<PAGE>


                                FIRST FEDERAL

                                  BANCSHARES

                                OF ARKANSAS, INC. 





-------------------------------------------------------------------------------
                        1 9 9 6   A N N U A L   R E P O R T
-------------------------------------------------------------------------------


<PAGE>


                               TABLE OF CONTENTS

                                                                   Page
                                                                   ----
President's Letter to Stockholders...........................        1
 
Corporate Profile............................................        2
 
Selected Consolidated Financial and Other Data...............        3
 
Selected Quarterly Operating Results.........................        5
 
Management's Discussion and Analysis of Financial Condition           
  and Results of Operations..................................        6
 
Report of Independent Certified Public Accountants...........       17
 
Financial Statements.........................................       18
 
Directors and Executive Officers.............................       39
 
Banking Locations............................................       39
 
Stockholder Information......................................       40



<PAGE>

FIRST FEDERAL
BANCSHARES
of Arkansas, Inc.
 
Dear Stockholder:
 
    First Federal Bancshares had a great first year as a public company! As of
December 31, 1996, our stock had increased in price over 58% since our initial
public offering at $10.00 per share on May 3, 1996.
 
    The repurchase of 5% or 257,688 of our outstanding shares was completed in
December, 1996. In addition, our Board of Directors also declared an initial
quarterly dividend of $.05 per share payable on March 17, 1997, to stockholders
of record on March 3, 1997. Both the stock repurchase and the quarterly cash
dividend further emphasizes the commitment of both the board and management in
maximizing our shareholders' value.
 
    The FDIC insurance premium disparity and recapitalization of the Savings
Association Insurance Fund were finally resolved in September 1996. This
resulted in a one time assessment of approximately $2.6 million before taxes but
will lower our FDIC insurance premiums by approximately $625,000 before taxes in
1997. The Company would have earned $5.1 million, excluding the SAIF special
assessment, for the year ended December 31, 1996.
 
    We continue to grow and expand our market share in booming Northwest
Arkansas. New offices were opened in Rogers and Tontitown in Northwest Arkansas
during 1996. Additionally, in April 1997, we will open our second office in
Fayetteville located on Crossover Road.
 
    An advanced, computerized telephone banking system called VOICELINE 24 was
also implemented in 1996. With our CIRRUS affiliated ATM network and VOICELINE
24, our customers now have virtually worldwide access to their accounts 24 hours
every day. We also established an internet home page to market our services with
the location at www.ffbh.com.

    Our vision is to be the "premier family bank in Arkansas". The board,
management and all the "First Team" members will achieve this vision by
constantly staying focused on our mission of "being the best provider of family
banking services in our market areas and maximizing our shareholders' value." We
appreciate your confidence expressed by investing in First Federal Bancshares of
Arkansas.
 
                                              Sincerely,
 
                                              /s/ Larry J. Brandt

                                              Larry J. Brandt
                                              President

                                       1

<PAGE>

                               CORPORATE PROFILE
 
    First Federal Bancshares of Arkansas, Inc. (the "Company") was incorporated
in January 1996 under Texas law for the purpose of acquiring all of the capital
stock issued by First Federal Bank of Arkansas, FA ("First Federal" or the
"Bank") in connection with its conversion from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association (the "Conversion"). The Conversion was consummated on May 3, 1996
and, as a result, the Company became a unitary savings and loan holding company
of the Bank. The Company has no significant assets other than the shares of the
Bank's common stock acquired in the Conversion, the Company's loan to the
Employee Stock Ownership Plan and the portion of the net Conversion proceeds
retained and invested by the Company. The Company has no significant
liabilities.
 
    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
nine 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 secured
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.
 
    At December 31, 1996, the Company had total assets of $505.7 million, total
deposits of $422.9 million and stockholders' equity of $80.8 million. The
Company's and the Bank's principal executive offices are located at 200 West
Stephenson, Harrison, Arkansas 72601, and their telephone number is
(501)741-7641.

                                       2

<PAGE>

 
                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
 
    The selected consolidated financial and other data of the Company set forth
below and on the following page does not purport to be complete and should be
read in conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and related Notes,
appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                                             AT OR FOR THE
                                                                        YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------------
 
                                                          1996        1995        1994        1993        1992
                                                       ----------  ----------  ----------  ----------  ----------
                                                                             (IN THOUSANDS)

<S>                                                    <C>         <C>         <C>         <C>         <C>
 
Selected Financial Condition Data:
 
 Total assets.........................................  $  505,739  $  454,479  $  428,312  $  402,649  $  391,897
 Cash and cash equivalents............................       6,819       8,845       8,280      22,491      13,961
 Investment securities................................      91,322      96,312     130,527     134,861     152,875
 Loans receivable, net................................     396,508     339,505     279,783     236,659     215,854
 Deposits.............................................     422,858     417,229     395,483     374,908     369,368
 Stockholders' equity.................................      80,758      35,308      31,242      26,451      21,078
 
Selected Operating Data:
 Interest income......................................  $   37,192  $   32,964  $   29,790  $   29,944  $   31,099
 Interest expense.....................................      22,449      21,538      17,700      17,047      19,847
                                                        ----------  ----------  ----------  ----------  ----------
 Net interest income..................................      14,743      11,426      12,090      12,897      11,252
 Provision for loan losses............................          60         133          54         511         393
                                                        ----------  ----------  ----------  ----------  ----------
 Net interest income after provision for loan
  losses.............................................      14,683      11,293      12,036      12,386      10,859
 Gain on sale of mortgage-backed and investment
  securities.........................................      --             311         446       1,063         853
 Noninterest income...................................       1,222       1,107       1,137       1,165       1,303
 Noninterest expense(1)...............................      10,749       6,836       6,667       6,132       5,863
                                                        ----------  ----------  ----------  ----------  ----------
 Income before income taxes...........................       5,156       5,875       6,952       8,482       7,152
 Provision for income taxes...........................       1,756       1,871       2,250       3,109       2,650
                                                        ----------  ----------  ----------  ----------  ----------
 Net income(1)........................................  $    3,400  $    4,004  $    4,702  $    5,373  $    4,502
                                                        ----------  ----------  ----------  ----------  ----------
                                                        ----------  ----------  ----------  ----------  ----------
</TABLE>
 
------------------------
 (1) The year ended December 31, 1996 includes a nonrecurring SAIF special
    assessment of approximately $2.6 million or approximately $1.7 million net
    of the income tax benefit.


                                       3 



<PAGE>

<TABLE>
<CAPTION>
                                                                           AT OR FOR THE YEAR ENDED DECEMBER 31,
                                                                   -----------------------------------------------------
                                                                      1996       1995       1994       1993       1992
                                                                   ---------  ---------  ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>        <C>        <C>
 
Selected Operating Ratios(1):
Return on average assets(2)......................................        .69%       .91%      1.12%      1.35%      1.16%
Return on average equity(2)......................................       5.22      12.03      16.22      22.56      24.12
Average equity to average assets.................................      13.23       7.55       6.91       5.99       4.80
Interest rate spread(3)..........................................       2.48       2.37       2.74       3.14       2.84
Net interest margin(3)...........................................       3.08       2.66       2.96       3.33       2.98
Net interest income after provision for loan losses to
  noninterest expense............................................     136.60     165.20     180.53     201.99     185.21
Noninterest expense to average assets............................       2.18       1.55       1.59       1.54       1.51
Average interest-earning assets to average interest-bearing
  liabilities....................................................     112.96     105.92     105.23     104.37     102.67
Operating efficiency(4)..........................................      67.33      53.22      48.76      40.54      43.73
 
Asset Quality Ratios(5):
Nonperforming loans to total loans(6)............................       0.18       0.10       0.09       0.60       0.18
Nonperforming assets to total assets(6)..........................       0.17       0.13       0.12       0.48       0.40
Allowance for loan losses to non-performing loans................     173.51     350.86     420.00      99.25     254.76
Allowance for loan losses to total loans.........................       0.30       0.35       0.40       0.59       0.45
 
Capital Ratios(5):
Tangible capital to adjusted total assets........................      12.30       7.74       7.29       6.57       5.38
Core capital to adjusted total assets............................      12.30       7.74       7.29       6.57       5.38
Risk-based capital to risk-weighted assets.......................      23.24      15.57      16.62      16.52      14.58
 
Other Data:
Full service offices at end of period............................         10          8          8          8          8

</TABLE>
 
------------------------
 
(1) Ratios are based on average month end balances.
 
(2) The year ended December 31, 1996 includes a nonrecurring SAIF special
    assessment of approximately $2.6 million or approximately $1.7 million net
    of the income tax benefit. For the year ended December 31, 1996, return on
    average assets, without the SAIF special assessment, would have been 1.04%
    and return on average equity for the same period would have been 7.83%.
 
(3) Interest rate spread represents the difference between the weighted average
    yield on average interest-earning assets and the weighted average cost of
    average interest-bearing liabilities, and net interest margin represents net
    interest income as a percent of average interest-earning assets.
 
(4) Noninterest expense to net interest income plus noninterest income.
 
(5) Asset quality ratios and capital ratios are end of period ratios.
 
(6) Nonperforming assets consist of nonperforming loans and real estate owned
    ("REO"). Nonperforming loans consist of non-accrual loans while REO consists
    of real estate acquired in settlement of loans.

                                       4

<PAGE>

                      SELECTED QUARTERLY OPERATING RESULTS
                 (IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                    FOURTH        THIRD       SECOND        FIRST
YEAR ENDED DECEMBER 31, 1996                                        QUARTER      QUARTER      QUARTER      QUARTER
----------------------------------------------------------------  -----------  -----------  -----------  -----------
<S>                                                               <C>          <C>          <C>          <C>
 
Interest income.................................................   $   9,655    $   9,600    $   9,232    $   8,705
Interest expense................................................       5,598        5,556        5,592        5,703
                                                                  -----------  -----------  -----------  -----------
Net interest income.............................................       4,057        4,044        3,640        3,002
Provision for loan losses.......................................          60       --           --           --
                                                                  -----------  -----------  -----------  -----------
Net interest income after provision for loan losses.............       3,997        4,044        3,640        3,002
Noninterest income..............................................         314          307          311          290
Noninterest expense(1)..........................................       2,190        4,738        1,951        1,870
                                                                  -----------  -----------  -----------  -----------
Income (loss) before income taxes...............................       2,121         (387)       2,000        1,422
Provision (benefit) for income taxes............................         711         (127)         692          480
                                                                  -----------  -----------  -----------  -----------
Net income (loss) (1)...........................................   $   1,410    $    (260)   $   1,308    $     942
                                                                  -----------  -----------  -----------  -----------
                                                                  -----------  -----------  -----------  -----------
Earnings (loss) per share (2)...................................   $    0.30    $   (0.05)   $    0.28           NA

Selected Ratios (Annualized):
Net interest margin.............................................        3.29%        3.29%        3.03%        2.69%
Return on average assets........................................        1.11        (0.21)        1.06         0.82
Return on average equity........................................        6.79        (1.24)        8.75        10.54
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    FOURTH        THIRD       SECOND        FIRST
YEAR ENDED DECEMBER 31, 1995                                        QUARTER      QUARTER      QUARTER      QUARTER
----------------------------------------------------------------  -----------  -----------  -----------  -----------
<S>                                                               <C>          <C>          <C>          <C>
 
Interest income.................................................   $   8,520    $   8,406    $   8,154    $   7,884
Interest expense................................................       5,703        5,596        5,377        4,862
                                                                  -----------  -----------  -----------  ----------- 
Net interest income.............................................       2,817        2,810        2,777        3,022
Provision for loan losses.......................................         125       --                2            6
Net interest income after provision for loan losses.............       2,692        2,810        2,775        3,016
Noninterest income..............................................         596          279          279          264
Noninterest expense.............................................       1,810        1,648        1,668        1,710
                                                                  -----------  -----------  -----------  -----------
Income before income taxes......................................       1,478        1,441        1,386        1,570
Provision for income taxes......................................         475          461          458          477
                                                                  -----------  -----------  -----------  ----------- 
Net income......................................................   $   1,003    $     980    $     928    $   1,093
                                                                  -----------  -----------  -----------  -----------
                                                                  -----------  -----------  -----------  ----------- 
Earnings per share..............................................          NA           NA           NA           NA
 
Selected Ratios (Annualized):
Net interest margin.............................................        2.57%        2.60%        2.61%        2.89%
Return on average assets........................................        0.89         0.88         0.85         1.01
Return on average equity........................................       11.53        11.61        11.31        13.32
</TABLE>
 
------------------------
 
(1) The third quarter of 1996 includes the nonrecurring SAIF special assessment
    of approximately $2.6 million or approximately $1.7 million net of the
    income tax benefit.
 
(2) Earnings (loss) per share of common stock has been computed on the basis of
    the weighted-average number of shares of common stock outstanding in each
    quarter. The second quarter of 1996 assumes the Company was a public company
    at the beginning of that quarter.

                                       5

<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
GENERAL
 
    Management's discussion and analysis of results of operations is intended to
assist in understanding the consolidated financial condition and results of
operations of the Company. The information contained in this section should be
read in conjunction with the Consolidated Financial Statements and the
accompanying Notes to Consolidated Financial Statements and the other sections
contained in this Annual Report.
 
    The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations also are affected by the provision for loan losses, the
level of its noninterest income and expenses, and income tax expense.
 
ASSET AND LIABILITY MANAGEMENT
 
    The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of December 31, 1996, the Bank estimates that the ratio of
its one-year gap to total assets was a negative 16.6% and its ratio of
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 62.8%.
 
