**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                          |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |   | **For the quarterly period ended June 30, 2003**                                                                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| **OR**     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |   | **For the transition period from                                 to                              ** |

 

**Commission File Number 0-28312**

 

**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Texas**                                                       |   | **71-0785261**                            |
|-----------------------------------------------------------------|--------|-------------------------------------------|
| (State or other jurisdiction of incorporation  or organization) |   | (I.R.S. Employer   Identification Number) |
|                                                            |   |                                      |
| **1401 Highway 62-65 North   Harrison, Arkansas**               |   | **72601**                                 |
| (Address of principal executive office)                         |   | (Zip Code)                                |
|                                                            |   |                                      |
| **(870) 741-7641**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o  

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act.

Yes o  No ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:  As of August 6, 2003, there were issued andoutstanding 2,668,943 shares of the Registrant’s Common Stock, par value $.01per share.

 

 

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**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**TABLE OF CONTENTS**

 
| **Part I.**    | **Financial Information**                                                                                                    | **Page** |
|----------------|------------------------------------------------------------------------------------------------------------------------------|----------|
|           |                                                                                                                         |     |
| Item 1.        | Consolidated  Financial Statements                                                                                           |     |
|           |                                                                                                                         |     |
|           | Consolidated Statements of Financial  Condition  as of June 30, 2003 (unaudited) and December 31, 2002                       | 1        |
|           |                                                                                                                         |     |
|           | Consolidated Statements of Income for the  three months and six  months ended June 30, 2003 (unaudited) and 2002 (unaudited) | 2        |
|           |                                                                                                                         |     |
|           | Consolidated Statement of Stockholders’  Equity for the six  months ended June 30, 2003 (unaudited)                     | 3        |
|           |                                                                                                                         |     |
|           | Consolidated Statements of Cash Flows for  the six months  ended June 30, 2003 (unaudited) and 2002 (unaudited)              | 4        |
|           |                                                                                                                         |     |
|           | Notes to Unaudited Consolidated Financial  Statements                                                                        | 6        |
|           |                                                                                                                         |     |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  | 10       |
|           |                                                                                                                         |     |
| Item 3.        | Quantitative and Qualitative Disclosures about  Market Risk                                                                  | 22       |
|           |                                                                                                                         |     |
| Item 4.        | Controls and Procedures                                                                                                      | 23       |
|           |                                                                                                                         |     |
| **Part  II.**  | **Other  Information**                                                                                                       |     |
|           |                                                                                                                         |     |
| Item 1.        | Legal Proceedings                                                                                                            | 24       |
| Item 2.        | Changes in Securities and Use of Proceeds                                                                                    | 24       |
| Item 3.        | Defaults Upon Senior Securities                                                                                              | 24       |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                                                         | 24       |
| Item 5.        | Other Information                                                                                                            | 25       |
| Item 6.        | Exhibits and Reports on Form 8-K                                                                                             | 25       |
|           |                                                                                                                         |     |
| **Signatures** |                                                                                                                         | 26       |

 

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**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

# **CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

(In thousands, except share data)

 
|                                                                                                                                                                                   |   | **June 30,  2003** |    | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                                                                                   |   | **(Unaudited)**    |    |                    |   |
|                                                                                                                                                                                   |   |               |    |                    |   |
| ASSETS                                                                                                                                                                                 |   |               |    |                    |   |
|                                                                                                                                                                                   |   |               |    |                    |   |
| Cash and cash equivalents                                                                                                                                                              |   | $                  | 97,413  |                    | $      | 44,493 |   |
| Investment securities held to maturity                                                                                                                                                 |   | 72,585             |    | 114,471                 |   |
| Federal Home Loan Bank stock                                                                                                                                                           |   | 5,127              |    | 5,064                   |   |
| Loans receivable, net                                                                                                                                                                  |   | 487,247            |    | 483,468                 |   |
| Accrued interest receivable                                                                                                                                                            |   | 3,884              |    | 4,380                   |   |
| Real estate acquired in settlement of  loans, net                                                                                                                                      |   | 748                |    | 320                     |   |
| Office properties and equipment, net                                                                                                                                                   |   | 14,421             |    | 10,690                  |   |
| Prepaid expenses and other assets                                                                                                                                                      |   | 17,682             |    | 17,010                  |   |
| TOTAL ASSETS                                                                                                                                                                           |   | $                  | 699,107 |                    | $      | 679,896 |   |
|                                                                                                                                                                                   |   |               |    |                    |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                              |   |               |    |                    |   |
|                                                                                                                                                                                   |   |               |    |                    |   |
| LIABILITIES:                                                                                                                                                                           |   |               |    |                    |   |
| Deposits                                                                                                                                                                               |   | $                  | 572,777 |                    | $      | 568,762 |   |
| Federal Home Loan Bank advances                                                                                                                                                        |   | 47,459             |    | 38,610                  |   |
| Advance payments by borrowers for taxes and  insurance                                                                                                                                 |   | 403                |    | 760                     |   |
| Other liabilities                                                                                                                                                                      |   | 6,346              |    | 2,498                   |   |
| Total liabilities                                                                                                                                                                      |   | $                  | 626,985 |                    | $      | 610,630 |   |
|                                                                                                                                                                                   |   |               |    |                    |   |
| 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, 2,667,943 and 2,687,359 shares  outstanding at June 30, 2003 and December 31, 2002, respectively |   | 52                 |    | 52                      |   |
| Additional paid-in capital                                                                                                                                                             |   | 52,456             |    | 52,040                  |   |
| Employee stock benefit plans                                                                                                                                                           |   | (1,247             | )       | (1,551                  | )      |
| Retained earnings-substantially restricted                                                                                                                                             |   | 70,060             |    | 67,043                  |   |
|                                                                                                                                                                                   |   | 121,321            |    | 117,584                 |   |
| Treasury stock, at cost, 2,485,808 and  2,466,392 shares at June 30, 2003 and December 31, 2002, respectively                                                                          |   | (49,199            | )       | (48,318                 | )      |
| Total stockholders’ equity                                                                                                                                                        |   | 72,122             |    | 69,266                  |   |
|                                                                                                                                                                                   |   |               |    |                    |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                        |   | $                  | 699,107 |                    | $      | 679,896 |   |

 

See notes to unauditedconsolidated financial statements.

 

1

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**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)

(Unaudited)

 
|                                                 |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                 |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| INTEREST INCOME:                                     |   |                              |   |                            |   |   |   |   |   |
| Loans receivable                                     |   | $                                 | 8,584  |                            | $      | 9,170 |   | $ | 17,392 |   | $ | 18,489 |   |
| Investment securities:                               |   |                              |   |                            |   |   |   |   |   |
| Taxable                                              |   | 826                               |   | 1,658                           |   | 1,878 |   | 3,201 |   |
| Nontaxable                                           |   | 115                               |   | 70                              |   | 219 |   | 140 |   |
| Other                                                |   | 191                               |   | 244                             |   | 318 |   | 516 |   |
| Total interest income                                |   | 9,716                             |   | 11,142                          |   | 19,807 |   | 22,346 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| INTEREST EXPENSE:                                    |   |                              |   |                            |   |   |   |   |   |
| Deposits                                             |   | 3,766                             |   | 5,073                           |   | 7,789 |   | 10,386 |   |
| Other borrowings                                     |   | 352                               |   | 635                             |   | 717 |   | 1,368 |   |
| Total interest expense                               |   | 4,118                             |   | 5,708                           |   | 8,506 |   | 11,754 |   |
| NET INTEREST INCOME                                  |   | 5,598                             |   | 5,434                           |   | 11,301 |   | 10,592 |   |
| PROVISION FOR LOAN LOSSES                            |   | 136                               |   | 373                             |   | 415 |   | 736 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES |   | 5,462                             |   | 5,061                           |   | 10,886 |   | 9,856 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| NONINTEREST INCOME:                                  |   |                              |   |                            |   |   |   |   |   |
| Deposit fee income                                   |   | 646                               |   | 589                             |   | 1,202 |   | 1,136 |   |
| Earnings on life insurance policies                  |   | 209                               |   | 222                             |   | 426 |   | 438 |   |
| Gain on sale of loans                                |   | 510                               |   | 137                             |   | 913 |   | 374 |   |
| Appreciation of contributed assets                   |   | 414                               |   | —                          |   | 414 |   | — |   |
| Other                                                |   | 366                               |   | 311                             |   | 733 |   | 598 |   |
| Total noninterest income                             |   | 2,145                             |   | 1,259                           |   | 3,688 |   | 2,546 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| NONINTEREST EXPENSES:                                |   |                              |   |                            |   |   |   |   |   |
| Salaries and employee benefits                       |   | 2,552                             |   | 2,090                           |   | 5,003 |   | 4,187 |   |
| Net occupancy expense                                |   | 527                               |   | 313                             |   | 886 |   | 608 |   |
| Data processing                                      |   | 407                               |   | 338                             |   | 793 |   | 656 |   |
| Professional fees                                    |   | 102                               |   | 90                              |   | 194 |   | 177 |   |
| Advertising and public relations                     |   | 152                               |   | 169                             |   | 303 |   | 251 |   |
| Postage and supplies                                 |   | 186                               |   | 112                             |   | 343 |   | 243 |   |
| Contributions                                        |   | 508                               |   | 55                              |   | 519 |   | 72 |   |
| Other                                                |   | 560                               |   | 403                             |   | 987 |   | 792 |   |
| Total noninterest expenses                           |   | 4,994                             |   | 3,570                           |   | 9,028 |   | 6,986 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| INCOME BEFORE INCOME TAXES                           |   | 2,613                             |   | 2,750                           |   | 5,546 |   | 5,416 |   |
| INCOME TAX PROVISION                                 |   | 726                               |   | 916                             |   | 1,675 |   | 1,826 |   |
| NET INCOME                                           |   | $                                 | 1,887  |                            | $      | 1,834 |   | $ | 3,871 |   | $ | 3,590 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| EARNINGS PER SHARE:                                  |   |                              |   |                            |   |   |   |   |   |
| Basic                                                |   | $                                 | 0.74   |                            | $      | 0.66 |   | $ | 1.52 |   | $ | 1.27 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Diluted                                              |   | $                                 | 0.71   |                            | $      | 0.64 |   | $ | 1.46 |   | $ | 1.23 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Cash Dividends Declared                              |   | $                                 | 0.16   |                            | $      | 0.12 |   | $ | 0.32 |   | $ | 0.24 |   |

