**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|       | **For the quarterly period ended  March 31, 2004**                                                                                                                                                                                                                                                                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **OR**     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|       | **For the transition period from                                      to                                   ** |

 

**Commission File Number 0-28312**

 

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

(Exact name of registrant as specified in itscharter)

 

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

 

| **1401 Highway 62-65 North  Harrison, Arkansas** |   | **72601**  |
|--------------------------------------------------|--------|------------|
| (Address of principal executive office)          |   | (Zip Code) |

 

**(870) 741-7641**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý   No  o

 

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

Yes  ý   No  o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:  As of April 30, 2004, there were issuedand outstanding 5,315,256 shares of the Registrant’s Common Stock, par value$.01 per share.

 

 

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**TABLEOF CONTENTS**

 
| **Part I.**    | **Financial  Information**                                                                                                                                       | **Page** |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|           |                                                                                                                                                             |     |
| Item 1.        | Consolidated  Financial Statements                                                                                                                               |     |
|           |                                                                                                                                                             |     |
|           | Consolidated Statements of Financial  Condition as of  March 31, 2004 and December 31, 2003 (unaudited)                                                | 1        |
|           |                                                                                                                                                             |     |
|           | Consolidated Statements of Income for the  three months ended  March 31, 2004 and 2003 (unaudited)                                                          | 2        |
|           |                                                                                                                                                             |     |
|           | Consolidated Statement of Stockholders’  Equity for the three months ended  March 31, 2004 (unaudited)                                                 | 3        |
|           |                                                                                                                                                             |     |
|           | Consolidated Statements of Cash Flows for  the three months ended  March 31, 2004 and 2003 (unaudited)                                                      | 4        |
|           |                                                                                                                                                             |     |
|           | Notes to Unaudited Consolidated Financial  Statements                                                                                                            | 5        |
|           |                                                                                                                                                             |     |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition  and Results of Operations                                                                     | 7        |
|           |                                                                                                                                                             |     |
| Item 3.        | Quantitative and Qualitative Disclosures About  Market Risk                                                                                                      | 19       |
|           |                                                                                                                                                             |     |
| Item 4.        | Controls and Procedures                                                                                                                                          | 19       |
|           |                                                                                                                                                             |     |
| **Part II.**   | **Other Information**                                                                                                                                            |     |
|           |                                                                                                                                                             |     |
| Item 1.        | Legal  Proceedings                                                                                                                                               | 20       |
| Item 2.        | Changes in Securities, Use of Proceeds, and  Issuer Purchases of Equity Securities                                                                               | 20       |
| Item 3.        | Defaults Upon Senior Securities                                                                                                                                  | 20       |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                                                                                             | 20       |
| Item 5.        | Other  Information                                                                                                                                               | 20       |
| Item 6.        | Exhibits and Reports on Form 8-K                                                                                                                                 | 20       |
|           |                                                                                                                                                             |     |
| **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                                                                                                                       |     |
|           |                                                                                                                                                             |     |

 

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

**CONSOLIDATED STATEMENTS OF FINANCIAL CON****DITION**

(In thousands, except share data)

(Unaudited)

 
|                                                                                                                                                                                               |   | **March 31,  2004** |    | **December 31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
| ASSETS                                                                                                                                                                                             |   |                     |    |                        |   |
|                                                                                                                                                                                               |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                                                                                          |   | $                        | 32,573  |                        | $      | 56,201 |   |
| Investment securities held to maturity                                                                                                                                                             |   | 88,661                   |    | 80,379                      |   |
| Federal Home Loan Bank stock                                                                                                                                                                       |   | 3,763                    |    | 3,749                       |   |
| Loans receivable, net                                                                                                                                                                              |   | 534,353                  |    | 512,756                     |   |
| Accrued interest receivable                                                                                                                                                                        |   | 4,324                    |    | 4,089                       |   |
| Real estate acquired in settlement of  loans, net                                                                                                                                                  |   | 597                      |    | 822                         |   |
| Office properties and equipment, net                                                                                                                                                               |   | 14,720                   |    | 14,238                      |   |
| Cash surrender value of life insurance                                                                                                                                                             |   | 17,313                   |    | 17,102                      |   |
| Prepaid expenses and other assets                                                                                                                                                                  |   | 980                      |    | 1,317                       |   |
|                                                                                                                                                                                               |   |                     |    |                        |   |
| TOTAL ASSETS                                                                                                                                                                                       |   | $                        | 697,284 |                        | $      | 690,653 |   |
|                                                                                                                                                                                               |   |                     |    |                        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                          |   |                     |    |                        |   |
|                                                                                                                                                                                               |   |                     |    |                        |   |
| LIABILITIES:                                                                                                                                                                                       |   |                     |    |                        |   |
| Deposits                                                                                                                                                                                           |   | $                        | 580,847 |                        | $      | 573,580 |   |
| Federal Home Loan Bank advances                                                                                                                                                                    |   | 37,490                   |    | 39,562                      |   |
| Advance payments by borrowers for taxes and  insurance                                                                                                                                             |   | 887                      |    | 725                         |   |
| Other liabilities                                                                                                                                                                                  |   | 2,478                    |    | 1,708                       |   |
| Total liabilities                                                                                                                                                                                  |   | 621,702                  |    | 615,575                     |   |
|                                                                                                                                                                                               |   |                     |    |                        |   |
| 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, 5,315,256 and 5,340,086 shares  outstanding at March 31, 2004 and December 31, 2003, respectively |   | 103                      |    | 103                         |   |
| Additional paid-in capital                                                                                                                                                                         |   | 53,415                   |    | 52,950                      |   |
| Employee stock benefit plans                                                                                                                                                                       |   | (914                     | )       | (1,025                      | )      |
| Retained earnings-substantially restricted                                                                                                                                                         |   | 73,862                   |    | 72,634                      |   |
|                                                                                                                                                                                               |   | 126,466                  |    | 124,662                     |   |
| Treasury stock, at cost, 4,992,246 and  4,967,416 shares at March 31, 2004 and December 31, 2003,  respectively                                                                          |   | (50,884                  | )       | (49,584                     | )      |
| Total stockholders’ equity                                                                                                                                                                    |   | 75,582                   |    | 75,078                      |   |
|                                                                                                                                                                                               |   |                     |    |                        |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                    |   | $                        | 697,284 |                        | $      | 690,653 |   |

 

See notes to Unaudited consolidated financial statements.

 

1

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

(In thousands,except share data)

(Unaudited)

 
|                                                 |   | **Three  Months Ended**  |   |
|------------------------------------------------------|--------|--------------------------|--------|
|                                                 |   | **March 31,  2004** |   | **March 31,  2003** |   |
|                                                 |   |                     |   |   |   |
| INTEREST INCOME:                                     |   |                     |   |   |   |
| Loans receivable                                     |   | $                        | 8,329  |   | $ | 8,808 |   |
| Investment securities:                               |   |                     |   |   |   |
| Taxable                                              |   | 794                      |   | 1,052 |   |
| Nontaxable                                           |   | 166                      |   | 104 |   |
| Other                                                |   | 91                       |   | 127 |   |
| Total interest income                                |   | 9,380                    |   | 10,091 |   |
|                                                 |   |                     |   |   |   |
| INTEREST EXPENSE:                                    |   |                     |   |   |   |
| Deposits                                             |   | 3,187                    |   | 4,023 |   |
| Other borrowings                                     |   | 319                      |   | 365 |   |
| Total interest expense                               |   | 3,506                    |   | 4,388 |   |
|                                                 |   |                     |   |   |   |
| NET INTEREST INCOME                                  |   | 5,874                    |   | 5,703 |   |
|                                                 |   |                     |   |   |   |
| PROVISION FOR LOAN LOSSES                            |   | 259                      |   | 279 |   |
|                                                 |   |                     |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES |   | 5,615                    |   | 5,424 |   |
|                                                 |   |                     |   |   |   |
| NONINTEREST INCOME:                                  |   |                     |   |   |   |
| Deposit fee income                                   |   | 692                      |   | 556 |   |
| Earnings on life insurance policies                  |   | 211                      |   | 217 |   |
| Gain on sale of loans                                |   | 127                      |   | 402 |   |
| Other                                                |   | 402                      |   | 367 |   |
| Total noninterest income                             |   | 1,432                    |   | 1,542 |   |
|                                                 |   |                     |   |   |   |
| NONINTEREST EXPENSES:                                |   |                     |   |   |   |
| Salaries and employee benefits                       |   | 2,673                    |   | 2,450 |   |
| Net occupancy expense                                |   | 492                      |   | 360 |   |
| Data processing                                      |   | 408                      |   | 365 |   |
| Professional fees                                    |   | 108                      |   | 92 |   |
| Advertising and public relations                     |   | 128                      |   | 151 |   |
| Postage and supplies                                 |   | 179                      |   | 177 |   |
| Other                                                |   | 486                      |   | 438 |   |
| Total noninterest expenses                           |   | 4,474                    |   | 4,033 |   |
|                                                 |   |                     |   |   |   |
| INCOME BEFORE INCOME TAXES                           |   | 2,573                    |   | 2,933 |   |
| INCOME TAX PROVISION                                 |   | 813                      |   | 949 |   |
| NET INCOME                                           |   | $                        | 1,760  |   | $ | 1,984 |   |
|                                                 |   |                     |   |   |   |
| EARNINGS PER SHARE:                                  |   |                     |   |   |   |
| Basic                                                |   | $                        | 0.34   |   | $ | 0.39 |   |
|                                                 |   |                     |   |   |   |
| Diluted                                              |   | $                        | 0.32   |   | $ | 0.38 |   |
|                                                 |   |                     |   |   |   |
| Cash Dividends Declared                              |   | $                        | 0.10   |   | $ | 0.08 |   |