    In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Company's management has implemented and continues to monitor asset and
liability management policies to better match the maturities and repricing terms
of the Bank's interest-earning assets and interest-bearing liabilities. Such
policies have consisted primarily of: (i) emphasizing the origination of
adjustable-rate mortgage loans ("ARMs"); (ii) maintaining a significant
portfolio of relatively short-term (five years or less) investment securities;
and (iii) lengthening the maturity on deposits.

    The Bank focuses its lending activities on the origination of one-, three-
and seven-year adjustable-rate residential mortgage loans. Although
adjustable-rate loans involve certain risks, including increased payments and
the potential for default in an increasing interest rate environment, such loans
decrease the risks associated with changes in interest rates. As a result of the
Bank's efforts, as of December 31, 1996, $205.9 million or 60.9% of the Bank's
portfolio of one- to four-family residential mortgage loans consisted of ARMs,
including $172.5 million in seven-year ARMs.
 
    The Company's investment securities portfolio amounted to $91.3 million or
18.1% of the Company's total assets at December 31, 1996. Of such amount, $17.0
million or 18.6% is due within one year and $44.8 million or 49.1% is due after
one year through five years. However, actual maturities are normally shorter
than contractual maturities due to the ability of borrowers to call or prepay
such obligations with or without call or prepayment penalties.

                                       6

<PAGE>

    Deposits are the Bank's primary funding source and the Bank prices its
deposit accounts based upon competitive factors and the availability of prudent
lending and investment opportunities. The Bank seeks to lengthen the maturities
of its deposits by soliciting longer term certificates of deposit when market
conditions have created opportunities to attract such deposits. However, the
Bank does not solicit high-rate jumbo certificates of deposit and does not
pursue an aggressive growth strategy which would force the Bank to focus
exclusively on competitors' rates rather than deposit affordability.
 
NET PORTFOLIO VALUE
 
    Management also presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Bank's portfolio equity and
the level of net interest income on a quarterly basis. The Office of Thrift
Supervision ("OTS") adopted a final rule in August 1993 incorporating an
interest rate risk component into the risk-based capital rules. Under the rule,
an institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate component from total capital for
purposes of calculating the risk-based capital requirement. An institution with
a greater than "normal" interest rate risk is defined as an institution that
would suffer a loss of net portfolio value ("NPV") exceeding 2% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
A resulting change in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its capital 50%
of that excess change. The rule provides that the OTS will calculate the
interest rate risk component quarterly for each institution. In October 1994,
however, the Director of the OTS waived such deductions for all institutions
until the OTS publishes the process by which institutions may appeal the capital
deductions calculated by the OTS. The OTS has recently indicated that no
institution will be required to deduct capital for interest rate risk until
further notice. However, utilizing this measurement concept, at December 31,
1996, there would be a decrease in the Bank's NPV of approximately 3.10% of the
present value of its assets, assuming a 200 basis point increase in interest
rates.
 
    The following table presents the Bank's NPV as of December 31, 1996, as
calculated by the OTS, based on information provided to the OTS by the Bank.

<TABLE>
<CAPTION>
                                             NET PORTFOLIO VALUE
------------------------------------------------------------------------------------------

                                       ESTIMATED NPV AS A
CHANGE IN INTEREST                       PERCENTAGE OF
   RATES (BASIS                          PRESENT VALUE        AMOUNT          PERCENT
     POINTS)          ESTIMATED NPV        OF ASSETS         OF CHANGE       OF CHANGE
------------------  -----------------  ------------------  -------------  -------------
                         (DOLLARS IN THOUSANDS)
<S>                  <C>                    <C>                <C>            <C>
 
+400                   $   38,775               8.43%         $  (32,885)      (46)%
+300                       47,246              10.00             (24,415)      (34)
+200                       55,834              11.50             (15,826)      (22)
+100                       64,215              12.89              (7,446)      (10)
  --                       71,660              14.04              --            --
-100                       76,300              14.67               4,640         6
-200                       75,893              14.46               4,233         6
-300                       75,130              14.19               3,469         5
-400                       76,380              14.24               4,719         7
</TABLE>
 

                                       7

<PAGE>

CHANGES IN FINANCIAL CONDITION
 
    GENERAL. At December 31, 1996, the Company's assets amounted to $505.7 
million as compared to $454.5 million at December 31, 1995. The $51.2 million 
or 11.3% increase was primarily due to an increase of $57.0 million or 16.8% 
in loans receivable, net, which was partially offset by a decrease in 
investment securities held to maturity of $5.1 million or 5.3%. Such increase 
in assets was due to the deployment of net proceeds of $45.8 million 
resulting from the sale of 5,153,751 shares of the Company's common stock at 
a price of $10.00 per share. As discussed in Note 1 of the Notes to 
Consolidated Financial Statements, the Conversion was consummated on May 3, 
1996. Liabilities increased $5.8 million or 1.4% to $425.0 million at 
December 31, 1996 compared to $419.2 million at December 31, 1995. 
Stockholders' equity amounted to $80.8 million or 16.0% of total assets at 
December 31, 1996 compared to $35.3 million at December 31, 1995. The 
increase in stockholders' equity during the twelve month period was primarily 
due to net income of $3.4 million and the receipt of net conversion proceeds 
of $45.8 million reduced by the repurchase of 257,688 shares of common stock, 
as treasury stock, for $4.2 million.
 
    LOANS RECEIVABLE.  Net loans receivable increased by $57.0 million, or
16.8%, to $396.5 million at December 31, 1996 from $339.5 million at December
31, 1995. Loan originations for 1996 totaled $161.1 million. The net loans
receivable increase was composed of increases in single-family residential loans
of $50.5 million or 17.5%, construction loans, net of undisbursed funds, of $4.1
million or 55.8%, commercial loans of $334,000 or 8.3%, and consumer loans of
$2.9 million or 11.7%. Loans were originated using the Bank's normal
underwriting standards, rates, and terms.
 
    Unearned loan fee income at December 31, 1996 amounted to $4.4 million, up
from $3.7 million at December 31, 1995. These unearned fees are recognized as an
adjustment to yield over the contractual lives of the related loans. Undisbursed
amounts of loans in process related to construction loans at December 31, 1996
was $8.7 million, compared to $4.3 million at December 31, 1995.
 
    INVESTMENT SECURITIES.  Investment securities available for sale and held to
maturity amounted to $91.3 million as of December 31, 1996 compared to $96.3
million as of December 31, 1995. In 1996, approximately $41.0 million of
short-term U.S. Government and agency obligations were purchased with funds
primarily received from the Conversion. Maturities and called securities
amounted to $46.0 million in 1996, which resulted in a decrease of $5.0 million
or 5.2% in investment securities at December 31, 1996 compared to December 31,
1995.
 
    DEPOSITS.  Deposits at December 31, 1996 amounted to $422.9 million, a
increase of $5.7 million from the December 31, 1995 balance of $417.2 million.
The growth was limited due to deposits at the Bank used to purchase the
Company's stock in May 1996. The Bank does not advertise for deposits outside of
its primary market area, Northcentral and Northwest Arkansas, or utilize the
services of deposit brokers. Also, the Bank continues to promote longer term
deposits, to the extent possible, in keeping with its asset and liability
management goals. In the latter part of 1996, the Bank introduced a new
inflation protected certificate of deposit, which reflects management's desire
to offer competitive investment products to the Bank's customers.
 
    STOCKHOLDERS' EQUITY. Stockholders' equity increased $45.5 million to $80.8
million at December 31, 1996 from $35.3 million at December 31, 1995. The
increase was primarily the result of $45.8 million of net proceeds from the
issuance of the Company's common stock in the Conversion as discussed in Note 1
of the Notes to Consolidated Financial Statements and net income of $3.4
million, which was partially offset by the repurchase of 257,688 shares of the
Company's stock, as treasury stock, for $4.2 million.


                                       8

<PAGE>

AVERAGE BALANCE SHEET
 
    The following table sets forth certain information relating to the 
Company's average balance sheet and reflects the average yield on assets and 
average cost of liabilities for the periods indicated and the yields earned 
and rates paid at December 31, 1996. Such yields and costs are derived by 
dividing income or expense by the average balance of assets or liabilities, 
respectively, for the periods presented and outstanding balances at December 
31, 1996. Average balances are based on month end balances during the periods.

<TABLE>
<CAPTION>
                                      DECEMBER 31,                           YEAR ENDED DECEMBER 31,
                                      ------------  -----------------------------------------------------------------------
                                          1996                         1996                               1995             
                                      -------------------------------------------------------------------------------------
                                         YIELD/                                AVERAGE                           AVERAGE   
                                          COST         AVERAGE                  YIELD/     AVERAGE                YIELD/   
                                                       BALANCE      INTEREST     COST      BALANCE    INTEREST     COST    
                                      -------------  ------------  ----------  ---------  ---------  ----------  --------- 
                                                                    (DOLLARS IN THOUSANDS)                               

<S>                                    <C>            <C>           <C>          <C>      <C>         <C>         <C>    
Interest-earning  assets:                                                                                               
 Loans receivable(1)                   8.22%          $  369,185    $  30,498    8.26%    $306,175    $  25,544    8.34%
 Investment securities(2)              6.22              102,398        6,258    6.11      109,267        6,343    5.81 
 Mortgage-backed securities            8.83                  264           22    8.33        9,378          778    8.30 
 Other interest-earning assets         5.21                6,335          414    6.54        4,069          299    7.35 
                                                       ---------    ---------             ----------    ---------       
   Total interest-earning assets       7.84              478,182       37,192    7.78      428,889       32,964    7.69 
                                                                    ---------                           ---------
Noninterest-earning assets                                13,821                            12,326                   
                                                       ---------                          ----------                   
    Total assets                                      $  492,003                          $441,215                   
                                                       ---------                          ----------                   
                                                       ---------                          ---------- 
Interest-bearing liabilities:                                                                         
 Deposits                             5.32            $  420,062       22,409    5.33     $404,930       21,538    5.32
 Other borrowings                       --                 3,264           40    1.23        --            --       -- 
                                                       ---------    ---------             ----------       ------      
    Total interest-bearing                                                                                             
      liabilities                     5.32               423,326       22,449    5.30      404,930       21,538    5.32
Noninterest-bearing liabilities                            3,564                             2,988                   
                                                       ---------                          ----------                   
    Total liabilities                                    426,890                           407,918                   
Stockholders' equity                                      65,113                            33,297                   
                                                       ---------                          ----------                   
    Total liabilities and                                                                             
     stockholders' equity                             $  492,003                          $441,215                   
                                                       ---------                          ----------                   
                                                       ---------                          ----------                   
                                                                    --------                             --------    
Net interest income                                                $  14,743                             $ 11,426    
                                                                    --------                             --------    
                                                                    --------                             --------    
Net earning assets                                    $   54,856                          $ 23,959                   
                                                       ---------                          ----------                   
                                                       ---------                          ----------                   
Interest rate spread                  2.52%                                     2.48%                               2.37% 
                                      -----                                     -----                               ----- 
                                      -----                                     -----                               ----- 
Net  interest margin                                                            3.08%                               2.66% 
                                                                                -----                               -----  
                                                                                -----                               -----     
Ratio of interest-earning                                                                                                    
  assets to interest-bearing                                                                                              
  liabilities                                                                 112.96%                             105.92% 
                                                                                -------                           -------  
                                                                                -------                           ------- 



                                  --------------------------------- 
                                                  1994             
                                  --------------------------------- 
                                                          AVERAGE   
                                    AVERAGE                YIELD/   
                                    BALANCE    INTEREST     COST    
                                   ---------  ----------  --------- 
<S>                                <C>        <C>         <C> 
Interest-earning  assets:
 Loans receivable(1)               $  257,261  $  21,200   8.24%
 Investment securities(2)             117,535      6,410   5.45
 Mortgage-backed securities            19,843      1,624   8.18
 Other interest-earning assets         13,392        556   4.15
   Total interest-earning assets   ----------  --------- 
Noninterest-earning assets            408,031     29,790   7.30
                                               --------- 
    Total assets                       11,275 
                                    --------- 
                                   $  419,306 
                                    --------- 
                                    --------- 
Interest-bearing liabilities:
 Deposits                          $  387,756     17,700   4.56
 Other borrowings                          --         --     --
                                    ---------     ------
    Total interest-bearing         
      liabilities                     387,756     17,700   4.56
Noninterest-bearing liabilities         2,567              
                                   ----------
    Total liabilities                 390,323                    
Stockholders' equity                   28,983              
                                   ---------- 
    Total liabilities and                                    
     stockholders' equity          $  419,306              
                                   ----------              
                                   ----------              
                                                 -------- 
Net interest income                              $ 12,090 
                                                 -------- 
                                                 -------- 
Net earning assets                 $   20,275              
                                   ----------              
                                   ----------              
Interest rate spread                                       2.74%
                                                          ------
                                                          ------
Net  interest margin                                       2.96%
                                                          ------
                                                          ------
Ratio of interest-earning        
  assets to interest-bearing     
  liabilities                                            105.23%
                                                          ------
                                                          ------
</TABLE>
 
------------------------
(1) Includes non-accrual loans.
 
(2) Includes Federal Home Loan Bank of Dallas ("FHLB") stock and Federal Home
    Loan Mortgage Corporation ("FHLMC") preferred stock at cost.


