an environmental study of the property. To date, the Bank has not
experienced any material credit or environmental problems with such loans.

      The Bank requires appraisals of all properties securing commercial real
estate loans. The Bank considers the quality and location of the real estate,
the credit of the borrower, cash flow of the project and the quality of
management involved with the property. The Bank's commercial real estate loans
are originated with fixed interest rates based on a ten or fifteen year
amortization schedule and loan to value ratios on such loans are generally
limited to 80%. As part of the criteria for underwriting multi-family and
commercial real estate loans, the Bank generally imposes a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of not less than 1.2. It is also the Bank's policy to typically obtain
corporate or personal guarantees, as applicable, on its commercial real estate
loans from the principals of the borrower.

      Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Such loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans is typically dependent on the successful
operation of the real estate project. The success of such projects is sensitive
to changes in supply and demand conditions in the market for commercial real
estate as well as regional and economic conditions generally. At December 31,
1997, the Bank did have one nonperforming commercial real estate loan in the
amount of $3.4 million. See"- Asset Quality."


                                        7
<PAGE>

      Construction Loans. The Bank also originates primarily residential
construction loans, although the Bank has originated commercial real estate and
multi-family residential construction loans to a limited degree. The Bank's
construction lending activities are limited to the Bank's primary market area.
At December 31, 1997, construction loans amounted to $20.8 million or 4.7% of
the Bank's total loan portfolio, of which $14.4 million consisted of
single-family residential construction loans and $6.4 million consisted of
commercial real estate and multi-family residential construction loans. The
Bank's construction loans generally have fixed interest rates for a term of six
months to nine months. However, the Bank is permitted to originate construction
loans with terms of up to two years under its loan policy. Commercial real
estate and multi-family residential construction loans are made with a maximum
loan to value ratio of 80%. Construction loans to individuals are typically made
with a loan to value ratio of up to 90% and non-owner occupied construction
loans are limited to 80%.

      With limited exceptions, the Bank's construction loans are made to
individual homeowners and a limited number of local real estate builders and
developers for the purpose of constructing one- to four-family residential
homes. Construction loans to individuals are typically made in connection with
the granting of the permanent financing on the property. Such loans convert to a
fully amortizing adjustable or fixed-rate loan at the end of the construction
term. The Bank typically requires that permanent financing with the Bank or some
other lender be in place prior to closing any construction loan to an
individual. Interest on construction/permanent loans is due upon completion of
the construction phase of the loan. At such time, the loan automatically
converts to a permanent loan with an interest rate which is determined upon the
closing of the construction/permanent loan.

      Upon application, credit review and analysis of personal and, if
applicable, corporate financial statements, the Bank makes construction loans to
local builders for the purpose of construction of speculative (or unsold)
residential properties and for the construction of pre-sold single-family homes.
The Bank generally limits the number of unsold homes under construction to each
builder to one. Prior to making a commitment to fund a construction loan, the
Bank requires an appraisal of the property by the Bank's appraisal staff. The
Bank's appraisal staff also reviews and inspects each project at the
commencement of construction and prior to every disbursement of funds during the
term of the construction loan. Loan proceeds are disbursed after inspections of
the project based on a percentage of completion. Interest on construction loans
is due upon maturity.

      Construction lending is generally considered to involve a higher level of
risk as compared to one- to four-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor. In
addition, speculative construction loans to a builder are not pre-sold and thus
pose a greater potential risk to the Bank than construction loans to individuals
on their personal residences.

      The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and by
limiting its construction lending to primarily residential properties. In
addition, the Bank has adopted underwriting guidelines which impose stringent
loan to value, debt service and other requirements for loans which are believed
to involve higher elements of credit risk, by limiting the geographic area in
which the Bank will do business and by working with builders with whom it has
established relationships. At December 31, 1997, the Bank did not have any
nonperforming construction loans. See "- Asset Quality."


                                        8
<PAGE>

      Commercial Loans. To a limited extent, the Bank offers commercial loans
which primarily consist of equipment and inventory loans which are typically
cross-collateralized by commercial real estate. The Bank does not actively
market such loans and offers such loans primarily as an accommodation to its
present customers. At December 31, 1997, such loans amounted to $5.6 million or
1.3% of the total loan portfolio. At December 31, 1997, the Bank did have one
nonperforming commercial loan in the amount of $48,000. See "- Asset Quality."

      The Bank's commercial loans are originated with fixed interest rates with
call provisions between one and five years. Such loans are typically based on a
ten year amortization schedule.

      Consumer Loans. The Bank offers consumer loans in order to provide a full
range of financial services to its customers. The consumer loans offered by the
Bank include primarily home equity and second mortgage loans, automobile loans,
deposit account secured loans and unsecured loans. Consumer loans amounted to
$28.7 million or 6.4% of the total loan portfolio at December 31, 1997, of which
$13.0 million, $8.3 million and $7.4 million consisted of home equity and second
mortgage loans, automobile loans and other consumer loans, respectively. The
Bank intends to continue its emphasis on consumer loans in furtherance of its
role as a community oriented financial institution. Consumer loans are subject
to Arkansas usury law which limits the interest rate that may be charged to 5%
over the Federal Reserve discount rate, which was 5.00% at December 31, 1997. A
change in the usury rate does not affect loans already in portfolio.

      The Bank's home equity and second mortgage loans are typically fixed-rate
loans with terms of up to 15 years. Although the Bank does not require that it
hold the first mortgage on the secured property, the Bank does hold the first
mortgage on a significant majority of its home equity and second mortgage loans.
The Bank limits the mortgages on the secured property to 85% of the value of the
secured property.

      The Bank's automobile loans are typically originated for the purchase of
new and used cars and trucks. Such loans are generally originated with a maximum
term of five years.