 

See notes to unaudited consolidated financial statements.

 

2

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

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’****EQUITY**

**FOR THE THREEMONTHS ENDED MARCH 31, 2004**

(In thousands, except share data)

(Unaudited)

 
|                                                       |   |       |   | **Additional  Paid-In  Capital** |   | **Employee  Stock  Benefit  Plans** |   | **Retained  Earnings** |   |
|------------------------------------------------------------|--------|------------|--------|----------------------------------|--------|-------------------------------------|--------|------------------------|--------|
| **Issued  Common Stock**                                   |
| **Shares**                                                 |   | **Amount** |
|                                                       |   |       |   |                             |   |                                |   |                   |   |   |   |
| Balance, December 31, 2003                            |   | 10,307,502 |   | $                                | 103    |                                | $      | 52,950                 |   | $ | (1,025 | ) | $ | 72,634 |   |
| Net income                                                 |   |       |   |                             |   |                                |   |                   |   | 1,760 |   |
| Release of ESOP shares                                     |   |       |   |                             |   | 325                                 |   | 104                    |   |   |   |
| Tax effect of stock compensation plan                      |   |       |   |                             |   | 171                                 |   |                   |   |   |   |
| Treasury shares reissued due to exercise of  stock options |   |       |   |                             |   | (31                                 | )      |                   |   |   |   |
| Purchase of treasury stock, at cost                        |   |       |   |                             |   |                                |   |                   |   |   |   |
| MRP shares                                                 |   |       |   |                             |   |                                |   | 7                      |   |   |   |
| Dividends paid                                             |   |       |   |                             |   |                                |   |                   |   | (532 | ) |
|                                                       |   |       |   |                             |   |                                |   |                   |   |   |   |
| Balance, March 31, 2004                               |   | 10,307,502 |   | $                                | 103    |                                | $      | 53,415                 |   | $ | (914 | ) | $ | 73,862 |   |

 
|                                                       |   |                |   | **Total  Stockholders’  Equity** |    |
|------------------------------------------------------------|--------|---------------------|--------|---------------------------------------|---------|
|                                                       |   | **Treasury  Stock** |   |                                  |
| **Shares**                                                 |   | **Amount**          |
|                                                       |   |                |   |                                  |    |   |   |
| Balance, December 31, 2003                            |   | 4,967,416           |   | (49,584                               | )       | 75,078 |   |
| Net income                                                 |   |                |   |                                  |    | 1,760 |   |
| Release of ESOP shares                                     |   |                |   |                                  |    | 429 |   |
| Tax effect of stock compensation plan                      |   |                |   |                                  |    | 171 |   |
| Treasury shares reissued due to exercise of  stock options |   | (74,170             | )      | 745                                   |    | 714 |   |
| Purchase of treasury stock, at cost                        |   | 99,000              |   | (2,045                                | )       | (2,045 | ) |
| MRP shares                                                 |   |                |   |                                  |    | 7 |   |
| Dividends paid                                             |   |                |   |                                  |    | (532 | ) |
|                                                       |   |                |   |                                  |    |   |   |
| Balance, March 31, 2004                               |   | 4,992,246           |   | $                                     | (50,884 | ) | $ | 75,582 |   |
|                                                            |        |                     |        |                                       |         |  |  |  |  |

 

See notes to unaudited consolidated financial statements.

 

3

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands)

(Unaudited)

 
|                                                                               |   | **Three  Months Ended March 31,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                               |   | **2004**                               |   | **2003** |   |
|                                                                               |   |                                   |   |   |   |
| OPERATING ACTIVITIES:                                                              |   |                                   |   |   |   |
| Net income                                                                         |   | $                                      | 1,760  |   | $ | 1,984 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                   |   |   |   |
| Provision for loan losses                                                          |   | 259                                    |   | 279 |   |
| Provision for real estate losses                                                   |   | —                                 |   | 14 |   |
| Deferred tax provision (benefit)                                                   |   | 43                                     |   | (116 | ) |
| Accretion of discounts on investment  securities, net                              |   | (33                                    | )      | (7 | ) |
| Federal Home Loan Bank stock dividends                                             |   | (14                                    | )      | (31 | ) |
| (Gain) loss on disposition of office  properties and equipment                     |   | (34                                    | )      | 4 |   |
| (Gain) on sale of repossessed assets, net                                          |   | (6                                     | )      | (7 | ) |
| Originations of loans held for sale                                                |   | (10,604                                | )      | (27,624 | ) |
| Proceeds from sales of loans                                                       |   | 10,613                                 |   | 32,602 |   |
| Gain on sale of loans originated to sell                                           |   | (127                                   | )      | (402 | ) |
| Depreciation                                                                       |   | 298                                    |   | 251 |   |
| Amortization (accretion) of deferred loan  fees, net                               |   | 3                                      |   | (118 | ) |
| Release of ESOP shares                                                             |   | 429                                    |   | 268 |   |
| MRP compensation expense                                                           |   | 7                                      |   | — |   |
| Earnings on life insurance policies                                                |   | (211                                   | )      | (217 | ) |
| Changes in operating assets and liabilities:                                       |   |                                   |   |   |   |
| Accrued interest receivable                                                        |   | (235                                   | )      | 252 |   |
| Prepaid expenses and other assets                                                  |   | 323                                    |   | 197 |   |
| Other liabilities                                                                  |   | 298                                    |   | 854 |   |
| Net cash provided by operating activities                                          |   | 2,769                                  |   | 8,183 |   |
|                                                                               |   |                                   |   |   |   |
| INVESTING ACTIVITIES:                                                              |   |                                   |   |   |   |
| Purchases of investment securities held to  maturity                               |   | (63,878                                | )      | (49,181 | ) |
| Proceeds from maturities/calls of  investment securities held to maturity          |   | 55,879                                 |   | 69,064 |   |
| Loan participations sold                                                           |   | 2,709                                  |   | — |   |
| Loan originations, net of repayments                                               |   | (24,404                                | )      | (9,146 | ) |
| Proceeds from sales of repossessed assets                                          |   | 215                                    |   | 53 |   |
| Proceeds from sales of office properties  and equipment                            |   | 546                                    |   | — |   |
| Purchases of office properties and  equipment                                      |   | (958                                   | )      | (2,187 | ) |
| Net cash provided by (used in) investing  activities                               |   | (29,891                                | )      | 8,603 |   |
|                                                                               |   |                                   |   |   |   |
| FINANCING ACTIVITIES:                                                              |   |                                   |   |   |   |
| Net increase in deposits                                                           |   | 7,267                                  |   | 6,781 |   |
| Advances from FHLB                                                                 |   | 2,033                                  |   | 11,000 |   |
| Repayment of advances from FHLB                                                    |   | (4,105                                 | )      | (5,426 | ) |
| Net increase in advance payments by  borrowers for taxes and insurance             |   | 162                                    |   | 67 |   |
| Purchase of treasury stock                                                         |   | (2,045                                 | )      | (1,206 | ) |
| Reissued treasury stock                                                            |   | 714                                    |   | 479 |   |
| Dividends paid                                                                     |   | (532                                   | )      | (427 | ) |
| Net cash provided by financing activities                                          |   | 3,494                                  |   | 11,268 |   |
|                                                                               |   |                                   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | (23,628                                | )      | 28,054 |   |
|                                                                               |   |                                   |   |   |   |
| CASH AND CASH EQUIVALENTS:                                                         |   |                                   |   |   |   |
| Beginning of period                                                                |   | $                                      | 56,201 |   | $ | 44,493 |   |
| End of period                                                                      |   | $                                      | 32,573 |   | $ | 72,547 |   |
|                                                                               |   |                                   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                                |   |                                   |   |   |   |
| Cash paid for:                                                                     |   |                                   |   |   |   |
| Interest                                                                           |   | $                                      | 3,489  |   | $ | 4,417 |   |
| Income taxes                                                                       |   | $                                      | 168    |   | $ | — |   |
|                                                                               |   |                                   |   |   |   |
| SUPPLEMENTAL SCHEDULE OF NONCASH  INVESTING ACTIVITIES:                       |   |                                   |   |   |   |
| Real estate and other assets acquired in  settlement of Loans                      |   | $                                      | 151    |   | $ | 533 |   |
| Loans to facilitate sales of real estate  owned                                    |   | $                                      | 197    |   | $ | 137 |   |
| Investment securities traded, recorded in  investments not yet settled in cash     |   | $                                      | 250    |   | $ | 2,000 |   |

