**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

** **

**FORM 10-Q**

** **

**[X]**                           QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly periodended March 31, 2007**

** **

**OR**

** **

**[ ]**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934

 

 

**For the transition periodfrom                        to                                 **

** **

** **

**Commission File Number0-28312**

** **

** **

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

(Exact name of registrant as specified in its charter)

 

| **Texas**                                      | ** ** | **71-0785261**          |
|------------------------------------------------|------------|-------------------------|
| (State or other  jurisdiction of incorporation |       | (I.R.S. Employer        |
| or organization)                               |       | 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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.Yes x  No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer.

Large acceleratedfiler o  Accelerated filer  x   Non-accelerated filer   o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o  No x

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:  As of May 2, 2007, there were issued andoutstanding 4,872,640 shares of the Registrant’s Common Stock, par value $.01per share.

 

----

 

**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**TABLEOF CONTENTS**

 
|                | ** ** | ** **                                                                                                                                                  | ** ** | **Page** |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I.**    |       | **Financial Information**                                                                                                                                   |       |     |
| ** **     |       | ** **                                                                                                                                                  |       |     |
| Item 1.        |       | Consolidated Financial Statements                                                                                                                           |       |     |
|           |       |                                                                                                                                                        |       |     |
|           |       | Consolidated Statements of Financial Condition as of  March 31, 2007 and December 31, 2006 (unaudited)                                                      |       | 1        |
|           |       |                                                                                                                                                        |       |     |
|           |       | Consolidated Statements of Income for the three months  ended March 31, 2007 and 2006 (unaudited)                                                           |       | 2        |
|           |       |                                                                                                                                                        |       |     |
|           |       | Consolidated Statement of Stockholders’ Equity for the  three months ended March 31, 2007 (unaudited)                                                  |       | 3        |
|           |       |                                                                                                                                                        |       |     |
|           |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 2007 and 2006 (unaudited)                                                       |       | 4        |
|           |       |                                                                                                                                                        |       |     |
|           |       | Notes to Unaudited Consolidated Financial Statements                                                                                                        |       | 6        |
|           |       |                                                                                                                                                        |       |     |
| Item 2.        |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                 |       | 8        |
|           |       |                                                                                                                                                        |       |     |
| Item 3.        |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                 |       | 21       |
|           |       |                                                                                                                                                        |       |     |
| Item 4.        |       | Controls and Procedures                                                                                                                                     |       | 21       |
|           |       |                                                                                                                                                        |       |     |
| **Part II.**   | ** ** | **Other Information**                                                                                                                                       |       |     |
|           |       |                                                                                                                                                        |       |     |
| Item  1.       |       | Legal  Proceedings                                                                                                                                          |       | 23       |
|           |       |                                                                                                                                                        |       |     |
| Item 1A.       |       | Risk Factors                                                                                                                                                |       | 23       |
|           |       |                                                                                                                                                        |       |     |
| Item 2.        |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                                |       | 23       |
|           |       |                                                                                                                                                        |       |     |
| Item 3.        |       | Defaults Upon Senior Securities                                                                                                                             |       | 23       |
|           |       |                                                                                                                                                        |       |     |
| Item 4.        |       | Submission of Matters to a Vote of Security Holders                                                                                                         |       | 23       |
|           |       |                                                                                                                                                        |       |     |
| Item  5.       |       | Other  Information                                                                                                                                          |       | 23       |
|           |       |                                                                                                                                                        |       |     |
| Item 6.        |       | Exhibits                                                                                                                                                    |       | 23       |
|           |       |                                                                                                                                                        |       |     |
| **Signatures** |       |                                                                                                                                                        |       |     |
|           |       |                                                                                                                                                        |       |     |
| **Exhibits**   |       |                                                                                                                                                        |       |     |
| 31.1           |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |       |     |
|           |       |                                                                                                                                                        |       |     |
| 31.2           |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |       |     |
|           |       |                                                                                                                                                        |       |     |
| 32.1           |       | Section 906 Certification of the CEO                                                                                                                        |       |     |
|           |       |                                                                                                                                                        |       |     |
| 32.2           |       | Section 906 Certification of the CFO                                                                                                                        |       |     |
|           |       |                                                                                                                                                        |       |     |

 

 

** **

----

 

**FIRST FEDERALBANCSHARES OF ARKANSAS, INC.CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(In thousands, except share data)(Unaudited)**
| ** **                                                                                                                                                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ASSETS                                                                                                                                                                                    |       |               |       |                  |       |
|                                                                                                                                                                                      |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                |       | $                  | 40,400     |                  | $          | 35,518 |   |
| Investment securities  held to maturity                                                                                                                                                   |       | 62,734             |       | 60,746                |       |
| Federal Home Loan Bank  stock                                                                                                                                                             |       | 5,872              |       | 7,089                 |       |
| Loans receivable, net                                                                                                                                                                     |       | 670,146            |       | 693,095               |       |
| Accrued interest  receivable                                                                                                                                                              |       | 10,285             |       | 9,999                 |       |
| Real estate acquired in  settlement of loans, net                                                                                                                                         |       | 2,876              |       | 3,858                 |       |
| Office properties and  equipment, net                                                                                                                                                     |       | 20,677             |       | 20,384                |       |
| Cash surrender value of  life insurance                                                                                                                                                   |       | 19,585             |       | 19,396                |       |
| Prepaid expenses and  other assets                                                                                                                                                        |       | 2,197              |       | 2,390                 |       |
|                                                                                                                                                                                      |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                              |       | $                  | 834,772    |                  | $          | 852,475 |   |
|                                                                                                                                                                                      |       |               |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                |       |               |       |                  |       |
|                                                                                                                                                                                      |       |               |       |                  |       |
| LIABILITIES:                                                                                                                                                                              |       |               |       |                  |       |
| Deposits                                                                                                                                                                                  |       | $                  | 654,393    |                  | $          | 652,265 |   |
| Federal Home Loan Bank  advances                                                                                                                                                          |       | 102,554            |       | 120,305               |       |
| Advance payments by  borrowers for taxes and insurance                                                                                                                                    |       | 868                |       | 666                   |       |
| Other liabilities                                                                                                                                                                         |       | 2,674              |       | 3,666                 |       |
| Total  liabilities                                                                                                                                                                        |       | 760,489            |       | 776,902               |       |
|                                                                                                                                                                                      |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                |       |               |       |                  |       |
| Preferred stock, no par  value, 5,000,000 shares authorized, none issued                                                                                                                  |       |               |       |                  |       |
| Common stock, $.01 par  value, 20,000,000 shares authorized, 10,307,502 shares issued, 4,872,240 and  4,838,962 shares outstanding at March 31, 2007 and December 31, 2006,  respectively |       | 103                |       | 103                   |       |
| Additional paid-in  capital                                                                                                                                                               |       | 56,671             |       | 56,617                |       |
| Employee stock benefit  plans                                                                                                                                                             |       | (60                | )          | (72                   | )          |
| Retained  earnings-substantially restricted                                                                                                                                               |       | 87,448             |       | 88,068                |       |
|                                                                                                                                                                                      |       | 144,162            |       | 144,716               |       |
| Treasury stock, at  cost, 5,435,262 and 5,468,540 shares at March 31, 2007 and December 31, 2006,  respectively                                                                           |       | (69,879            | )          | (69,143               | )          |
| Total  stockholders’ equity                                                                                                                                                          |       | 74,283             |       | 75,573                |       |
|                                                                                                                                                                                      |       |               |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                          |       | $                  | 834,772    |                  | $          | 852,475 |   |

 

See notes to unaudited consolidated financial statements.