      Other consumer loans consist primarily of deposit account loans and
unsecured loans. Loans secured by deposit accounts are originated for up to 90%
of the account balance, with a hold placed on the account restricting the
withdrawal of the account balance.

      Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. At December 31, 1997, the Bank had $434,000 of
nonperforming consumer loans. See "-Asset Quality."

Asset Quality

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


                                        9
<PAGE>

      Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Bank does not accrue interest on loans past due 90 days or more. Loans may
be reinstated to accrual status when payments are made to bring the loan under
90 days past due and, in the opinion of management, collection of the remaining
balance can be reasonably expected.

      Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of foreclosure. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations are included in the current period
income. Additions to the valuation allowance are included in the provision for
real estate losses.


                                       10
<PAGE>

      Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1997, in dollar amounts and as a percentage of
the Bank's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.

<TABLE>
<CAPTION>
                 Single-family        Multi-Family        Commercial
                  Residential         Residential         Real Estate         Construction         Commercial           Consumer
              ------------------  ------------------  ------------------  ------------------  ------------------  ------------------
                      Percentage          Percentage          Percentage          Percentage          Percentage          Percentage
                       of Total            of Total            of Total            of Total            of Total            of Total
              Amount    Loans     Amount     Loans    Amount    Loans     Amount    Loans     Amount     Loans    Amount    Loans
              ------  ----------  ------  ----------  ------  ----------  ------  ----------  ------  ----------  ------  ----------
                                                                          (Dollars in Thousands)
<S>           <C>         <C>     <C>        <C>      <C>         <C>      <C>       <C>       <C>       <C>       <C>       <C>
Loans
delinquent:

30-59 days    $1,360      .30%    $   --      --%     $ 1,086    .24%      $ 50      .01%      $ 33      .01%      $296      .07%

60-89 days       925      .21         --      --           --     --         --       --         42      .01        166      .04

90 days and    1,001      .22        109     .02        3,365    .75         --       --         48      .01        434      .10
              ------               -----              -------               ----                ----               ----
over

Total         $3,286               $ 109              $ 4,451               $ 50                $123               $896
              ======               =====              =======               ====                ====               ====
</TABLE>


                                       11
<PAGE>

      The following table sets forth the amounts and categories of the Bank's
nonperforming assets at the dates indicated.

<TABLE>
<CAPTION>
                                                             December 31,
                                          -------------------------------------------------
                                           1997       1996       1995      1994       1993
                                          ------     -----      -----    -------    -------
                                                         (Dollars in Thousands)
<S>                                       <C>        <C>        <C>      <C>        <C>   
Nonperforming loans:
  Single-family residential               $1,001     $ 493      $ 223    $   159    $   146
  Multi-family residential                   109        --         --         --         --
  Commercial real estate                   3,365        --         --         --      1,215
  Construction loans                          --        --         --         78         --
  Commercial loans                            48        --         --         --         --
  Consumer loans                             434       228        127         33         97
                                          ------     -----      -----    -------    -------
     Total nonperforming loans            $4,957       721        350        270      1,458
                                          ------     -----      -----    -------    -------

Real estate owned                            195       154        234        250        491
                                          ------     -----      -----    -------    -------

     Total nonperforming assets           $5,152     $ 875      $ 584    $   520    $ 1,949
                                          ======     =====      =====    =======    =======

Total nonperforming loans as a
  percentage of total loans
  receivable                                1.11%     0.18%      0.10%      0.09%      0.60%
                                          ======     =====      =====    =======    =======

Total nonperforming assets as a
  percentage of total assets                0.94%     0.17%      0.13%      0.12%      0.48%
                                          ======     =====      =====    =======    =======
</TABLE>

      Interest income that would have been recorded under the original terms of
the Bank's non-accruing loans for the year ended December 31, 1997 amounted to
$556,000, and the interest recognized during this period amounted to $221,000.

      Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. At December 31,
1997, the Bank had $5.1 million of classified assets, $4.8 million of which were
classified as substandard and $329,000 of which were classified as loss. In
addition, at such date, the Bank had $43,000 of assets designated as special
mention.

      Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the loan
portfolio and the adequacy of the allowance. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral and current economic conditions. The allowance is increased by
provisions for loan losses which are charged against income. When consumer loans
become 90 days or more past due, the Bank reserves for the amount of the loan in
excess of the estimated value of the collateral, if any.


                                       12
<PAGE>

      Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the OTS
and the FDIC, as an integral part of their examination process, periodically
review the Bank's allowance for possible loan losses. Such agencies may require
the Bank to recognize additions to such allowance based on their judgments about
information available to them at the time of their examination.

      The following table summarizes changes in the allowance for loan losses
and other selected statistics for the periods presented.

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                   -----------------------------------------------------------------
                                     1997          1996          1995          1994          1993
                                   ---------     ---------     ---------     ---------     ---------
                                                           (Dollars in Thousands)
<S>                                <C>           <C>           <C>           <C>           <C>      
Total loans outstanding at
 end of period                     $ 445,955     $ 410,790     $ 348,752     $ 286,557     $ 243,915
                                   =========     =========     =========     =========     =========
Average loans outstanding          $ 415,075     $ 369,185     $ 306,175     $ 257,261     $ 228,460
                                   =========     =========     =========     =========     =========
Allowance at beginning of period   $   1,251     $   1,228     $   1,134     $   1,447     $     991
                                   ---------     ---------     ---------     ---------     ---------
Charge-offs:
  Single-family residential               --            --            (2)          (24)           --
  Commercial real estate                  --            --            (8)         (335)           (9)
  Commercial loans                        --            --            --            --           (17)
  Consumer loans                         (67)          (40)          (30)           (9)          (36)
                                   ---------     ---------     ---------     ---------     ---------
    Total charge-offs                    (67)          (40)          (40)         (368)          (62)
                                   ---------     ---------     ---------     ---------     ---------
Recoveries:
  Commercial real estate                  --             1            --            --            --
  Consumer loans                          12             2             1             1             7
                                   ---------     ---------     ---------     ---------     ---------
    Total recoveries                      12             3             1             1             7
                                   ---------     ---------     ---------     ---------     ---------
Net charge-offs                          (55)          (37)          (39)         (367)          (55)
                                   ---------     ---------     ---------     ---------     ---------
Total provisions for losses               --            60           133            54           511
                                   ---------     ---------     ---------     ---------     ---------
Allowance at end of period         $   1,196     $   1,251     $   1,228     $   1,134     $   1,447
                                   =========     =========     =========     =========     =========