 

See notes tounaudited consolidated financial statements.

 

2

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**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

# **FOR THE SIX MONTHS ENDEDJUNE 30, 2003**

(In thousands, except share data)

(Unaudited)

 
|                                                      |   | **Issued  Common Stock** |   | **Additional    Paid-In** |   | **Employee   Stock   Benefit** |   | **Retained** |   | **Treasury  Stock** |   | **Total  Stockholders’** |   |
|-----------------------------------------------------------|--------|--------------------------|--------|---------------------------|--------|--------------------------------|--------|--------------|--------|---------------------|--------|-------------------------------|--------|
|                                                      |   | **Shares**               |   | **Amount**                |   | **Capital**                    |   | **Plans**    |   | **Earnings**        |   | **Shares**                    |   | **Amount** |   | **Equity** |   |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Balance, December 31, 2002                                |   | 5,153,751                |   | $                         | 52     |                           | $      | 52,040       |   | $                   | (1,551 | )                             | $      | 67,043 |   | 2,466,392 |   | $ | (48,318 | ) | $ | 69,266 |   |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Net income                                                |   |                     |   |                      |   |                           |   |         |   | 3,871               |   |                          |   |   |   | 3,871 |   |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Release  of ESOP shares                                   |   |                     |   |                      |   | 360                            |   | 208          |   |                |   |                          |   |   |   | 568 |   |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Tax effect of stock compensation plan                     |   |                     |   |                      |   | 38                             |   |         |   |                |   |                          |   |   |   | 38 |   |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Treasury shares reissued due to exercise of stock options |   |                     |   |                      |   | (17                            | )      |         |   |                |   | (43,084                       | )      | 848 |   | 831 |   |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Purchase of treasury stock, at cost                       |   |                     |   |                      |   |                           |   |         |   |                |   | 67,500                        |   | (1,828 | ) | (1,828 | ) |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| MRP shares                                                |   |                     |   |                      |   | 35                             |   | 96           |   |                |   | (5,000                        | )      | 99 |   | 230 |   |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Dividends paid                                            |   |                     |   |                      |   |                           |   |         |   | (854                | )      |                          |   |   |   | (854 | ) |
|                                                      |   |                     |   |                      |   |                           |   |         |   |                |   |                          |   |   |   |   |   |
| Balance, June 30, 2003                                    |   | 5,153,751                |   | $                         | 52     |                           | $      | 52,456       |   | $                   | (1,247 | )                             | $      | 70,060 |   | 2,485,808 |   | $ | (49,199 | ) | $ | 72,122 |   |

 

See notes tounaudited consolidated financial statements.

 

3

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**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands)

(Unaudited)

 
|                                                                               |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                               |   | **2003**                       |   | **2002** |   |
|                                                                               |   |                           |   |   |   |
| OPERATING ACTIVITIES:                                                              |   |                           |   |   |   |
| Net income                                                                         |   | $                              | 3,871  |   | $ | 3,590 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                           |   |   |   |
| Provision for loan losses                                                          |   | 415                            |   | 736 |   |
| Provision for real estate losses                                                   |   | 27                             |   | 16 |   |
| Deferred tax benefit                                                               |   | (147                           | )      | (174 | ) |
| Federal Home Loan Bank stock dividends                                             |   | (63                            | )      | (73 | ) |
| Loss on disposition of office properties  and equipment                            |   | 93                             |   | — |   |
| (Gain) loss on sale of repossessed assets,  net                                    |   | (2                             | )      | 8 |   |
| Originations of loans held for sale                                                |   | (65,004                        | )      | (21,778 | ) |
| Proceeds from sales of loans                                                       |   | 69,145                         |   | 26,981 |   |
| Gain on sale of loans originated to sell                                           |   | (913                           | )      | (374 | ) |
| Depreciation                                                                       |   | 531                            |   | 373 |   |
| Accretion of deferred loan fees, net                                               |   | (236                           | )      | (326 | ) |
| Release of ESOP shares                                                             |   | 568                            |   | 498 |   |
| MRP compensation expense                                                           |   | 31                             |   | — |   |
| Bank owned life insurance earnings                                                 |   | (426                           | )      | (438 | ) |
| Changes in operating assets and  liabilities:                                      |   |                           |   |   |   |
| Accrued interest receivable                                                        |   | 496                            |   | (258 | ) |
| Prepaid expenses and other assets                                                  |   | (272                           | )      | (125 | ) |
| Other liabilities                                                                  |   | 357                            |   | (2,358 | ) |
| Net cash provided by operating activities                                          |   | 8,471                          |   | 6,298 |   |
|                                                                               |   |                           |   |   |   |
| INVESTING ACTIVITIES:                                                              |   |                           |   |   |   |
| Purchases of investment securities held to  maturity                               |   | (141,651                       | )      | (40,157 | ) |
| Proceeds from maturities/calls of  investment securities held to maturity          |   | 187,412                        |   | 38,065 |   |
| Loan originations, net of repayments                                               |   | (8,149                         | )      | (13,163 | ) |
| Proceeds from sales of repossessed assets                                          |   | 536                            |   | 364 |   |
| Proceeds from sales of office properties  and equipment                            |   | 14                             |   | — |   |
| Purchases of office properties and  equipment                                      |   | (4,369                         | )      | (1,294 | ) |
| Net cash provided by (used in) investing  activities                               |   | 33,793                         |   | (16,185 | ) |
|                                                                                    |        |                                |        |  |  |  |  |

 

(continued)

 

4

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|                                                                           |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                           |   | **2003**                       |   | **2002** |   |
|                                                                           |   |                           |   |   |   |
| FINANCING ACTIVITIES:                                                          |   |                           |   |   |   |
| Net increase in deposits                                                       |   | 4,015                          |   | 19,364 |   |
| Advances from FHLB                                                             |   | 19,000                         |   | 4,000 |   |
| Repayment of advances from FHLB                                                |   | (10,151                        | )      | (16,037 | ) |
| Net decrease in advance payments by  borrowers for taxes & insurance       |   | (357                           | )      | (398 | ) |
| Purchase of treasury stock                                                     |   | (1,828                         | )      | (3,908 | ) |
| Reissued treasury stock                                                        |   | 831                            |   | 162 |   |
| Dividends paid                                                                 |   | (854                           | )      | (713 | ) |
| Net cash provided by financing activities                                      |   | 10,656                         |   | 2,470 |   |
|                                                                           |   |                           |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                          |   | 52,920                         |   | (7,417 | ) |
|                                                                           |   |                           |   |   |   |
| CASH AND CASH EQUIVALENTS:                                                     |   |                           |   |   |   |
| Beginning of period                                                            |   | 44,493                         |   | 72,311 |   |
| End of period                                                                  |   | $                              | 97,413 |   | $ | 64,894 |   |
|                                                                           |   |                           |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                            |   |                           |   |   |   |
| Cash paid for:                                                                 |   |                           |   |   |   |
| Interest                                                                       |   | $                              | 8,569  |   | $ | 11,975 |   |
| Income taxes                                                                   |   | $                              | 1,952  |   | $ | 1,791 |   |
|                                                                           |   |                           |   |   |   |
| SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING  ACTIVITIES:                        |   |                           |   |   |   |
| Real estate and other assets acquired in  settlement of loans                  |   | $                              | 1,111  |   | $ | 448 |   |
| Loans to facilitate sales of real estate  owned                                |   | $                              | 137    |   | $ | 219 |   |
| Investment securities traded, recorded in  investments not yet settled in cash |   | $                              | 3,875  |   | $ | 5,000 |   |
| Treasury stock traded, recorded in treasury  stock not yet settled in cash     |   | $                              | — |   | $ | 1,280 |   |

 

See notes to unauditedconsolidated financial statements.