                                       9

<PAGE>

RATE/VOLUME ANALYSIS
 
    The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate); (ii) changes in rate
(change in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume); and
(iv) the net change.
<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                              ---------------------------------------------------------------------------------
                                                             1996 VS. 1995                             1995 VS. 1994
                                              ----------------------------------------------  ---------------------------------
                                                     INCREASE (DECREASE)                             INCREASE (DECREASE)
                                                           DUE TO                                          DUE TO
                                              ---------------------------------               ---------------------------------
 
                                                                                    TOTAL
                                                                       RATE/      INCREASE                             RATE/
                                               VOLUME      RATE       VOLUME     (DECREASE)    VOLUME      RATE       VOLUME
                                              ---------  ---------  -----------  -----------  ---------  ---------  -----------
 
                                                                               (IN THOUSANDS)
<S>                                           <C>        <C>        <C>          <C>          <C>        <C>        <C>
 
Interest income:
 Loans receivable............................  $   5,257  $    (252)  $     (51)   $   4,954   $   4,031  $     262   $      51
 Investment securities.......................       (399)       335         (21)         (85)       (451)       413         (29)
 Mortgage-backed securities..................       (756)         9          (9)        (756)       (856)        22         (12)
 Other interest-earning assets...............        166        (33)        (18)         115        (387)       428        (298)
                                                ---------  ---------       -----   -----------  ---------  ---------       -----
   Total interest-earning assets.............      4,268         59         (99)       4,228       2,337      1,125        (288)
                                                ---------  ---------       -----   -----------  ---------  ---------       -----
Interest expense:
 Deposits....................................        805         63           3          871         784      2,925         129
 Other borrowings............................         --         --              40           40      --         --          --
                                                ---------  ---------       -----   -----------  ---------  ---------       -----
    Total interest-bearing liabilities.......        805         63          43          911         784      2,925         129
                                                ---------  ---------       -----   -----------  ---------  ---------       -----
 Net change in interest income...............   $   3,463  $      (4)  $    (142)   $   3,317   $   1,553  $  (1,800)  $    (417)
                                                 ---------  ---------       -----   -----------  ---------  ---------       -----
                                              ---------  ---------       -----   -----------  ---------  ---------       -----
 
<CAPTION>
 
<S>                                           <C>
 
                                                 TOTAL
                                               INCREASE
                                              (DECREASE)
                                              -----------
 
<S>                                           <C>
Interest income:
 Loans receivable............................   $   4,344
 Investment securities.......................         (67)
 Mortgage-backed securities..................        (846)
 Other interest-earning assets...............        (257)
                                               -----------
    Total interest-earning assets...........         3,174
                                               -----------
Interest expense:
 Deposits....................................        3,838
 Other borrowings............................           --
                                               -----------
Total interest-bearing liabilities..........       3,838
                                              -----------
Net change in interest income...............   $    (664)
                                              -----------
                                              -----------
</TABLE>
 
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995.
 
    GENERAL.  Net income amounted to $3.4 million for 1996 compared to $4.0
million for 1995. The decrease in net income was due primarily to an increase in
noninterest expenses as a result of the SAIF special assessment, which was
partially offset by an increase in net interest income.
 
    NET INTEREST INCOME.  Net interest income is determined by the Company's 
interest rate spread (i.e., the difference between the yields earned on its 
interest-earning assets and the rates paid on its interest-bearing 
liabilities) and the relative amounts of interest-earning assets and 
interest-bearing liabilities. The Company's net interest income amounted to 
$14.7 million in 1996, an increase of $3.3 million or 28.9% compared to $11.4 
million for 1995. The Company's interest rate spread and net interest margin 
increased to 2.48% and 3.08%, respectively, for 1996 compared to 2.37% and 
2.66% for 1995. Such increases in the Bank's interest rate spread and net 
interest margin were due to the increased investment in higher yielding loans 
receivable, relative to investment securities, and an increase in the ratio 
of interest-earning assets to interest-bearing liabilities to 112.96% for 
1996 compared to 105.92% for 1995, which was partially offset by an increase 
in interest expense due to deposit growth.
 
    INTEREST INCOME.  Interest income increased $4.2 million or 12.7% to 
$37.2 million for 1996 compared to $33.0 million for 1995. The interest 
income increase resulted from an increase of $5.0 million in interest income 
on loans receivable which was partially offset by decreases of $756,000 and 
$85,000 in interest income on mortgage-backed securities and investment 
securities, respectively. The increase in interest income on loans receivable 
was due to an increase of $63.0 million or 20.6% in the average balance of 
loans receivable as a result of increased loan originations. The positive 
impact of the increase on the average balance of loans receivable was 
partially offset by 

                                       10

<PAGE>

a decrease in the average yield earned on such assets to 8.26% for 1996 from 
8.34% in 1995. Such decrease in the average yield was due to originations of 
loans at lower interest rates and refinancing of higher rate loans. Interest 
income on investment securities declined primarily as a result of a decrease 
in the average balance of such assets due to maturities and calls of such 
investments that were invested in higher-yielding loans. The decline was 
partially offset by an increase in the average yield earned on investment 
securities from 5.81% in 1995 to 6.11% in 1996. Such increase was primarily 
due to the investment of a portion of the net proceeds from the Conversion in 
longer term higher-rate investment securities, a substantial portion of which 
were subsequently called in the latter part of 1996 and scheduled maturities 
of lower-yielding investment securities. The decrease in interest income on 
mortgage-backed securities was substantially due to a decrease of $9.1 
million in the average balance of such assets resulting from sales of 
mortgage-backed securities and payments and prepayments of the mortgages 
underlying such securities. The sales of such securities occurred in November 
1995, with no sales of such securities in 1996.
 
    INTEREST EXPENSE.  Interest expense increased $911,000 or 4.2% to $22.4 
million in 1996 compared to $21.5 million in 1995. The increase was due 
almost solely to an increase of $15.1 million or 3.7% in the average balance 
of deposits resulting from interest credited which was partially offset by a 
deposit outflow primarily related to accountholders purchasing the Company's 
common stock in the Conversion.
 
    PROVISION FOR LOAN LOSSES.  Provisions for loan losses amounted to 
$60,000 and $133,000 for 1996 and 1995, respectively. Provisions for losses 
include charges to reduce the recorded balance of mortgage loans to their 
estimated fair value. Such provision and the adequacy of the allowance for 
loan losses is evaluated periodically by management of the Bank 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 decrease in the provision for loan losses in 1996 compared to 1995 was 
due to management's evaluation of the adequacy of the allowance for loan 
losses.

      NONINTEREST INCOME.  Noninterest income decreased $196,000 or 13.8% to 
$1.2 million in 1996 compared to $1.4 million in 1995 due primarily to a 
$311,000 decrease in gain on sales of mortgage-backed and investment 
securities. Such decrease was the result of no sales activity in 1996. 
Deposit fee income amounted to $764,000 and $716,000 for 1996 and 1995, 
respectively or a 6.7% increase.

      NONINTEREST EXPENSE.  Noninterest expenses increased $3.9 million or 
57.2% to $10.7 million in 1996 compared to $6.8 million in 1995. The increase 
was primarily due to a nonrecurring SAIF special assessment of $2.6 million, 
a $870,000 increase in salaries and employee benefits, a $117,000 increase in 
data processing and additional costs associated with being a public company. 
The increase in salaries and employee benefits was due to normal merit 
increases as well as increases in personnel and additional post retirement 
costs including the employee stock ownership plan ("ESOP") adopted in 
connection with the Conversion. Generally accepted accounting principles 
require recognition of compensation expense for shares released from the ESOP 
at the fair market value of the shares at the time they are committed to be 
released. Such costs amounted to $402,000 in 1996. The increase in data 
processing costs was the result of charges tied to the number of accounts 
reflecting the growth of the Bank.

      INCOME TAXES.  Income taxes amounted to $1.8 million and $1.9 million 
for 1996 and 1995, respectively, resulting in effective tax rates of 34.1% 
and 31.8%, respectively.
 
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994.
 
    GENERAL.  The Bank's net income amounted to $4.0 million for the year 
ended December 31, 1995 compared to $4.7 million for the year ended December 
31, 1994. The decrease of $698,000 or 14.8% was primarily due to decreases in 
net interest income and noninterest income as well as an increase in 
noninterest expenses.

                                       11

<PAGE>
     NET INTEREST INCOME.  The Bank's net interest income amounted to $11.4 
million for the year ended December 31, 1995, a decrease of $664,000 or 5.5% 
compared to $12.1 million for the same period in 1994. The decrease was due 
to an increase of $3.8 million or 21.7% in interest expense which was 
partially offset by an increase of $3.2 million or 10.7% in interest income. 
The Bank's interest rate spread and net interest margin decreased to 2.37% 
and 2.66%, respectively, for the year ended December 31, 1995 from 2.74% and 
2.96%, respectively, for the 1994 period. The ratio of interest-earning 
assets to interest-bearing liabilities was 105.92% and 105.23% for the years 
ended December 31, 1995 and 1994, respectively.

      INTEREST INCOME.  The increase in interest income during the year ended 
December 31, 1995 compared to December 31, 1994 was primarily due to an 
increase of $4.3 million or 20.5% in interest income on loans receivable. 
Such increase was due to an increase in the average balance of such assets of 
$48.9 million or 19.0% as a result of increased loan demand. In addition, to 
a significantly lesser extent, the increase in interest income on loans 
receivable was due to an increase in the average yield earned on such assets 
of 10 basis points. Such increase in interest income on loans receivable was 
partially offset by a decrease in interest income on mortgage-backed 
securities of $846,000 or 52.1% due to a decrease in the average balance of 
such assets. During the year ended December 31, 1995, the Bank used liquidity 
from operations, including cash flow from mortgage-backed securities, 
primarily to fund loan originations.

      INTEREST EXPENSE.  Interest expense, consisting solely of interest paid 
on deposits, increased by $3.8 million or 21.7% during the year ended 
December 31, 1995 compared to 1994 due primarily to an increase in the 
average rate paid on deposits. The average rate paid on deposits increased 76 
basis points to 5.32% for the year ended December 31, 1995 compared to 4.56% 
for the year ended December 31, 1994. The increase in the average rate 
reflects both an increase in general market rates of interest in 1995 and the 
payment of higher rates on longer-term deposits by the Bank as part of its 
asset and liability management. The increase in deposit interest expense was 
also due to an increase in the average balance of deposits reflecting deposit 
inflows and marketing of the Bank's deposit products.

      PROVISION FOR LOAN LOSSES.  Provisions for loan losses amounted to 
$133,000 and $54,000 for 1995 and 1994, respectively. Provisions for losses 
include charges to reduce the recorded balance of mortgage loans to their 
estimated fair value. Such provision and the adequacy of the allowance for 
loan losses is evaluated periodically by management of the Bank based on the 
Bank's past loan loss experience, known and inherent risks in the portfolio, 
adverse situations that may affect the borrowers ability to repay, the 
estimated value of any underlying collateral and current economic conditions. 
The increase in the provision for loan losses in 1995 compared to 1994 was 
primarily due to the slight increase in nonperforming assets and management's 
desire to increase the allowance for loan losses in light of the increase in 
the Bank's loan portfolio.

      NONINTEREST INCOME.  Noninterest income decreased $165,000 or 10.4% to 
$1.4 million for the year ended December 31, 1995 compared to $1.6 million 
for the year ended December 31, 1994. Such decrease was due primarily to a 
decrease of $135,000 in gain on sales of mortgage-backed and investment 
securities as a result of decreased sales activity in 1995.

      NONINTEREST EXPENSES.  Noninterest expenses increased $169,000 or 2.5% 
between the 1995 and 1994 periods primarily due to an increase in salaries 
and employee benefits. The increase in salaries and employee benefits of 
$361,000 or 11.7%, due primarily to normal merit increases, as well as an 
increase in personnel, was partially offset by a decrease of $91,000 in the 
provision for real estate losses. The increase in personnel was due to 
increased staffing requirements as a result of the growth of the Bank.

      INCOME TAXES.  Income taxes amounted to $1.9 million and $2.3 million, 
respectively, for the years ended December 31, 1995 and 1994, resulting in 
effective tax rates of 31.8% and 32.4%, respectively.  

                                       12

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      The Bank's liquidity, represented by cash and cash equivalents, is a 
product of its operating, investing and financing activities. The Bank's 
primary sources of funds are deposits, amortization, prepayments and 
maturities of outstanding loans, maturities and sales of investment 
securities and other short-term investments and funds provided from 
operations. While scheduled loan amortization and maturing investment 
securities and short-term investments are relatively predictable sources of 
funds, deposit flows and loan prepayments are greatly influenced by general 
interest rates, economic conditions and competition. The Bank manages the 
pricing of its deposits to maintain a steady deposit balance. In addition, 
the Bank invests excess funds in overnight deposits and other short-term 
interest-earning assets which provide liquidity to meet lending requirements. 
The Bank has generally been able to generate enough cash through the retail 
deposit market, its traditional funding source, to offset the cash utilized 
in investing activities. As an additional source of funds, the Bank may 
borrow from the FHLB of Dallas but has not generally utilized this source of 
funds.

      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 5%. At December 31, 1996, the Bank's liquidity ratio 
was 12.3%.

      Liquidity management is both a daily and long-term function of business 
management. Excess liquidity is generally invested in short-term investments 
such as overnight deposits. On a longer-term basis, the Bank maintains a 
strategy of investing in various lending products. The Bank uses its sources 
of funds primarily to meet its ongoing commitments, to pay maturing savings 
certificates and savings withdrawals and fund loan commitments. At December 
31, 1996, the total approved mortgage loan origination commitments 
outstanding, excluding the undisbursed portion of construction loans, 
amounted to $2.8 million. At the same date, the undisbursed portion of 
construction loans approximated $8.7 million. The Bank's unused lines of 
credit at December 31, 1996 were approximately $2.3 million. Certificates of 
deposit scheduled to mature in one year or less at December 31, 1996 totaled 
$197.4 million. Investment securities scheduled to mature in one year or less 
at December 31, 1996 totaled $17.0 million. Management believes that a 
significant portion of maturing deposits will remain with the Bank.

      As of December 31, 1996, the Bank's regulatory capital was well in 
excess of all applicable regulatory requirements. At December 31, 1996, the 
Bank's tangible, core and risk-based capital ratios amounted to 12.30%, 
12.30% and 23.24%, respectively.  