Allowance for loan losses as a
  percentage of total loans
  outstanding at end of period          0.27%         0.30%         0.35%         0.40%         0.59%
                                   =========     =========     =========     =========     =========
Net loans charged-off as a
  percentage of average loans
  outstanding                           0.01%         0.01%         0.01%         0.14%         0.02%
                                   =========     =========     =========     =========     =========
</TABLE>


                                       13
<PAGE>

      The following table presents the allocation of the Bank's allowance for
loan losses by the type of loan at each of the dates indicated. The significant
portion of the allowance which is unallocated is due to historically low levels
of nonperforming single-family residential loans, multi-family residential
loans, commercial real estate loans, construction loans, commercial loans and
consumer loans, which would otherwise require a larger allocation of the
allowance, balanced with management's desire to provide for an adequate
allowance in light of the size of the Bank's loan portfolio.

<TABLE>
<CAPTION>
                                                                           December 31,
                             -------------------------------------------------------------------------------------------------------
                                     1997                 1996                  1995                1994                  1993
                             -------------------  -------------------  -------------------  -------------------  -------------------
                                     Percent of           Percent of           Percent of           Percent of           Percent of
                                     Total Loans          Total Loans          Total Loans          Total Loans          Total Loans
                             Amount  by Category  Amount  by Category  Amount  by Category  Amount  by Category  Amount  by Category
                             ------  -----------  ------  -----------  ------  -----------  ------  -----------  ------  -----------
                                                                      (Dollars in Thousands)
<S>                          <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>   
Single-family residential    $   49     83.18%    $   11     82.36%    $   11     82.54%    $   16     82.96%    $   37     81.11%
Multi-family residential         --       .29         --       .38         --       .30         --      0.28         --      0.66
Commercial real estate          125      4.17        117      4.66        124      5.66        117      6.12        439      7.64
Construction loans               --      4.66         --      4.88         --      3.33         --      2.61         --      2.91
Commercial loans                 13      1.27         19      1.06         27      1.15         21      1.11         14      0.84
Consumer loans                  221      6.43        270      6.66        241      7.02        143      6.92        123      6.84
Unallocated                     788        --        834        --        825        --        837        --        834        --
                             ------    ------     ------    ------     ------    ------     ------    ------     ------    ------
         Total               $1,196    100.00%    $1,251    100.00%    $1,228    100.00%    $1,134    100.00%    $1,447    100.00%
                             ======    ======     ======    ======     ======    ======     ======    ======     ======    ======
</TABLE>


                                       14
<PAGE>

Investment Activities

      Mortgage-Backed Securities. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the FHLMC, the FNMA and the Government National Mortgage Association ("GNMA").

      The FHLMC is a public corporation chartered by the U.S. Government and
guarantees the timely payment of interest and the ultimate return of principal
within one year. The FHLMC mortgage-backed securities are not backed by the full
faith and credit of the United States, but because the FHLMC is a U.S.
Government sponsored enterprise, these securities are considered high quality
investments with minimal credit risks. The GNMA is a government agency within
the Department of Housing and Urban Development which is intended to help
finance government assisted housing programs. The GNMA guarantees the timely
payment of principal and interest, and GNMA securities are backed by the full
faith and credit of the U.S. Government. The FNMA guarantees the timely payment
of principal and interest, and FNMA securities are indirect obligations of the
U.S. Government.

      Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly, the
life of a mortgage-backed pass-through security approximates the life of the
underlying mortgages. It has been the Bank's practice to invest only in
fixed-rate mortgage-backed securities. Mortgage-backed securities that
management has the positive intent and ability to hold to maturity are
classified as held to maturity and are reported at amortized cost.
Mortgage-backed securities classified as available for sale are reported at fair
value, with unrealized gains and losses excluded from earnings, net of taxes,
and reported as a separate component of equity.

      The following table sets forth certain information relating to the
composition of the Bank's mortgage-backed securities at the dates indicated.

                                                                December 31,
                                                          ----------------------
                                                          1997     1996     1995
                                                          ----     ----     ----
                                                              (In Thousands)

Mortgage-backed securities held to maturity:
  FHLMC                                                   $157     $227     $323
                                                          ----     ----     ----

   Total mortgage-backed
     securities                                           $157     $227     $323
                                                          ====     ====     ====


                                       15
<PAGE>

      Mortgage-backed securities are generally backed by insurance or
guarantees, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Bank. At December 31, 1997,
no mortgage-backed securities were pledged to secure obligations of the Bank.

      Of the $157,000 of mortgage-backed securities at December 31, 1997, $7,000
was scheduled to mature between one and five years, $30,000 between five and ten
years and the remaining $120,000 was scheduled to mature after ten years. The
$7,000, $30,000 and $120,000 of mortgage-backed securities had weighted average
yields of 7.13%, 8.50% and 9.00%, respectively. At such date, all of the Bank's
mortgage-backed securities were fixed-rate and are disclosed above in the
periods in which they are scheduled to mature. The actual maturity of a
mortgage-backed security may be less than its stated maturity due to prepayments
of the underlying mortgages. Prepayments that are faster than anticipated will
shorten the life of the security and adversely affect its yield to maturity. The
yield is based upon the interest income and the amortization of any premium or
discount related to the mortgage-backed security. In accordance with generally
accepted accounting principles, premiums and discounts are amortized over the
estimated lives of the securities, which decrease and increase interest income,
respectively. 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 actual prepayments. Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
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 generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because
to the extent that the Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable interest rate.