 

5

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**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

# **Note 1 - Basis of Presentation and Principlesof Consolidation**

 

First Federal Bancshares ofArkansas, Inc. (the “Corporation”) is a unitary holding company which owns allof the stock of First Federal Bank of Arkansas, FA (the “Bank”).  The Bank provides a broad line of financialproducts to individuals and small- to medium-sized businesses.  The consolidated financial statements alsoinclude the accounts of the Bank’s wholly-owned subsidiary, First HarrisonService Corporation (“FHSC”), which is inactive.

 

The accompanying unauditedconsolidated financial statements of the Corporation have been prepared inaccordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  However, such informationreflects all adjustments which are, in the opinion of management, necessary fora fair statement of results for the interim periods.

 

The accompanying unauditedconsolidated financial statements include the accounts of the Corporation andthe Bank.  All material intercompanytransactions have been eliminated in consolidation.

 

The results of operations forthe six months ended June 30, 2003, are not necessarily indicative of theresults to be expected for the year ending December 31, 2003.  The unaudited consolidated financialstatements and notes thereto should be read in conjunction with the auditedfinancial statements and notes thereto for the year ended December 31, 2002,contained in the Corporation’s 2002 Annual Report to Stockholders.

 

Certain amounts in the June 30,2002, unaudited consolidated financial statements have been reclassified toconform to the classifications adopted for reporting in 2003.

 

**Note2 - Recently Issued Accounting Standards**

 

In December 2002, the FASB issued SFAS No.148, *Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123*(“SFAS 148”).  SFAS 148 amends SFAS No.123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of Statement 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The transition provisions areeffective for fiscal years ending after December 15, 2002.  The provisions of the statement related tointerim disclosures are effective for interim periods beginning after December31, 2002.  The Corporation has adoptedthe disclosure provisions of SFAS 148 beginning in the quarter ended March 31,2003, and has included the required disclosures in Note 7 to the unauditedconsolidated financial statements.

 

6

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FASB Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (“FIN 45”) elaborates on thedisclosures to be made by a guarantor in its financial statements about itsobligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initialmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002, irrespective of theguarantor’s fiscal year-end.  Thedisclosure requirements in FIN 45 are effective for financial statements ofannual periods ending after December 15, 2002.  The adoption of FIN45 did not have a material effect on the financial statements of theCorporation.

 

In April 2003, the FASB issued SFAS No. 149, *Amendments of Statement 133 on Derivative Instruments and HedgingActivities* (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under FASB Statement No. 133, *Accounting for Derivative Instruments and HedgingActivities*.  SFAS 149requires that contracts with comparable characteristics be accounted forsimilarly.  In particular, SFAS 149 (1)clarifies under what circumstances a contract with an initial net investmentmeets the characteristic of a derivative discussed in paragraph 6(b) ofStatement 133, (2) clarifies when a derivative contains a financing component,(3) amends the definition of an underlying to conform it to language used inFIN 45, and (4) amends certain other existing pronouncements.  SFAS 149 is effective for contracts enteredinto or modified after June 30, 2003, with certain exceptions.  Based on its current activities, theCorporation does not expect SFAS 149 to have a material effect on its financialstatements.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity* (“SFAS 150”).  SFAS 150 establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity.  SFAS 150 is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003, with certain exceptions. The adoption of SFAS 150 did not have a material effect on the financialstatements of the Corporation as of June 30, 2003 and is not expected to have amaterial effect in future periods.

 

**Note3 - Earnings per Share**

 

The weighted average number ofcommon shares used to calculate earnings per share for the periods ended June30, 2003 and 2002 were as follows:

 
|                              |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-----------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                              |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Basic weighted - average shares   |   | 2,544,258                         |   | 2,776,650                       |   | 2,543,360 |   | 2,817,594 |   |
| Effect of dilutive securities     |   | 127,786                           |   | 106,737                         |   | 115,757 |   | 96,367 |   |
| Diluted weighted - average shares |   | 2,672,044                         |   | 2,883,387                       |   | 2,659,117 |   | 2,913,961 |   |

 

7

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**Note4 - Declaration of Dividends**

 

At their meeting on May 28,2003, the Board of Directors declared a $.16 (sixteen cent) per share cashdividend on the common stock of the Corporation.  The cash dividend was paid on June 25, 2003 to thestockholders of record at the close of business on June 10, 2003.

 

**Note5 - Investment Securities**

 

Investment securities consistedof the following (in thousands):

 
|                                     |   | **June 30,  2003**   |   |
|------------------------------------------|--------|----------------------|--------|
| **Held-to-Maturity**                     |   | **Amortized   Cost** |   | **Fair   Value** |   |
| Municipal securities                     |   | $                    | 11,455 |   | $ | 11,890 |   |
| U. S. Government and Agency  obligations |   | 50,130               |   | 50,636 |   |
| Certificates of deposit                  |   | 11,000               |   | 11,001 |   |
|                                     |   | $                    | 72,585 |   | $ | 73,527 |   |

 

# **Note 6 - Loans Receivable**

 

Loans receivable consisted ofthe following (in thousands):

 
|                            |   | **June 30, 2003** |    | **December 31, 2002** |   |
|---------------------------------|--------|-------------------|---------|-----------------------|--------|
| First mortgage loans:           |   |              |    |                  |   |
| One- to four- family residences |   | $                 | 265,336 |                  | $      | 289,106 |   |
| Commercial                      |   | 73,431            |    | 64,888                |   |
| Multifamily                     |   | 7,630             |    | 5,821                 |   |
| Other properties                |   | 1,725             |    | 1,735                 |   |
| Construction                    |   | 63,639            |    | 49,144                |   |
| Less:                           |   |              |    |                  |   |
| Unearned discounts              |   | (154              | )       | (178                  | )      |
| Undisbursed loan funds          |   | (27,530           | )       | (20,618               | )      |
| Deferred loan fees, net         |   | (1,034            | )       | (1,414                | )      |
| Total first mortgage loans      |   | 383,043           |    | 388,484               |   |
| Consumer and other loans:       |   |              |    |                  |   |
| Commercial                      |   | 31,898            |    | 28,213                |   |
| Automobile                      |   | 23,244            |    | 22,570                |   |
| Consumer                        |   | 8,816             |    | 7,741                 |   |
| Home equity and second mortgage |   | 35,431            |    | 31,670                |   |
| Savings                         |   | 2,186             |    | 2,158                 |   |
| Other                           |   | 4,086             |    | 3,907                 |   |
| Deferred loan costs, net        |   | 260               |    | 254                   |   |
| Total consumer and other loans  |   | 105,921           |    | 96,513                |   |
| Allowance for loan losses       |   | (1,717            | )       | (1,529                | )      |
| Loans receivable, net           |   | $                 | 487,247 |                  | $      | 483,468 |   |

 

8

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Nonaccrual loans at June 30,2003 were $4.5 million.  All loans 90days or more past due are recorded as nonaccrual.