RECENT ACCOUNTING PRONOUNCEMENTS

      In May 1993, the Financial Accounting Standards Board ("FASB") issued 
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for 
Certain Investments in Debt and Equity Securities," affecting the accounting 
for investments in debt and equity securities, which are to be classified 
into one of three categories. Securities which management has the positive 
intent and ability to hold until maturity are to be classified as held to 
maturity and reported at amortized cost. Securities that are bought and held 
principally for the purpose of selling them in the near term are to be 
classified as trading securities and reported at fair value, with unrealized 
gains and losses included in earnings. All other securities are to be 
classified as available for sale securities and reported at fair value, with 
unrealized gains and losses excluded from earnings and reported as a separate 
component of equity until realized. The Bank adopted SFAS No. 115 as of 
January 1, 1994. As a result of its adoption of SFAS No. 115, the Company 
included in equity at December 31, 1996 and 1995 an unrealized gain net of 
taxes of $202,000 and $151,000, respectively, on securities available for 
sale. See also Note 1 of the Notes to Consolidated Financial Statements.

                                       13

<PAGE>
     In May 1993, the FASB also issued SFAS No. 114, "Accounting by Creditors 
for Impairment of a Loan." In October 1994, the FASB issued SFAS No. 118 
"Accounting by Creditors for Impairment of a Loan--Income Recognition and 
Disclosures," which amended income recognition methods and certain 
disclosures required by SFAS No. 114. The Bank implemented SFAS No. 114, as 
amended, on January 1, 1995. The statement establishes accounting 
measurement, recognition and reporting standards for impaired loans. SFAS No. 
114 provides that a loan is impaired when, based on current information and 
events, it is probable that the creditor will be unable to collect all 
amounts due according to the contractual terms of the loan agreement (both 
principal and interest). SFAS No. 114 requires that when a loan is impaired, 
impairment should be measured based on the present value of the expected cash 
flows, discounted at the loan's effective interest rate. If the loan is 
collateral dependent, as a practical expedient, impairment can be based on a 
loan's observable market price or the fair value of the collateral. The value 
of the loan is adjusted through a valuation allowance created through a 
charge against income. Residential mortgages and consumer installment 
obligations are excluded. Loans that were treated as in-substance 
foreclosures under previous accounting pronouncements are considered to be 
impaired loans and remain in the loan portfolio under SFAS No. 114. The 
adoption of SFAS No. 114, as amended, has not had a material effect on the 
Company's operations.

    In October 1995, the FASB issued SFAS No. 123, "Accounting for 
Stock-Based Compensation," establishing financial accounting and reporting 
standards for stock-based employee compensation plans. This Statement 
encourages all entities to adopt a new method of accounting to measure 
compensation cost of all employee stock compensation plans based on the 
estimated fair value of the award at the date it is granted. Companies are, 
however, allowed to continue to measure compensation cost for those plans 
using the intrinsic value based method of accounting, which generally does 
not result in compensation expense recognition for most plans. Companies that 
elect to remain with the existing accounting are required to disclose, in a 
footnote to the financial statements, pro forma net income and, if presented, 
earnings per share, as if this statement had been adopted. The accounting 
requirements of this statement are effective for transactions entered into in 
fiscal years that begin after December 15, 1995; however, companies are 
required to disclose information for awards granted in their first fiscal 
year beginning after December 15, 1994. The Company will submit to its 
stockholders at the 1997 annual meeting the Company's 1997 stock option plan 
(the "Plan"). Assuming the Plan is approved by the stockholders the Company 
intends to use the intrinsic value based method of accounting. Accordingly, 
the Company does not believe that this statement will have a material impact 
on its financial condition or results of operations.

      In November 1993, the AICPA issued SOP 93-6, Employers' Accounting for 
Employee Stock Ownership Plans, which is effective for fiscal years beginning 
after December 15, 1993. SOP 93-6 applied to the Company for its year 
beginning January 1, 1996. SOP 93-6 requires the application of its guidance 
for shares acquired by ESOPs after December 31, 1992 but not yet committed to 
be released as of the beginning of the year SOP 93-6 is adopted. SOP 93-6 
changes, among other things, the measure of compensation expense recorded by 
employers for leveraged ESOPs from the cost of ESOP shares to the fair value 
of ESOP shares. Under SOP 93-6, the Company recognizes compensation cost 
equal to the fair value of the ESOP shares during the periods in which they 
become committed to be released. To the extent that fair value of the 
Company's ESOP shares differ from the cost of such shares, this differential 
is charged or credited to equity. Employers with internally leveraged ESOPs 
such as the Company does not report the loan receivable from the ESOP as an 
asset and does not report the ESOP debt from the employer as a liability. The 
application of SOP 93-6 has not had a material impact on the Company's 
financial condition.
 
    In October 1994, the FASB issued SFAS No. 119, "Disclosures about 
Derivative Financial Instruments and Fair Value of Financial Instruments." 
SFAS No. 119 applies to financial statements issued for fiscal years ending 
after December 15, 1994. SFAS No. 119 requires entities that hold or issue 
derivative financial instruments for trading purposes to disclose related 
average fair value and net trading gains or losses. For entities that hold or 
issue derivative financial instruments for purposes other than trading, it 
requires disclosure about those purposes and about 

                                       14

<PAGE>

how the instruments are reported in financial statements. For entities that 
hold or issue derivative financial instruments and account for them as hedges 
of anticipated transactions, it requires disclosure about the anticipated 
transactions, the classes of derivative financial instruments used to hedge 
those transactions, the amounts of hedging gains and losses deferred, and the 
transactions or other events that result in recognition of the deferred gains 
or losses in earnings. SFAS No. 119 also encourages the disclosure of 
quantitative information about market risks of derivative financial 
instruments, and also of other assets and liabilities, that is consistent 
with the way the entity manages or adjusts risks and that is useful for 
comparing the results of applying the entity's strategies to its objectives 
for holding or issuing the derivative financial instruments. Although 
authorized by the Company's investment policy, the Company does not hold any 
derivative financial instruments under SFAS No. 119 and does not anticipate 
that the implementation of SFAS No. 119 will have a material impact on its 
results of operations or financial position.

      In March 1995, the FASB issued SFAS No. 121 "Accounting for the 
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 
SFAS No. 121 establishes accounting standards for the impairment of 
long-lived assets, certain identifiable intangibles, and goodwill related to 
those assets to be held and used and for long-lived assets and certain 
identifiable intangibles to be disposed of. The statement does not apply to 
financial instruments, long-term customer relationships of a financial 
institution (core deposits), mortgage and other servicing rights and deferred 
tax assets. SFAS No. 121 requires the review of long-lived assets and certain 
identifiable intangibles for impairment whenever events or changes in 
circumstances include, for example, a significant decrease in market value of 
an asset, a significant change in use of an asset, an adverse change in a 
legal factor that could effect the value of an asset. If such an event occurs 
and it is determined that the carrying value of the asset may not be 
recoverable, an impairment loss should be recognized as measured by the 
amount by which the carrying amount of the asset exceeds the fair value of 
the asset. Fair value can be determined by a current transaction, quoted 
market prices or present value of estimated expected future cash flows 
discounted at the appropriate rate. The statement is effective for fiscal 
years beginning after December 15, 1995. The Company does not anticipate 
implementation of SFAS No. 121 will have a material impact on its results of 
operations or financial position.

      In December 1994, the AICPA issued SOP 94-6, "Disclosure of Certain 
Significant Risks and Uncertainties" which requires entities to disclose 
specified information, including a description of certain risks and 
uncertainties. SOP 94-6 requires four new disclosures related to: (1) the 
nature of an entities operations, (2) a statement about the use of estimates 
in the financial statements, (3) uncertainties concerning estimates that 
affect financial statement amounts if it is reasonably possible that the 
estimates that will change within a year and that change could be material to 
the financial statements, and (4) risks related to concentrations in volume 
of business, sources of supply, revenue or market or geographic area if those 
concentrations expose the entity to risk of a disruption in operations within 
a year. The first two disclosures will always be necessary whereas the 
disclosure about certain significant estimates and vulnerability from 
concentrations apply if criteria specified in SOP 94-6 are met. SOP 94-6 is 
effective for fiscal years ending after December 15, 1995.

      In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage 
Servicing Rights, an amendment of FASB Statement No. 65," which requires that 
a mortgage banking enterprise record as a separate asset rights to service 
mortgage loans for others, however those servicing rights are acquired. In 
circumstances where mortgage loans are originated, separate asset rights to 
service mortgage loans are only recorded when the enterprise intends to sell 
such loans. This statement will be applied prospectively for fiscal years 
beginning after December 15, 1995. Adoption of SFAS No. 122 is not expected 
to have a material impact on the Company's financial position or results of 
operations.

                                        15

<PAGE>

IMPACT OF INFLATION AND CHANGING PRICES

      The financial statements and related financial data presented herein 
have been prepared in accordance with generally accepted accounting 
principles, which require the measurement of financial position and operating 
results in terms of historical dollars, without considering changes in 
relative purchasing power over time due to inflation.

      Unlike most industrial companies, virtually all of the Bank's assets 
and liabilities are monetary in nature. As a result, interest rates generally 
have a more significant impact on a financial institution's performance than 
does the effect of inflation.  

                                       16

<PAGE>

                                   [LETTERHEAD]



INDEPENDENT AUDITORS' REPORT
 
The Board of Directors of 
First Federal Bancshares of Arkansas, Inc.:
 
    We have audited the consolidated statements of financial condition of 
First Federal Bancshares of Arkansas, Inc. and its subsidiary (the "Company") 
as of December 31, 1996 and 1995, and the related consolidated statements of 
income, stockholders' equity and cash flows for each of the three years in 
the period ended December 31, 1996. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit also includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.
 
    In our opinion, such consolidated financial statements present fairly, in 
all material respects, the financial position of First Federal Bancshares of 
Arkansas, Inc. and its subsidiary at December 31, 1996 and 1995, and the 
results of their operations and their cash flows for each of the three years 
in the period ended December 31, 1996, in conformity with generally accepted 
accounting principles.

/s/  Deloitte & Touche LLP

February 15, 1997
 
                                       17

<PAGE>
                   FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
 
         CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS)
                           DECEMBER 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                           1996        1995
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
ASSETS
Cash and cash equivalents.............................................  $    6,819  $    8,845
Investment securities:
Available for sale, at fair value (amortized cost of $12 at December
  31, 1996 and 1995)..................................................         340         258
Held to maturity, at amortized cost (fair value at December 31, 1996
  and 1995, of $90,497 and $96,118, respectively).....................      90,982      96,054
Federal Home Loan Bank stock..........................................       3,026       2,821
Loans receivable, net of allowance at December 31, 1996 and 1995, of
  $1,251 and $1,228, respectively.....................................     396,508     339,505
Accrued interest receivable...........................................       3,620       3,477
Real estate acquired in settlement of loans, net......................         154         234
Office properties and equipment, net..................................       3,565       2,993
Prepaid expenses and other assets.....................................         725         292
                                                                        ----------  ----------
TOTAL ASSETS..........................................................  $  505,739  $  454,479
                                                                        ----------  ----------
                                                                        ----------  ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
 Deposits.............................................................  $  422,858  $  417,229
 Advance payments by borrowers for taxes and insurance................         806         746
 Other liabilities....................................................       1,317       1,196
                                                                        ----------  ----------
   Total liabilities..................................................     424,981     419,171
                                                                        ----------  ----------
STOCKHOLDERS' EQUITY:
 Preferred stock, no par value, 5,000,000 shares authorized, none
   issued Common stock, $.01 par value, 20,000,000 shares authorized,
   5,153,751 shares issued, 4,896,063 shares outstanding..............          52      --
 Additional paid-in capital...........................................      49,975      --
 Unearned ESOP shares.................................................      (3,848)     --
 Unrealized gain on investment securities available for sale, net of
   tax of $126 in 1996 and $95 in 1995................................         202         151
 Retained earnings--substantially restricted..........................      38,557      35,157
                                                                        ----------  ----------
                                                                            84,938      35,308
Treasury stock, at cost, 257,688 shares...............................      (4,180)     --
                                                                        ----------  ----------
   Total stockholders' equity.........................................      80,758      35,308
                                                                        ----------  ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................  $  505,739  $  454,479
                                                                        ----------  ----------
                                                                        ----------  ----------

</TABLE>
 
    See notes to consolidated financial statements.
 
                                       18

<PAGE>
                   FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
 
  CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                                                     1996       1995       1994
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
INTEREST INCOME:
 Loans receivable................................................................  $  30,498  $  25,544  $  21,200
 Investment securities...........................................................      6,258      6,343      6,410
 Mortgage-backed securities......................................................         22        778      1,624
 Other...........................................................................        414        299        556
                                                                                   ---------  ---------  ---------
   Total interest income.........................................................     37,192     32,964     29,790
INTEREST EXPENSE:
 Deposits........................................................................     22,409     21,538     17,700
 Other Borrowings................................................................         40     --         --
                                                                                   ---------  ---------  ---------
   Total interest expense........................................................     22,449     21,538     17,700
                                                                                   ---------  ---------  ---------
NET INTEREST INCOME..............................................................     14,743     11,426     12,090
PROVISION FOR LOAN LOSSES........................................................         60        133         54
                                                                                   ---------  ---------  ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..............................     14,683     11,293     12,036
                                                                                   ---------  ---------  ---------
NONINTEREST INCOME:
 Gain on sales of investment securities, primarily mortgage-backed...............     --            311        446
 Deposit fee income..............................................................        764        716        741
 Other...........................................................................        458        391        396
                                                                                   ---------  ---------  ---------
   Total noninterest income......................................................      1,222      1,418      1,583
                                                                                   ---------  ---------  ---------
NONINTEREST EXPENSES:
 Salaries and employee benefits..................................................      4,325      3,455      3,094
 Net occupancy expense...........................................................        672        612        649
 Federal insurance premiums......................................................        902        910        867
 SAIF Special Assessment.........................................................      2,611     --         --
 Provision for real estate losses................................................         38         25        116
 Data processing.................................................................        745        628        672
 Postage and supplies............................................................        309        261        235
 Other...........................................................................      1,147        945      1,034
                                                                                   ---------  ---------  ---------
   Total noninterest expenses....................................................     10,749      6,836      6,667
                                                                                   ---------  ---------  ---------
INCOME BEFORE PROVISION FOR INCOME TAXES.........................................      5,156      5,875      6,952
PROVISION FOR INCOME TAXES.......................................................      1,756      1,871      2,250
                                                                                   ---------  ---------  ---------
NET INCOME.......................................................................  $   3,400  $   4,004  $   4,702
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
EARNINGS PER SHARE...............................................................       0.72  $     N/A        N/A
                                                                                   ---------
                                                                                   ---------
</TABLE>
 
    See notes to consolidated financial statements.
 