1

----

 

**FIRST FEDERALBANCSHARES OF ARKANSAS, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except share data)(Unaudited)**
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| INTEREST INCOME:                                     |       |                             |       |   |   |
| Loans receivable                                     |       | $                                | 12,201     |   | $ | 12,227 |   |
| Investment securities:                               |       |                             |       |   |   |
| Taxable                                              |       | 656                              |       | 581 |   |
| Nontaxable                                           |       | 182                              |       | 187 |   |
| Other                                                |       | 188                              |       | 96 |   |
| Total interest income                                |       | 13,227                           |       | 13,091 |   |
|                                                 |       |                             |       |   |   |
| INTEREST  EXPENSE:                                   |       |                             |       |   |   |
| Deposits                                             |       | 5,848                            |       | 4,446 |   |
| Other borrowings                                     |       | 1,260                            |       | 1,742 |   |
| Total interest expense                               |       | 7,108                            |       | 6,188 |   |
|                                                 |       |                             |       |   |   |
| NET INTEREST  INCOME                                 |       | 6,119                            |       | 6,903 |   |
|                                                 |       |                             |       |   |   |
| PROVISION FOR  LOAN LOSSES                           |       | 1,961                            |       | 285 |   |
|                                                 |       |                             |       |   |   |
| NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES |       | 4,158                            |       | 6,618 |   |
|                                                 |       |                             |       |   |   |
| NONINTEREST  INCOME:                                 |       |                             |       |   |   |
| Deposit fee income                                   |       | 1,157                            |       | 1,078 |   |
| Earnings on life insurance policies                  |       | 189                              |       | 184 |   |
| Gain on sale of loans                                |       | 174                              |       | 197 |   |
| Other                                                |       | 342                              |       | 858 |   |
| Total noninterest income                             |       | 1,862                            |       | 2,317 |   |
|                                                 |       |                             |       |   |   |
| NONINTEREST  EXPENSES:                               |       |                             |       |   |   |
| Salaries and employee benefits                       |       | 3,443                            |       | 3,720 |   |
| Net occupancy expense                                |       | 623                              |       | 589 |   |
| Data processing                                      |       | 454                              |       | 441 |   |
| Professional fees                                    |       | 141                              |       | 105 |   |
| Advertising and public relations                     |       | 359                              |       | 316 |   |
| Postage and supplies                                 |       | 275                              |       | 228 |   |
| Other                                                |       | 775                              |       | 623 |   |
| Total noninterest expenses                           |       | 6,070                            |       | 6,022 |   |
|                                                 |       |                             |       |   |   |
| INCOME (LOSS)  BEFORE INCOME TAXES                   |       | (50                              | )          | 2,913 |   |
| INCOME TAX  PROVISION (BENEFIT)                      |       | (209                             | )          | 928 |   |
| NET INCOME                                           |       | $                                | 159        |   | $ | 1,985 |   |
|                                                 |       |                             |       |   |   |
| EARNINGS PER  SHARE:                                 |       |                             |       |   |   |
| Basic                                                |       | $                                | 0.03       |   | $ | 0.39 |   |
|                                                 |       |                             |       |   |   |
| Diluted                                              |       | $                                | 0.03       |   | $ | 0.38 |   |
|                                                 |       |                             |       |   |   |
| Cash Dividends  Declared                             |       | $                                | 0.16       |   | $ | 0.14 |   |

 

 

See notes to unaudited consolidated financial statements.

2

----

 

**FIRST FEDERALBANCSHARES OF ARKANSAS, INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFOR THE THREE MONTHS ENDED MARCH 31, 2007(In thousands, except share data)(Unaudited)**

 
| ** **                                                 | ** ** | **Issued Common Stock** | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                          | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **Shares**                        | ** ** | **Amount** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Employee  Stock  Benefit  Plans** | ** ** | **Retained  Earnings** | ** ** |
|                                                       |       |                              |       |       |       |                             |       |                                |       |   |   |
| Balance, January  1, 2007                                  |       | 10,307,502                        |       | $          | 103        |                             | $          | 56,617                              |       | $ | (72 | ) | $ | 88,068 |   |
| Net income                                                 |       |                              |       |       |       |                             |       |                                |       | 159 |   |
| Tax effect of  stock compensation plan                     |       |                              |       |       |       | 440                              |       |                                |       |   |   |
| Treasury shares  reissued due to exercise of stock options |       |                              |       |       |       | (388                             | )          |                                |       |   |   |
| Purchase of  treasury stock, at cost                       |       |                              |       |       |       |                             |       |                                |       |   |   |
| Stock  compensation expense                                |       |                              |       |       |       | 2                                |       | 12                                  |       |   |   |
| Dividends paid                                             |       |                              |       |       |       |                             |       |                                |       | (779 | ) |
|                                                       |       |                              |       |       |       |                             |       |                                |       |   |   |
| Balance, March 31, 2007                                    |       | 10,307,502                        |       | $          | 103        |                             | $          | 56,671                              |       | $ | (60 | ) | $ | 87,448 |   |

 
| ** **                                                 | ** ** | **Treasury Stock** | ** ** | **Total   Stockholders’** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **Shares**              | ** ** | **Amount**                          | ** ** | **Equity** | ** ** |
|                                                       |       |                    |       |                                |       |   |   |
| Balance, January  1, 2007                                  |       | 5,468,540               |       | $                                   | (69,143    | ) | $ | 75,573 |   |
| Net income                                                 |       |                    |       |                                |       | 159 |   |
| Tax effect of  stock compensation plan                     |       |                    |       |                                |       | 440 |   |
| Treasury shares  reissued due to exercise of stock options |       | (88,804                 | )          | (1,389                              | )          | (1,389 | ) |
| Purchase of  treasury stock, at cost                       |       | 55,526                  |       | 653                                 |       | 265 |   |
| Stock  compensation expense                                |       |                    |       |                                |       | 14 |   |
| Dividends paid                                             |       |                    |       |                                |       | (779 | ) |
|                                                       |       |                    |       |                                |       |   |   |
| Balance, March 31, 2007                                    |       | 5,435,262               |       | $                                   | (69,879    | ) | $ | 74,283 |   |

 

See notes to unauditedconsolidated financial statements.

3

----

 

**FIRST FEDERALBANCSHARES OF ARKANSAS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)(Unaudited)**
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| OPERATING ACTIVITIES:                                                              |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 159        |   | $ | 1,985 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                 |       |   |   |
| Provision for  loan losses                                                         |       | 1,961                                                |       | 285 |   |
| Provision for  real estate losses                                                  |       | 74                                                   |       | — |   |
| Deferred tax  (benefit) provision                                                  |       | (788                                                 | )          | 221 |   |
| Accretion of  discounts on investment securities, net                              |       | (9                                                   | )          | (1 | ) |
| Federal Home Loan  Bank stock dividends                                            |       | (98                                                  | )          | (93 | ) |
| Gain on  disposition of office properties and equipment                            |       | (2                                                   | )          | (234 | ) |
| Loss (gain) on  sale of repossessed assets, net                                    |       | 43                                                   |       | (32 | ) |
| Originations of  loans held for sale                                               |       | (16,100                                              | )          | (13,805 | ) |
| Proceeds from  sales of loans held for sale                                        |       | 16,024                                               |       | 13,567 |   |
| Gain on sale of  loans originated to sell                                          |       | (174                                                 | )          | (197 | ) |
| Depreciation                                                                       |       | 354                                                  |       | 312 |   |
| Amortization of  deferred loan fees, net                                           |       | 91                                                   |       | 16 |   |
| Release of ESOP  shares                                                            |       | —                                               |       | 511 |   |
| Stock  compensation expense                                                        |       | 14                                                   |       | 35 |   |
| Earnings on life  insurance policies                                               |       | (189                                                 | )          | (184 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                                 |       |   |   |
| Accrued interest  receivable                                                       |       | (286                                                 | )          | (1,109 | ) |
| Prepaid expenses  and other assets                                                 |       | 191                                                  |       | (247 | ) |
| Other  liabilities                                                                 |       | 236                                                  |       | (108 | ) |
| Net cash  provided by operating activities                                         |       | 1,501                                                |       | 922 |   |
|                                                                               |       |                                                 |       |   |   |
| INVESTING ACTIVITIES:                                                              |       |                                                 |       |   |   |
| Purchases of  investment securities held to maturity                               |       | (6,299                                               | )          | — |   |
| Proceeds from  maturities/calls of investment securities held to maturity          |       | 4,320                                                |       | — |   |
| Federal Home  Loan Bank stock redeemed                                             |       | 1,315                                                |       | — |   |
| Loan  participations sold                                                          |       | 4,907                                                |       | 3,419 |   |
| Net loan  (originations) repayments                                                |       | 16,090                                               |       | (13,928 | ) |
| Proceeds from  sales of repossessed assets                                         |       | 1,165                                                |       | 717 |   |
| Improvements to  real estate owned                                                 |       | (148                                                 | )          | — |   |
| Proceeds from  sales of office properties and equipment                            |       | 6                                                    |       | 249 |   |
| Purchases of  office properties and equipment                                      |       | (651                                                 | )          | (723 | ) |
| Net cash  provided by (used in) investing activities                               |       | 20,705                                               |       | (10,266 | ) |
|                                                                               |       |                                                 |       |   |   |
| FINANCING ACTIVITIES:                                                              |       |                                                 |       |   |   |
| Net increase in  deposits                                                          |       | 2,128                                                |       | 23,205 |   |
| Advances from  FHLB                                                                |       | 4,000                                                |       | 22,500 |   |
| Repayment of  advances from FHLB                                                   |       | (21,751                                              | )          | (22,118 | ) |
| Net decrease in  advance payments by borrowers for taxes and insurance             |       | 202                                                  |       | 125 |   |
| Purchase of  treasury stock                                                        |       | (1,389                                               | )          | (3,150 | ) |
| Reissued  treasury stock                                                           |       | 265                                                  |       | 726 |   |
| Dividends paid                                                                     |       | (779                                                 | )          | (711 | ) |
| Net cash  provided by (used in) financing activities                               |       | (17,324                                              | )          | 20,577 |   |
| Net increase in cash  and cash equivalents                                         |       | 4,882                                                |       | 11,233 |   |
|                                                                                    |            |                                                      |            |  |  |  |  |