 

A summary of the activity inthe allowance for loan losses is as follows (in thousands):

 
|                            |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|---------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                            |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Balance at beginning of period  |   | $                               | 1,661  |                          | $      | 1,149 |   | $ | 1,529 |   | $ | 923 |   |
| Provisions for estimated losses |   | 136                             |   | 373                           |   | 415 |   | 736 |   |
| Recoveries                      |   | 14                              |   | 18                            |   | 41 |   | 38 |   |
| Other                           |   | —                          |   | 35                            |   | — |   | 35 |   |
| Losses charged off              |   | (94                             | )      | (117                          | )      | (268 | ) | (274 | ) |
| Balance at end of period        |   | $                               | 1,717  |                          | $      | 1,458 |   | $ | 1,717 |   | $ | 1,458 |   |

# ** **

# **Note 7 – Stock Option Plan**

 

At June 30, 2003, theCorporation had one stock option plan in effect covering key employees anddirectors.  The plan is more fullydescribed in the Notes to Consolidated Financial Statements included in theCorporation’s 2002 Annual Report to Stockholders.  The Corporation accounts for this plan under the recognition andmeasurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  No stock-based employee or directorcompensation cost is recognized in net income, as all options granted under theplan had an exercise price equal to the market value of the underlying stock onthe date of grant.  The following tableillustrates the effect on net income and earnings per share if the Corporationhad applied the fair value recognition provisions of FASB Statement 123, *Accounting for Stock-Based Compensation*,to stock-based employee and director compensation:

 
|                       |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                       |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Net income (in thousands): |   |                              |   |                            |   |   |   |   |   |
| As reported                |   | $                                 | 1,887  |                            | $      | 1,834 |   | $ | 3,871 |   | $ | 3,590 |   |
| Proforma                   |   | 1,885                             |   | 1,826                           |   | 3,862 |   | 3,575 |   |
| Earnings per share:        |   |                              |   |                            |   |   |   |   |   |
| Basic, as  reported        |   | $                                 | 0.74   |                            | $      | 0.66 |   | $ | 1.52 |   | $ | 1.27 |   |
| Basic,  proforma           |   | 0.74                              |   | 0.66                            |   | 1.52 |   | 1.27 |   |
| Diluted, as reported       |   | 0.71                              |   | 0.64                            |   | 1.46 |   | 1.23 |   |
| Diluted, proforma          |   | 0.71                              |   | 0.63                            |   | 1.45 |   | 1.23 |   |

 

9

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# **MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**CriticalAccounting Policies**

 

Variouselements of our accounting policies, by their nature, are inherently subject toestimation techniques, valuation assumptions and other subjectiveassessments.  In particular, themethodology for the determination of our allowance for loan losses, due to thejudgments, estimates and assumptions inherent in that policy, is critical topreparation of our financial statements. This policy and the judgments, estimates and assumptions are describedin greater detail in subsequent sections of Management’s Discussion andAnalysis and in the notes to the unaudited financial statements includedherein.  We believe that the judgments,estimates and assumptions used in the preparation of our financial statementsare appropriate given the factual circumstances at the time.  However, given the sensitivity of our financialstatements to this critical accounting policy, the use of other judgments,estimates and assumptions could result in material differences in our financialcondition or results of operations.

 

**General.**  At June 30, 2003, the Corporation’sassets amounted to $699.1 million as compared to $679.9 million at December 31,2002.  The $19.2 million or 2.8%increase was primarily due to an increase of $52.9 million or 118.9% in cashand cash equivalents, an increase of $3.8 million or 0.8% in net loansreceivable, and an increase of $3.7 million or 34.9% in office properties andequipment. The increase in office properties and equipment was primarilydue to the new corporate headquarters building and furnishings in northHarrison, Arkansas. The building was under construction at December 31,2002 and was completed in June 2003. Such increases were partially offset by a $41.9 million or 36.6%decrease in investment securities held to maturity. The funds available from theproceeds of matured or called investment securities held to maturity and theincrease in deposits and FHLB advances were temporarily invested in cash andcash equivalents and used to fund loan growth.  Liabilities increased $16.4 million or 2.7% to $627.0million at June 30, 2003 compared to $610.6 million at December 31,2002.  The increase in liabilities wasprimarily due to an increase of $4.0 million or 0.7% in deposits and anincrease of $8.8 million or 22.9% in advances from the Federal Home Loan Bankof Dallas (“FHLB of Dallas”). Stockholders’ equity amounted to $72.1 million or10.3% of total assets at June 30, 2003 compared to $69.3 million or 10.2% oftotal assets at December 31, 2002.

 

**Loans Receivable.**  Net loans receivable increased by $3.8million, or 0.8%, to $487.2 million at June 30, 2003 from $483.5 million atDecember 31, 2002.  The increase in netloans receivable was comprised mainly of increases in commercial real estateloans of $8.5 million, multifamily real estate loans of $1.8 million, constructionloans, net of undisbursed funds, of $7.6 million, consumer loans of $5.7million, and commercial loans of $3.7 million. Such increases were partially offset by a decrease in one- to four- familyresidential loans of $23.8 million.  Inrecent years, the Bank has placed an increased emphasis on commercial realestate lending, construction lending, commercial lending and consumer lendingto diversify its loan portfolio, increase the average yield on its loanportfolio, expand its operations and provide greater opportunities tocross-sell its products.

 

10

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Loan originations for the six month period ended June 30, 2003consisted of $95.6 million in one- to four- family residential loans, $62.0million of which were originated for sale in the secondary market, $2.5 millionin multifamily residential loans, $36.4 million in commercial loans, $41.3million in construction loans and $30.1 million in consumer installment loans,of which $9.4 million consisted of home equity loans and $8.6 million consistedof automobile loans.

 

**Asset Quality. **The following tablesets forth the amounts and categories of the Bank’s nonperforming assets at thedates indicated.

 
|                                                                               |   | **June 30,  2003**          |   | **December  31, 2002** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------|--------|------------------------|--------|
|                                                                               |   | **(Dollars  in Thousands)** |   |
| Nonaccrual loans:                                                                  |   |                        |   |                   |   |
| One-  to four-family residential                                                   |   | $                           | 2,342  |                   | $      | 2,184 |   |
| Multi-family  residential                                                          |   | —                      |   | —                 |   |
| Construction loans                                                                 |   | —                      |   | —                 |   |
| Commercial  real estate                                                            |   | 922                         |   | 124                    |   |
| Commercial loans                                                                   |   | 697                         |   | 245                    |   |
| Consumer loans                                                                     |   | 527                         |   | 175                    |   |
| Total nonaccrual loans                                                             |   | 4,488                       |   | 2,728                  |   |
|                                                                               |   |                        |   |                   |   |
| Restructured loans                                                                 |   | 4,180                       |   | 4,219                  |   |
| Repossessed assets                                                                 |   | 15                          |   | 41                     |   |
| Real estate owned                                                                  |   | 748                         |   | 320                    |   |
|                                                                               |   |                        |   |                   |   |
| Nonperforming assets                                                               |   | $                           | 9,431  |                   | $      | 7,308 |   |
|                                                                               |   |                        |   |                   |   |
| Total nonaccrual and restructured loans as a percentage of total  loans receivable |   | 1.67                        | %      | 1.37                   | %      |
|                                                                               |   |                        |   |                   |   |
| Total nonperforming assets as a percentage  of total assets                        |   | 1.35                        | %      | 1.07                   | %      |

 

Nonaccrual commercial and commercial realestate loans increased due to three loans to unrelated borrowers with principalbalances totaling $1.3 million.  TheBank does not expect to incur losses on these loans based on the estimatedvalue of the collateral properties.  Asa result, no specific valuation allowance has been recorded for these loans.

 

**Allowance for Loan Losses.**  The allowance for loan losses was $1.7million or 0.33% of total loans at June 30, 2003, compared to $1.5 million or..30% of total loans at December 31, 2002. Nonperforming assets, consisting of nonaccrual and restructuredloans and repossessed assets, amounted to $9.4 million or 1.35% of total assetsat June 30, 2003, compared to $7.3 million or 1.07% of total assets at December31, 2002.  The allowance for loan lossesincludes $614,000 and $625,000 in allowances allocated to specific loans as ofJune 30, 2003 and December 31, 2002, respectively.

 

11

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The allowance for loan losses is evaluated ona regular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions.  Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as conditions change and more informationbecomes available.