      Investment Securities. The investment policy of the Bank, as established
by the Board of Directors, is designed primarily to provide and maintain
liquidity and to generate a favorable return on investments without incurring
undue interest rate risk, credit risk, and investment portfolio asset
concentrations. The Bank's investment policy is currently implemented by the
Bank's President within the parameters set by the Board of Directors. The Bank
is authorized to invest in obligations issued or fully guaranteed by the U.S.
Government, certain federal agency obligations, certain time deposits,
negotiable certificates of deposit issued by commercial banks and other insured
financial institutions, investment grade corporate debt securities and other
specified investments.

      Investment securities that management has the positive intent and ability
to hold to maturity are classified as held to maturity and are reported at
amortized cost. Investment securities classified as available for sale are
reported at fair value, with unrealized gains and losses excluded from earnings,
net of taxes, and reported as a separate component of equity. At December 31,
1997, approximately $15 million of the Bank's investment securities were pledged
to secure obligations of the Bank. At December 31, 1997, investments in the debt
and/or equity securities of any one issuer, other than those issued by U.S.
Government agencies, did not exceed more than 10% of the Company's stockholders'
equity.

      At December 31, 1997, the Bank's investment securities included structured
notes of $9.1 million, of which $3.0 million were FHLB step-up notes, $3.0
million were adjustable-rate FHLB notes and $3.1 million were FHLB zero coupon
bonds with a face value of $10.9 million. The interest rate on the step-up and
multi-step FHLB notes is scheduled to increase to a pre-determined rate on
pre-determined dates, and the notes are callable at par on a pre-determined date
and every six months subsequent to such date which coincide with interest
payment dates. If the step-up interest rate exceeds the then current market rate
for notes with similar terms to the next adjustment date or maturity date, the
note would generally be called and the Bank would have to re-invest the proceeds
in the lower interest rate environment. If the step-up interest rate is less
than the then current market rate, the note would generally not be called and
the Bank would continue to hold the note with a below market interest rate. The
step-up


                                       16
<PAGE>

FHLB notes do not have caps or floors and have remaining maturities of three
years. At December 31, 1997, $1.0 million of the adjustable-rate FHLB notes
adjust monthly based on the five-year constant maturity treasury ("CMT") index
minus 170 basis points with no caps or floors and $2.0 million of the
adjustable-rate notes adjust semi-annually based on a multiple of the ten-year
CMT index plus 160 basis points with a floor of 4.50% and a cap of 24.0%. The
adjustable-rate FHLB notes are non-callable with remaining maturity dates up to
three years. The CMT index could result in the interest rate on these notes
being less than market rates of interest. The FHLB zero coupon bonds have
remaining maturities of fifteen to twenty years with callable dates beginning in
one to two years.

      The maturity terms of the investment securities purchased in 1997
generally have been longer term, up to twenty years with six month to two year
call protection.

      The following table sets forth the amount of investment securities which
contractually mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31, 1997. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay the obligation without prepayment penalties.

<TABLE>
<CAPTION>
                                     Less Than            One to Five           Five to Ten          After Ten
                                      One Year               Years                 Years               Years              Total
                                 -----------------    ------------------   --------------------   ----------------   ---------------
                                  Amount     Yield     Amount      Yield    Amount        Yield    Amount    Yield   Amount    Yield
                                  ------     -----     ------      -----    ------        -----    ------    -----   ------    -----
                                                                        (Dollars in Thousands)
<S>                              <C>          <C>     <C>           <C>    <C>            <C>     <C>        <C>    <C>        <C>  
Bonds and other debt
 securities held to maturity:
 U.S. Government and
  agency obligations             $12,009      5.07%   $25,290       6.05%  $24,092        6.94%   $33,985    7.58%  $95,376    6.70%
                                 -------              -------              -------                -------           -------

Total investment securities      $12,009              $25,290              $24,092                $33,985           $95,376
                                 =======              =======              =======                =======           =======
</TABLE>

      As of December 31, 1997, there were approximately $71 million of
investments with call options, of which approximately $60 million are callable
within one year.

      The following table sets forth the carrying value of the Company's
investment securities classified as held to maturity and available for sale at
the dates indicated.

                                                  December 31,
                                         -----------------------------
                                           1997       1996       1995
                                         -------    -------    -------
                                                (In Thousands)
Investment securities held
  to maturity:
  U.S. Government and agency
    obligations                          $95,376    $90,755    $95,731

Equity securities available for sale:
  FHLMC preferred stock(1)                    --        340        258
                                         -------    -------    -------
Total investment securities              $95,376    $91,095    $95,989
                                         =======    =======    =======

----------

(1)   Reflects carrying value at fair market value. At December 31, 1997, the
      Company held no securities as available for sale.

      As a member of the FHLB of Dallas, the Bank is required to maintain an
investment in FHLB stock. At December 31, 1997, the Bank's investment in FHLB
stock amounted to $3.6 million. No ready market exists for such stock and it has
no quoted market value.


                                       17
<PAGE>

Sources of Funds

      General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments and prepayments and interest payments, maturities
of investment securities and advances from the FHLB of Dallas. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer term
basis for general business purposes. The Bank began utilizing FHLB of Dallas
advances as an additional source of funds during 1997.

      Deposits. The Bank's deposit products include a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, demand
deposit accounts ("DDA"), money market accounts, regular savings accounts and
term certificate accounts. Deposit account terms vary, with the principal
differences being the minimum balance required, the time period the funds must
remain on deposit, early withdrawal penalties and the interest rate.