 

See notes to unaudited consolidated financial statements.

 

4

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIA****L STATEMENTS**

 

 

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

 

First Federal Bancshares of Arkansas, Inc.(the “Company”) is a unitary holding company which owns all of the stock ofFirst Federal Bank of Arkansas, FA (the “Bank”).  The Bank provides a broad line of financial products toindividuals and small- to medium-sized businesses in Northwest and NorthcentralArkansas.  The consolidated financialstatements also include the accounts of the Bank’s wholly-owned subsidiary,First Harrison Service Corporation (“FHSC”), which is inactive.

 

The accompanying unaudited consolidatedfinancial statements of the Company have been prepared in accordance withinstructions to Form 10-Q.  Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  However, such information reflects alladjustments which are, in the opinion of management, necessary for a fairstatement of results for the interim periods.

 

The accompanying unaudited consolidatedfinancial statements include the accounts of the Company and the Bank.  All material intercompany transactions havebeen eliminated in consolidation.

 

The results of operations for the three months ended March 31,2004, are not necessarily indicative of the results to be expected for the yearending December 31, 2004.  Theunaudited consolidated financial statements and notes thereto should be read inconjunction with the audited financial statements and notes thereto for theyear ended December 31, 2003, contained in the Company’s 2003 AnnualReport to Stockholders.

 

Certain amounts in the March 31, 2003,unaudited consolidated financial statements have been reclassified to conformto the classifications adopted for reporting in 2004.

 

**Note 2 - Earningsper Share**

 

The weighted average number of common sharesused to calculate earnings per share for the periods ended March 31, 2004and 2003 were as follows:

 
|                              |   | **Three  months ended March 31,** |   |
|-----------------------------------|--------|----------------------------------------|--------|
|                              |   | **2004**                               |   | **2003** |   |
| Basic weighted - average shares   |   | 5,146,747                              |   | 5,084,904 |   |
| Effect of dilutive securities     |   | 345,290                                |   | 202,248 |   |
| Diluted weighted - average shares |   | 5,492,037                              |   | 5,287,152 |   |

 

5

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# **Note 3 – Stock Option Plan**

 

At March 31, 2004, the Company had onestock option plan in effect covering key employees and directors.  The plan is more fully described in theNotes to Consolidated Financial Statements included in the Company’s 2003Annual Report to Stockholders.  The Companyaccounts for this plan under the recognition and measurement principles of APBOpinion No. 25, *Accounting for Stock Issuedto Employees*, and related interpretations.  No stock-based employee or director compensation cost isrecognized in net income, as all options granted under the plan had an exerciseprice equal to the market value of the underlying stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of FASB Statement 123, *Accounting for Stock-Based Compensation*,to stock-based employee and director compensation:

 
|                       |   | **Three  Months Ended March 31,** |   |
|----------------------------|--------|----------------------------------------|--------|
|                       |   | **2004**                               |   | **2003** |   |
| Net income (in thousands): |   |                                   |   |   |   |
| As reported                |   | $                                      | 1,760  |   | $ | 1,984 |   |
| Proforma                   |   | 1,754                                  |   | 1,977 |   |
| Earnings per share:        |   |                                   |   |   |   |
| Basic, as reported         |   | $                                      | 0.34   |   | $ | 0.39 |   |
| Basic, proforma            |   | 0.34                                   |   | 0.39 |   |
| Diluted, as reported       |   | 0.32                                   |   | 0.38 |   |
| Diluted, proforma          |   | 0.32                                   |   | 0.37 |   |

 

6

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**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

### **CRITICALACCOUNTING POLICIES**

 

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

 

Inestimating the amount of credit losses inherent in our loan portfolio, variousjudgments and assumptions are made.  Forexample, when assessing the condition of the overall economic environment,assumptions are made regarding future market conditions and their impact on theloan portfolio.  In the event thenational economy were to sustain a prolonged downturn, the loss factors appliedto our portfolios 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**

 

Changesin financial condition between March 31, 2004 and December 31, 2003are presented in the following table (dollars in thousands).  Material changes between periods will bediscussed in the sections which follow the table.

 
|                                           |   | **March 31,****2004** |    | **December 31,  2003** |   | **Increase  (Decrease)** |   | **Percentage****Change** |    |
|------------------------------------------------|--------|----------------------------|---------|-----------------------------|--------|--------------------------|--------|--------------------------|---------|
| **ASSETS**                                     |   |                       |    |                        |   |                     |   |                     |    |
| Cash and cash equivalents                      |   | $                          | 32,573  |                        | $      | 56,201                   |   | $                        | (23,628 | ) | (42.0 | )% |
| Investment securities held to maturity         |   | 88,661                     |    | 80,379                      |   | 8,282                    |   | 10.3                     | %       |
| Loans receivable, net                          |   | 534,353                    |    | 512,756                     |   | 21,597                   |   | 4.2                      | %       |
| Prepaid expenses and other assets              |   | 41,697                     |    | 41,317                      |   | 380                      |   | 0.9                      | %       |
|                                           |   |                       |    |                        |   |                     |   |                     |    |
| TOTAL                                          |   | $                          | 697,284 |                        | $      | 690,653                  |   | $                        | 6,631   |   | 1.0 | % |
|                                           |   |                       |    |                        |   |                     |   |                     |    |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY** |   |                       |    |                        |   |                     |   |                     |    |
| LIABILITIES:                                   |   |                       |    |                        |   |                     |   |                     |    |
| Deposits                                       |   | $                          | 580,847 |                        | $      | 573,580                  |   | $                        | 7,267   |   | 1.3 | % |
| Other borrowings                               |   | 37,490                     |    | 39,562                      |   | (2,072                   | )      | (5.2                     | )%      |
| Other liabilities                              |   | 3,365                      |    | 2,433                       |   | 932                      |   | 38.3                     | %       |
|                                           |   |                       |    |                        |   |                     |   |                     |    |
| Total liabilities                              |   | 621,702                    |    | 615,575                     |   | 6,127                    |   | 1.0                      | %       |
|                                           |   |                       |    |                        |   |                     |   |                     |    |
| STOCKHOLDERS’ EQUITY                      |   | 75,582                     |    | 75,078                      |   | 504                      |   | 0.7                      | %       |
|                                           |   |                       |    |                        |   |                     |   |                     |    |
| TOTAL                                          |   | $                          | 697,284 |                        | $      | 690,653                  |   | $                        | 6,631   |   | 1.0 | % |
|                                           |   |                       |    |                        |   |                     |   |                     |    |
| BOOK VALUE PER SHARE                           |   | $                          | 14.22   |                        | $      | 14.06                    |   |                     |    |   |   |
|                                           |   |                       |    |                        |   |                     |   |                     |    |
| EQUITY TO ASSETS                               |   | 10.8                       | %       | 10.9                        | %      |                     |   |                     |    |