 

The Bank reviews its non-homogeneous loansfor impairment on a quarterly basis. The Bank considers commercial real estate, non-one- to four- familyconstruction, multifamily, other non-residential real estate, and commercialloans to be non-homogeneous loans.  Aloan is considered impaired when, based on current information and events, itis probable that the Bank will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement. Factors considered by management in determining impairment includepayment status, collateral value, and the probability of collecting scheduledprincipal and interest payments when due. Loans that experience insignificant payment delays and paymentshortfalls generally are not classified as impaired.  Management determines the significance of payment delays andpayment shortfalls on a case-by-case basis, taking into consideration all ofthe circumstances surrounding the loan and the borrower, including the lengthof the delay, the reasons for the delay, the borrower’s prior payment record,and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loanbasis by either the present value of expected future cash flows discounted atthe loan’s effective interest rate, the loan’s obtainable market price, or thefair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneousloans are collectively evaluated for impairment.  Accordingly, the Bank does not separately identify individualconsumer and residential loans for impairment disclosures.  Homogeneous loans are those that areconsidered to have common characteristics that provide for evaluation on anaggregate or pool basis.  The Bankconsiders the characteristics of (1) one- to four- family residential firstmortgage loans; (2) unsecured consumer loans; and (3) collateralized consumerloans to permit consideration of the appropriateness of the allowance forlosses of each group of loans on a pool basis. The primary methodology used to determine the appropriateness of theallowance for losses includes segregating certain specific, poorly performingloans based on their performance characteristics from the pools of loans as totype, grading these loans, and then applying a loss factor to the remainingpool balance based on several factors including past loss experience, inherentrisks, economic conditions in the primary market areas, and other factors whichusually are beyond the control of the Bank.

 

In estimating the amount of credit lossesinherent in our loan portfolio, various judgments and assumptions aremade.  For example, when assessing thecondition of the overall economic environment, assumptions are made regardingfuture market conditions and their impact on the loan portfolio.  In the event the national economy were tosustain a prolonged downturn, the loss factors applied to our portfolios mayneed to be revised, which may significantly impact the measurement of theallowance for loan losses.  For impairedloans that are collateral-dependent, the estimated fair value of the collateralmay deviate significantly from the proceeds received when the collateral issold.

 

Although we consider the allowance for loanlosses of $1.7 million adequate to cover losses

 

12

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inherent inour loan portfolio at June 30, 2003, no assurance can be given that we will notsustain loan losses that are significantly different from the amount reserved,or that subsequent evaluations of the loan portfolio, in light of factors thenprevailing, would not result in a significant change in the allowance for loan losses.

 

**Investment Securities.**  Investment securities, all of which wereclassified as held to maturity, amounted to $72.6 million as of June 30, 2003,compared to $114.5 million as of December 31, 2002.  During the first six months of 2003, investment securitiestotaling $145.5 million were purchased and $187.4 million matured or werecalled, resulting in a net decrease of $41.9 million or 36.6%.  This composition of the change in investmentsecurities held to maturity from December 31, 2002 to June 30, 2003 was adecrease in U.S. government agency securities of $15.3 million, a decrease incertificates of deposit of $29.3 million, and an increase in municipalsecurities of $2.7 million.

 

**Deposits.**  Deposits at June 30, 2003 amounted to $572.8million, an increase of $4.0 million or 0.7% from the December 31, 2002 balanceof $568.8 million.  The Bank does notadvertise for deposits outside of its primary market area of Northcentral andNorthwest Arkansas.  The Bank continuedto experience a change in the mix of deposits due to the current low interestrate environment.  The primarycomponents of the change in deposits during the first six months of 2003 wereincreases in money market accounts of $20.9 million and checking accounts of$7.9 million and a decrease in certificates of deposit of $25.5 million.

 

**Borrowed Funds.**  Borrowed funds, which consist entirely ofFHLB of Dallas advances, increased by $8.8 million or 22.9% to $47.5 million atJune 30, 2003 from $38.6 million at December 31, 2002.  The Bank is continuing to obtain advances totake advantage of the current low interest rate environment and extend thematurity of the portfolio.

 

**Stockholders’ Equity.**  Stockholders’ equity increased $2.9 millionto $72.1 million at June 30, 2003 from $69.3 million at December 31, 2002.The increase in stockholders’ equity was primarily due to net income of$3.9 million resulting from continued profitable operations and the issuance of43,084 shares of treasury stock totaling $848,000 as a result of the exerciseof stock options.  Such increase waspartially offset by the purchase of 67,500 shares of treasury stock totaling$1.8 million in connection with the Corporation’s stock repurchase plan and, toa lesser extent, the payment of cash dividends aggregating $854,000.

 

13

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**AverageBalance Sheets**

 

The following table sets forth certain information relating to the Corporation’saverage balance sheets and reflects the average yield on assets and averagecost of liabilities for the periods indicated and the yields earned and ratespaid at June 30, 2003.  Such yields andcosts are derived by dividing income or expense by the average balance ofassets or liabilities, respectively, for the periods presented and outstandingbalances at June 30, 2003.  Averagebalances are based on daily balances during the period.

 
|                                                              |   | **June 30,**                |   | **Three  Months Ended June 30,** |    |
|-------------------------------------------------------------------|--------|-----------------------------|--------|----------------------------------|---------|
|                                                              |   | **2003**                    |   | **2003**                         |    | **2002** |   |
|                                                              |   | **Yield/Cost**              |   | **Average  Balance**             |    | **Interest** |   | **Average  Yield/  Cost** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/  Cost** |   |
|                                                              |   | **(Dollars  in Thousands)** |   |
|                                                              |   |                        |   |
| Interest-earning assets:                                          |   |                        |   |
| Loans receivable(1)                                               |   | 7.04                        | %      | $                                | 488,102 |   | $ | 8,584 |   | 7.03 | % | $ | 478,768 |   | $ | 9,170 |   | 7.66 | % |
| Investment securities(2)                                          |   | 4.68                        |   | 94,526                           |    | 941 |   | 3.98 |   | 111,825 |   | 1,728 |   | 6.18 |   |
| Other interest-earning assets                                     |   | 1.10                        |   | 67,306                           |    | 191 |   | 1.14 |   | 58,750 |   | 244 |   | 1.66 |   |
| Total interest-earning assets                                     |   | 6.00                        |   | 649,934                          |    | 9,716 |   | 5.98 |   | 649,343 |   | 11,142 |   | 6.86 |   |
| Noninterest-earning assets                                        |   |                        |   | 45,039                           |    |   |   |   |   | 37,888 |   |   |   |   |   |
| Total assets                                                      |   |                        |   | $                                | 694,973 |   |   |   |   |   | $ | 687,231 |   |   |   |   |   |
| Interest-bearing liabilities:                                     |   |                        |   |                             |    |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                          |   | 2.50                        |   | 572,925                          |    | 3,766 |   | 2.63 |   | $ | 569,504 |   | 5,073 |   | 3.56 |   |
| Other borrowings                                                  |   | 2.98                        |   | 46,412                           |    | 352 |   | 3.04 |   | 41,369 |   | 635 |   | 6.14 |   |
| Total interest-bearing liabilities                                |   | 2.54                        |   | 619,337                          |    | 4,118 |   | 2.66 |   | 610,873 |   | 5,708 |   | 3.74 |   |
| Noninterest-bearing liabilities                                   |   |                        |   | 3,647                            |    |   |   |   |   | 4,884 |   |   |   |   |   |
| Total liabilities                                                 |   |                        |   | 622,984                          |    |   |   |   |   | 615,757 |   |   |   |   |   |
| Stockholders’ equity                                         |   |                        |   | 71,989                           |    |   |   |   |   | 71,474 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |   |                        |   | $                                | 694,973 |   |   |   |   |   | $ | 687,231 |   |   |   |   |   |
|                                                              |   |                        |   |                             |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                               |   |                        |   |                             |    | $ | 5,598 |   |   |   |   |   | $ | 5,434 |   |   |   |
| Net earning assets                                                |   |                        |   | $                                | 30,597  |   |   |   |   |   | $ | 38,470 |   |   |   |   |   |
| Interest rate spread                                              |   | 3.46                        | %      |                             |    |   |   | 3.32 | % |   |   |   |   | 3.12 | % |
| Net interest margin                                               |   |                        |   |                             |    |   |   | 3.45 | % |   |   |   |   | 3.35 | % |
| Ratio of interest-earning assets to interest-bearing  liabilities |   |                        |   |                             |    |   |   | 104.94 | % |   |   |   |   | 106.30 | % |