      The Bank considers its primary market area to be Northcentral and
Northwest Arkansas. The Bank utilizes traditional marketing methods to attract
new customers and savings deposits. The Bank does not advertise for deposits
outside of its primary market area or utilize the services of deposit brokers,
and management believes that an insignificant number of deposit accounts were
held by non-residents of Arkansas at December 31, 1997.

      The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. Although market demand
generally dictates which deposit maturities and rates will be accepted by the
public, the Bank intends to continue to promote longer term deposits to the
extent possible and consistent with its asset and liability management goals.

      The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type of deposit, as of the dates
indicated.

<TABLE>
<CAPTION>
                                                              December 31,
                                    --------------------------------------------------------------
                                           1997                 1996                   1995
                                    ------------------    -----------------     ------------------
                                    Amount        %        Amount       %        Amount       %
                                    --------    -----     --------    -----     --------    -----
                                                        (Dollars in Thousands)
<S>                                 <C>         <C>       <C>         <C>       <C>         <C>   
Certificate accounts:
      3.00% - 3.99%                 $    362       .1%    $    607       .2%    $     --       --%
      4.00% - 5.99%                  241,660     53.6      205,912     48.7      157,718     37.8
      6.00% - 7.99%                   97,885     21.7       90,568     21.4      127,456     30.6
      8.00% and over                  20,236      4.5       36,408      8.6       42,323     10.1
                                    --------    -----     --------    -----     --------    -----
  Total certificate accounts         360,143     79.9      333,495     78.9      327,497     78.5
                                    --------    -----     --------    -----     --------    -----

Transaction accounts:
  Passbook and statement savings      25,330      5.6       26,451      6.2       27,480      6.6
  Money market accounts               15,438      3.4       17,214      4.1       19,920      4.8
  NOW accounts/DDA                    49,963     11.1       45,698     10.8       42,332     10.1
                                    --------    -----     --------    -----     --------    -----
     Total transaction accounts       90,731     20.1       89,363     21.1       89,732     21.5
                                    --------    -----     --------    -----     --------    -----
     Total deposits                 $450,874    100.0%    $422,858    100.0%    $417,229    100.0%
                                    ========    =====     ========    =====     ========    =====
</TABLE>


                                       18
<PAGE>

      The following table presents the average balance of each type of deposit
and the average rate paid on each type of deposit and/or total deposits for the
periods indicated.

<TABLE>
<CAPTION>
                                                           Year Ended December 31,

                                          1997                     1996                     1995
                                  ---------------------    ---------------------     -------------------
                                                Average                  Average                 Average
                                  Average        Rate      Average        Rate       Average      Rate
                                  Balance        Paid      Balance        Paid       Balance     Paid(1)
                                  -------        ----      -------        ----       -------     -------
                                                             (Dollars in Thousands)
<S>                               <C>             <C>      <C>             <C>      <C>     
Passbook and statement savings
  accounts                        $ 26,092        2.72%    $ 27,149        2.72%    $ 29,145

Money market accounts and
  NOW accounts                      55,486        2.34       54,748        2.42       55,269
Demand deposit accounts              9,624          --        9,244          --        7,590
Certificates of deposit            348,945        6.11      328,921        6.19      312,926
                                  --------        ----     --------        ----     --------
    Total deposits                $440,147        5.30%    $420,062        5.33%    $404,930        5.32%
                                  ========        ====     ========        ====     ========        ====
</TABLE>

----------

(1)   The average rate paid for each type of deposit was not available in 1995.

      The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1997 and 1996 and the amounts
at December 31, 1997 which mature during the periods indicated.

<TABLE>
<CAPTION>
                                                                 Balance at December 31, 1997
                                    December 31,        Maturing in the 12 Months Ending December 31,
                                --------------------    ---------------------------------------------
                                  1997        1996        1998        1999       2000      Thereafter
                                --------    --------    --------    --------    --------   ----------
                                                              (In Thousands)
<S>                             <C>         <C>         <C>         <C>         <C>         <C>     
Certificates of Deposit
3.00% - 3.99%                   $    362    $    607    $    362    $     --    $     --    $     --
4.00% - 5.99%                    241,660     205,912     208,247      26,821       5,851         741
6.00% - 7.99%                     97,885      90,568       8,448      20,512      13,331      55,594
8.00% and over                    20,236      36,408      11,732       3,068         221       5,215
                                --------    --------    --------    --------    --------    --------
  Total certificate accounts    $360,143    $333,495    $228,789    $ 50,401    $ 19,403    $ 61,550
                                ========    ========    ========    ========    ========    ========
</TABLE>

      The following table sets forth the savings flows of the Bank during the
periods indicated.

                                                   Year Ended December 31,
                                               ---------------------------------
                                                 1997        1996        1995
                                               --------    --------     --------
                                                        (In Thousands)

Increase (decrease) before interest credited   $ 10,786    $(10,731)    $  6,118
Interest credited                                17,230      16,360       15,628
                                               --------    --------     --------
  Net increase in deposits                     $ 28,016    $  5,629     $ 21,746
                                               ========    ========     ========

      The decrease in deposits before interest credited in 1996 was primarily
due to the use of such funds to purchase shares of the Company's common stock in
the Conversion.

      The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at December 31, 1997 by time remaining to maturity.

                                                            Amounts
                                                        --------------
Period Ending:                                          (In Thousands)
March 31, 1998                                             $ 18,016
June 30, 1998                                                14,485
December 31, 1998                                             9,095
After December 31, 1998                                      20,605
                                                           --------
  Total certificates of deposit with
    balances of $100,000 or more                           $ 62,201
                                                           ========


                                       19
<PAGE>

      Borrowed funds. The Bank has utilized FHLB advances in its normal
operating and investing activities during 1997. There were no advances
outstanding at previous year ends. The Bank pledges as collateral for FHLB
advances their FHLB stock and has entered into blanket collateral agreements
with the FHLB whereby the Bank agrees to maintain, free of other encumbrances,
qualifying single family first mortgage loans with unpaid principal balances,
when discounted at 75% of the such balances, of at least 100% of total
outstanding advances.