 

7

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**Loans Receivable. **Changes in loancomposition between March 31, 2004 and December 31, 2003 arepresented in the following table (dollars in thousands).

 
|                                           |   | **March 31,****2004** |    | **December 31,  2003** |   | **Increase  (Decrease)** |   | **Percentage****Change** |   |
|------------------------------------------------|--------|----------------------------|---------|-----------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                           |   |                       |    |                        |   |                     |   |                     |   |
| One- to four- family residences                |   | $                          | 265,986 |                        | $      | 259,121                  |   | $                        | 6,865  |   |   |   |
| Multi-family                                   |   | 9,516                      |    | 7,673                       |   | 1,843                    |   |                     |   |
| Commercial real estate                         |   | 104,721                    |    | 97,310                      |   | 7,411                    |   |                     |   |
| Construction                                   |   | 104,903                    |    | 89,332                      |   | 15,571                   |   |                     |   |
| Total first mortgage loans                     |   | 485,126                    |    | 453,436                     |   | 31,690                   |   | 7.0                      | %      |
|                                           |   |                       |    |                        |   |                     |   |                     |   |
| Commercial                                     |   | 20,810                     |    | 21,491                      |   | (681                     | )      | (3.2                     | )%     |
|                                           |   |                       |    |                        |   |                     |   |                     |   |
| Home equity and second mortgage                |   | 37,100                     |    | 36,332                      |   | 768                      |   |                     |   |
| Automobile                                     |   | 21,414                     |    | 22,087                      |   | (673                     | )      |                     |   |
| Other                                          |   | 17,770                     |    | 16,869                      |   | 901                      |   |                     |   |
| Total consumer                                 |   | 76,284                     |    | 75,288                      |   | 996                      |   | 1.3                      | %      |
|                                           |   |                       |    |                        |   |                     |   |                     |   |
| Total loans receivable                         |   | 582,220                    |    | 550,215                     |   | 32,005                   |   | 5.8                      | %      |
| Less:                                          |   |                       |    |                        |   |                     |   |                     |   |
| Undisbursed loan funds                         |   | (45,541                    | )       | (35,181                     | )      | (10,360                  | )      |                     |   |
| Unearned discounts and net deferred loan  fees |   | (623                       | )       | (657                        | )      | 34                       |   |                     |   |
| Allowance for loan losses                      |   | (1,703                     | )       | (1,621                      | )      | (82                      | )      |                     |   |
|                                           |   |                       |    |                        |   |                     |   |                     |   |
| Total loans receivable, net                    |   | $                          | 534,353 |                        | $      | 512,756                  |   | $                        | 21,597 |   | 4.2 | % |

 

Certain 2003 amounts in thetable above have been reclassified to conform to the 2004 presentation.

 

The interest rate environmentand robust economies of our market areas have continued to provide increaseddemand for our loan products.  The Bankhas continued its emphasis on real estate lending, particularly commercial realestate lending, to increase the average yield on its portfolio, expand itsoperations, and provide greater opportunities to cross-sell its products.  This quarter we also experienced an increasein one-to four- family residential loans held for investment, which coincideswith the decrease in secondary market activity.  Construction lending has continued to increase, with $9.9 millionof the increase due to one- to four- family residential construction, $4.9 milliondue to multi-family construction, and the remainder due to commercial realestate construction

 

8

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**Asset Quality. **Thefollowing table sets forth the amounts and categories of the Bank’snonperforming assets at the dates indicated.

 
|                                                                               |   | **March 31,  2004**   |   | **December 31,  2003** |   |
|------------------------------------------------------------------------------------|--------|----------------------------|--------|-----------------------------|--------|
|                                                                               |   | **(Dollars in Thousands)** |   |
| Nonaccrual loans:                                                                  |   |                       |   |                        |   |
| One- to four-family residential                                                    |   | $                          | 2,181  |                        | $      | 1,537 |   |
| Multi-family residential                                                           |   | —                     |   | —                      |   |
| Construction loans                                                                 |   | —                     |   | —                      |   |
| Commercial real estate                                                             |   | 677                        |   | 99                          |   |
| Commercial loans                                                                   |   | 296                        |   | 131                         |   |
| Consumer loans                                                                     |   | 462                        |   | 564                         |   |
| Total nonaccrual loans                                                             |   | 3,616                      |   | 2,331                       |   |
|                                                                               |   |                       |   |                        |   |
| Restructured loans                                                                 |   | —                     |   | 1,352                       |   |
| Real estate owned                                                                  |   | 597                        |   | 822                         |   |
|                                                                               |   |                       |   |                        |   |
| Nonperforming assets                                                               |   | $                          | 4,213  |                        | $      | 4,505 |   |
|                                                                               |   |                       |   |                        |   |
| Total nonaccrual and restructured loans as  a percentage of total loans receivable |   | 0.62                       | %      | 0.67                        | %      |
|                                                                               |   |                       |   |                        |   |
| Total nonperforming assets as a percentage  of total assets                        |   | 0.60                       | %      | 0.65                        | %      |

 

Restructured loans reported atDecember 31, 2003, is comprised of a group of loans to relatedborrowers.  At that date the loans werenot over 90 days past due.  AtMarch 31, 2004, these loans were over 90 days past due and are included innonaccrual loans in the one- to four- family and commercial real estatecategories in the table above.

 

**Allowancefor Loan Losses**.  A summary of theactivity in the allowance for loan losses is as follows (in thousands):

 
|                            |   | **Three  Months Ended March 31,** |   |
|---------------------------------|--------|----------------------------------------|--------|
|                            |   | **2004**                               |   | **2003** |   |
| Balance at beginning of period  |   | $                                      | 1,621  |   | $ | 1,529 |   |
| Provisions for estimated losses |   | 259                                    |   | 279 |   |
| Recoveries                      |   | 24                                     |   | 27 |   |
| Losses charged off              |   | (201                                   | )      | (174 | ) |
| Balance at end of period        |   | $                                      | 1,703  |   | $ | 1,661 |   |

 

Changesin the composition of the allowance for loan losses between March 31, 2004and December 31, 2003 are presented in the following table (in thousands):

 
|        |   | **March 31,****2004** |   | **December 31,  2003** |   | **Increase  (Decrease)** |   |
|-------------|--------|----------------------------|--------|-----------------------------|--------|--------------------------|--------|
| General     |   | $                          | 1,355  |                        | $      | 1,306                    |   | $ | 49 |   |
| Specific    |   | 298                        |   | 252                         |   | 46                       |   |
| Unallocated |   | 50                         |   | 63                          |   | (13                      | )      |
|        |   | $                          | 1,703  |                        | $      | 1,621                    |   | $ | 82 |   |

 

Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodicreview of the collectibility of the loans in light of historical experience,the nature and volume of the loan portfolio, adverse situations that may affectthe borrower’s ability to repay, the estimated value of any underlyingcollateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates thatare susceptible to significant revision as conditions change and moreinformation becomes available.

 

9

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The allowance consists of specific, generaland unallocated components. The specific component relates to loans that areclassified as loss, doubtful, substandard or special mention. For such loansthat are also classified as impaired, an allowance is established when thediscounted cash flows (or collateral value or observable market price) of theimpaired loan is lower than the carrying value of that loan. The generalcomponent covers non-classified loans and is based primarily on historical lossexperience. An unallocated component is maintained to cover uncertainties thatcould affect management’s estimate of probable losses. The unallocatedcomponent of the allowance reflects the margin of imprecision inherent in theunderlying assumptions used in the methodologies for estimating specific andgeneral losses in the portfolio.