 
|                                                              |   | **Six  Months Ended June 30,** |    |
|-------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                              |   | **2003**                       |    | **2002** |   |
|                                                              |   | **Average  Balance**           |    | **Interest** |   | **Average  Yield/  Cost** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/  Cost** |   |
|                                                              |   | **(Dollars  in Thousands)**    |    |
| Interest-earning assets:                                          |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                               |   | $                              | 487,839 |   | $ | 17,392 |   | 7.13 | % | $ | 476,110 |   | $ | 18,489 |   | 7.77 | % |
| Investment securities(2)                                          |   | 102,214                        |    | 2,097 |   | 4.10 |   | 107,626 |   | 3,341 |   | 6.21 |   |
| Other interest-earning assets                                     |   | 55,935                         |    | 318 |   | 1.14 |   | 62,639 |   | 516 |   | 1.65 |   |
| Total interest-earning assets                                     |   | 645,988                        |    | 19,807 |   | 6.13 |   | 646,375 |   | 22,346 |   | 6.91 |   |
| Noninterest-earning assets                                        |   | 43,638                         |    |   |   |   |   | 37,558 |   |   |   |   |   |
| Total assets                                                      |   | $                              | 689,626 |   |   |   |   |   | $ | 683,933 |   |   |   |   |   |
| Interest-bearing liabilities:                                     |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                          |   | 570,308                        |    | 7,789 |   | 2.73 |   | $ | 563,449 |   | 10,386 |   | 3.69 |   |
| Other borrowings                                                  |   | 43,978                         |    | 717 |   | 3.26 |   | 43,743 |   | 1,368 |   | 6.26 |   |
| Total interest-bearing liabilities                                |   | 614,286                        |    | 8,506 |   | 2.77 |   | 607,192 |   | 11,754 |   | 3.87 |   |
| Noninterest-bearing liabilities                                   |   | 4,064                          |    |   |   |   |   | 4,910 |   |   |   |   |   |
| Total liabilities                                                 |   | 618,350                        |    |   |   |   |   | 612,102 |   |   |   |   |   |
| Stockholders’ equity                                         |   | 71,276                         |    |   |   |   |   | 71,831 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |   | $                              | 689,626 |   |   |   |   |   | $ | 683,933 |   |   |   |   |   |
|                                                              |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                               |   |                           |    | $ | 11,301 |   |   |   |   |   | $ | 10,592 |   |   |   |
| Net earning assets                                                |   | $                              | 31,702  |   |   |   |   |   | $ | 39,183 |   |   |   |   |   |
| Interest rate spread                                              |   |                           |    |   |   | 3.36 | % |   |   |   |   | 3.04 | % |
| Net interest margin                                               |   |                           |    |   |   | 3.50 | % |   |   |   |   | 3.28 | % |
| Ratio of interest-earning assets to  interest-bearing liabilities |   |                           |    |   |   | 105.16 | % |   |   |   |   | 106.45 | % |

 

----

(1)  Includes nonaccrual loans.

(2)  Includes FHLB of Dallas stock.

 

14

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**Rate/VolumeAnalysis**

 

Thetable below sets forth certain information regarding changes in interest incomeand interest expense of the Corporation for the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (i) changes in volume (changes in average volume multiplied byprior rate); (ii) changes in rate (change in rate multiplied by prior averagevolume); (iii) changes in rate-volume (changes in rate multiplied by the changein average volume); and (iv) the net change.

 
|                               |   | **Three  Months Ended June 30,  2003 vs. 2002** |                                  | **Six  Months Ended June 30,  2003 vs. 2002** |                            |
|------------------------------------|--------|-------------------------------------------------|---------------------------------------|-----------------------------------------------|---------------------------------|
|                               |   | **Increase (Decrease)  Due to**                 | **Total********Increase  (Decrease)** |                                          | **Increase (Decrease)  Due to** | **Total********Increase********(Decrease)** |   |
|                               |   |                                            |                                  |                                          |                            |   |   |
|                               |   | **Volume**                                      |                                  | **Rate**                                      |                            | **Rate/  Volume** |   |   | **Volume** |   | **Rate** |   | **Rate/********Volume** |   |   |
|                               |   | **(In  Thousands)**                             |                                  | **(In  Thousands)**                           |                            |
| Interest income:                   |   |                                            |                                  |                                          |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                   |   | $                                               | 179                                   |                                          | $                               | (750 | ) | $ | (15 | ) | $ | (586 | ) | $ | 455 |   | $ | (1,515 | ) | $ | (37 | ) | $ | (1,097 | ) |
| Investment securities              |   | (267                                            | )                                     | (615                                          | )                               | 95 |   | (787 | ) | (168 | ) | (1,133 | ) | 57 |   | (1,244 | ) |
| Other interest-earning assets      |   | 35                                              |                                  | (77                                           | )                               | (11 | ) | (53 | ) | (55 | ) | (160 | ) | 17 |   | (198 | ) |
| Total interest-earningassets       |   | (53                                             | )                                     | (1,442                                        | )                               | 69 |   | (1,426 | ) | 232 |   | (2,808 | ) | 37 |   | (2,539 | ) |
|                               |   |                                            |                                  |                                          |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                  |   |                                            |                                  |                                          |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                           |   | 31                                              |                                  | (1,330                                        | )                               | (8 | ) | (1,307 | ) | 126 |   | (2,691 | ) | (32 | ) | (2,597 | ) |
| Other borrowings                   |   | 77                                              |                                  | (321                                          | )                               | (39 | ) | (283 | ) | 7 |   | (655 | ) | (3 | ) | (651 | ) |
| Total interest-bearing liabilities |   | 108                                             |                                  | (1,651                                        | )                               | (47 | ) | (1,590 | ) | 133 |   | (3,346 | ) | (35 | ) | (3,248 | ) |
| Net change in net interest income  |   | $                                               | (161                                  | )                                             | $                               | 209 |   | $ | 116 |   | $ | 164 |   | $ | 99 |   | $ | 538 |   | $ | 72 |   | $ | 709 |   |

 

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# **Results of Operations for the Three MonthsEnded June 30, 2003 and 2002**

 

**General. **The Corporation reported net income of $1.9 millionduring the three months ended June 30, 2003 compared to net income of $1.8million for the same period in 2002. The increase of $53,000 in net income in the 2003 period compared to thesame period in 2002 was primarily due to increases in net interest income andnoninterest income and decreases in the provisions for loan losses and incometaxes, which were offset by an increase in noninterest expenses.  Net interest income increased from $5.4million for the three months ended June 30, 2002 to $5.6 million for the sameperiod in 2003.  Net interest income isdetermined by the Corporation’s interest rate spread (i.e., the differencebetween the yields earned on its interest-earning assets and the rates paid onits interest-bearing liabilities) and the relative amounts of interest-earningassets and interest-bearing liabilities. The Corporation’s interest rate spread and net interest margin increasedto 3.32% and 3.45%, respectively, for the 2003 three month period compared to3.12% and 3.35%, respectively, for the 2002 three month period.  The increases in the interest rate spreadand net interest margin were primarily the result of declining interest ratesand the Bank’s liability-sensitive position. The decline in interest rates resulted in a 108 basis point reduction inthe cost of interest-bearing liabilities to 2.66% for the three months endedJune 30, 2003 compared to 3.74% for the three months ended June 30, 2002.  These and other significant fluctuations inoperations are discussed below.

 

**Interest Income. **Interest income amounted to $9.7 million for the three months endedJune 30, 2003 compared to $11.1 million for the same period in 2002.  The decrease of $1.4 million or 12.8% wasprimarily due to decreases in the average yields earned on net loansreceivable, investment securities, and other interest earning assets, primarilyovernight funds.  The average yield oninterest earning assets decreased 88 basis points from 6.86% for the threemonths ended June 30, 2002 to 5.98% for the three months ended June 30, 2003,primarily as a result of the declining level of interest rates.

 

**Interest Expense. **Interest expense decreased $1.6 million or 27.9% to $4.1 million forthe three months ended June 30, 2003 compared to $5.7 million for the same periodin 2002.  Such decrease was primarilydue to a decrease in the interest rates paid on deposits and FHLB of Dallasadvances.  The decrease in the interestrates paid on deposits was primarily the result of maturing certificates andvariable interest bearing accounts being repriced to lower interest rates.  The average cost of deposits decreased 93basis points from 3.56% for the three months ended June 30, 2002 to 2.63% forthe three months ended June 30, 2003, primarily as a result of the declininglevel of interest rates.

 

**Provisionfor Loan Losses.**  The provision for loanlosses amounted to $136,000 for the three months ended June 30, 2003 comparedto $373,000 for the same period in 2002. The decrease in the provision for loan losses was due to an estimatedloss on a single commercial real estate loan of approximately $245,000 recordedin the quarter ended June 30, 2002.