      Advances at December 31, 1997, have maturity dates and weighted average
rates as follows:

                                      Weighted                     
                Year Ending            Average
                December 31             Rate            Amount
                -----------           --------          ------
                    1999                6.19%          $ 4,000
            
                    2000                6.04             2,000
            
                    2002                6.59             3,997
            
                 Thereafter             6.26             2,000
                                                       -------
            
                   Total                6.31%          $11,997
                                                       =======

Employees

      The Bank had 156 full-time employees and 15 part-time employees at
December 31, 1997. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with its
personnel.

Subsidiaries

      The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. The Bank's only
subsidiary, First Harrison Service Corporation (the "Service Corporation"), was
formed in 1971. At December 31, 1997, the Service Corporation's only significant
asset was a $3.4 million loan collateralized by a hotel in Oklahoma City,
Oklahoma. The Bank currently anticipates accepting a deed in lieu of foreclosure
in the first quarter of 1998. The property will be promptly listed and
aggressively marketed, and will be operated by a management company until
disposition. A preliminary appraisal amount has been determined as of December
31, 1997 and an adequate loan loss allowance has been established. The Service
Corporation generated net income of approximately $118,000 during 1997.

Competition

      The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings associations, credit unions and commercial banks,
including many large financial institutions which have greater financial and
marketing resources available to them. In addition, during times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities, mutual funds and other
corporate and government securities. The ability of the Bank to attract and
retain savings deposits depends on its ability to generally provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities.

      The Bank experiences strong competition for real estate loans principally
from savings associations, commercial banks and mortgage companies. The Bank
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.


                                       20
<PAGE>

                                   REGULATION

      Set forth below is a brief description of those laws and regulations
which, together with the descriptions of laws and regulations contained
elsewhere herein, are deemed material to an investor's understanding of the
extent to which the Company and the Bank are regulated. The description of the
laws and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.

The Company

      General. The Company, as a savings and loan holding company within the
meaning of the Home Owners Loan Act ("HOLA"), has 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. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the 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 institution, the
Director 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, as discussed under "- The Bank - Qualified Thrift
Lender Test," then such unitary holding company also shall become subject to the
activities restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, shall register as, and become subject to the restrictions
applicable to, a bank holding company. See "- The Bank - Qualified Thrift Lender
Test."

      If the Company were to acquire control of another savings institution,
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, as set forth below, 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 shall 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 authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the Federal Reserve Board
("FRB") as permissible for bank holding companies. Those activities described in
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.

      Limitations on Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In


                                       21
<PAGE>

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 other similar 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.

      In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) permits loans to
directors, executive officers and principal stockholders made pursuant to a
benefit or compensation program that is widely available to employees of a
subject savings association provided that no preference is given to any officer,
director or principal shareholder or related interest thereto over any other
employee. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At December 31, 1997, the Bank was in compliance with the
above restrictions.

      Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the 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 acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.

      The Director of the 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 located 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 ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the 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).

      Under the Bank Holding Company Act of 1956, the FRB is authorized to
approve an application by a bank holding company to acquire control of a savings
institution. In addition, 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 FRB. As a result of these provisions, there have been a
number of acquisitions of savings institutions by bank holding companies in
recent years.


                                       22
<PAGE>

The Bank

      General. The OTS has extensive authority over the operations of federally
chartered savings institutions. As part of this authority, savings institutions
are required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC. The last regulatory examination of the
Bank by the OTS was completed in November 1997. The Bank was not required to
make any material changes to its operations as a result of such examination. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Those laws and
regulations generally are applicable to all federally chartered savings
institutions and may also apply to state-chartered savings institutions. Such
regulation and supervision is primarily intended for the protection of
depositors.

      The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.

      Insurance of Accounts. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.

      The deposits of the Bank are currently insured by the SAIF. Both the SAIF
and the BIF, the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ratio
of 1.25% of insured deposits. The BIF had achieved a fully funded status in
contrast to the SAIF and, therefore, the FDIC substantially reduced the average
deposit insurance premium paid by commercial banks to a level approximately 75%
below the average premium paid by savings institutions.

      The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF and
address the resulting premium disparity. On September 30, 1996, the Omnibus
Appropriations Act was signed into law. The legislation authorized a one-time
charge on SAIF insured deposits at a rate of $.657 per $100.00 of March 31, 1995
deposits. As a result, the Bank's assessment amounted to $2.6 million ($1.7
million net of tax). Additional provisions of the Act include new BIF and SAIF
premiums and the merger of BIF and SAIF. The new BIF and SAIF premiums include a
premium of repayment of the Financing Corporation ("FICO") bonds plus and
regular insurance assessment, currently nothing for the lowest risk category
institutions. Until full pro-rate FICO sharing is in effect, the FICO premiums
for BIF and SAIF are 1.3 and approximately 6.5 basis points, respectively,
effective January 1, 1997. Full pro-rata FICO sharing is to begin no later than
January 1, 2000. BIF and SAIF are to be merged on January 1, 1999, provided the
bank and savings association charters are merged by that date. While the
one-time special assessment had a significant impact on 1996 earnings, the
resulting lower annual premiums will benefit future earnings.

      The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by


                                       23
<PAGE>

the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.

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

      Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' 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." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets, with only a limited exception
for purchased mortgage servicing rights. The Bank had no goodwill or other
intangible assets at December 31, 1997. Both core and tangible capital are
further reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). These adjustments do not materially
affect the Bank's regulatory capital. At December 31, 1997, the Bank exceeded
its tangible, core and risk-based capital requirements.