 

The Bankreviews its non-homogeneous loans for impairment on a quarterly basis.  The Bank considers commercial real estate,construction, multi-family, and commercial loans to be non-homogeneousloans.  A loan is considered impairedwhen, based on current information and events, it is probable that the Bankwill be unable to collect the scheduled payments of principal or interest whendue according to the contractual terms of the loan agreement.  Factors considered by management indetermining impairment include payment status, collateral value, and theprobability of collecting scheduled principal and interest payments whendue.  Loans that experience insignificantpayment delays and payment shortfalls generally are not classified asimpaired.  Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and theborrower, including the length of the delay, the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed. Impairment is measured on a loanby loan basis by either the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the loan’s obtainable marketprice, or the fair value of the collateral if the loan is collateral dependent.

 

Large groupsof smaller balance homogeneous loans are collectively evaluated forimpairment.  Accordingly, the Bank doesnot separately identify individual consumer and residential loans forimpairment disclosures.  Homogeneousloans are those that are considered to have common characteristics that providefor evaluation on an aggregate or pool basis. The Bank considers the characteristics of (1) one- to- four familyresidential first mortgage loans; (2) unsecured consumer loans; and (3)collateralized consumer loans to permit consideration of the appropriateness ofthe allowance for losses of each group of loans on a pool basis.  The primary methodology used to determinethe appropriateness of the allowance for losses includes segregating certainspecific, poorly performing loans based on their performance characteristicsfrom the pools of loans as to type, valuing these loans, and then applying aloss factor to the remaining pool balance based on several factors, includingpast loss experience, inherent risks, and economic conditions in the primarymarket areas.

 

Inestimating the amount of credit losses inherent in our loan portfolio, variousjudgments and assumptions are made.  Forexample, when assessing the condition of the overall economic environment,assumptions are made regarding future market conditions and their impact on theloan portfolio.  In the event thenational economy were to sustain a prolonged downturn, the loss factors appliedto our portfolios 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.

 

Althoughwe consider the allowance for loan losses of $1.7 million appropriate andadequate to cover losses inherent in our loan portfolio at March 31, 2004,no assurance can be given that we will not sustain loan losses that aresignificantly different from the amount provided, or that subsequent evaluationsof the loan portfolio, in light of factors then prevailing, would not result ina significant change in the allowance for loan losses.

 

10

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**Investment Securities. **Changes inthe composition of investment securities held to maturity betweenMarch 31, 2004 and December 31, 2003 are presented in the followingtable (dollars in thousands).

 
|                                   |   | **March 31,  2004** |   | **December 31,  2003** |   | **Increase  (Decrease)** |   |
|----------------------------------------|--------|--------------------------|--------|-----------------------------|--------|--------------------------|--------|
| Certificates of deposit                |   | $                        | 23,000 |                        | $      | 9,000                    |   | $ | 14,000 |   |
| U.S. Government and agency obligations |   | 50,666                   |   | 57,076                      |   | (6,410                   | )      |
| Municipal securities                   |   | 14,995                   |   | 14,303                      |   | 692                      |   |
| Total                                  |   | $                        | 88,661 |                        | $      | 80,379                   |   | $ | 8,282 |   |

 

Duringthe first quarter of 2004, investment securities totaling $64.1 million werepurchased and $55.9 million matured or were called.  The majority of these purchases and maturities were shorter-termcertificates of deposit.  The decreasein U.S. Government and agency obligations was due to calls and maturities inexcess of purchases.

 

At March 31, 2004, estimatedfair values of investment securities held to maturity were as follows:

 
|                                    |   | **Amortized Cost** |   | **Fair Value** |   |
|-----------------------------------------|--------|--------------------|--------|----------------|--------|
|                                    |   |               |   |           |   |
| Certificates  of deposit                |   | $                  | 23,000 |           | $      | 23,000 |   |
| U.S.  Government and agency obligations |   | 50,666             |   | 50,742         |   |
| Municipal  securities                   |   | 14,995             |   | 15,517         |   |
| Total                                   |   | $                  | 88,661 |           | $      | 89,259 |   |

 

**Deposits. **Changesin the composition of deposits between March 31, 2004 andDecember 31, 2003 are presented in the following table (dollars inthousands).

 
|                    |   | **March 31,  2004** |    | **December 31,  2003** |   | **Increase  (Decrease)** |   | **Percentage  Change** |   |
|-------------------------|--------|--------------------------|---------|-----------------------------|--------|--------------------------|--------|------------------------|--------|
|                    |   |                     |    |                        |   |                     |   |                   |   |
| DDA and NOW accounts    |   | $                        | 101,287 |                        | $      | 96,090                   |   | $                      | 5,197  |   | 5.4 | % |
| Money Market accounts   |   | 117,946                  |    | 108,400                     |   | 9,546                    |   | 8.8                    | %      |
| Savings accounts        |   | 32,084                   |    | 29,269                      |   | 2,815                    |   | 9.6                    | %      |
| Certificates of deposit |   | 329,530                  |    | 339,821                     |   | (10,291                  | )      | (3.0                   | )%     |
|                    |   |                     |    |                        |   |                     |   |                   |   |
| Total deposits          |   | $                        | 580,847 |                        | $      | 573,580                  |   | $                      | 7,267  |   | 1.3 | % |

 

TheBank continued to experience a change in the mix of deposits due to the lowinterest rate environment during the quarter. Certificates of deposit decreased while money market, savings, anddemand and NOW deposit accounts increased. Checking accounts are an attractive source of funds for the Bank as theyoffer low-interest deposits, fee income potential, and the opportunity tocross-sell other financial services.  TheBank does not advertise for deposits outside of its primary market area of Northcentraland Northwest Arkansas or utilize the services of deposit brokers.

 

**OtherLiabilities.** Other liabilities increased primarily due to payment timing differencesbetween December 31, 2003 and March 31, 2004.  Timing differences include a $250,000payable for investment securities purchased which had not settled, as well asother smaller timing differences, such as tax withholdings and miscellaneousaccruals.  A portion of the increase inother liabilities was due to the recording of deferred gains on sales of realestate of approximately $350,000 during the first quarter.  The Bank financed the sale of two propertiesand has deferred the gains in accordance with Statement of Financial AccountingStandards No. 66 (“SFAS 66”), *Accounting forSales of Real Estate*, until the borrowers make sufficient principalpayments to constitute an adequate investment in the underlying properties, asdefined by SFAS 66.

 

**Stockholders’ Equity. **Stockholders’ equity increased $504,000from December 31, 2003 to March 31, 2004.  The increase in stockholders’ equity was primarily due to netincome of $1.8 million and the issuance of treasury stock due to exercise ofstock options of $745,000, offset by the purchase of treasury stock totaling $2.0million during the first quarter of 2004. In addition, during the quarter ended March 31, 2004 cash dividendsof $532,000 were paid.  See theUnaudited Consolidated Statement of Stockholders’ Equity for the three monthsended March 31, 2004 for more detail.