(Continued)

4

----

 

**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)(Unaudited)**
| ** **                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                           |       |                                                 |       |   |   |
| CASH AND CASH  EQUIVALENTS:                                                    |       |                                                 |       |   |   |
| Beginning of  period                                                           |       | $                                                    | 35,518     |   | $ | 21,109 |   |
| End of period                                                                  |       | $                                                    | 40,400     |   | $ | 32,342 |   |
|                                                                           |       |                                                 |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                            |       |                                                 |       |   |   |
| Cash paid for:                                                                 |       |                                                 |       |   |   |
| Interest                                                                       |       | $                                                    | 7,253      |   | $ | 6,025 |   |
| Income taxes                                                                   |       | $                                                    | 2          |   | $ | 11 |   |
|                                                                           |       |                                                 |       |   |   |
| SUPPLEMENTAL SCHEDULE  OF NONCASH INVESTING ACTIVITIES:                        |       |                                                 |       |   |   |
| Real estate and  other assets acquired in settlement of loans                  |       | $                                                    | 150        |   | $ | 44 |   |
| Investment  securities traded, recorded in investments not yet settled in cash |       | $                                                    | —     |   | $ | 1,000 |   |

 

(Concluded)

See notes to unauditedconsolidated financial statements.

5

----

 

**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

# **Note 1 — Basis of Presentationand Principles of Consolidation**

First FederalBancshares of Arkansas, Inc. (the “Company”) is a unitary holding company whichowns all of the stock of First Federal Bank (the “Bank”).  The Bank provides a broad line of financialproducts to individuals and small- to medium-sized businesses.  The unaudited consolidated financialstatements also include the accounts of the Bank’s wholly-owned subsidiary,First Harrison Service Corporation (“FHSC”), which is inactive.

The accompanyingunaudited consolidated financial statements of the Company have been preparedin accordance 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 accompanyingunaudited consolidated financial statements include the accounts of the Companyand the Bank.  All material intercompanytransactions have been eliminated in consolidation.

The results of operationsfor the three months ended March 31, 2007, are not necessarily indicative ofthe results to be expected for the year ending December 31, 2007.  The unaudited consolidated financialstatements and notes thereto should be read in conjunction with the auditedfinancial statements and notes thereto for the year ended December 31,2006, contained in the Company’s 2006 Annual Report to Stockholders.

Certain amounts inthe March 31, 2006, unaudited consolidated financial statements have beenreclassified to conform to the classifications adopted for reporting in 2007.

# **Note 2 — Recently AdoptedAccounting Standard**

We adopted SFAS No. 155, *Accounting for Certain Hybrid Financial Instruments*,as of January 1, 2007.  The adoption ofthis Statement did not have a material effect on the financial statements ofthe Company.

We adopted SFAS No. 156, *Accounting for Servicing of Financial Assets*,as of January 1, 2007.  The adoption ofthis Statement did not have a material effect on the financial statements ofthe Company.

We adopted FASB FinancialInterpretation No. 48, *Accounting forUncertainty in Income Taxes*, as of January 1, 2007.  The adoption of this Statement did not have amaterial effect on the financial statements of the Company.

**Note 3 — Earnings per Share**

The weightedaverage number of common shares used to calculate earnings per share for theperiods ended March 31, 2007 and 2006 were as follows:
| ** **                         | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Basic weighted -  average shares   |       | 4,869,855                                            |       | 5,032,320 |   |
| Effect of  dilutive securities     |       | 38,509                                               |       | 143,188 |   |
| Diluted weighted  - average shares |       | 4,908,364                                            |       | 5,175,508 |   |

 

6

----

**Note 4 — Allowances for Loan andReal Estate Losses**

A summary of the activityin the allowances for loan and real estate losses is as follows for thequarters ended March 31 (in thousands):

 
| ** **                        | ** ** | **Three Months Ended  March 31,  2007** | ** ** | **Three Months Ended   March 31,  2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                        | ** ** | **Loans**                                              | ** ** | **Real  Estate**                                             | ** ** | **Loans** | ** ** | **Real  Estate** | ** ** |
| Balance—beginning  of period |       | $                                                      | 2,572      |                                                         | $          | — |   | $ | 2,114 |   | $ | — |   |
|                              |       |                                                   |       |                                                         |       |   |   |   |   |
| Provisions for estimated losses   |       | 1,961                                                  |       | 74                                                           |       | 285 |   | — |   |
| Recoveries                        |       | 49                                                     |       | —                                                       |       | 47 |   | — |   |
| Losses charged off                |       | (288                                                   | )          | (74                                                          | )          | (195 | ) | — |   |
| Balance—end of period        |       | $                                                      | 4,294      |                                                         | $          | — |   | $ | 2,251 |   | $ | — |   |

 

The allowance for loanlosses increased between the periods listed above primarily due to a $1.4million specific loan loss allowance on two phases of a subdivision recorded asof March 31, 2007.

7

----

# **MANAGEMENT’SDISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

### **CRITICALACCOUNTING POLICIES**

Various elements of our accounting policies, by their nature, are inherentlysubject to estimation 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 ourfinancial statements to this critical accounting policy, the use of otherjudgments, estimates and assumptions could result in material differences inour financial condition or results of operations.

In estimating the amount of credit losses inherent in our loanportfolio, various judgments and assumptions are made.  For example, when assessing the condition ofthe overall economic environment, assumptions are made regarding future marketconditions and their impact on the loan portfolio.  In the event the local or national economywere to sustain a prolonged downturn, the loss factors applied to ourportfolios may need to be revised, which may significantly impact themeasurement of the allowance for loan losses. For impaired loans that are collateral-dependent, the estimated fairvalue of the collateral may deviate significantly from the proceeds receivedwhen the collateral is sold.

## **CHANGES INFINANCIAL CONDITION**

Changes in financial condition between March 31, 2007 and December31, 2006 are presented in the following table (dollars in thousands).  Material changes between the periods arediscussed in the sections which follow the table.
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **Percentage** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|
| ** **                                 | ** ** | **2007**           | ** ** | **2006**              | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| ASSETS                                     |       |               |       |                  |       |           |       |           |       |
| Cash and cash equivalents                  |       | $                  | 40,400     |                  | $          | 35,518         |       | $              | 4,882      |   | 13.7 | % |
| Investment securities held to maturity     |       | 62,734             |       | 60,746                |       | 1,988          |       | 3.3            |       |
| Federal Home Loan Bank stock               |       | 5,872              |       | 7,089                 |       | (1,217         | )          | (17.2          | )          |
| Loans receivable, net                      |       | 670,146            |       | 693,095               |       | (22,949        | )          | (3.3           | )          |
| Accrued interest receivable                |       | 10,285             |       | 9,999                 |       | 286            |       | 2.9            |       |
| Office properties and equipment, net       |       | 20,677             |       | 20,384                |       | 293            |       | 1.4            |       |
| Prepaid expenses and other assets          |       | 24,658             |       | 25,644                |       | (986           | )          | (3.8           | )          |
|                                       |       |               |       |                  |       |           |       |           |       |
| TOTAL                                      |       | $                  | 834,772    |                  | $          | 852,475        |       | $              | (17,703    | ) | (2.1 | )% |
|                                       |       |               |       |                  |       |           |       |           |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY |       |               |       |                  |       |           |       |           |       |
| LIABILITIES:                               | ** ** | ** **         | ** ** | ** **            | ** ** | ** **     | ** ** | ** **     | ** ** |
| Deposits                                   |       | $                  | 654,393    |                  | $          | 652,265        |       | $              | 2,128      |   | 0.3 | % |
| Federal Home Loan Bank advances            |       | 102,554            |       | 120,305               |       | (17,751        | )          | (14.8          | )          |
| Other liabilities                          |       | 3,542              |       | 4,332                 |       | (790           | )          | (18.2          | )          |
|                                       |       |               |       |                  |       |           |       |           |       |
| Total liabilities                          |       | 760,489            |       | 776,902               |       | (16,413        | )          | (2.1           | )          |
|                                       |       |               |       |                  |       |           |       |           |       |
| STOCKHOLDERS’  EQUITY                 |       | 74,283             |       | 75,573                |       | (1,290         | )          | (1.7           | )          |
|                                       |       |               |       |                  |       |           |       |           |       |
| TOTAL                                      |       | $                  | 834,772    |                  | $          | 852,475        |       | $              | (17,703    | ) | (2.1 | )% |
|                                       |       |               |       |                  |       |           |       |           |       |
| BOOK VALUE PER  SHARE                      |       | $                  | 15.25      |                  | $          | 15.62          |       |           |       |   |   |
|                                       |       |               |       |                  |       |           |       |           |       |
| EQUITY TO ASSETS                           |       | 8.9                | %          | 8.9                   | %          |           |       |           |       |