                                       19

<PAGE>
                   FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
 
         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                                                              UNREALIZED
                                                                                               GAIN ON
                                                  ISSUED                         UNEARNED     SECURITIES             
                                              COMMON STOCK          ADDITIONAL     ESOP      AVAILABLE FOR   RETAINED
                                       ---------------------------   PAID-IN      SHARES       SALE, NET     EARNINGS
                                       --------------  -----------  -----------  -----------  -------------  ---------
<S>                                    <C>             <C>          <C>        <C>          <C>            <C>      
BALANCE, JANUARY 1, 1994                                                                                   $  26,451
 Effect of adoption of SFAS 115.......                                                        $ 821           --    
 Net income...........................                                                           --            4,702
Net change in unrealized gain
  on securities available for sale....                                                         (732)          --    
                                                                                             -----------   ---------
BALANCE, DECEMBER 31, 1994............                                                           89           31,153
 Net income...........................                                                          --            4,004 
Net change in unrealized gain on 
  securities available for sale.......                                                           62           --    

BALANCE, DECEMBER 31, 1995............                                                          151           35,157
 Net income............................                                                                        3,400
 Issuance of common stock..............      5,153,751    $ 52        $ 49,848                  --            --    
 Loan to Employee Stock 
  Ownership Plan ("ESOP")..............                     --            --     $  (4,123)     --            --    
 Repayment of ESOP loan and related
  increase in share value..............                     --             127         275      --            --    
 Net change in unrealized gain
  on securities available for sale.....                     --             --            --      51           --    
 Purchase of treasury stock, at cost...                     --             --            --     --            --    
                                         --------------    ---        ---------  -----------   -----         --------
BALANCE, DECEMBER 31, 1996.............      5,153,751    $ 52        $  49,975   $  (3,848)   $202          $38,557
                                         --------------    ---        ---------  -----------   -----         --------
                                         --------------    ---        ---------  -----------   -----         ---------

<CAPTION>
                                              TREASURY STOCK        TOTAL       
                                           --------------------  STOCKHOLDERS'  
                                            SHARES     AMOUNT       EQUITY      
                                           ---------  ---------  ------------   
<S>                                        <C>        <C>        <C>            
BALANCE, JANUARY 1, 1994                                          $   26,451    
 Effect of adoption of SFAS 115.......                                   821    
 Net income...........................                                 4,702    
Net change in unrealized gain                                                   
  on securities available for sale....                                  (732)   
                                                                   ----------   
BALANCE, DECEMBER 31, 1994............                                31,242    
 Net income...........................                                4,004     
Net change in unrealized gain on                                                
  securities available for sale.......                                    62    
                                                                                
BALANCE, DECEMBER 31, 1995............                                35,308    
 Net income............................                                3,400    
 Issuance of common stock..............                               49,900    
 Loan to Employee Stock                                                         
  Ownership Plan ("ESOP")..............                               (4,123)   
 Repayment of ESOP loan and related                                             
  increase in share value..............                                  402    
 Net change in unrealized gain                                                  
  on securities available for sale.....                                   51    
 Purchase of treasury stock, at cost...       257,688    $  (4,180)   (4,180)   
                                             ---------   ---------  ------------
BALANCE, DECEMBER 31, 1996.............       257,688    $  (4,180)  $   80,758 
                                             ---------   ---------  ------------
                                             ---------   ---------  ------------

</TABLE>
 
    See notes to consolidated financial statements.
 
                                       20

<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                                                      1996       1995       1994
                                                                                    ---------  ---------  ---------
<S>                                                                                 <C>        <C>        <C>
OPERATING ACTIVITIES:
 Net income.......................................................................  $   3,400  $   4,004  $   4,702
 Adjustments to reconcile net income to net cash 
  provided by operating activities:
  Provision for loan losses.......................................................         60        133         54
  Provision for real estate losses................................................         38         25        116
  Deferred tax provision..........................................................        111        153        109
  Gain on sale of investment securities...........................................     --           (311)      (446)
  Gain on sale of real estate owned...............................................        (10)       (11)       (45)
  Depreciation....................................................................        403        391        427
  Accretion of deferred loan fees.................................................       (640)      (470)      (466)
  Repayment of ESOP loan and related increase in share value......................        402        --         --
  Changes in operating assets and liabilities:
   Accrued interest receivable....................................................       (143)        17       (610)
   Prepaid expenses and other assets..............................................       (433)        29       (122)
   Other liabilities..............................................................        (21)       157        196
                                                                                    ---------  ---------  ---------
Net cash provided by operating activities.........................................      3,167      4,117      3,915
                                                                                    ---------  ---------  ---------
INVESTING ACTIVITIES:
Purchases of investment securities--held to maturity..............................    (41,172)   (24,395)   (48,617)
Purchases of loans................................................................     --         (3,235)      (720)
Proceeds from sales of investment securities -available for sale..................     --         10,253     19,454
Proceeds from maturities of investment securities -held to maturity...............     46,040     48,594     33,791
Loan originations, net of repayments..............................................    (56,518)   (56,265)   (42,078)
Proceeds from sales of real estate owned..........................................        146        117        260
Purchases of office properties and equipment......................................       (975)      (373)      (892)
                                                                                    ---------  ---------  ---------
Net cash used by investing activities.............................................    (52,479)   (25,304)   (38,802)
                                                                                    ---------  ---------  ---------
FINANCING ACTIVITIES:
Net increase in deposits..........................................................      5,629     21,746     20,575
Net increase in advance payments by borrowers for taxes and insurance.............         60          6        101
Increase from issuance of common stock, net of related expenses...................     45,777     --         --
Purchase of treasury stock........................................................     (4,180)    --         --
                                                                                    ---------  ---------  ---------
Net cash provided by financing activities.........................................     47,286     21,752     20,676
                                                                                    ---------  ---------  ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..............................     (2,026)       565    (14,211)
CASH AND CASH EQUIVALENTS:
Beginning of year.................................................................      8,845      8,280     22,491
                                                                                    ---------  ---------  ---------
End of year.......................................................................  $   6,819  $   8,845  $   8,280
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
                                                             (Continued)
 
                                       21
<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                                                     1996       1995       1994
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.........................................................................  $  22,451  $  21,417  $  17,540
                                                                                   ---------  ---------  ---------
Income taxes.....................................................................  $   1,899  $   1,916  $   2,180
                                                                                   ---------  ---------  ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans......................................  $      95  $     128  $      98
                                                                                   ---------  ---------  ---------
Loans to facilitate sales of real estate owned...................................  $     110  $     108
                                                                                   ---------  ---------  ---------
Transfers of investment securities to available for sale portfolio...............             $   9,946
                                                                                              ---------
Increase (decrease) in unrealized gains, net.....................................  $      51  $      62  $    (732)
                                                                                   ---------  ---------  ---------
</TABLE>
 
                                                                    (Concluded)
 
See notes to consolidated financial statements.


                                       22

<PAGE>


FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    Nature of Operations and Principles of Consolidation--First Federal 
Bancshares of Arkansas, Inc. (the "Company") was incorporated in January 1996 
by First Federal Bank of Arkansas, FA (the "Bank") in connection with the 
conversion of the Bank from a federally chartered mutual savings and loan 
association to a federally chartered stock savings and loan association, the 
issuance of the Bank's common stock to the Company, and the offer and sale of 
the Company's common stock by the Company (the "Conversion"). Upon 
consummation of the Conversion on May 3, 1996, the Company became a unitary 
holding company for the Bank. Approximately 50% of the net proceeds from the 
Conversion were used to acquire 100% of the common stock of the Bank. The 
remaining net proceeds from the Conversion were retained by the Company. The 
conversion was accounted for at historical cost in a manner similar to that 
in pooling of interests accounting.
 
    The Bank provides a broad line of financial products to individuals and 
small to medium sized businesses. The consolidated financial statements also 
include the accounts of the Bank's wholly-owned subsidiary, First Harrison 
Service Corporation whose activities are limited to owning an interest in and 
servicing a commercial loan. All material intercompany transactions have been 
eliminated in consolidation. The financial statements as of December 31, 
1995, and for the years ended December 31, 1994 and 1995, are those of the 
Bank prior to the Conversion. Results of operations and cash flows of the 
Bank for the period from January 1, 1996 to May 3, 1996, are included in the 
consolidated financial statements of the Company for the year ended December 
31, 1996.

    Basis of Presentation--The consolidated financial statements of the 
Company have been prepared in conformity with generally accepted accounting 
principles ("GAAP").
 
    Use of Estimates--The preparation of financial statements in conformity 
with generally accepted accounting principles requires management to make 
estimates and assumptions that affect the reported amounts of assets and 
liabilities and disclosure of contingent assets and liabilities at the date 
of the financial statements and the reported amounts of revenues and expenses 
during the reporting period. Actual results could differ from those estimates 
and such differences could be significant.
 
    Liquidity Requirement--Regulations require the Bank to maintain an amount 
equal to 5% of deposits (net of loans on deposits) plus short-term borrowings 
in cash and U.S. Government and other approved securities.
 
    Cash and Cash Equivalents--For purposes of reporting cash flows, cash 
includes cash on hand and amounts due from depository institutions, which 
includes interest-bearing amounts available upon demand.
 
    Investment Securities--The Company classifies investment securities into 
one of two categories: held to maturity or available for sale. Debt 
securities that the Company has the positive intent and ability to hold to 
maturity are classified as held to maturity and recorded at cost, adjusted 
for the amortization of premiums and the accretion of discounts.

                                       23

<PAGE>

    Investment securities that the Company intends to hold for indefinite 
periods of time are classified as available for sale and are recorded at fair 
value. Unrealized holding gains and losses are excluded from earnings and 
reported net of tax as a separate component of equity until realized. 
Investment securities in the available for sale portfolio may be used as part 
of the Company's asset and liability management practices and may be sold in 
response to changes in interest rate risk, prepayment risk or other economic 
factors.
 
    Premiums are amortized into interest income using the interest method to 
the earlier of maturity or call date. Discounts are accreted into interest 
income using the interest method over the period to maturity. The specific 
identification method of accounting is used to compute gains or losses on the 
sales of investment securities.
 
    The overall return or yield earned on mortgage-backed securities depends 
on the amount of interest collected over the life of the security and the 
amortization of any premium or accretion of any discount. Premiums and 
discounts are recognized in income using a method that approximates the 
level-yield method over the assets' remaining lives adjusted for anticipated 
prepayments. Although the Company receives the full amount of principal if 
prepaid, the interest income that would have been collected during the 
remaining period to maturity, net of any discount accretion or premium 
amortization is lost. Accordingly, the actual yields and maturities of 
mortgage-backed securities depend on when the underlying mortgage principal 
and interest are prepaid. Prepayments generally result when market interest 
rates fall below a mortgage's contractual interest rate and it is to the 
borrower's advantage to prepay the existing loan and obtain new, lower rate 
financing. In addition to changes in interest rates, mortgage prepayments 
depend on other factors such as loan types and geographic location of the 
related properties.  

    If the fair value of an investment security declines for reasons other 
than temporary market conditions, the carrying value of such a security is 
written down to fair value by a charge to operations.
 
    Loans Receivable--Loans receivable are stated at unpaid principal 
balances less the allowance for loan losses and net of deferred loan fees or 
costs and discounts. Deferred loan fees or costs and discounts on first 
mortgage loans are amortized or accreted to income using the level-yield 
method over the remaining period to contractual maturity.
 
    The Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 
114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, 
Accounting by Creditors for Impairment of a Loan--Income Recognition and 
Disclosures, an amendment of SFAS No. 114, effective January 1, 1995. These 
statements address the accounting by creditors for impairment of certain 
loans. They apply to all creditors and to all loans, uncollateralized as well 
as collateralized, except for large groups of smaller-balance homogeneous 
loans that are collectively evaluated for impairment, loans measured at fair 
value or at lower of cost or fair value, leases, and debt securities. The 
Bank considers all one- to four- family residential mortgage loans, 
construction loans, and all consumer and other loans (as presented in Note 3) 
to be smaller homogeneous loans. These statements apply to all loans that are 
restructured involving a modification of terms. Loans within the scope of 
these statements are considered impaired when, based on current information 
and events, it is probable that all principal and interest will not be 
collected in accordance with the contractual terms of the loans. Management 
determines the impairment of loans based on knowledge of the borrower's 
ability to repay the loan according to the contractual agreement and the 
borrower's repayment history. Management does not consider an insignificant 
delay or insignificant shortfall to impair a loan and has determined that a 
delay less than 90 days will be considered an insignificant delay and that an 
amount less than $25 thousand will be considered an insignificant shortfall. 
The Bank does not apply SFAS No. 114 using major risk classifications, but 
applies SFAS No. 114 on a 

                                       24

<PAGE>

loan by loan basis. All nonaccrual loans on which the accrual of interest has 
been discontinued are considered to be impaired. Impaired loans are 
considered to be nonaccrual loans only if they are 90 days or more past due. 
All loans are charged off when management determines that principal and 
interest are not collectible. Impaired loans during the years ended December 
31, 1996 and 1995, were insignificant.
 