 

11

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### **Average Balance Sheets**

 

The following table sets forthcertain information relating to the Company’s average balance sheets andreflects the average yield on assets and average cost of liabilities for theperiods indicated and the yields earned and rates paid at March 31, 2004.  Such yields and costs are derived bydividing income or expense by the average balance of assets or liabilities,respectively, for the periods presented and outstanding balances at March 31,2004.  Average balances are based ondaily balances during the period.

 
|                                                              |   | **March 31,** |   | **Quarter Ended March 31,** |    |
|-------------------------------------------------------------------|--------|--------------------|--------|----------------------------------|---------|
|                                                              |   | **2004**           |   | **2004**                         |    | **2003** |   |
|                                                              |   |               |   |                             |    |   |   | **Average** |   |   |   |   |   | **Average** |   |
|                                                              |   |               |   | **Average**                      |    |   |   | **Yield/** |   | **Average** |   |   |   | **Yield/** |   |
|                                                              |   | **Yield/Cost**     |   | **Balance**                      |    | **Interest** |   | **Cost** |   | **Balance** |   | **Interest** |   | **Cost** |   |
|                                                              |   |               |   | **(Dollars in  Thousands)**      |    |
| Interest-earning  assets:                                         |   |               |   |                             |    |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable(1)                                              |   | 6.37               | %      | $                                | 520,908 |   | $ | 8,329 |   | 6.40 | % | $ | 487,575 |   | $ | 8,808 |   | 7.23 | % |
| Investment  securities(2)                                         |   | 4.02               |   | 88,051                           |    | 960 |   | 4.36 |   | 109,903 |   | 1,156 |   | 4.21 |   |
| Other  interest-earning assets                                    |   | .88                |   | 41,057                           |    | 91 |   | 0.89 |   | 44,564 |   | 127 |   | 1.14 |   |
| Total  interest-earning assets                                    |   | 5.88               |   | 650,016                          |    | 9,380 |   | 5.77 |   | 642,042 |   | 10,091 |   | 6.29 |   |
| Noninterest-earning  assets                                       |   |               |   | 46,961                           |    |   |   |   |   | 42,238 |   |   |   |   |   |
| Total  assets                                                     |   |               |   | 696,977                          |    |   |   |   |   | $ | 684,280 |   |   |   |   |   |
| Interest-bearing  liabilities:                                    |   |               |   |                             |    |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                          |   | 2.18               |   | 577,829                          |    | 3,187 |   | 2.21 |   | 567,691 |   | 4,023 |   | 2.83 |   |
| Other  borrowings                                                 |   | 3.38               |   | 38,490                           |    | 319 |   | 3.31 |   | 41,543 |   | 365 |   | 3.51 |   |
| Total  interest-bearing liabilities                               |   | 2.25               |   | 616,319                          |    | 3,506 |   | 2.27 |   | 609,234 |   | 4,388 |   | 2.88 |   |
| Noninterest-bearing  liabilities                                  |   |               |   | 5,192                            |    |   |   |   |   | 4,482 |   |   |   |   |   |
| Total  liabilities                                                |   |               |   | 621,511                          |    |   |   |   |   | 613,716 |   |   |   |   |   |
| Stockholders’  equity                                        |   |               |   | 75,466                           |    |   |   |   |   | 70,564 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                  |   |               |   | $                                | 696,977 |   |   |   |   |   | $ | 684,280 |   |   |   |   |   |
|                                                              |   |               |   |                             |    |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                              |   |               |   |                             |    | $ | 5,874 |   |   |   |   |   | $ | 5,703 |   |   |   |
| Net  earning assets                                               |   |               |   | $                                | 33,697  |   |   |   |   |   | $ | 32,808 |   |   |   |   |   |
| Interest  rate spread                                             |   | 3.63               | %      |                             |    |   |   | 3.50 | % |   |   |   |   | 3.41 | % |
| Net  interest margin                                              |   |               |   |                             |    |   |   | 3.61 | % |   |   |   |   | 3.55 | % |
| Ratio  of interest-earning assets to interest-bearing liabilities |   |               |   |                             |    |   |   | 105.47 | % |   |   |   |   | 105.38 | % |

 

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(1)          Includesnonaccrual loans.

(2)          IncludesFHLB of Dallas stock.

 

12

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## **Rate/VolumeAnalysis**

 

The table below sets forthcertain information regarding changes in interest income and interest expenseof the Company for the periods indicated. For each category of interest-earning assets and interest-bearingliabilities, information is provided on changes attributable to (i) changes involume (changes in average volume multiplied by prior rate); (ii) changes inrate (change in rate multiplied by prior average volume); (iii) changes inrate-volume (changes in rate multiplied by the change in average volume); and(iv) the net change.

 
|                                |   | **Quarter Ended March 31,  2004 vs. 2003** |   |
|-------------------------------------|--------|-------------------------------------------------|--------|
|                                |   | **Increase (Decrease)**                         |   |   |   |
|                                |   | **Due to**                                      |   | **Total** |   |
|                                |   |                                            |   |   |   | **Rate/** |   | **Increase** |   |
|                                |   | **Volume**                                      |   | **Rate** |   | **Volume** |   | **(Decrease)** |   |
|                                |   | **(In Thousands)**                              |   |
| Interest income:                    |   |                                            |   |   |   |   |   |   |   |
| Loans  receivable                   |   | $                                               | 602    |   | $ | (1,012 | ) | $ | (69 | ) | $ | (479 | ) |
| Investment securities               |   | (230                                            | )      | 42 |   | (8 | ) | (196 | ) |
| Other  interest-earning assets      |   | (10                                             | )      | (28 | ) | 2 |   | (36 | ) |
| Total interest-earning assets       |   | 362                                             |   | (998 | ) | (75 | ) | (711 | ) |
|                                |   |                                            |   |   |   |   |   |   |   |
| Interest  expense:                  |   |                                            |   |   |   |   |   |   |   |
| Deposits                            |   | 72                                              |   | (892 | ) | (16 | ) | (836 | ) |
| Other borrowings                    |   | (27                                             | )      | (20 | ) | 1 |   | (46 | ) |
| Total  interest-bearing liabilities |   | 45                                              |   | (912 | ) | (15 | ) | (882 | ) |
| Net  change in net interest income  |   | $                                               | 317    |   | $ | (86 | ) | $ | (60 | ) | $ | 171 |   |

 

13

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**CHANGES IN RESULTS OFOPERATIONS**

 

Thetable below presents a comparison of results of operations for the threemonths ended March 31, 2004 and 2003 (dollars in thousands).  Specific changes in captions will bediscussed below the table.

 
|                                                  |   | **Three  Months Ended  March 31,** |   | **Increase  (Decrease)** |   | **Percentage  Change** |   |
|-------------------------------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|------------------------|--------|
|                                                  |   | **2004**                                |   | **2003**                 |   | **2004 vs  2003**      |   | **2004 vs  2003** |   |
| Interest income:                                      |   |                                    |   |                     |   |                   |   |   |   |
| Loans receivable                                      |   | $                                       | 8,329  |                     | $      | 8,808                  |   | $ | (479 | ) |   |   |
| Investment securities                                 |   | 960                                     |   | 1,156                    |   | (196                   | )      |   |   |
| Other                                                 |   | 91                                      |   | 127                      |   | (36                    | )      |   |   |
| Total interest income                                 |   | 9,380                                   |   | 10,091                   |   | (711                   | )      | (7.1 | )% |
| Interest expense:                                     |   |                                    |   |                     |   |                   |   |   |   |
| Deposits                                              |   | 3,187                                   |   | 4,023                    |   | (836                   | )      |   |   |
| Other borrowings                                      |   | 319                                     |   | 365                      |   | (46                    | )      |   |   |
| Total interest expense                                |   | 3,506                                   |   | 4,388                    |   | (882                   | )      | (20.1 | )% |
| Net interest income before  provision for loan losses |   | 5,874                                   |   | 5,703                    |   | 171                    |   |   |   |
| Provision for loan losses                             |   | 259                                     |   | 279                      |   | (20                    | )      |   |   |
| Net interest income after  provision for loan losses  |   | 5,615                                   |   | 5,424                    |   | 191                    |   | 3.5 | % |
| Noninterest income:                                   |   |                                    |   |                     |   |                   |   |   |   |
| Deposit fee income                                    |   | 692                                     |   | 556                      |   | 136                    |   |   |   |
| Gain on sale of loans                                 |   | 127                                     |   | 402                      |   | (275                   | )      |   |   |
| Earnings on life insurance policies                   |   | 211                                     |   | 217                      |   | (6                     | )      |   |   |
| Other                                                 |   | 402                                     |   | 367                      |   | 35                     |   |   |   |
| Total noninterest income                              |   | 1,432                                   |   | 1,542                    |   | (110                   | )      | (7.1 | )% |
| Noninterest expenses:                                 |   |                                    |   |                     |   |                   |   |   |   |
| Salaries and employee benefits                        |   | 2,673                                   |   | 2,450                    |   | 223                    |   |   |   |
| Net occupancy expense                                 |   | 492                                     |   | 360                      |   | 132                    |   |   |   |
| Data processing                                       |   | 408                                     |   | 365                      |   | 43                     |   |   |   |
| Other                                                 |   | 901                                     |   | 858                      |   | 43                     |   |   |   |
| Total noninterest expenses                            |   | 4,474                                   |   | 4,033                    |   | 441                    |   | 10.9 | % |
| Income before income taxes                            |   | 2,573                                   |   | 2,933                    |   | (360                   | )      |   |   |
| Provision for income taxes                            |   | 813                                     |   | 949                      |   | (136                   | )      |   |   |
| Net income                                            |   | 1,760                                   |   | 1,984                    |   | (224                   | )      | (11.3 | )% |
|                                                  |   |                                    |   |                     |   |                   |   |   |   |
| Basic earnings per share                              |   | $                                       | 0.34   |                     | $      | 0.39                   |   | $ | (0.05 | ) | (12.8 | )% |
| Diluted earnings per share                            |   | $                                       | 0.32   |                     | $      | 0.38                   |   | $ | (0.06 | ) | (15.8 | )% |
|                                                  |   |                                    |   |                     |   |                   |   |   |   |
| Interest rate spread                                  |   | 3.50                                    | %      | 3.41                     | %      | 0.09                   | %      | 2.6 | % |
| Net interest margin                                   |   | 3.61                                    | %      | 3.55                     | %      | 0.06                   | %      | 1.7 | % |
|                                                  |   |                                    |   |                     |   |                   |   |   |   |
| Full-time equivalents                                 |   | 248                                     |   | 243                      |   | 5                      |   | 2.1 | % |
| Full-service offices                                  |   | 15                                      |   | 14                       |   | 1                      |   | 7.1 | % |