 

8

----

**Loans Receivable. **Changesin loan compositionbetween March 31, 2007 and December 31, 2006 are presented in the followingtable (dollars in thousands).
| ** **                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | ** **        | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2007**           | ** ** | **2006**              | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| One- to  four-family residences                  |       | $                  | 249,892    |                  | $          | 257,978        |       | $                 | (8,086     | ) | (3.1 | )% |
| Home equity  lines of credit and second mortgage |       | 35,355             |       | 34,971                |       | 384            |       | 1.1               | %          |
| Multi-family                                     |       | 12,113             |       | 12,203                |       | (90            | )          | (0.7              | )%         |
| Commercial real  estate                          |       | 126,326            |       | 133,647               |       | (7,321         | )          | (5.5              | )%         |
| Land                                             |       | 48,255             |       | 48,737                |       | (482           | )          | (1.0              | )%         |
| Construction:                                    |       |               |       |                  |       |           |       |              |       |
|  One- to four-family residences             |       | 27,600             |       | 32,036                |       | (4,436         | )          | (13.8             | )%         |
|  Speculative one-to four-family residences  |       | 73,894             |       | 80,311                |       | (6,417         | )          | (8.0              | )%         |
|  Multi-family                               |       | 14,120             |       | 14,120                |       | —         |       | —            |       |
|  Commercial real estate                     |       | 29,549             |       | 21,896                |       | 7,653          |       | 35.0              | %          |
|  Land development                           |       | 46,772             |       | 47,439                |       | (667           | )          | (1.4              | )%         |
|  Total mortgage loans                       |       | 663,876            |       | 683,338               |       | (19,462        | )          | (2.8              | )%         |
|                                             |       |               |       |                  |       |           |       |              |       |
| Commercial                                       |       | 25,577             |       | 26,355                |       | (778           | )          | (3.0              | )%         |
|                                             |       |               |       |                  |       |           |       |              |       |
| Automobile                                       |       | 11,835             |       | 12,210                |       | (375           | )          | (3.1              | )%         |
| Other                                            |       | 13,426             |       | 13,690                |       | (264           | )          | (1.9              | )%         |
|  Total consumer                             |       | 25,261             |       | 25,900                |       | (639           | )          | (2.5              | )%         |
|                                             |       |               |       |                  |       |           |       |              |       |
| Total loans  receivable                          |       | 714,714            |       | 735,593               |       | (20,879        | )          | (2.8              | )%         |
|                                             |       |               |       |                  |       |           |       |              |       |
| Undisbursed loan  funds                          |       | (40,460            | )          | (40,069               | )          | (391           | )          | 1.0               | %          |
| Deferred loan  costs — net                  |       | 186                |       | 143                   |       | 43             |       | 30.1              | %          |
| Allowance for  loan losses                       |       | (4,294             | )          | (2,572                | )          | (1,722         | )          | 67.0              | %          |
|                                             |       |               |       |                  |       |           |       |              |       |
| Loans receivable, net                            |       | $                  | 670,146    |                  | $          | 693,095        |       | $                 | (22,949    | ) | (3.3 | )% |

 

The decrease inthe Bank’s loan portfolio was primarily due to a softening of the housingmarket in Northwest Arkansas.  Marketdata indicates an overall decrease in home sales in Benton and Washingtoncounties in 2007 and 2006 compared to 2005. The Bank’s loan originations were down 24% for the quarter ended March31, 2007, compared to the fourth quarter of 2006.  Although the economy in the NorthwestArkansas region continues to be strong as reflected in sustained job andpopulation growth, the supply of new residential lots and new speculative homesfor sale has outpaced demand during the last few years.

Several years ago, theBank began to emphasize commercial real estate lending, construction lending,and commercial lending to diversify its loan portfolio, take advantage ofmarket opportunities in these types of loans, and help the Bank transition to amore full-service community bank, as well as to provide opportunities tocross-sell its other banking products. Although the Bank plans to continue this emphasis, the volume of suchlending will continue to be subject to the economic and market conditionsdiscussed above and the availability of prudent lending opportunities.

9

----

 

**Asset Quality. **The following table sets forth the amountsand categories of the Bank’s nonperforming assets at the dates indicated.
| ** **                                                                                                                   | ** ** | **March 31,  2007**             | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                   | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans:                                                                                                            |       |                                 |       |                        |       |
| One- to  four-family residential                                                                                             |       | $                                    | 3,103      |                        | $          | 3,689 |   |
| Speculative one-  to four-family construction                                                                                | ** ** | 7,001                                |       | 5,417                       |       |
| Acquisition and  development                                                                                                 | ** ** | 5,325                                |       | 5,324                       |       |
| Land                                                                                                                         | ** ** | 1,375                                |       | 1,372                       |       |
| Commercial real  estate                                                                                                      |       | 741                                  |       | 738                         |       |
| Commercial loans                                                                                                             |       | 1,232                                |       | 1,268                       |       |
| Consumer loans                                                                                                               |       | 976                                  |       | 1,207                       |       |
| Total nonaccrual  loans                                                                                                      |       | 19,753                               |       | 19,015                      |       |
|                                                                                                                         |       |                                 |       |                        |       |
| Accruing loans 90 days  or more past due                                                                                     |       | 1,692                                |       | 668                         |       |
| Real estate owned                                                                                                            |       | 2,876                                |       | 3,858                       |       |
|                                                                                                                         |       |                                 |       |                        |       |
| Total  nonperforming assets                                                                                                  |       | $                                    | 24,321     |                        | $          | 23,541 |   |
|                                                                                                                         |       |                                 |       |                        |       |
| Total nonaccrual,  accruing loans 90 days or more past due and restructured loans as a  percentage of total loans receivable |       | 3.00                                 | %          | 2.68                        | %          |
|                                                                                                                         |       |                                 |       |                        |       |
| Total nonperforming assets as a percentage of total assets                                                                   |       | 2.91                                 | %          | 2.76                        | %          |

 

The increase in nonaccrual loans is primarily related to an increasein nonaccrual speculative single family construction loans, which was offsetsomewhat by a decrease in nonaccrual single family residential loans and adecrease in nonaccrual consumer loans. The Northwest Arkansas market continues to experience an oversupply oflots and speculative homes. Certain of the Bank’s homebuilders are experiencingextended marketing times for the sale of their homes which has resulted ininadequate cash flow to service the interest carry on their loans.  The specific loan loss allowance related toloans to builders and developers was approximately $1.9 million at March 31,2007.

The level of nonaccrualspeculative construction loans, acquisition and development loans and landloans is attributable primarily to four loan relationships.  These relationships are in foreclosure andare described in more detail in the paragraphs that follow.

The first relationshiptotaled $6.4 million at March 31, 2007, and is comprised of two subdivisionloans totaling $5.3 million, four complete speculative homes totalingapproximately $550,000, and the borrower’s primary residence totalingapproximately $520,000.  Foreclosureproceedings have begun on the subdivision and the speculative homes.  The subdivision loans represent two phases ofthe same subdivision located in Lowell, Arkansas, one of which is complete andthe other is approximately 10% complete. At December 31, 2006, we estimated no loss on the subdivision based onestimated sales prices of the lots and the estimated costs to complete theincomplete phase of the subdivision.  Since that time market conditions havedeteriorated and a subdivision across the street from this subdivision has goneinto default.  We are aware that thefinancial institution in that case is trying to liquidate the lots quickly at adiscounted price, which has in turn decreased the value of the lots in oursubdivision.  As a result, we obtainednew appraisals on both phases of our subdivision which used discounted cashflow analysis for the complete phase, given the extended selling period thatwould be necessary to recover our costs, and a land only valuation on theincomplete phase given the decreasing likelihood that we would develop theselots.  The new appraisals revealed theneed for a specific loan loss allowance totaling $1.4 million on this subdivision.  Due to the nature of these loans and thepossibility of continued adverse changes in market conditions, we may incurlosses in excess of the amount estimated in the future.