 

Provisions forloan losses include charges to reduce the recorded balance of loans to theirestimated fair value.  Such provisionand the adequacy of the allowance for loan losses is evaluated quarterly bymanagement of the Bank based on the Bank’s past loan loss experience, known and

 

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inherent risks in the portfolio, adverse situations that may affect theborrower’s ability to repay, the estimated value of any underlying collateraland current economic conditions.

 

**Noninterest Income. **Noninterest income increased $886,000 or70.4% to $2.1 million for the three months ended June 30, 2003 compared to $1.3million for the three months ended June 30, 2002.  The increase in noninterest income for the three month comparableperiods ended June 30 was primarily due to an increase of $373,000 in gain onsale of mortgage loans and the appreciation of contributed assets of $414,000.

 

Gain on sale of mortgage loans has increased due to increased secondarymarket activity compared to last year due to continued low mortgage loaninterest rates.  Originations of loansfor sale in the secondary market were $7.8 million for the quarter ended June30, 2002, compared to $37.4 million for the quarter ended June 30, 2003.  Proceeds from loan sales increased from$10.1 million for the quarter ended June 30, 2002 to $36.5 million for thequarter ended June 30, 2003.

 

The appreciation of contributed assets was recorded in connection withan adjustment of the carrying value of donated real estate to estimated fairvalue.  A corresponding expense in theamount of $414,000 was also recorded and is included in the balance ofcontributions expense.  The effect ofthis contribution is further described below.

 

**Noninterest Expense**.Noninterest expense increased $1.4 million or 39.9% between the 2002 and 2003three month periods ended June 30.  Suchincrease was primarily due to increases in salaries and employee benefits, netoccupancy expense, contributions expense, and other noninterest expenses.

 

The increaseof $462,000 in salaries and employee benefits was primarily composed of a$298,000 increase in compensation expense due to an increase in personnel aswell as salary and merit increases, a $28,000 increase in related payrolltaxes, a $44,000 increase in the employee stock ownership plan expense as aresult of the increase in the average stock price of the Corporation’s commonstock, a $31,000 increase in MRP compensation expense due to the awarding of5,000 shares on April 30, 2003, and a $54,000 increase in the requiredcontribution to the multiemployer pension plan.  At June 30, 2003, total unearned compensation related to the MRPamounted to $102,000.  This amount willbe recognized ratably over the period ending April 30, 2007.

 

The $214,000increase in net occupancy expense was primarily due to furniture andaccessories for the new corporate office that opened June 2, 2003.  Furniture and accessories totaling $120,000were expensed in the three months ended June 30, 2003.  Depreciation expense has increased $85,000from the quarter ended June 30, 2002 to the same period in 2003 due to ageneral increase in office properties and equipment related to the overallgrowth of the Bank.  Specifically,$26,000 of the increase was due to depreciation expense related to corporateoffice property.

 

Contributionsexpense increased $453,000, mainly due to the contribution of real estatediscussed above, offset by a decrease of $47,000 in other contributions.  The $508,000 balance of contributionsexpense for the three months ended June 30, 2003, includes the fair value ofthe donated real estate of $500,000.

 

Othernoninterest expense increased $157,000, the largest component of which was anincrease in fees paid to consultants of $72,000.  The increase in these fees relates to payments to the projectmanager for furniture and accessory acquisitions related to the new corporateoffice and fees paid to the overdraft program consultant resulting fromincreased fee income.

 

17

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**Income Taxes. **Income taxes amounted to $726,000 and$916,000 for the three months ended June 30, 2003 and 2002, respectively,resulting in effective tax rates of 27.8% and 33.3%, respectively.  The decrease in the income tax provision wasdue primarily to the tax benefit resulting from the contribution of realestate.

 

**Resultsof Operations for the Six Months Ended June 30, 2003 and 2002**

 

**General. **The Corporation reported net income of $3.9million during the six months ended June 30, 2003 compared to net income of$3.6 million for the same period in 2002. The increase of $281,000 in net income in the 2003 period compared tothe same period in 2002 was primarily due to increases in net interest incomeand noninterest income and decreases in the provision for loan losses andincome taxes, which were offset by an increase in noninterest expenses.  Net interest income increased $709,000 from$10.6 million for the six months ended June 30, 2002 to $11.3 million for thesame period in 2003.  The Corporation’sinterest rate spread and net interest margin increased to 3.36% and 3.50%,respectively, for the 2003 six month period compared to 3.04% and 3.28%,respectively, for the 2002 six month period. The increases in the interest rate spread and net interest margin wereprimarily the result of declining interest rates and the Bank’sliability-sensitive position.  Thedecline in interest rates resulted in a 110 basis point reduction in the costof interest-bearing liabilities to 2.77% for six months ended June 30, 2003compared to 3.87% for the six months ended June 30, 2002.

 

**Interest Income. **Interest income amounted to $19.8million for the six months ended June 30, 2003 compared to $22.3 millionfor the same period in 2002.  Thedecrease of $2.5 million was primarily due to a decrease in the average yieldearned on net loans receivable, investment securities and other interestearning assets, primarily overnight funds, which were partially offset by anincrease in the average balance of net loans receivable.  The average yield on interest earning assetsdecreased 78 basis points from 6.91% for the six months ended June 30, 2002 to6.13% for the six months ended June 30, 2003, primarily as a result of thedeclining level of interest rates.

 

**Interest Expense. **Interest expense decreased $3.2 millionor 27.6% to $8.5 million for the six months ended June 30, 2003 compared to$11.8 million for the same period in 2002. Such decrease was primarily due to a decrease in the interest rates paidon deposits and FHLB of Dallas advances. The decrease in the interest rates paid on deposits was primarily theresult of maturing certificates and variable interest bearing accounts beingrepriced to lower interest rates.  Theaverage cost of deposits decreased 96 basis points from 3.69% for the sixmonths ended June 30, 2002 to 2.73% for the six months ended June 30, 2003,primarily as a result of the declining level of interest rates.

 

**Provision for Loan Losses.**  Provisionfor loan losses amounted to $415,000 for the six months ended June 30, 2003compared to $736,000 for the same period in 2002.  The decrease in the provision for loan losses was due to anestimated loss on a single commercial real estate loan of approximately$415,000 recorded in the six months ended June 30, 2002.

 

Provisions forloan losses include charges to reduce the recorded balance of loans to theirestimated fair value.  Such provisionand the adequacy of the allowance for loan losses is evaluated

 

18

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quarterly by management of the Bank based on the Bank’s past loan lossexperience, known and inherent risks in the portfolio, adverse situations thatmay affect the borrower’s ability to repay, the estimated value of anyunderlying collateral and current economic conditions.

 

**Noninterest Income. **Noninterest income increased $1.1million or 44.9% to $3.7 million for the six months ended June 30, 2003compared to $2.5 million for the six months ended June 30, 2002.  The increase in noninterest income for thesix month comparable periods ended June 30 was primarily due to an increase of$539,000 in gain on sale of mortgage loans and the appreciation of contributedassets of $414,000.

 

Gain on sale of mortgage loans has increased due to increased secondarymarket activity compared to last year due to continued low mortgage loaninterest rates.  Originations of loansfor sale in the secondary market were $21.8 million for the six months endedJune 30, 2002, compared to $65.0 million for the six months ended June 30,2003.  Proceeds from loan salesincreased from $27.0 million for the six months ended June 30, 2002 to $69.1 millionfor the six months ended June 30, 2003.

 

The appreciation of contributed assets was recorded in connection withan adjustment of the carrying value of donated real estate to estimated fairvalue.  A corresponding expense in theamount of $414,000 was also recorded and is included in the balance ofcontributions expense.  The effect ofthis contribution is further described below.

 

**Noninterest Expense**.Noninterest expense increased $2.0 million or 29.2% between the 2002 and 2003six month periods ended June 30.  Suchincrease was primarily due to increases in salaries and employee benefits, netoccupancy expense, contributions expense, and other noninterest expenses.

 

The increaseof $816,000 in salaries and employee benefits was primarily composed of a$537,000 increase in compensation expense due to an increase in personnel aswell as salary and merit increases, a $61,000 increase in related payrolltaxes, a $69,000 increase in the employee stock ownership plan expense as aresult of the increase in the average stock price of the Corporation’s commonstock, a $31,000 increase in MRP compensation expense due to the awarding of5,000 shares on April 30, 2003, and a $108,000 increase in the requiredcontribution to the multiemployer pension plan.  At June 30, 2003, total unearned compensation related to the MRPamounted to $102,000.  This amount willbe recognized ratably over the period ending April 30, 2007.