 

14

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**Net InterestIncome. **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 Company’s net interest income increaseddue to increases in interest rate spread and interest rate margin.  There was a general decrease in marketinterest rates from the quarter ended March 31, 2003 to the quarter endedMarch 31, 2004, as evidenced by the changes in key interest ratespresented below:

 
|           |   | **March  2004** |   | **December  2003** |   | **March  2003** |   | **December  2002** |   |
|----------------|--------|-----------------|--------|--------------------|--------|-----------------|--------|--------------------|--------|
|           |   |            |   |               |   |            |   |               |   |
| Fed funds rate |   | 1.00            | %      | 0.98               | %      | 1.25            | %      | 1.24               | %      |
| Prime rate     |   | 4.00            | %      | 4.00               | %      | 4.25            | %      | 4.25               | %      |

Source:

www.federalreserve.gov

 

In the 2004 vs. 2003 period,due to the Bank’s negative gap, rates paid on deposits decreased more quicklythan rates on earning assets.  As aresult, the Company experienced an increase in the interest rate spread and netinterest margin.

 

### **INTEREST INCOME ANDINTEREST EXPENSE**

 

Dollar and percentage changesin interest income and interest expense for the comparison periods are presentedin the rate/volume analysis table which appears on page 13.

 

**InterestIncome. **Thedecrease was primarily due to a decrease in the average yield earned on loansand other interest-earning assets and a decrease in the average balance ofinvestment securities, partially offset by an increase in the average balanceof loans.  The decrease in the averageyield earned on loans and other interest-earning assets was primarily due tothe declining level of interest rates in the first quarter of 2004 compared tothe same period in 2003.  The decreasein the average balance of investment securities held to maturity was primarilythe result of called U.S. Government and agency securities.  The average balance of loans increasedprimarily due to increased construction, commercial, and one- to four- familyloan origination activity since the first quarter of 2003.

 

**InterestExpense. **Thedecrease in interest expense was primarily due to a decrease in the averagerate paid on deposit accounts and FHLB advances offset slightly by an increasein the average balance of deposits.  Thedecrease in the average interest rate paid on deposits was primarily the resultof maturing certificates and variable interest bearing deposits being repricedto lower interest rates.

 

**Provision forLoan Losses.** The provision for loan losses includes charges to maintain an allowancefor loan losses adequate to cover probable credit losses related tospecifically identified loans as well as probable credit losses inherent in theremainder of the loan portfolio that have been incurred as of the balance sheetdate.  Such provision and the adequacyof the allowance for loan losses is evaluated quarterly by management of theBank based on the Bank’s past loan loss experience, known and inherent risks inthe portfolio, adverse situations that may affect the borrower’s ability torepay, the estimated value of any underlying collateral and current economicconditions.

 

While the loan portfolioincreased by $21.6 million since December 31, 2003, the estimatedallowance for loan losses did not increase significantly since the majority ofthe growth was in real estate loans, which have lower estimated loss rates thanconsumer loans.  There were no changesin loss factors applied to pooled loans during the quarter, except forunsecured loans, which increased slightly due to an upward trend incharge-offs.

 

**NoninterestIncome. **Depositfee income increased as a result of the Bank’s continued promotion of Bounce ProtectionTM overdraftservice as well as an increase in the number of checking accounts and a10% increase in the insufficient funds fee. The number of checking accounts increased approximately 5% fromMarch 31, 2003 to March 31, 2004. The Bank plans to aggressively promote checking accounts in 2004 throughdirect mail campaigns to expand its checking accounts and increase deposit feeincome.

 

15

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Gain on sale of loans decreaseddue to a decrease in originations of loans for sale.  Sales of loans peaked in 2003 due to record low interest rates in2003 and the resulting refinancing activity. We do not expect loan sales to continue at this level in 2004.

 

**Noninterest Expense**

 

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

 
|                              |   | **Three  Months Ended March 31,** |   | **Increase****(Decrease)** |   |
|-----------------------------------|--------|----------------------------------------|--------|----------------------------|--------|
|                              |   | **2004**                               |   | **2003**                   |   | **2004 vs  2003** |   |
| Salaries                          |   | $                                      | 1,868  |                       | $      | 1,798 |   | $ | 70 |   |
| Payroll taxes                     |   | 220                                    |   | 184                        |   | 36 |   |
| Insurance                         |   | 138                                    |   | 136                        |   | 2 |   |
| ESOP expense (1)                  |   | 410                                    |   | 247                        |   | 163 |   |
| MRP expense (2)                   |   | 7                                      |   | —                     |   | 7 |   |
| Defined benefit plan contribution |   | (8                                     | )      | 54                         |   | (62 | ) |
| Other                             |   | 38                                     |   | 31                         |   | 7 |   |
| Total                             |   | $                                      | 2,673  |                       | $      | 2,450 |   | $ | 223 |   |

 

----

(1)          EmployeeStock Ownership Plan

(2)          ManagementRecognition and Retention Plan

 

The increase in salaries wasdue to an increase in personnel and normal salary and merit increases.  Payroll taxes increased due to the increasein salaries and the exercise of stock options. The increase in employee stock ownership plan expense was due to anincrease in the Company’s average stock price from $12.90 in 2003 to $20.60 in2004.  Defined benefit plan expensedecreased due to applying the current plan year’s contributions to the previousplan year during the first quarter of 2004, resulting in the elimination of theadditional funding charge for the current plan year ending June 30,2004.  The resulting reduction of therequired contribution for the first six months of the plan year endingJune 30, 2004 was accounted for on a prospective basis and resulted in anet credit balance of $8,000 in defined benefit plan expense for the quarterended March 31, 2004.  Definedbenefit plan expense is estimated to be approximately $121,000 in the secondquarter of 2004.

 

**Net occupancyexpense. **Thechanges in the composition of this line item are presented below (inthousands):

 
|                                       |   | **Three  Months Ended March 31,** |   | **Increase  (Decrease)** |   |
|--------------------------------------------|--------|----------------------------------------|--------|--------------------------|--------|
|                                       |   | **2004**                               |   | **2003**                 |   | **2004 vs  2003** |   |
| Depreciation                               |   | $                                      | 275    |                     | $      | 223 |   | $ | 52 |   |
| Furniture, fixtures, and equipment expense |   | 36                                     |   | 16                       |   | 20 |   |
| Utilities                                  |   | 59                                     |   | 39                       |   | 20 |   |
| Building repairs and maintenance           |   | 62                                     |   | 37                       |   | 25 |   |
| Taxes and insurance                        |   | 43                                     |   | 26                       |   | 17 |   |
| Rent                                       |   | 17                                     |   | 19                       |   | (2 | ) |
| Total                                      |   | $                                      | 492    |                     | $      | 360 |   | $ | 132 |   |

 

The increase in net occupancyexpense was primarily due to an increase in depreciation expense on buildingsand equipment.  This increase indepreciation was due to completion of the new corporate headquarters inHarrison in June 2003.  Factorscontributing to the increases in other categories of net occupancy expenseinclude the effect of the new headquarters building and the new Bentonvillebranch on utilities, taxes, and insurance, as well as remodeling costs incurredfor other branches.