10

----

The second relationshiptotaled $5.0 million at March 31, 2007, and is comprised of $1.3 million insingle family residential loans, most of which are rental properties, $3.0million in speculative single family construction loans, approximately $450,000of raw land, and approximately $275,000 of commercial loans.  The speculative homes are in various stagesof completion ranging from approximately 60% to 100%.  The commercial loans consist of junior lienson the speculative single family properties. This relationship includes twoprincipals, one of which has filed for bankruptcy protection.  All of the properties in this relationshipare in foreclosure and bankruptcy litigation and all loans are on nonaccrualstatus.  The properties in thisrelationship are cross-collateralized and we have evaluated our loss exposureon a total relationship basis.  Based onestimated sales prices of the properties net of costs to sell, compared toprincipal balances plus estimated costs to complete, as appropriate, we haveestimated losses of approximately $190,000 at March 31, 2007.  However, based on factors such as thecomplexity of this relationship, difficulty in estimating completion costs,potential adverse changes in market conditions, and the decisions of thebankruptcy trustee, we may incur losses in excess of the amount estimated.

The thirdrelationship totaled $1.5 million at March 31, 2007, and is comprised of $1.0million in speculative single family construction loans, approximately $410,000of land and lot loans, and approximately $40,000 of commercial loans.  The speculative homes are in various stagesof completion ranging from approximately 75% to 100%. The commercial loansconsist primarily of junior liens on the speculative single familyproperties.  This borrower has filed forbankruptcy protection.  We have estimatedlosses of $150,000 at March 31, 2007. However, based on factors such as the difficulty in estimatingcompletion costs, potential adverse changes in market conditions, and thedecisions of the bankruptcy trustee, we may incur losses in excess of theamount estimated.

The fourth relationshiptotaled $2.9 million at March 31, 2007, $2.4 million of which was on nonaccrualstatus.  The $2.4 million consisted ofapproximately $1.4 million of speculative single family construction loans onthree properties, approximately $375,000 of land and lot loans, andapproximately $625,000 of commercial loans. All of the real estate loans are in foreclosure.  The commercial loans consist of accountsreceivable and unsecured loans totaling approximately $420,000, with anestimated reserve of $75,000, and junior liens on the lots and speculativehomes totaling approximately $205,000, with an estimated reserve of$80,000.  The remaining $500,000 balanceon this relationship that was kept on accrual status consists of the borrower’sprimary residence and equipment loans being refinanced by one of theguarantors.  Based on factors such as thecomplexity of this relationship, difficulty in estimating completion costs, andpotential adverse changes in market conditions, we may incur losses in excessof the amount estimated.

The increase in accruing loans 90 days or more past due was due to several borrowers who paidtheir interest after quarter end and therefore were placed on accrual status asof March 31, 2007,

The decrease in realestate owned was due to the sale of four speculative homes in the firstquarter.  Construction costs are added tothe real estate balance to the extent that the resulting balance does notexceed the estimated fair value of the property less estimated selling costs.

11

----

**Allowance for Loan Losses**. A summary of the activity in the allowance for loan losses is asfollows (in thousands):

|                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Balance at  beginning of period       |       | $                                                    | 2,572      |   | $ | 2,114 |   |
|  Provisions for estimated losses |       | 1,961                                                |       | 285 |   |
|  Recoveries                      |       | 49                                                   |       | 47 |   |
|  Losses charged off              |       | (288                                                 | )          | (195 | ) |
| Balance at end of  period             |       | $                                                    | 4,294      |   | $ | 2,251 |   |

 

Changes in the composition of the allowance for loan losses betweenMarch 31, 2007 and December 31, 2006 are presented in the following table (inthousands):

|            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** **   | ** ** |
|------------|------------|--------------------|------------|-----------------------|------------|--------------|------------|
| ** ** | ** ** | **2007**           | ** ** | **2006**              | ** ** | **Increase** | ** ** |
| General    |       | $                  | 2,335      |                  | $          | 1,966        |       | $ | 369 |   |
| Specific   |       | 1,959              |       | 606                   |       | 1,353        |       |
|       |       | $                  | 4,294      |                  | $          | 2,572        |       | $ | 1,722 |   |

 

The general component ofthe allowance for loan losses increased due to the loss factor applied tospeculative single family construction loans and acquisition and developmentloans.  These loss factors were increaseddue to the recent loss history on these types of loans.  The specific component of the allowance forloan losses increased primarily due to specific allowances on one largesubdivision in Lowell, Arkansas.  SeeAsset Quality.

The allowance for loanlosses is established as losses are estimated to have occurred through aprovision for loan losses charged to earnings. Loan losses are charged against the allowance when management believesit is likely that a loan balance is uncollectible.  Subsequent recoveries, if any, are creditedto the allowance.

The allowance for loanlosses represents management’s estimate of incurred credit losses inherent inthe Company’s loan portfolio as of the balance sheet date.  The estimation of the allowance is based on avariety of factors, including past loan loss experience, the current creditprofile of the Company’s borrowers, adverse situations that have occurred thatmay affect the borrowers’ ability to repay, the estimated value of underlyingcollateral, and general economic conditions. Losses are recognized when available information indicates that it isprobable that a loss has been incurred and the amount of the loss can bereasonably estimated. This evaluation is inherently subjective as it requiresestimates that are susceptible to significant revision as more informationbecomes available or conditions change.

In determining theallowance for loan losses, the Company allocates a portion of the allowance toits various loan categories based on an analysis of individual loans and poolsof loans.  However, the entire allowanceis available to absorb credit losses inherent in the total loan portfolio as ofthe balance sheet date.

A loan is consideredimpaired when, based on current information and events, it is probable that theBank will be unable to collect the scheduled payments of principal or interestwhen due according to the contractual terms of the loan agreement. Factorsconsidered by management in determining impairment include payment status,collateral value, and the probability of collecting scheduled principal andinterest payments when due. Loans that experience insignificant payment delaysand payment shortfalls generally are not classified as impaired. Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe short fall in relation to the principal and interest owed. Impairment ismeasured on a loan by loan basis by either the present value of expected futurecash flows discounted at the loan’s effective interest rate, the loan’sobtainable market price, or the fair value of the collateral if the loan iscollateral dependent.  Multi-familyresidential, commercial real estate, land and land development, and commercialloans that are delinquent or where the borrower’s total loan relationshipexceeds $1 million are evaluated on a loan by loan basis at least annually.

12

----

Large groups of smallerbalance homogeneous loans are collectively evaluated for impairment.Accordingly, the Bank does not separately identify individual consumer andresidential loans for impairment disclosures. Homogeneous loans are those that are considered to have commoncharacteristics that provide for evaluation on an aggregate or pool basis. TheBank considers 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 todetermine the appropriateness of the allowance for losses includes segregatingcertain specific, poorly performing loans based on their performancecharacteristics from the pools of loans as to type, valuing these loans, andthen applying a loss factor to the remaining pool balance based on severalfactors including past loss experience, inherent risks, and economic conditionsin the primary market areas.

In estimating the amount of credit losses inherent in our loanportfolio, various judgments and assumptions are made.  For example, when assessing the condition ofthe overall economic environment, assumptions are made regarding future marketconditions and their impact on the loan portfolio.  In the event the national or local economywere to sustain a prolonged downturn, the loss factors applied to ourportfolios may need to be revised, which may significantly impact themeasurement of the allowance for loan losses. For impaired loans that are collateral dependent, the estimated fairvalue of the collateral may deviate significantly from the proceeds receivedwhen the collateral is sold in the event that the Bank has to foreclose orrepossess the collateral.

Although we consider the allowance for loan losses of approximately$4.3 million adequate to cover losses inherent in our loan portfolio at March31, 2007, no assurance can be given that we will not sustain loan losses thatare significantly different from the amount recorded, or that subsequentevaluations of the loan portfolio, in light of factors then prevailing, wouldnot result in a significant change in the allowance for loan losses.

**Investment Securities. **Changes in the compositionof investment securities held to maturity between March 31, 2007 andDecember 31, 2006 are presented in the following table (in thousands).

|                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** **   | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------|------------|
| ** **                              | ** ** | **2007**           | ** ** | **2006**              | ** ** | **Increase** | ** ** |
| U.S. Government  and agency obligations |       | $                  | 46,538     |                  | $          | 43,857       |       | $ | 2,681 |   |
| Municipal  securities                   |       | 16,196             |       | 16,889                |       | (693         | )          |
| Total                                   |       | $                  | 62,734     |                  | $          | 60,746       |       | $ | 1,988 |   |

 

During the first three months of 2007, investment securities totaling$6.3 million were purchased and $4.3 million matured or were called.

At March 31, 2007, estimated fairvalues of investment securities held to maturity were as follows (inthousands):

|                                        | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------|------------|
|                                   |       |                |       |            |       |
| U.S. Government and agency obligations |       | $                   | 46,538     |            | $          | 45,889 |   |
| Municipal securities                   |       | 16,196              |       | 16,266          |       |
| Total                                  |       | $                   | 62,734     |            | $          | 62,155 |   |

 

**Accrued Interest Receivable. ** The increase in accruedinterest receivable was primarily due to an increase in the number of daysaccrued as well as an increase in the loan yield at March 31, 2007 compared toDecember 31, 2006.