    The accrual of interest on impaired loans is discontinued when, in 
management's opinion, the borrower may be unable to meet payments as they 
become due or when the loan becomes 90 days past due, whichever occurs first. 
When interest accrual is discontinued, all unpaid accrued interest is 
reversed. Interest income is subsequently recognized only to the extent cash 
payments in excess of principal due are received, until such time that in 
management's opinion, the borrower will be able to meet payments as they 
become due.
 
    Any excess of the Bank's recorded investment in the loans (unpaid 
principal balance, adjusted for unamortized premium or discount and net of 
deferred loan origination fees or costs) over the measured value of the loans 
in accordance with SFAS No. 114 are provided for in the allowance for loan 
losses. The Bank reviews its loans for impairment on a quarterly basis.
 
    Allowance for Loan Losses--The allowance for loan losses is a valuation 
allowance available for losses incurred on loans. All losses are charged to 
the allowance when the loss actually occurs or when a determination is made 
that a loss is likely to occur. Recoveries are credited to the allowance at 
the time of recovery.
 
    Throughout the year management estimates the likely level of losses to 
determine whether the allowance for loan losses is adequate to absorb losses 
in the existing portfolio. Based on these estimates, an amount is charged to 
the provision for loan losses and credited to the allowance for loan losses 
in order to adjust the allowance to a level determined to be adequate to 
absorb anticipated losses. The allowance for loan losses is increased by 
charges to income (provisions) and decreased by charge-offs, net of 
recoveries. Management's periodic evaluation of the adequacy of the allowance 
is based on the Company'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.
 
    Estimates of loan losses involve an exercise of judgment. While it is 
reasonably possible that in the near term the Company may sustain losses 
which are substantial in relation to the allowance for loan losses, it is the 
judgment of management that the allowance for loan losses reflected in the 
consolidated statements of financial condition is adequate to absorb 
estimated losses that may exist in the current portfolio.
 
    Real Estate--Real estate acquired in settlement of loans is initially 
recorded at estimated fair value less estimated costs to sell and is 
subsequently carried at the lower of depreciated cost or fair value less 
estimated disposal costs. Valuations are periodically performed by 
management, and an allowance for losses is established by a charge to 
operations or the balance is written off if the carrying value of a property 
exceeds its estimated fair value. Costs relating to the development and 
improvement of the property are capitalized, whereas those relating to 
holding the property are expensed.
 
    Office Properties and Equipment--Office properties and equipment are 
stated at cost less accumulated depreciation and amortization. The Company 
computes depreciation of office properties and equipment using the 
straight-line method over the estimated useful lives of the individual assets 
which range from 3 to 30 years.
 
                                       25


<PAGE>

    Loan Origination Fees--Loan origination fees and certain direct loan 
origination costs are deferred and the net fee or cost is recognized as an 
adjustment to interest income using the level-yield method over the 
contractual life of the loans. When a loan is fully repaid or sold, the 
amount of unamortized fee or cost is recorded in income.
 
    Income Taxes--The Company recognizes deferred tax liabilities and assets 
for the expected future tax consequences of temporary differences between the 
carrying amounts and the tax bases of assets and liabilities.
 
    Interest Rate Risk--The Bank's asset base is exposed to risk including 
the risk resulting from changes in interest rates and changes in the timing 
of cash flows. The Bank monitors the effect of such risks by considering the 
mismatch of the maturities of its assets and liabilities in the current 
interest rate environment and the sensitivity of assets and liabilities to 
changes in interest rates. The Bank's management has considered the effect of 
significant increases and decreases in interest rates and believes such 
changes, if they occurred, would be manageable and would not affect the 
ability of the Bank to hold its assets as planned. However, the Bank is 
exposed to significant market risk in the event of significant and prolonged 
interest rate changes.
 
    Recently Issued Accounting Standards--In June 1996 the Financial 
Accounting Standards Board ("FASB") issued SFAS No. 125, Accounting for 
Transfers and Servicing of Financial Assets and Extingquishments of 
Liabilities, as amended by SFAS No. 127. This statement provides accounting 
and reporting standards for transfer and servicing of financial assets and 
extinguishment of liabilities. The statement is effective for transfers and 
servicing of financial assets and extinguishments of liabilities occurring 
after December 31, 1996, as amended. Management believes that implementation 
of this pronouncement should have no material adverse effect on the Company's 
financial position or results of operations.
 
    Earnings per Share--Earnings per share of common stock has been computed 
on the basis of the weighted-average number of shares of common stock 
outstanding, assuming the Company was a public company since January 1, 1996.
 
    Reclassifications--Certain amounts in the 1995 and 1994 consolidated 
financial statements have been reclassified to conform to the classifications 
adopted for reporting in 1996.

2. INVESTMENT SECURITIES
 
    Investment securities consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,1996
                                      -----------------------------------------------------
                                                        GROSS          GROSS
                                        AMORTIZED     UNREALIZED     UNREALIZED      FAIR
AVAILABLE FOR SALE                        COST          GAINS          LOSSES        VALUE
------------------------------------  -------------  ------------  -------------  ---------
<S>                                       <C>           <C>          <C>            <C>

FHLMC preferred stock                      $12          $328         $ --           $340
                                         -------      --------       -----          -----
Total                                      $12          $328         $ --           $340
                                         -------      --------       -----          -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1996
                                      -----------------------------------------------------
                                                        GROSS          GROSS
                                         AMORTIZED    UNREALIZED     UNREALIZED      FAIR
HELD TO MATURITY                          COST          GAINS         LOSSES        VALUE
------------------------------------  ------------   -----------   -------------  -----------

<S>                                     <C>           <C>            <C>            <C>
U.S. Government and Agency 
 obligations                            $90,755       $227           $719           $90,263
Mortgage-backed securities
 --FHLMC                                    227          7             --               234
                                      -----------     -----          -----          ---------
    Total                               $90,982       $234           $719           $90,497
                                      -----------     -----          -----          ---------
                                      -----------     -----          -----          ---------
</TABLE>

                                       26

<PAGE>

 
<TABLE>
<CAPTION>
                                                        GROSS          GROSS
                                        AMORTIZED     UNREALIZED     UNREALIZED      FAIR
AVAILABLE FOR SALE                        COST          GAINS         LOSSES        VALUE
------------------------------------  -------------  ------------  -------------  -----------
<S>                                       <C>          <C>            <C>            <C>
FHLMC preferred stock                      $12         $246           $ --           $258
                                          -----       ------         -------        -----
Total                                      $12         $246           $ --           $258
                                          -----       ------         -------        -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1995
                                     --------------------------------------------------------
                                                        GROSS          GROSS
                                        AMORTIZED     UNREALIZED    UNREALIZED       FAIR
HELD TO MATURITY                          COST          GAINS          LOSSES        VALUE
------------------------------------  -------------  ------------  -------------  -----------
<S>                                    <C>              <C>           <C>            <C>

U.S. Government and Agency
 obligations                            $95,731          $633         $581           $95,783
Mortgage-backed securities--FHLMC           323            12          --                335
                                       ----------        -----        -----         ---------
    Total                               $96,054          $645         $581           $96,118
                                       ----------        -----        -----         ---------
                                       ----------        -----        -----         ---------

</TABLE>
 
    The Company had pledged investment securities held to maturity with carrying
values of approximately $13 million and $8 million at December 31, 1996 and
1995, respectively, as collateral for certain deposits in excess of $100
thousand.
 
    Gross realized gains on sales of available for sale securities were
approximately $311 thousand in 1995 and $446 thousand in 1994. There were no
significant gross losses.
 
    The scheduled maturities of debt securities at December 31, 1996, by
contractual maturity are shown below (in thousands). Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
 
<TABLE>
<CAPTION>
                                                                           AMORTIZED     FAIR
                                                                             COST        VALUE
                                                                         -----------  ---------
<S>                                                                        <C>         <C>
Due in one year or less................................................     $17,017     $16,957
Due from one year to five years........................................      44,775      44,515
Due from five years to ten years.......................................      25,963      25,843
Due after ten years....................................................       3,000       2,948
Mortgage-backed securities.............................................         227         234
                                                                         -----------  ---------
Total..................................................................   $  90,982   $  90,497
                                                                         -----------  ---------
                                                                         -----------  ---------
</TABLE>
 
    Upon adoption of SFAS 115 on January 1, 1994, the Bank classified 
approximately $20 million of investment securities as available for sale and 
recorded an unrealized holding gain, net of tax, of $821 thousand as an 
addition to equity.
 
    In November 1995, the FASB issued a Special Report, A Guide to 
Implementation of Statement 115 on Accounting for Certain Investments in Debt 
and Equity Securities (the "Guide"). The Guide provides that an enterprise 
may, concurrent with initial adoption of the Guide but no later than December 
31, 1995, reassess the appropriateness of the classification of all 
securities held at that time and account for any resulting reclassification 
at fair value in accordance with SFAS 115, paragraph 15. Reclassifications 
from held to maturity resulting from this one-time reassessment do not call 
into question the intent of an enterprise to hold other debt securities to 
maturity in the future. The Bank adopted the implementation guidance on 
November 15, 1995, and reclassified mortgage-backed securities with a 
carrying value of $9.9 million and a fair value of $10.2 million at that date 
from held to maturity to available for sale. On November 15, 1995, such 
mortgage-backed securities were sold with a gain of $311 thousand. Related 
income taxes due on gain were approximately $104 thousand.

                                       27

<PAGE>

    Management's intent and ability to hold investment and mortgage-backed 
securities classified as held to maturity will have a significant effect on 
the Company. Since management expresses a positive intent to hold such 
securities to maturity and they believe the Company has the ability to do so, 
the securities are classified as held to maturity and are carried in the 
statements of financial condition at amortized cost. In the absence of such 
positive intent or ability, the securities would be classified as available 
for sale and carried at estimated fair value. The Company may transfer or 
sell a security classified as held to maturity if it is near maturity or call 
date (within three months) if exercise of the call is probable or if 
substantially all of the principal has been collected (at least 85%) and 
under certain other circumstances including the deterioration of the issuer's 
creditworthiness, a change in tax law, statutory requirements, or other 
regulatory requirements. If the Company sells or transfers securities from 
the held to maturity portfolio not meeting one of the above exceptions, the 
entire held to maturity portfolio would most likely be reclassified as 
available for sale, resulting in unrealized holding gains and losses being 
reported net of tax as a separate component of stockholders' equity.

3. LOANS RECEIVABLE
 
   Loans receivable consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                         DECEMBER    DECEMBER
                                                                           31,         31,
                                                                           1996        1995
                                                                        ----------   ----------
<S>                                                                     <C>          <C>
First mortgage loans:
 One- to four- family residences......................................   $  338,349   $  287,872
 Other properties.....................................................       20,691       20,783
 Construction.........................................................       20,053       11,603
 Less:
  Unearned discounts...................................................      (1,253)      (1,420)
  Undisbursed loan funds...............................................      (8,670)      (4,298)
  Deferred loan fees, net..............................................      (3,232)      (2,423)
                                                                          ----------    ----------
    Total first mortgage loans.........................................     365,938      312,117
                                                                          ----------    ----------
Consumer and other loans:
 Commercial loans......................................................       4,348        4,014
 Automobile............................................................       7,556        6,993
 Consumer loans........................................................       4,077        4,336
 Home equity and second mortgage.......................................      12,549       10,466
 Savings loans.........................................................       1,526        1,174
 Other.................................................................       1,641        1,511
 Add--Deferred loan costs..............................................         124          122
                                                                          ----------  ----------
      Total consumer and other loans...................................      31,821       28,616
                                                                          ----------  ----------
Allowance for loan losses.............................................       (1,251)      (1,228)
                                                                          ----------  ----------
    Loans receivable, net..............................................  $  396,508   $  339,505
                                                                          ----------  ----------
                                                                          ----------  ----------
</TABLE>
 
    The Company originates and maintains loans receivable which are 
substantially concentrated in its lending territory (primarily Northwest and 
Northcentral Arkansas). The majority of the Company's loans are residential 
mortgage loans and construction loans for residential property. The Company's 
policy calls for collateral or other forms of repayment assurance to be 
received from the borrower at the time of loan origination. Such collateral 
or other form of repayment assurance is subject to changes in economic value 
due to various factors beyond the control of the Company.

    In the normal course of business, the Company has made loans to its 
directors, officers, and their related business interests. In the opinion of 
management, related party loans are made on substantially the same terms, 
including interest rates and collateral, as those prevailing at the time for 
comparable transactions with unrelated persons and do not involve more than 
the normal risk of collectibility. The aggregate dollar amount of loans 
outstanding to directors, officers and their related business interests 
totaled approximately $2.3 million and $1.9 million at December 31, 1996 and 
1995, respectively.