 

The $278,000increase in net occupancy expense was primarily due to furniture andaccessories for the new corporate office that opened June 2, 2003.  Furniture and accessories totaling $120,000were expensed in the six months ended June 30, 2003.  Depreciation expense has increased $150,000 from the six monthsended June 30, 2002 to the same period in 2003 due to a general increase inoffice properties and equipment related to the overall growth of the Bank.  Specifically, $26,000 of the increase wasdue to depreciation expense related to corporate office property.

 

Contributionsexpense increased $447,000, mainly due to the contribution of real estatediscussed above, offset by a decrease of $53,000 in other contributions.  The $519,000 balance of contributionsexpense for the six months ended June 30, 2003, includes the fair value of thedonated real estate of $500,000.

 

Othernoninterest expense increased $195,000, the largest component of which was anincrease in fees paid to consultants of $75,000.  The increase in these fees relates to payments to the

 

19

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project manager for furnitureand accessory acquisitions related to the new corporate office and fees paid tothe overdraft program consultant resulting from increased fee income.

 

**IncomeTaxes. **Incometaxes amounted to $1.7 million and $1.8 million for the six months ended June30, 2003 and 2002, respectively, resulting in effective tax rates of 30.2% and33.7%, respectively.** **The decrease in the income taxprovision was due primarily to the tax benefit resulting from the contributionof real estate, as previously discussed.

 

**Liquidityand Capital Resources**

 

The Bank’s liquidity, represented by cash and cash equivalents andeligible investment securities, is a product of its operating, investing andfinancing activities.  The Bank’sprimary sources of funds are deposits, collections on outstanding loans,maturities and calls of investment securities and other short-term investmentsand funds provided from operations. While scheduled loan amortization and maturing investment securities andshort-term investments are relatively predictable sources of funds, depositflows 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 steadydeposit balance.  In addition, the Bankinvests excess funds in overnight deposits and other short-terminterest-earning assets which provide liquidity to meet lendingrequirements.  The Bank has generallybeen able to generate enough cash through the retail deposit market, itstraditional funding source, to offset the cash utilized in investingactivities.  As an additional source offunds, the Bank has borrowed from the FHLB of Dallas.  At June 30, 2003, the Bank had outstanding advances from the FHLBof Dallas of $47.5 million.  Suchadvances were used in the Bank’s normal operating and investing activities.

 

As of June 30, 2003, the Bank’s regulatory capital was in excess of allapplicable regulatory requirements.  AtJune 30, 2003, the Bank’s tangible, core and risk-based capital ratios amountedto 9.95%, 9.95% and 16.67%, respectively, compared to applicable requirementsof 1.5%, 4.0% and 8.0%, respectively.

 

**Off-BalanceSheet Arrangements and Commitments**

 

The Corporation, in the normalcourse of business, makes commitments to buy or sell assets or to incur or fundliabilities.  Commitments include, butare not limited to:

 

•                  the origination,purchase or sale of loans,

•                  the purchase ofinvestment securities,

•                  the fulfillmentof commitments under letters-of-credit, extensions of credit on home equitylines of credit and construction loans, and

•                  the commitmentto fund withdrawals of savings accounts at maturity.

 

At June 30, 2003, the Bank’soff-balance sheet arrangements principally included lending commitments, whichare described below.  At June 30, 2003,the Corporation had no interests in non-consolidated special purpose entities.

 

20

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At June 30, 2003, commitmentsincluded:

 

•                  total approvedloan origination commitments outstanding amounting to $21.3 million, including$8.2 million of loans committed to sell;

•                  rate lockagreements with customers of $22.7 million, all of which have been locked withan investor;

•                  unadvancedportion of construction loans of $27.5 million;

•                  unused lines ofcredit of $16.0 million;

•                  outstandingstandby letters of credit of $1.3 million; and

•                  certificates ofdeposit scheduled to mature in one year or less totaling $178.1 million.

 

Based on historical experience,management believes that a significant portion of maturing deposits will remainwith the Bank.  We anticipate that wewill continue to have sufficient funds, through repayments, deposits andborrowings, to meet our current commitments.

 

21

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**Impactof Inflation and Changing Prices**

 

The financial statements and related financial data presented hereinhave been prepared in accordance with instructions to Form 10-Q, which requirethe measurement of financial position and operating results in terms ofhistorical dollars, without considering changes in relative purchasing powerover time due to inflation.

 

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

 

**Forward-LookingStatements**

 

This Form 10-Q contains certain forward-looking statements andinformation relating to the Corporation that are based on the beliefs ofmanagement as well as assumptions made by and information currently availableto management.  In addition, in thoseand other portions of this document, the words “anticipate,” “believe,”“estimate,” “except,” “intend,” “should” and similar expressions, or thenegative thereof, as they relate to the Corporation or the Corporation’smanagement, are intended to identify forward-looking statements.  Such statements reflect the current views ofthe Corporation with respect to future looking events and are subject tocertain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or shouldunderlying assumptions prove incorrect, actual results may vary from thosedescribed herein as anticipated, believed, estimated, expected orintended.  The Corporation does notintend to update these forward-looking statements.

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURES**

**ABOUT MARKET RISK**

 

For adiscussion of the Corporation’s asset and liability management policies as wellas the potential impact of interest rate changes upon the market value of theBank’s portfolio equity, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the Corporation’s 2002 Annual Report toStockholders.  There has been nomaterial change in the Corporation’s asset and liability position or the marketvalue of the Bank’s portfolio equity since December 31, 2002.

 

22

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**CONTROLSAND PROCEDURES**

 

Our managementevaluated, with the participation of our Chief Executive Officer and ChiefFinancial Officer, the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934) as of the end of the period covered by this report.  Based on such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and regulations and areoperating in an effective manner.

 

No change inour internal control over financial reporting (as defined in Rules 13a-15(f)and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during themost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**PartII**

 

Item 1.    Legal Proceedings

 

Neither the Corporation nor the Bank is involved in any pending legalproceedings other than non-material legal proceedings occurring in the ordinarycourse of business.

 

Item 2.    Changes in Securities

 

Not applicable.

 

Item 3.    Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.    Submission of Matters to a Vote ofSecurity Holders

 

On April 30, 2003, the Corporation held an annual meeting ofstockholders for the following purposes:

 

(1)                           To elect two directors for a term ofthree years; and

 

(2)                           To ratify theappointment by the Board of Directors of Deloitte and Touche LLP as theCorporation’s independent auditors for the year ending December 31, 2003.

 

The results of the voting are set forth below:

 

Proposal One (Election of Directors):

 
| **NAME**              |   | **FOR**   |   | **AGAINST/****WITHHELD** |   | **NOT  VOTED** |   |
|-----------------------|--------|-----------|--------|--------------------------|--------|----------------|--------|
| Jeffrey L. Brandt     |   | 2,228,464 |   | 6,019                    |   | 431,260        |   |
| John P. Hammerschmidt |   | 2,228,039 |   | 6,444                    |   | 431,260        |   |

 

Proposal Two (Ratification of Auditors):

 
| **FOR**   |   | **AGAINST** |   | **ABSTAIN** |   | **NOT VOTED** |   |
|-----------|--------|-------------|--------|-------------|--------|---------------|--------|
| 2,225,865 |   | 3,012       |   | 5,606       |   | 431,260       |   |

 

24

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Item 5.    Other Information

 

None.

 

Item 6.    Exhibits and Reports on Form 8-K

 

Exhibit 31.1 – Certification of Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

Exhibit 31.2 – Certification of Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

Exhibit 32.1 – Certification of Chief Executive Officer,Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

Exhibit 32.2 – Certification of Chief Financial Officer,Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

Reports on Form 8-K

On April 30, 2003, a Form 8-K was filed for the Corporation’s April 30,2003 press release that announced results of operations for the quarter endedMarch 31, 2003. 

 

25

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                       | **FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.** |
|----------------------------|------------------------------------------------|
|                       |                                           |   |
|                       |                                           |   |
| Date:  August 8, 2003 | By:                                            | /s/Larry J.  Brandt |   |
|                       |                                           | Larry J.  Brandt |
|                       |                                           | President/CEO |
|                       |                                           |   |
| Date:  August 8, 2003 | By:                                            | /s/Sherri R.  Billings |   |
|                       |                                           | Sherri R.  Billings |
|                       |                                           | EVP/CFO |
|                            |                                                |  |  |  |

 

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