13

----

**Deposits. **Changes in the composition of depositsbetween March 31, 2007 and December 31, 2006 are presented in the followingtable (dollars in thousands).

|                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase ** | ** ** | **Percentage ** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|----------------------|------------|
| ** **               | ** ** | **2007**           | ** ** | **2006**              | ** ** | **(Decrease)**     | ** ** | **Change**           | ** ** |
|                     |       |               |       |                  |       |               |       |                 |       |
| Checking  accounts       |       | $                  | 150,710    |                  | $          | 139,372            |       | $                    | 11,338     |   | 8.1 | % |
| Money Market  accounts   |       | 51,474             |       | 51,827                |       | (353               | )          | (0.7                 | )          |
| Savings accounts         |       | 28,630             |       | 26,824                |       | 1,806              |       | 6.7                  |       |
| Certificates of  deposit |       | 423,579            |       | 434,242               |       | (10,663            | )          | (2.5                 | )          |
|                     |       |               |       |                  |       |               |       |                 |       |
| Total deposits           |       | $                  | 654,393    |                  | $          | 652,265            |       | $                    | 2,128      |   | 0.3 | % |

 

Deposits increased in thecomparison period, primarily due to an increase in public unit deposits andfocused marketing efforts to increase checking accounts.  The Bank will continue to aggressively promote checking accounts bytargeting households and small- and medium-sized business accounts with itsdirect mail campaign and “thank you” gifts.  Checking accounts are anattractive source of funds for the Bank as they offer low-interest deposits,fee income potential, and the opportunity to cross-sell other financialservices.

**OtherLiabilities.**  Otherliabilities decreased primarily due to a decrease in federal and state deferredtax liabilities related to the increase in the loan loss provision.

**Stockholders’ Equity. **Stockholders’ equity decreased approximately $1.3 million fromDecember 31, 2006 to March 31, 2007.  Thedecrease in stockholders’ equity was primarily due to the purchase of treasurystock totaling $1.4 million during the first three months of 2007.  In addition, during the three months endedMarch 31, 2007, cash dividends of approximately $780,000 were paid.  See the Unaudited Consolidated Statement ofStockholders’ Equity for the three months ended March 31, 2007 for more detail.

14

----

### **AverageBalance Sheets**

The following table setsforth certain information relating to the Company’s average balance sheets andreflects the average yield on assets and average cost of liabilities for theperiods indicated.  Such yields and costsare derived by dividing income or expense by the average balance of assets orliabilities, respectively, for the periods presented.  Average balances are based on daily balancesduring the period.
| ** **                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                       | ** ** | **Average  Balance**                                 | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** |
| ** **                                                       | ** ** | **(Dollars in Thousands)**                 | ** ** |
| Interest-earning assets:                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                              |       | $                                                    | 686,419    |   | $ | 12,201 |   | 7.11 | % | $ | 730,761 |   | $ | 12,227 |   | 6.69 | % |
| Investment  securities(2)                                        |       | 66,961                                               |       | 838 |   | 5.00 |   | 65,119 |   | 768 |   | 4.71 |   |
| Other  interest-earning assets                                   |       | 14,650                                               |       | 188 |   | 5.13 |   | 8,710 |   | 96 |   | 4.43 |   |
| Total  interest-earning assets                                   |       | 768,030                                              |       | 13,227 |   | 6.89 |   | 804,590 |   | 13,091 |   | 6.51 |   |
| Noninterest-earning assets                                       |       | 66,206                                               |       |   |   |   |   | 60,058 |   |   |   |   |   |
| Total assets                                                     |       | $                                                    | 834,236    |   |   |   |   |   | $ | 864,648 |   |   |   |   |   |
| Interest-bearing liabilities:                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                         |       | $                                                    | 641,633    |   | 5,848 |   | 3.65 |   | $ | 614,263 |   | 4,446 |   | 2.89 |   |
| FHLB advances                                                    |       | 110,491                                              |       | 1,260 |   | 4.56 |   | 166,096 |   | 1,742 |   | 4.19 |   |
| Total  interest-bearing liabilities                              |       | 752,124                                              |       | 7,108 |   | 3.78 |   | 780,359 |   | 6,188 |   | 3.17 |   |
| Noninterest-bearing liabilities                                  |       | 6,201                                                |       |   |   |   |   | 6,376 |   |   |   |   |   |
| Total liabilities                                                |       | 758,325                                              |       |   |   |   |   | 786,735 |   |   |   |   |   |
| Stockholders’ equity                                        |       | 75,911                                               |       |   |   |   |   | 77,913 |   |   |   |   |   |
| Total liabilities  and stockholders’ equity                 |       | $                                                    | 834,236    |   |   |   |   |   | $ | 864,648 |   |   |   |   |   |
|                                                             |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                              |       |                                                 |       | $ | 6,119 |   |   |   |   |   | $ | 6,903 |   |   |   |
| Net earning assets                                               |       | $                                                    | 15,906     |   |   |   |   |   | $ | 24,231 |   |   |   |   |   |
| Interest rate spread                                             |       |                                                 |       |   |   | 3.11 | % |   |   |   |   | 3.34 | % |
| Net interest margin                                              |       |                                                 |       |   |   | 3.19 | % |   |   |   |   | 3.43 | % |
| Ratio of interest-earning assets to interest-bearing liabilities |       |                                                 |       |   |   | 102.11 | % |   |   |   |   | 103.11 | % |

----

(1)             Includes nonaccrual loans.

(2)             Includes FHLB of Dallas stock.

15

----

 

## **Rate/VolumeAnalysis**

The table below setsforth certain information regarding changes in interest income and interestexpense of the Company 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 March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2007 vs. 2006**                          | ** ** |
| ** **                         | ** ** | **Increase (Decrease)  Due to**            | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Volume**                                           | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total  Increase (Decrease)** | ** ** |
| ** **                         | ** ** | **(In Thousands)**                              | ** ** |
| Interest income:                   |       |                                                 |       |   |   |   |   |   |   |
| Loans receivable                   |       | $                                                    | (742       | ) | $ | 762 |   | $ | (46 | ) | $ | (26 | ) |
| Investment securities              |       | 22                                                   |       | 47 |   | 1 |   | 70 |   |
| Other interest-earning assets      |       | 66                                                   |       | 15 |   | 11 |   | 92 |   |
| Total interest-earning assets      |       | (654                                                 | )          | 824 |   | (34 | ) | 136 |   |
|                               |       |                                                 |       |   |   |   |   |   |   |
| Interest expense:                  |       |                                                 |       |   |   |   |   |   |   |
| Deposits                           |       | 198                                                  |       | 1,153 |   | 51 |   | 1,402 |   |
| FHLB advances                      |       | (583                                                 | )          | 152 |   | (51 | ) | (482 | ) |
| Total interest-bearing liabilities |       | (385                                                 | )          | 1,305 |   | — |   | 920 |   |
| Net change in net interest income  |       | $                                                    | (269       | ) | $ | (481 | ) | $ | (34 | ) | $ | (784 | ) |

 