                                       28

<PAGE>
4. LOAN SERVICING
 
    Mortgage loans serviced for others are not included in the accompanying 
consolidated statements of financial condition. The unpaid principal balances 
of these loans are summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,  DECEMBER 31,   DECEMBER 31,
                                                                    1996          1995           1994
                                                                ------------  -------------  -------------
<S>                                                             <C>           <C>            <C>
Mortgage loans underlying FHLMC pass-through securities.......   $  440        $  519         $  702
Mortgage loan portfolios serviced for other investors.........    1,335         1,477          2,465
                                                                --------       -------        -------
     Total....................................................   $1,775        $1,996         $3,167
                                                                --------       -------        -------
                                                                --------       -------        -------
</TABLE>
 
    Servicing loans for others generally consists of collecting mortgage 
payments, maintaining escrow accounts, disbursing payments to investors and 
foreclosure processing. Loan servicing income is recorded on the accrual 
basis and includes servicing fees from investors and certain charges 
collected from borrowers, such as late payment fees.
 
5. ACCRUED INTEREST RECEIVABLE
 
    Accrued interest receivable consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,   DECEMBER 31,
                                                                       1996           1995
                                                                   -------------  -------------
<S>                                                                <C>            <C>
Loans............................................................    $   2,348      $   2,046
Investment securities............................................        1,272          1,431
                                                                        ------         ------
    Total........................................................    $   3,620      $   3,477
                                                                        ------         ------
                                                                        ------         ------
</TABLE>
 
6. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES
 
    A summary of the activity in the allowances for loan and real estate 
losses is as follows (in thousands):
<TABLE>
<CAPTION>
                                              YEAR ENDED              YEAR ENDED               YEAR ENDED
                                           DECEMBER 31, 1996       DECEMBER 31, 1995         DECEMBER 31, 1994
                                        ----------------------  ----------------------  -------------------------
                                                      REAL                    REAL                       REAL
                                          LOANS      ESTATE       LOANS      ESTATE       LOANS         ESTATE
                                        ---------  -----------  ---------  -----------  ---------     -----------
<S>                                     <C>        <C>          <C>         <C>          <C>           <C>
Balance, beginning of year..............  $   1,228   $  --      $   1,134   $  --       $   1,447      $  --
Provisions for estimated losses.........         60      38            133      25              54        116
Recoveries..............................          3      --              1      --               1         --
Losses charged off......................        (40)    (38)           (40)    (25)           (368)      (116)
                                          ---------   ------     ---------   ------      ---------      ------
Balance, end of year....................  $   1,251   $  --      $   1,228   $  --       $   1,134      $  --
                                          ---------   ------     ---------   ------      ---------      ------
                                          ---------   ------     ---------   ------      ---------      ------
</TABLE>
 
7. FEDERAL HOME LOAN BANK STOCK
 
    THE BANK IS A MEMBER OF THE FEDERAL HOME LOAN BANK SYSTEM.  As a member of
this system, it is required to maintain an investment in capital stock of the
Federal Home Loan Bank in an amount equal to the greater of 1% of its
outstanding home loans or .3% of its total assets. No ready market exists for
such stock and it has no quoted market value.
 
                                       29



<PAGE>
8. OFFICE PROPERTIES AND EQUIPMENT
 
    Office properties and equipment consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,   DECEMBER 31,
                                                                       1996           1995
                                                                   -------------  -------------
<S>                                                                <C>            <C>
Land.............................................................    $     902      $     672
Buildings and improvements.......................................        2,797          2,526
Furniture and equipment..........................................        2,796          2,457
Automobiles......................................................          374            301
                                                                        ------         ------
Total............................................................        6,869          5,956
Accumulated depreciation.........................................       (3,304)        (2,963)
                                                                        ------         ------
Office properties and equipment, net.............................    $   3,565      $   2,993
                                                                        ------         ------
                                                                        ------         ------
</TABLE>
 
9. DEPOSITS
 
    Deposits are summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,  DECEMBER 31,
                                                                       1996          1995
                                                                   ------------  ------------
<S>                                                                <C>           <C>
Demand and NOW accounts, including noninterest-bearing deposits
  of $9,290 and $8,210 in 1996 and 1995,respectively.............   $   45,698    $   42,332
Money market.....................................................       17,214        19,920
Regular savings..................................................       26,451        27,480
Certificates of deposit..........................................      333,495       327,497
                                                                   ------------  ------------
Total............................................................   $  422,858    $  417,229
                                                                   ------------  ------------
                                                                   ------------  ------------
</TABLE>
 
    The aggregate amount of short-term jumbo certificates of deposit with a 
minimum denomination of $100 thousand was approximately $29 million and $23 
million at December 31, 1996 and 1995, respectively.
 
    At December 31, 1996, scheduled maturities of certificates of deposit are 
as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                                                TOTAL
                                                                                              ----------
<S>                                                                                           <C>
Years ending December 31:
1997                                                                                          $  197,406
1998                                                                                              49,443
1999                                                                                              26,676
2000                                                                                              15,193
2001                                                                                              10,966
Thereafter                                                                                        33,811
                                                                                             -----------
    Total                                                                                     $  333,495
</TABLE>

                                       30

<PAGE>


    Interest expense on deposits consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                                             YEARS ENDED
                                                                                            DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1996       1995       1994
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
NOW and Money Market.............................................................   $  1,324   $  1,359   $  1,543
Regular savings and certificate accounts.........................................     21,178     20,395     16,256
Early withdrawal penalties.......................................................        (93)      (216)       (99)
                                                                                   ---------  ---------  ---------
    Total........................................................................  $  22,409  $  21,538  $  17,700
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
    At December 31, 1996 and 1995, the Bank had pledged investment securities 
of approximately $13 million and $8 million, respectively, as collateral for 
certain deposits in excess of $100 thousand.
 
    Eligible deposits of the Bank are insured up to $100 thousand by the 
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance 
Corporation ("FDIC"). Both the SAIF and the Bank Insurance Fund ("BIF"), the 
federal deposit insurance fund that covers commercial bank deposits, are 
required by the law to attain and thereafter maintain a reserve ratio of 
1.25% of insured deposits.
 
    Legislation, passed by the U.S. House of Representatives and the Senate, 
was signed into law by the President on September 30, 1996, to recapitalize 
the SAIF. As a result of such legislation, the Bank was required to pay a 
one-time special assessment of $2.6 million which had an approximate $1.7 
million after-tax effect. The legislation also mandated that the deposit 
insurance premiums charged SAIF-insured institutions (such as the Bank) 
decline to approximately 6.5 basis points effective January 1, 1997. The 
mandated decline in the premium rate is expected to reduce the Bank's annual 
SAIF premiums by approximately $625 thousand (based on current deposit 
levels) which would result in an approximate $400 thousand after-tax effect.
 
10. INCOME TAXES
 
    The provisions for income taxes are summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                                                 YEAR ENDED
                                                                                                DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1996       1995       1994
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>

Income tax provision:
 Current.............................................................................  $   1,645  $   1,718  $   2,141
 Deferred............................................................................        111        153        109
                                                                                       ---------  ---------  ---------
    Total............................................................................  $   1,756  $   1,871  $   2,250
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>

<TABLE>
<CAPTION>
                                                         YEAR ENDED       YEAR ENDED       YEAR ENDED
                                                        DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                                            1996             1995             1994
                                                       ---------------  ---------------  ---------------
<S>                                                    <C>      <C>     <C>      <C>     <C>      <C>  
Taxes at statutory rate..............................   $1,753   34.0%   $1,997   34.0%   $2,364   34.0% 
Increase (decrease) resulting from:                                                                      
State income tax.....................................     --       --      --      --         14    0.2% 
Other, net...........................................        3    0.1%     (126)  (2.2)%    (128)  (1.8)% 
                                                         -----   -----     -----  ------  ------- -------
Total................................................   $1,756   34.1%   $1,871   31.8%    2,250  $ 32.4% 
                                                         -----   -----     -----  ------  ------- --------  
                                                         -----   -----     -----  ------  ------- --------  
</TABLE>
 
                                       31
<PAGE>

    During the year ended December 31, 1996, new legislation was enacted 
which provides for the recapture into taxable income of certain amounts 
previously deducted as additions to the bad debt reserves for income tax 
purposes. The Bank will begin changing its method of determining bad debt 
reserves for tax purposes following the year ended December 31, 1995. The 
amounts to be recaptured for income tax reporting purposes are considered by 
the Bank in the determination of the net deferred tax liability at December 
31, 1996.
 
    Payment of dividends to shareholders out of retained earnings deemed to 
have been made out of earnings previously set aside as bad debt reserves may 
create taxable income to the Bank. No provision has been made for income tax 
on such a distribution as the Bank does not anticipate making such 
distributions.
 
    The Company's deferred tax asset (liability) account was comprised of the 
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,   DECEMBER 31,
                                                                       1996           1995
                                                                   -------------  -------------
<S>                                                                <C>            <C>
Deferred tax assets--loan fees deferred..........................    $ 211         $ 283
Deferred tax liabilities:
Office properties................................................     (141)         (131)
Federal Home Loan Bank stock.....................................     (407)         (356)
Investment securities available for sale.........................     (126)          (95)
Loan loss reserves...............................................      (11)          (32)
                                                                      -----         -----
Total deferred tax liabilities...................................     (685)          (614)
                                                                      -----          -----
Net deferred tax liability.......................................    $(474)         $(331)
                                                                      -----          -----
                                                                      -----          -----
</TABLE>
 
    SFAS No. 109, Accounting for Income Taxes, provides for the recognition 
of a deferred tax asset or liability for the future tax consequences of 
differences in carrying amounts and tax bases of assets and liabilities. 
Specifically exempted from this provision are bad debt reserves for tax 
purposes of U.S. savings and loans in the institution's base year, as 
defined. Base year reserves totaled approximately $4.2 million at December 
31, 1996 and 1995. Consequently, a deferred tax liability of approximately 
$1.6 million related to such reserves was not provided for in the 
consolidated statements of financial condition at December 31, 1996 and 1995.
 
11. RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
 
    The Bank is a participant in a trusted multi-employer retirement plan and 
therefore separate information is not available. The plan is noncontributory 
and covers substantially all employees. The plan provides a retirement 
benefit and a death benefit. Retirement benefits are payable in monthly 
installments for life and must begin not later than the first day of the 
month coincident with or next following the seventieth birthday or the 
participant may elect a lump-sum distribution. Death benefits are paid in a 
lump-sum distribution, the amount of which depends on years of service. For 
the years ended December 31, 1996 and 1995, there was a net pension cost of 
approximately $100 thousand and $43 thousand, respectively. No pension cost 
was incurred for the year ended December 31, 1994.
 
    The Company established an Employee Stock Ownership Plan ("ESOP") on May 
3, 1996. During 1996, the ESOP borrowed $4.1 million from the Company to 
purchase shares of Company stock. The loan is collateralized by the shares 
that were purchased with the proceeds of the loan. As the loan is repaid, 
ESOP shares will be allocated to participants of the ESOP and are available 
for release to the participants subject to the vesting provisions of the ESOP.
 
    During the year ended December 31, 1996, ESOP expense was approximately 
$402 thousand.
 
                                       32
<PAGE>

12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
 
    The Company is a party to financial instruments with off-balance sheet 
risk in the normal course of business to meet the financing needs of its 
customers. These financial instruments include commitments to extend credit 
and standby letters of credit. Those instruments involve, to varying degrees, 
elements of credit risk in excess of the amount recognized in the 
consolidated statements of financial condition. The Company does not use 
financial instruments with off-balance sheet risk as part of its 
asset/liability management program or for trading purposes. The Company's 
exposure to credit loss in the event of nonperformance by the other party to 
the financial instrument for commitments to extend credit and standby letters 
of credit is represented by the contractual amounts of those instruments. The 
Company uses the same credit policies in making commitments and conditional 
obligations as it does for on-balance sheet instruments.
 
    Commitments to extend credit are agreements to lend to a customer as long 
as there is no violation of any condition established in the contract. 
Commitments generally have fixed expiration dates or other termination 
clauses. The Company evaluates each customer's creditworthiness on a 
case-by-case basis. The amount of collateral obtained, if deemed necessary by 
the Company upon extension of credit, is based on management's credit 
evaluation of the counterparty. Such collateral consists primarily of 
residential properties. Standby letters of credit are conditional commitments 
issued by the Company to guarantee the performance of a customer to a third 
party. The credit risk involved in issuing letters of credit is essentially 
the same as that involved in extending loan facilities to customers.
 
    The Company had the following outstanding commitments at December 31, 
1996 (in thousands):
 
<TABLE>
<S>                                                                  <C>
Undisbursed construction loans.....................................   $ 8,670
Commitments to originate mortgage loans............................     2,760
Letters of credit..................................................        53
Unused lines of credit.............................................     2,297
                                                                     ---------
Total..............................................................   $13,780
                                                                     ---------
                                                                     ---------
</TABLE>
 
    The funding period for construction loans is generally less than nine 
months and commitments to originate mortgage loans are generally outstanding 
for 60 days or less. At December 31, 1996, interest rates on commitments 
ranged from 5.5% to 10.25%.

                                       33

<PAGE>
 
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    The estimated fair value amounts have been determined by the Company 
using available market information and appropriate valuation methodologies. 
However, considerable judgment is required to interpret market data to 
develop the estimates of fair value. Accordingly, the estimates presented 
herein are not necessarily indicative of the amounts the Company could 
realize in a current market exchange. The use of different market assumptions 
and/or estimation methodologies may have a material effect on the estimated 
fair value amounts. The estimated fair values of financial instruments are as 
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31, 1996     DECEMBER 31, 1995
                                                                        --------------------  --------------------
                                                                        CARRYING     FAIR     CARRYING     FAIR
                                                                          VALUE      VALUE      VALUE      VALUE
                                                                        ---------  ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>        <C>
ASSETS:
Cash and cash equivalents.............................................  $   6,819  $   6,819  $   8,845  $   8,845
Investment securities:
Available for sale....................................................        340        340        258        258
Held to maturity......................................................     90,982     90,497     96,054     96,118
Federal Home Loan Bank stock..........................................      3,026      3,026      2,821      2,821
Loans receivable, net.................................................    396,508    399,175    339,505    343,369
Accrued interest receivable...........................................      3,620      3,620      3,477      3,477
LIABILITIES:
Deposits:
Demand, NOW, money market and regular savings.........................     89,363     89,363     89,732     89,732
Certificates of deposit...............................................    333,495    336,303    327,497    331,262
Accrued interest payable..............................................        434        434        436        436
Advance payments by borrowers for taxes and insurance 806.............        806        806        746        746
Commitments...........................................................     --         --         --         --
</TABLE>
 
    For cash and cash equivalents, Federal Home Loan Bank stock and accrued 
interest receivable, the carrying value is a reasonable estimate of fair 
value. The fair value of investment securities is based on quoted market 
prices, dealer quotes and prices obtained from independent pricing services. 
The fair value of loans receivable is estimated based on present values using 
applicable risk-adjusted spreads to the U.S. Treasury curve to approximate 
current entry-value interest rates considering anticipated prepayment speeds, 
maturity and credit risks.
 