      In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and general allowances for loan losses up
to a maximum of 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the FNMA or the FHLMC, except for
those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one- to four-family
first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential
bridge loans made directly for the construction of one- to four-family
residences and qualifying multi-family residential loans; and (iv) 100% for all
other loans and investments, including consumer loans, commercial loans, and
one- to four-family residential real estate loans more than 90 days delinquent,
and for repossessed assets.

      Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. At December 31, 1997, the Bank's liquidity ratio was
18.3%.


                                       24
<PAGE>

      Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.

      Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval.

      Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to a specified percentage of their net income
during the most recent four quarter period, depending on how close the
institution is to meeting its fully phased-in capital requirements. Tier 3
institutions, which are institutions that do not meet current minimum capital
requirements, or which have been otherwise notified by the OTS that it will be
treated as a Tier 3 institution because they are in need of more than normal
supervision, cannot make any capital distribution without obtaining OTS approval
prior to making such distributions.

      In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. At December 31, 1997, the Bank was a
Tier 1 institution for purposes of this regulation.

      Branching by Federal Savings Institutions. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS'
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if, among
other things, the law of the state where the branch would be located would
permit the branch to be established if the federal savings institution were
chartered by the state in which its home office is located. Furthermore, the OTS
will evaluate a branching applicant's record of compliance with the Community
Reinvestment Act of 1977 ("CRA"). An unsatisfactory CRA record may be the basis
for denial of a branching application.

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


                                       25
<PAGE>

      Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); stock issued by the FHLB of Dallas; and direct or indirect obligations
of the FDIC. In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold within
90 days of origination; 100% of consumer and educational loans (limited to 10%
of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institution's total assets.
At December 31, 1997, the qualified thrift investments of the Bank were
approximately 90.3% of its portfolio assets.

      Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas,
which is one of 12 regional FHLBs that administers the home financing credit
function of savings institutions. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB. At December 31, 1997, the
Bank had $12.0 million of outstanding FHLB advances.

      As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1997, the Bank had $3.6 million in
FHLB stock, which was in compliance with this requirement. No ready market
exists for such stock and it has no quoted market value.

      The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.

      Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. As of December 31, 1997, no reserves were required to be maintained on
the first $4.7 million of transaction accounts, reserves of 3% were required to
be maintained against the next $47.8 million of net transaction accounts (with
such dollar amounts subject to adjustment by the FRB), and a reserve of 10%
(which is subject to adjustment by the FRB to a level between 8% and 14%)
against all remaining net transaction accounts. Because required reserves must
be maintained in the form of vault cash or a noninterest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.

                                    TAXATION
Federal Taxation

      General. The Company and Bank are subject to the generally applicable
corporate tax provisions of the Internal Revenue Code of 1986, as amended
("Code"), and Bank is subject to certain additional provisions of the Code which
apply to thrift and other types of financial institutions. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters material to the taxation of the Company and the Bank
and is not a comprehensive discussion of the tax rules applicable to the Company
and Bank.


                                       26
<PAGE>

      Year. The Bank files a federal income tax return on the basis of a fiscal
year ending on December 31. The Company filed a consolidated federal income tax
return with both the Bank and the Service Corporation.

      Bad Debt Reserves. Prior to the enactment of the Small Business Jobs
Protection Act (the "Act"), which was signed into law on August 21, 1996,
certain thrift institutions, such as the Bank, were allowed deductions for bad
debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge off method of Section 166 of the Code or the reserve
method of Section 593 of the Code.

      Under Section 593, a thrift institution annually could elect to deduct bad
debts under either (i) the "percentage of taxable income" method applicable only
to thrift institutions, or (ii) the "experience" method that also was available
to small banks. Under the "percentage of taxable income" method, a thrift
institution generally was allowed a deduction for an addition to its bad debt
reserve equal to 8% of its taxable income (determined without regard to this
deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) and amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995 and 1994,
the Bank used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method.

      Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.

      A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely with respect to the "applicable excess reserves" of
the taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
is treated as a small bank, like the Bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or, (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.

      For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal


                                       27
<PAGE>

amounts of the residential loans made by the thrift during the six most recent
tax years beginning before January 1, 1996.

      A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.

      The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by the Bank to the Company is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced
and the Bank's gross income for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the pre-
1988 reserves. As of December 31, 1997, the Bank's pre-1988 reserves for tax
purposes totaled approximately $4.2 million.

      Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) tax-exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses).

      Net Operating Loss Carryovers. A financial institution may, for federal
income tax purposes, carry back net operating losses ("NOLs") to the preceding
three taxable years and forward to the succeeding 15 taxable years. This
provision applies to losses incurred in taxable years beginning after 1986. At
December 31, 1997, the Bank had no NOL carryforwards for federal income tax
purposes.

      Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.

      Other Matters. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect the Bank.

      The Bank's federal income tax returns for the tax years ended December 31,
1994 forward are open under the statute of limitations and are subject to review
by the IRS.


                                       28
<PAGE>

State Taxation

      The Bank will continue to be subject to Arkansas corporation income tax
which is a progressive rate up to a maximum of 6.5% of all taxable earnings.

      The Company is incorporated under Texas law and, accordingly, is subject
to Texas franchise tax in an amount equal to 4.5% of net income allocated to
Texas pursuant to apportionments of gross receipts based upon where the Company
conducts business.

Item 2. Properties.

      At December 31, 1997, the Bank conducted its business from its executive
office in Harrison, Arkansas, and eleven full service offices, all of which are
located in Northcentral and Northwest Arkansas.


                                       29
<PAGE>

      The following table sets forth the net book value (including leasehold
improvements and equipment) and certain other information with respect to the
offices and other properties of the Bank at December 31, 1997.