16

** **

----

**CHANGES IN RESULTS OF OPERATIONS**

The table below presents a comparison of results of operations forthe three months ended March 31, 2007 and 2006 (dollars inthousands).  Specific changes in captionsare discussed in the sections which follow the table.
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage Change** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **2007**                                         | ** ** | **2006**                 | ** ** | **2007 vs 2006** | ** ** | **2007 vs 2006** | ** ** |
| Interest income:                                      |       |                                             |       |                     |       |                       |       |   |   |
| Loans receivable                                      |       | $                                                | 12,201     |                     | $          | 12,227                     |       | $ | (26 | ) | (0.2 | )% |
| Investment securities                                 |       | 838                                              |       | 768                      |       | 70                         |       | 9.1 |   |
| Other                                                 |       | 188                                              |       | 96                       |       | 92                         |       | 95.8 |   |
| Total interest income                                 |       | 13,227                                           |       | 13,091                   |       | 136                        |       | 1.0 |   |
| Interest  expense:                                    |       |                                             |       |                     |       |                       |       |   |   |
| Deposits                                              |       | 5,848                                            |       | 4,446                    |       | 1,402                      |       | 31.5 |   |
| Other borrowings                                      |       | 1,260                                            |       | 1,742                    |       | (482                       | )          | (27.7 | ) |
| Total interest expense                                |       | 7,108                                            |       | 6,188                    |       | 920                        |       | 14.9 |   |
| Net interest  income before provision for loan losses |       | 6,119                                            |       | 6,903                    |       | (784                       | )          | (11.4 | ) |
| Provision for  loan losses                            |       | 1,961                                            |       | 285                      |       | 1,676                      |       | 588.1 |   |
| Net interest  income after provision for loan losses  |       | 4,158                                            |       | 6,618                    |       | (2,460                     | )          | (37.2 | ) |
| Noninterest  income:                                  |       |                                             |       |                     |       |                       |       |   |   |
| Deposit fee income                                    |       | 1,157                                            |       | 1,078                    |       | 79                         |       | 7.3 |   |
| Gain on sale of loans                                 |       | 174                                              |       | 197                      |       | (23                        | )          | (11.7 | ) |
| Other                                                 |       | 531                                              |       | 1,042                    |       | (511                       | )          | (49.0 | ) |
| Total noninterest income                              |       | 1,862                                            |       | 2,317                    |       | (455                       | )          | (19.6 | ) |
| Noninterest  expenses:                                |       |                                             |       |                     |       |                       |       |   |   |
| Salaries and employee benefits                        |       | 3,443                                            |       | 3,720                    |       | (277                       | )          | (7.5 | ) |
| Other                                                 |       | 2,627                                            |       | 2,302                    |       | 325                        |       | 14.1 |   |
| Total noninterest expenses                            |       | 6,070                                            |       | 6,022                    |       | 48                         |       | 0.8 |   |
| Income before income  taxes                           |       | (50                                              | )          | 2,913                    |       | (2,963                     | )          | (101.7 | ) |
| Income tax  provision (benefit)                       |       | (209                                             | )          | 928                      |       | (1,137                     | )          | (122.5 | ) |
| Net income                                            |       | $                                                | 159        |                     | $          | 1,985                      |       | $ | (1,826 | ) | (92.0 | )% |
|                                                  |       |                                             |       |                     |       |                       |       |   |   |
| Basic earnings  per share                             |       | $                                                | 0.03       |                     | $          | 0.39                       |       | $ | (0.36 | ) | (92.3 | )% |
| Diluted earnings  per share                           |       | $                                                | 0.03       |                     | $          | 0.38                       |       | $ | (0.35 | ) | (92.1 | )% |
|                                                  |       |                                             |       |                     |       |                       |       |   |   |
| Interest rate  spread                                 |       | 3.11                                             | %          | 3.34                     | %          |                       |       |   |   |
| Net interest  margin                                  |       | 3.19                                             | %          | 3.43                     | %          |                       |       |   |   |
|                                                  |       |                                             |       |                     |       |                       |       |   |   |
| Average  full-time equivalents                        |       | 306                                              |       | 308                      |       |                       |       |   |   |
|                                                  |       |                                             |       |                     |       |                       |       |   |   |
| Full-service offices                                  |       | 18                                               |       | 18                       |       |                       |       |   |   |

 

17

** **

----

 

**NetInterest Income.  **Netinterest income is determined by the Company’s interest rate spread (i.e., thedifference between the yields earned on its interest-earning assets and therates paid on its interest-bearing liabilities) and the relative amounts ofinterest-earning assets and interest-bearing liabilities.  The decrease in net interest income wasprimarily due to the Company’s negative gap position and the more rapidincrease in rates paid on deposits compared to the yield on the Company’sinterest earning assets.

### **INTEREST INCOME AND INTEREST EXPENSE**

Dollar changes ininterest income and interest expense for the comparison periods are presentedin the Rate/Volume Analysis table which appears on a previous page.

**InterestIncome. **The increasein interest income for the three month comparative period was primarily due toan increase in the average yield earned on all interest earning assets and anincrease in the average balance of other interest earning assets, offset by adecrease in the average balance of loans receivable.  The increase in average yields earned was dueto increases in market interest rates. The average balance of loans decreased primarily due to a decrease inloan originations, particularly construction loans.

**InterestExpense.  **The increasein interest expense for the three month comparative period was primarily due toan increase in the average rates paid on deposits and FHLB advances and anincrease in the average balance of deposits, offset by a decrease in theaverage balance of FHLB advances.  The averagebalance of FHLB advances decreased due to funds generated from loan repaymentsbeing used to pay down maturing advances. The increase in the average rates paid on deposit accounts reflects boththe shift in deposits from money market accounts and savings accounts to higherrate certificates of deposit as well as the recent increases in market interestrates.

**Provisionfor Loan Losses.**  Theprovision for loan losses includes charges to maintain an allowance for loanlosses adequate to cover probable credit losses related to specificallyidentified loans as well as probable credit losses inherent in the remainder ofthe loan portfolio that have been incurred as of the balance sheet date.  Such provision and the adequacy of theallowance for loan losses is evaluated quarterly by management of the Bankbased on the Bank’s past loan loss experience, known and inherent risks in theportfolio, adverse situations that may affect the borrower’s ability to repay,the estimated value of any underlying collateral and current economicconditions.

Factors influencingmanagement’s decision to increase the provision in the 2007 vs. 2006 periodinclude an increase in nonaccrual loans, conditions in the speculative singlefamily real estate market in Northwest Arkansas, and a specific loan lossallowance of $1.4 million on two phases of a subdivision in Lowell,Arkansas.  See further discussion of thisborrowing relationship in Asset Quality. The speculative single family construction market demonstrated weaknessin late 2005 and we began reducing our exposure in this area.  During the first quarter of 2007, we have notrecorded any construction loan charge-offs. However, we have recorded $249,000 in specific loan loss allowances onspeculative single family construction loans as of March 31, 2007.  This compares to charge-offs of $239,000 forthe year ended December 31, 2006, $77,000 for the year ended December 31,2005, and none for the year ended December 31, 2004.  The losses on these loans in 2006 relatedprimarily to extraordinary costs in constructing these residences, someoverfunding to cover these costs, and some substandard construction, ratherthan deterioration of the value of the underlying collateral.  However, the continued oversupply ofavailable housing during the quarter ended March 31, 2007 has impacted thevalue of speculative single family homes and development projects, as discussedabove.  Further deterioration in thismarket segment may impact the value of existing single family home values aswell as our provision for loan losses in the future.

**NoninterestIncome. **Deposit feeincome increased for the three month comparative period in 2007 as a result ofan increase in insufficient funds fee income. This increase resulted from an increase in the number of checkingaccounts with overdrawn balances and a 4.2% increase in the per item chargethat was effective February 1, 2007.  TheBank plans to continue to aggressively promote checking accounts in 2007through direct mail campaigns and offering “thank you” gifts to further expandits checking accounts and increase deposit fee income.

18

** **

----

The decrease in othernoninterest income for the three month comparative period in 2007 was primarilydue to nonrecurring gains on the sales of two properties totaling approximately$528,000 during the quarter ended March 31, 2006.  These properties represented excess land anda building adjacent to two existing branches.

**NoninterestExpense**

**Salariesand Employee Benefits. **Thechanges in the composition of this line item are presented below (inthousands):

|                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **2007**                                         | ** ** | **2006**                 | ** ** | **2007 vs 2006** | ** ** |
| Salaries                           |       | $                                                | 2,665      |                     | $          | 2,514 |   | $ | 151 |   |
| Payroll taxes                      |       | 263                                              |       | 256                      |       | 7 |   |
| Insurance                          |       | 170                                              |       | 170                      |       | — |   |
| ESOP (1)                           |       | —                                           |       | 508                      |       | (508 | ) |
| 401(k)                             |       | 80                                               |       | —                   |       | 80 |   |
| Stock  compensation (2)            |       | 14                                               |       | 35                       |       | (21 | ) |
| Defined benefit  plan contribution |       | 210                                              |       | 196                      |       | 14 |   |
| Other                              |       | 41                                               |       | 41                       |       | — |   |
| Total                              |       | $                                                | 3,443      |                     | $          | 3,720 |   | $ | (277 | ) |

----

(1)             EmployeeStock Ownership Plan

(2)             Includesstock options and Management Recognition and Retention Plan (“MRP”) expense.

The increase in salariesfor the three months ended March 31, 2007, was due primarily to normal salaryand merit increases.  Payroll taxesincreased during the period due to the increase in salaries.  The decrease in employee stock ownership planexpense was due to the plan shares becoming fully allocated as of March 31,2006.  The Company implemented a 401(k)Plan on June 1, 2006.  The 401(k) expenseabove relates to employer matching of employee 401(k) contributions.

**OtherExpenses.**  Otherexpenses increased in the three month comparative period in 2007 primarily dueto increased REO-related expenses and costs associated with upgrading ourcomputer system.  REO-related expensesincreased primarily due to losses on sales of REO and provisional writedowns ofREO.

**IncomeTaxes. **The provisionfor income taxes decreased due to a decrease in taxable income.

# **OFF-BALANCE SHEET ARRANGEMENTS**

The Company, in thenormal course of business, makes commitments to buy or sell assets or to incuror fund liabilities.  Commitmentsinclude, but are not limited to:

·                  the origination, purchase or sale ofloans;

·                  the fulfillment of commitments underletters-of-credit, extensions of credit on home equity lines of credit,construction loans, and predetermined overdraft protection limits; and

·                  the commitment to fund withdrawals ofcertificates of deposit at maturity.