    The fair value of demand deposit accounts, NOW accounts, savings accounts 
and money market deposits is the amount payable on demand at the reporting 
date. The fair value of fixed-maturity certificates of deposit is estimated 
using the rates currently offered for deposits of similar remaining 
maturities at the reporting date. For advance payments by borrowers for taxes 
and insurance and accrued interest payable the carrying value is a reasonable 
estimate of fair value. Commitments are generally made at prevailing interest 
rates at the time of funding and, therefore, there is no difference between 
the contract amount and fair value. The fair value estimates presented herein 
are based on pertinent information available to management as of December 31, 
1996 and 1995. Although management is not aware of any factors that would 
significantly affect the estimated fair value amounts, such amounts have not 
been comprehensively revalued for purposes of these financial statements 
since the reporting date and, therefore, current estimates of fair value may 
differ significantly from the amounts presented herein.

                                       34

<PAGE>

14. COMMITMENTS AND CONTINGENCIES
 
    In the ordinary course of business, the Company has various outstanding 
commitments and contingent liabilities that are not reflected in the 
accompanying consolidated financial statements. In addition, the Company is a 
defendant in certain claims and legal actions arising in the ordinary course 
of business. In the opinion of management, after consultation with legal 
counsel, the ultimate disposition of these matters is not expected to have a 
material adverse effect on the consolidated financial position of the Company.
 
15. RETAINED EARNINGS--SUBSTANTIALLY RESTRICTED
 
    Upon conversion, the Company established a special liquidation account 
for the benefit of eligible account holders and the supplemental eligible 
account holders in an amount equal to the net worth of the Bank as of the 
date of its latest statement of financial condition contained in the final 
offering circular used in connection with the conversion. The liquidation 
account will be maintained for the benefit of eligible account holders and 
supplemental eligible account holders who continue to maintain their accounts 
in the Bank after conversion. In the event of a complete liquidation (and 
only in such event), each eligible and supplemental eligible account holder 
will be entitled to receive a liquidation distribution from the liquidation 
account in an amount proportionate to the current adjusted qualifying 
balances for accounts then held.
 
    The Company may not declare or pay cash dividends on its shares of common 
stock if the effect thereof would cause the Company's stockholders' equity to 
be reduced below applicable regulatory capital maintenance requirements for 
insured institutions or below the special liquidation account referred to 
above.
 
16. REGULATORY MATTERS
 
    The Bank is subject to various regulatory capital requirements 
administered by the Office of Thrift Supervision ("OTS"). Failure to meet 
minimum capital requirements can initiate certain mandatory--and possible 
additional discretionary--actions by regulators that, if undertaken, could 
have a direct material effect on the Bank's financial statements. Under 
capital adequacy guidelines and the regulatory framework for prompt 
corrective action, the Bank must meet specific capital guidelines that 
involve quantitative measures of the Bank's assets, liabilities, and certain 
off-balance sheet items as calculated under regulatory accounting practices. 
The Bank's capital amounts and classification are also subject to qualitative 
judgments by the regulators about components, risk weightings, and other 
factors.
 
    Quantitative measures established by regulation to ensure capital 
adequacy require the Bank to maintain minimum amounts and ratios (set forth 
in the table below) of tangible capital and core (Tier I) capital (as defined 
in the regulations) to adjusted total assets (as defined), and of total 
risk-based capital (as defined) to risk-weighted assets (as defined).
 
    Prior to December 31, 1996, the most recent notification from the OTS 
categorized the Bank as well capitalized under the regulatory framework for 
prompt corrective action. To be well capitalized the Bank must maintain 
minimum core (Tier I) leverage, core (Tier I) risk-based, and total 
risk-based ratios as set forth in the table. There are no conditions or 
events since that notification that management believes have changed the 
Bank's category.
 
                                       35
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                     TO BE WELL
                                                                                                  CAPITALIZED UNDER
                                                                                FOR CAPITAL       PROMPT CORRECTIVE
                                                            ACTUAL           ADEQUACY PURPOSES    ACTION PROVISIONS
                                                     --------------------  --------------------  --------------------
<S>                                                  <C>        <C>        <C>        <C>          <C>        <C>               
                                                      AMOUNT      RATIO     AMOUNT       RATIO      AMOUNT      RATIO           
                                                     ---------  ---------  ---------     -----     ---------  ---------         
As of December 31, 1996:                                                                                                        
Tangible Capital to Adjusted Total Assets..........  $  60,932      12.30% $   7,429        1.50%        N/A        N/A         
Core (Tier I) Capital to Adjusted Total Assets.....     60,932      12.30%    14,858        3.00%  $  24,764       5.00%        
Total Risk-Based Capital to Risk-Weighted Assets...     61,923      23.24%    21,315        8.00%     26,643      10.00%        
Core (Tier I) Capital to Risk-Weighted Assets......     60,932      22.87%       N/A        N/ A      15,986       6.00%        
As of December 31, 1995:                                                                                                        
Tangible Capital to Adjusted Total Assets..........  $  35,157       7.74% $   6,814        1.50%        N/A        N/A         
Core (Tier I) Capital to Adjusted Total Assets.....     35,157       7.74%    13,627        3.00%  $  22,712       5.00%        
Total Risk-Based Capital to Risk-Weighted Assets...     36,130      15.57%    18,569        8.00%     23,212      10.00%        
Core (Tier I) Capital to Risk-Weighted Assets......     35,157      15.15%       N/A        N/ A      13,927       6.00%        

</TABLE>

17. PARENT COMPANY ONLY FINANCIAL INFORMATION
 
    The following condensed statement of financial condition, as of December 
31, 1996, and condensed statement of income and of cash flows for the period 
from May 3, 1996 (date of conversion) to December 31, 1996, for First Federal 
Bancshares of Arkansas, Inc. should be read in conjunction with the 
consolidated financial statements and the notes herein.

                                       36

<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)
 
CONDENSED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS)
DECEMBER 31, 1996
------------------------------------------------------------------------------
<TABLE>
<S>                                                                  <C>
ASSETS
Cash and cash equivalents..........................................  $    49
Investment securities, held to maturity............................    9,987
Loan to bank subsidiary............................................    9,268
Accrued interest receivable........................................      210
Investment in bank subsidiary......................................   61,134
Other assets.......................................................      178
                                                                     ---------
TOTAL ASSETS.......................................................  $80,826
                                                                     ---------
                                                                     ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities.............................  $    68
Stockholders' equity...............................................   80,758
                                                                     ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.........................  $80,826
                                                                     ---------
                                                                     ---------
</TABLE>

CONDENSED STATEMENT OF INCOME (IN THOUSANDS)
FOR THE PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996
------------------------------------------------------------------------------
<TABLE>
<S>                                                                   <C>
INCOME:
Interest income--investment securities..............................  $   537
Interest income--loan to bank subsidiary............................      401
                                                                      ---------
Total income........................................................      938
EXPENSES:
Management fees.....................................................       44
Other operating expenses............................................       64
                                                                      ---------
Total expenses......................................................      108
                                                                      ---------
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRIBUTED
  EARNINGS OF BANK SUBSIDIARY.......................................      830
INCOME TAX EXPENSE..................................................      316
                                                                      ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDARY....      514
EQUITY OF UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY.................    2,886
                                                                      ---------
NET INCOME..........................................................  $ 3,400
                                                                      ---------
                                                                      ---------
</TABLE>
 
                                       37

<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)

CONDENSED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996
------------------------------------------------------------------------------

<TABLE>
<S>                                                                  <C>
OPERATING ACTIVITIES:
Net income.........................................................  $ 3,400
Adjustments to reconcile net income to net cash provided by
  operating activities:
Equity in undistributed net income of bank subsidiary..............   (2,886)
Repayment of ESOP loan and related increase in share value.........      402
Changes in operating assets and liabilities:
Accrued interest receivable........................................     (210)
Other assets.......................................................     (178)
Accrued expenses and other liabilities.............................       68
                                                                     ---------
Net cash provided by operating activities..........................      596
INVESTING ACTIVITIES:
Purchase of bank subsidiary stock..................................  (22,889)
Loan to bank subsidiary, net of repayments.........................   (9,268)
Purchases of investment securities--held to maturity...............  (14,987)
Proceeds from maturities of investment securities--held to
  maturity.........................................................    5,000
                                                                     ---------
Net cash used by investing activities..............................  (42,144)
FINANCING ACTIVITIES:
Increase from issuance of common stock, net of related expenses....   45,777
Purchase of treasury stock.........................................   (4,180)
                                                                     ---------
Net cash provided by financing activities..........................   41,597
                                                                     ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..........................       49
CASH AND CASH EQUIVALENTS:
Beginning of period................................................        0
                                                                     ---------
End of period......................................................  $    49
                                                                     ---------
                                                                     ---------
</TABLE>
 
                                  * * * * * *
 
                                       38

<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
FIRST FEDERAL BANK OF ARKANSAS, FA
------------------------------------------------------------------------------
 
<TABLE>
<S>                                        <C>
DIRECTORS                                   EXECUTIVE OFFICERS 
Frank L. Coffman, Jr.                       Frank L. Coffman, Jr.
Chairman of the Board and                   Chairman of the Board and 
Chief Executive Officer                     Chief Executive Officer 

Larry J. Brandt                             Larry J. Brandt 
President and Chief Operating               President and Chief Operating 
Officer Officer 

John P. Hammerschmidt                       Carolyn M. Thomason 
U. S. Congressman, Retired                  Executive Vice President and Secretary 

James D. Heuer                              Tommy W. Richardson 
Farming and Investments                     Senior Vice President and Chief Financial Officer 

William F. Smith                            Sherri R. Billings
Retired Pharmacist and Investments          Senior Vice President and Treasurer

</TABLE>
 
BANKING LOCATIONS
------------------------------------------------------------------------------
 
                                 MAIN OFFICE
 
                              200 West Stephenson 
                            Harrison, Arkansas 72601
 
                                 BRANCH OFFICES
 
    128 West Stephenson                               301 Highway 62 West 
  Harrison, Arkansas 72601                          Yellville, Arkansas 72687 

  Corner Central & Willow                             307 North Walton Blvd. 
  Harrison, Arkansas 72601                         Bentonville, Arkansas 72712 

 Ozark Mall--Hwy. 62-65 North                          3460 North College 
  Harrison, Arkansas 72601                         Fayetteville, Arkansas 72703

   324 Highway 62-65 Bypass                                1303 West Hudson 
   Harrison, Arkansas 72601                             Rogers, Arkansas 72756 

      210 South Main                               201 East Henri De Tonti Blvd.
 Berryville, Arkansas 72616                          Tontitown, Arkansas 72762 

    666 Highway 62 East
Mountain Home, Arkansas 72653

                                       39

<PAGE>
 
STOCKHOLDER INFORMATION
------------------------------------------------------------------------------
 
    First Federal Bancshares of Arkansas, Inc. is a unitary savings and loan 
holding company conducting business through its wholly-owned subsidiary, 
First Federal Bank of Arkansas, FA. The Bank is a federally-chartered, 
SAIF-insured savings institution operating through its main office and nine 
full service branch offices. The Company's and the Bank's principal executive 
office is located at 200 West Stephenson, Harrison, Arkansas 72601.
 
TRANSFER AGENT/REGISTRAR:
 
    Registrar and Transfer Company 
    10 Commerce Drive 
    Cranford, New Jersey 07016
    Phone: (800) 368-5948
 
STOCKHOLDER REQUESTS:
 
    Request for annual reports, quarterly reports and related stockholder 
literature should be directed to Investor Relations, First Federal Bancshares 
of Arkansas, Inc., P. O. Box 550, Harrison, Arkansas 72602.
 
    Stockholders needing assistance with stock records, transfers or lost 
certificates, should contact the Company's transfer agent, Registrar and 
Transfer Company.
 
COMMON STOCK INFORMATION:
 
    Shares of the Company's common stock are traded under the symbol "FFBH" 
on the Nasdaq National Market System. At March 11, 1997, the Company had 
4,896,063 shares of common stock outstanding and had approximately 1,597 
stockholders of record. Such holdings do not reflect the number of beneficial 
owners of common stock.
 
    The following table sets forth the reported high and low sale prices of a 
share of the Company's common stock as reported by Nasdaq (the common stock 
commenced trading on the Nasdaq National Market System on May 3, 1996). No 
cash dividends were paid on the common stock during the periods indicated.
 
<TABLE>
<CAPTION>
                                                         HIGH        LOW
                                                      ---------  ---------
<S>                                                    <C>        <C>
Quarter ended                       
June 30, 1996                                           $14.00     $12.88
                                     
Quarter ended                         
September 30, 1996                                       15.38      12.75
                                       
Quarter ended                          
December 31, 1996                                        16.50      14.75
</TABLE>
 
                                       40