                                 Leased/    Net Book Value
    Description/Address          Owned       of Property      Amount of Deposits
    -------------------          -----       -----------      ------------------
                                                      (In Thousands)

200 West Stephenson
Harrison, AR 72601               Owned         $1,295(1)            $141,600

128 West Stephenson              Owned               124                 (2)
Harrison, AR  72601

Corner Central & Willow          Owned               266                 (2)
Harrison, AR  72601

Ozark Mall - Hwy. 62-65 North    Leased(3)            32              26,996
Harrison, AR  72601

324 Hwy. 62-65 Bypass            Owned               293              38,280
Harrison, AR  72601

210 South Main                   Owned               273              24,985
Berryville, AR  72616

668 Highway 62 East              Owned               699             150,465
Mountain Home, AR  72653

301 Highway 62 West              Owned               117              18,038
Yellville, AR  72687

307 North Walton Blvd.           Owned               281              21,562
Bentonville, AR  72712

3460 North College               Owned               483              22,884
Fayetteville, AR  72703

1303 West Hudson                 Owned               239                 512
Rogers, AR  72756

201 East Henri De Tonti Blvd.    Owned               250               2,824
Tontitown, AR  72762

2025 North Crossover Road        Owned               661               1,996
Fayetteville, AR 72703

249 West Main Street             Leased(4)           205                 732
Farmington, AR 72730

----------
(1)   Includes property acquisition for expansion in North Harrison.
(2)   Such offices do not open deposit accounts.
(3)   Such property is subject to a month-to-month lease.
(4)   Such property is subject to a five year lease expiring November 1, 2002.


                                       30
<PAGE>

Item 3. Legal Proceedings.

      Neither the Company nor the Bank is involved in any pending legal
proceedings other than nonmaterial legal proceedings occurring in the ordinary
course of business.

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

      None.

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

      The information required herein, to the extent applicable, is incorporated
by reference from page 40 of the Company's 1997 Annual Report to Stockholders
("1997 Annual Report").

Item 6. Selected Financial Data.

      The information required herein is incorporated by reference from pages 3
and 4 of the 1997 Annual Report.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

      The information required herein is incorporated by reference from pages 6
to 15 of the 1997 Annual Report.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

      The information required herein is incorporated by reference from pages 6
and 7 of the 1997 Annual Report.

Item 8. Financial Statements and Supplementary Data.

      The information required herein is incorporated by reference from page 5
and pages 16 to 38 of the 1997 Annual Report.

Item 9. Changes in and Disagreements With Accountants on Accounting and
        Financial Disclosure.

      Not Applicable.

PART III.

Item 10. Directors and Executive Officers of the Registrant.

      The information required herein is incorporated by reference from pages 3
to 5 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on April 23, 1998 ("Definitive Proxy Statement").


                                       31
<PAGE>

Item 11. Executive Compensation.

      The information required herein is incorporated by reference from pages 8
to 13 of the Definitive Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      The information required herein is incorporated by reference from pages 6
and 7 of the Definitive Proxy Statement.

Item 13. Certain Relationships and Related Transactions.

      The information required herein is incorporated by reference from page 12
of the Definitive Proxy Statement.

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

      (a) Documents Filed as Part of this Report

      (1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):

            Independent Auditors' Report
            Consolidated Statements of Financial Condition at December 31,
              1997 and 1996
            Consolidated Statements of Income for the years ended
              December 31, 1997, 1996 and 1995
            Consolidated Statements of Changes in Stockholders' Equity for
              the years ended December 31, 1997, 1996 and 1995.
            Consolidated Statements of Cash Flows for the years ended
              December 31, 1997, 1996 and 1995.
            Notes to Consolidated Financial Statements.

      (2) All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements and related notes thereto.

      (3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.


                                       32
<PAGE>

                                  Exhibit Index

2.1*    Plan of Conversion
3.1*    Articles of Incorporation of First Federal Bancshares of Arkansas, Inc.
3.2*    Bylaws of First Federal Bancshares of Arkansas, Inc.
4.0**   Stock Certificate of First Federal Bancshares of Arkansas, Inc.
10.5*   Employment Agreement between the Company, the Bank and Frank L. 
          Coffman, Jr.
10.6*   Employment Agreement between the Company, the Bank and Larry J. Brandt
10.7*   Employment Agreement between the Company, the Bank and Carolyn M. 
          Thomason
13.0    1997 Annual Report to Stockholders
22.0    Subsidiaries of the Registrant - Reference is made to
          "Item 1 Business - Subsidiaries" for the required information
27.0    Financial Data Schedule
----------
(*)   Incorporated herein by reference from the Company's Registration Statement
      on Form S-1 (File No. 333- 612) filed with the SEC.
(**)  Incorporated herein by reference from the Company's Registration Statement
      on Form 8-A filed with the SEC.


                                       33
<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.


                                      FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.



                                      By: /s/ Larry J. Brandt
                                          --------------------------------------
                                          Larry J. Brandt
                                          President and Chief Operating Officer

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


/s/ Frank L. Coffman, Jr.                                         March 25, 1998
-------------------------------
Frank L. Coffman
Chairman of the Board and Chief
  Executive Officer


/s/ Larry J. Brandt                                               March 25, 1998
-------------------------------
Larry J. Brandt
President and Chief
 Operating Officer


/s/ John P. Hammerschmidt                                         March 25, 1998
-------------------------------
John P. Hammerschmidt
Director

/s/ James D. Heuer                                                March 25, 1998
-------------------------------
James D. Heuer
Director

/s/ William F. Smith                                              March 25, 1998
-------------------------------
William F. Smith
Director

                                                                  March 25, 1998
/s/ Tommy W. Richardson
-------------------------------
Tommy W. Richardson
Senior Vice President and Chief
 Financial Officer