At March 31, 2007, theBank’s off-balance sheet arrangements principally included lending commitments,which are described below.  At March 31,2007, the Company had no interests in non-consolidated special purposeentities.

19

** **

----

At March 31, 2007,commitments included:

·                  total approved commitments tooriginate or purchase loans amounting to $15.9 million, including $2.6 millionof loans committed to sell;

·                  rate lock agreements with customersof $8.5 million, all of which have been locked with an investor;

·                  funded mortgage loans committed tosell of $1.3 million;

·                  unadvanced portion of constructionloans of $40.5 million;

·                  unused lines of credit of $31.5million;

·                  outstanding standby letters of creditof approximately $3.9 million;

·                  total predetermined overdraftprotection limits of $11.5 million; and

·                  certificates of deposit scheduled tomature in one year or less totaling $311.6 million.

Total unfundedcommitments to originate loans for sale and the related commitments to sell of$8.5 million meet the definition of a derivative financial instrument.  The related asset and liability areconsidered immaterial at March 31, 2007.

Historically, a verysmall percentage of predetermined overdraft limits have been used.  At March 31, 2007, overdrafts of accountswith Bounce ProtectionTM represented usage of 2.5% of the limit.  We expect utilization of these overdraftlimits to remain at comparable levels in the future.

Based on historicalexperience, management believes that a significant portion of maturing depositswill remain with the Bank.  We anticipatethat we will continue to have sufficient funds, through repayments, depositsand borrowings, to meet our current commitments.

### **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’s primarysources of funds are deposits, borrowings, 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.  TheBank manages the pricing of its deposits to maintain a steady depositbalance.  In addition, the Bank investsexcess funds in overnight deposits and other short-term interest-earning assetswhich provide liquidity to meet lending requirements.  During the first quarter of 2007, the use ofFHLB advances decreased due to the Bank’s using funds generated from loanrepayments to pay down maturing advances. At March 31, 2007, available borrowing capacity with the FHLB was in excess of $194million.

For the quarters ended March 31, 2007 and 2006, the Company paiddividends of $0.16 and $0.14 per share, respectively.  The determination of future dividends on theCompany’s common stock will depend on conditions existing at that time withconsideration given to the Company’s earnings, capital, and liquidity needs.

Liquidity management is both a daily and long-term function ofbusiness management.  Excess liquidity isgenerally invested in short-term investments such as overnight deposits andcertificates of deposit.  On alonger-term basis, the Bank maintains a strategy of investing in variouslending products.   The Bank uses itssources of funds primarily to meet its ongoing commitments, to pay maturingsavings certificates and savings withdrawals, to repay maturing FHLB of Dallasadvances, and to fund loan commitments.

As of March 31, 2007, the Bank’s regulatory capital was in excess of all applicableregulatory requirements.  At March31, 2007, the Bank’s tangible,core and risk-based capital ratios amounted to 8.73%, 8.73% and 12.10%,respectively, compared to regulatory requirements of 1.5%, 4.0% and 8.0%,respectively.

20

** **

----

### **IMPACTOF INFLATION AND CHANGING PRICES**

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

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**

The Company’s QuarterlyReport on Form 10-Q contains certain forward-looking statements and informationrelating to the Company that are based on the beliefs of management as well asassumptions made by and information currently available to management.  In addition, in this document, the words “anticipate”,“believe,” “estimate,”****“expect,” “intend,”“should” and similar expressions, or the negative thereof, as they relate tothe Company or the Company’s management, are intended to identifyforward-looking statements.  Suchstatements reflect the current views of the Company with respect to futurelooking events and are subject to certain risks, uncertainties andassumptions.  Should one or more of theserisks or uncertainties materialize or should underlying assumptions proveincorrect, actual results may vary materially from those described herein asanticipated, believed, estimated, expected or intended.  The Company does not intend to update theseforward-looking statements.

**QUANTITATIVEAND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

There has been nomaterial change in the market value of the Bank’s portfolio equity sinceDecember 31, 2006.  Similarly, whilethere has been no material change in the Company’s asset and liability positionsince such time, the Bank’s negative gap position has adversely impacted netincome as interest expense during the three months ended March 31, 2007increased at a greater pace than the comparable increase in interestincome.  Correspondingly, the Bank’s netinterest margin decreased from 3.43% for the three months ended March 31, 2006to 3.19% for the same period in 2007.  Based on the current market interest rate environment and increasedcompetition, management anticipates continued pressure on the Bank’s interestrate spread and interest margin for the second quarter of 2007.

**CONTROLSAND PROCEDURES**

Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) as of the end of the period covered by thisreport.  Based on such evaluation, ourChief Executive 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.

21

** **

----

No change in the Company’sinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act) occurred during the most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financialreporting.  However, late in the firstquarter of 2007, the Company migrated its operational software system from oneproduct to another offered by its software vendor.  This migration affected the deposit and loanprocessing functions of the bank. Extensive data verification processes were performed throughout the Bankleading up to the conversion.  Inaddition, our internal audit department reviewed the financial reportingcontrol activities and narratives for each of the Company’s business cyclesthat had previously been identified for the Company’s testing of internalcontrol over financial reporting.   Eachmajor area of the Company that has a direct impact on the creation of data thatis used in the financial reporting process asserted that the conversion did notcreate material changes in the Company’s system of internal controls overfinancial reporting.

The Companycontinues to evaluate and resolve post-conversion issues. A detailed analysisto identify any significant changes in the quality of internal control overfinancial reporting as a result of the conversion will be conducted in thelatter part of the second quarter by our internal audit department.

 

22

** **

----

 

**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**PartII**
| Item 1.  |   | Legal Proceedings                                                                                                                                                              |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                           |
|     |   | Neither the Company nor the Bank is involved in any  pending legal proceedings other than non-material legal proceedings occurring  in the ordinary course of business.        |
|     |   |                                                                                                                                                                           |
| Item 1A. |   | Risk Factors                                                                                                                                                                   |
|     |   |                                                                                                                                                                           |
|     |   | There have been no material changes in the Company’s  risk factors from those previously disclosed in the Company’s Form 10-K for  the year ended December 31, 2006. |
|     |   |                                                                                                                                                                           |
| Item 2.  |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                                                   |

** **

**ISSUER PURCHASES OF EQUITY SECURITIES**

| Period                           | ** ** | ** ** | ** ** | **(a) Total   Number of  Shares  Purchased** | ** ** | **(b)   Average  Price Paid  per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **(d) Maximum  Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|----------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** **                                                  | ** ** | ** **                                              | ** ** | ** **                                                                                                                            | ** ** |
| January 1 to  January 31, 2007   |       | —     |       | —                                                      |       | —                                                  |       | —                                                                                                                                |       |
| February 1 to  February 28, 2007 |       | 55,526     |       | $                                                           | 25.03      |                                                    | 55,526     |                                                                                                                                  | 76,626     |                                                                                                                                     |
| March 1 to March 31,  2007       |       | —     |       | —                                                      |       | —                                                  |       | —                                                                                                                                |       |
|                                  |            |            |            |                                                             |            |                                                         |            |                                                                                                                                       |            |                                                                                                                                          |            |  |

 

 
|    |   | The Company is in its 19th announced repurchase  program, which was approved by the board of directors on July 25, 2006, and  publicly announced on November 8, 2006. Total shares approved to be purchased  in this program are 245,197 of which 168,571 have been purchased as of March  31, 2007. All treasury stock purchases are made under publicly announced  repurchase programs. |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| Item 3. |   | Defaults Upon Senior Securities                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   | Not applicable.                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| Item 4. |   | Submission of Matters to a  Vote of Security Holders                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   | Not applicable.                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| Item 5. |   | Other Information                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| Item 6. |   | Exhibits                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   | Exhibit 31.1 – Certification of Chief Executive  Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  1350)                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   | Exhibit 31.2 – Certification of Chief Financial  Officer, Pursuant 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)                                                                                                                                                                                                                                                |

 

23

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                   | **FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.** |
|-------------------|------------------------------------------------|
| ** **        | ** **                                     | ** ** |
| ** **        | ** **                                     | ** ** |
| Date: May 8, 2007 | By:                                            | /s/Larry J. Brandt |
|              |                                           | Larry J. Brandt |
|              |                                           | Chief Executive Officer |
|              |                                           |   |
|              |                                           |   |
| Date: May 8, 2007 | By:                                            | /s/Sherri R. Billings |
|              |                                           | Sherri R. Billings |
|              |                                           | Chief Financial Officer and Chief Accounting Officer |

 

24

----