 

**Dataprocessing expense.** Data processing expense increased due primarily to an upgrade of theBank’s wide area network, increased ATM volume, and growth in electronicbanking services.

 

16

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

 
|                           |   | **Three  Months Ended March 31,** |   | **Increase****(Decrease)** |   |
|--------------------------------|--------|----------------------------------------|--------|----------------------------|--------|
|                           |   | **2004**                               |   | **2003**                   |   | **2004 vs  2003** |   |
| Consultant and management fees |   | $                                      | 93     |                       | $      | 18 |   | $ | 75 |   |
| Other                          |   | 808                                    |   | 840                        |   | (32 | ) |
| Total                          |   | $                                      | 901    |                       | $      | 858 |   | $ | 43 |   |

 

Other expenses in this periodincreased primarily due to consultant and management fees.  These fees increased primarily due to feespaid to a consulting firm for assistance in promotion of checkingaccounts.  Fees paid to a third partyvendor related to the Bounce ProtectionTM program also increased due toincreased overdraft activity during the quarter.

 

**Income Taxes.**

 

The decrease in income taxexpense was primarily due to a decrease in taxable income and, to a lesserextent, a decrease in the effective tax rate. The decrease in the effective tax rate from 32.4% for the first quarterof  2003 to 31.6% for the first quarterof 2004 was attributable to an increase in nontaxable interest income.

 

**OFF-BALANCE SHEETARRANGEMENTS**

 

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

 

•                  the origination,purchase or sale of loans;

•                  the purchase ofinvestment securities;

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

•                  the commitmentto fund withdrawals of certificates of deposit at maturity.

 

At March 31, 2004, theBank’s off-balance sheet arrangements principally included lending commitments,which are described below.  AtMarch 31, 2004, the Company had no interests in non-consolidated specialpurpose entities.

 

At March 31, 2004,commitments included:

 

•                  total approvedloan origination commitments outstanding amounting to $30.5 million, including$10.5 million of loans committed to sell;

•                  rate lockagreements with customers of $10.5 million, all of which have been locked withan investor;

•                  funded mortgageloans committed to sell of $1.8 million;

•                  unadvancedportion of construction loans of $45.5 million;

•                  unused lines ofcredit of $20.0 million;

•                  outstandingstandby letters of credit of $1.7 million;

•                  totalpredetermined overdraft protection limits of $9.7 million; and

•                  certificates ofdeposit scheduled to mature in one year or less totaling $181.7 million.

 

Total unfunded commitments tooriginate loans for sale and the related commitments to sell of $10.5 millionmeet the definition of a derivative financial instrument.  The related asset and liability areconsidered immaterial at March 31, 2004.

 

Historically, a very smallpercentage of predetermined overdraft limits have been used.  At March 31, 2004, overdrafts ofaccounts with Bounce ProtectionTMrepresented usage of 1.7% of the limit. We expect utilization of these overdraft limits to remain at comparablelevels in the future.

 

17

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

 

### **LIQUIDITY AND CAPITAL RESOURCES**

 

TheBank’s liquidity, represented by cash and cash equivalents and eligibleinvestment securities, is a product of its operating, investing and financingactivities.  The Bank’s primary sourcesof funds are deposits, collections on outstanding loans, maturities and callsof investment securities and other short-term investments and funds providedfrom operations.  While scheduled loanamortization and maturing investment securities and short-term investments arerelatively predictable sources of funds, deposit flows and loan prepayments aregreatly influenced by general interest rates, economic conditions andcompetition.  The Bank manages thepricing of its deposits to maintain a steady deposit balance.  In addition, the Bank invests excess fundsin overnight deposits and other short-term interest-earning assets whichprovide liquidity to meet lending requirements.  The Bank has generally been able to generate enough cash throughthe retail deposit market, its traditional funding source, to offset the cashutilized in investing activities.  As anadditional source of funds, the Bank has borrowed from the FHLB of Dallas.  At March 31, 2004, available borrowingcapacity with the FHLB was in excess of $200 million.

 

Liquiditymanagement is both a daily and long-term function of business management.  Excess liquidity is generally invested inshort-term investments such as overnight deposits and certificates of deposit.  On a longer-term basis, the Bank maintains astrategy of investing in various lending products.  The Bank uses its sources of funds primarily to meet its ongoingcommitments, to pay maturing savings certificates and savings withdrawals, torepay maturing FHLB of Dallas advances, and to fund loan commitments.

 

Asof March 31, 2004, the Bank’s regulatory capital was in excess of allapplicable regulatory requirements.  At March 31,2004, the Bank’s tangible, core and risk-based capital ratios amounted to 10.44%,10.44% and 16.16%, respectively, compared to regulatory requirements of 1.5%, 4.0%and 8.0%, respectively.

 

### **IMPACT OF INFLATION AND CHANGING PRICES**

 

The financial statements andrelated financial data presented herein have been prepared in accordance withgenerally 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 to inflation.

 

Unlike mostindustrial companies, virtually all of the Bank’s assets and liabilities aremonetary in nature.  As a result,interest rates generally have a more significant impact on a financialinstitution’s performance than does the effect of inflation.

 

### **FORWARD-LOOKING STATEMENTS**

 

The Company’s Quarterly Reporton 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, thewords “anticipate”, “believe,” “estimate,”****“expect,”“intend,” “should” and similar expressions, or the negative thereof, as theyrelate to the 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 and assumptions.  Should one or more of these risks oruncertainties materialize or should underlying assumptions prove incorrect,actual results may vary materially from those described herein as anticipated,believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

 

18

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**QUANTITATIVE AND QUALITATIVE DISCLOSURES**

**ABOUT MARKET RISK**

 

For a discussion of theCompany’s asset and liability management policies as well as the potentialimpact of interest rate changes upon the market value of the Bank’s portfolioequity, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in the Company’s 2003 Annual Report toStockholders.  There has been no materialchange in the Company’s asset and liability position or the market value of theBank’s portfolio equity since December 31, 2003.

 

**CONTROLSAND PROCEDURES**

 

Our management evaluated, withthe participation of our Chief Executive Officer and Chief Financial Officer,the effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as ofthe end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and proceduresare designed to ensure that information required to be disclosed by us in thereports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and regulations and are operating in an effective manner.

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f)under the Securities Exchange Act of 1934) occurred during the most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

19

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

 

**PartII**

 

Item 1.            LegalProceedings

 

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

 

Item 2.            Changes in Securities, Use ofProceeds, and Issuer Purchases of Equity Securities

 

ISSUER PURCHASES OF EQUITYSECURITIES

 
|                                    |   | **(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** |    |
|-----------------------------------------|--------|----------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|---------|
|                                    |   |                                               |   |                                          |   |                                                                                                |   |                                                                                             |    |
| February 12 to  March 2, 2004 |   | 99,000                                             |   | $                                             | 20.66  |                                                                                                | 99,000 |                                                                                             | 148,034 |   |
|                                         |        |                                                    |        |                                               |        |                                                                                                     |        |                                                                                                  |         |  |

 

The Company isin its 15th announced repurchase program, which was approved by the board ofdirectors on March 21, 2003, and publicly announced on November 5,2003.  Total shares approved to bepurchased in this program are 262,476 (split adjusted), of which 114,442 havebeen purchased as of March 31, 2004. All treasury stock purchases are made under publicly announcedrepurchase programs.

 

Item 3.            DefaultsUpon Senior Securities

 

Not applicable.

 

Item 4.            Submission of Matters to a Vote ofSecurity Holders

 

Not applicable.

 

Item 5.            OtherInformation

 

None.

 

Item 6.            Exhibitsand Reports on Form 8-K

 

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

 

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

 

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

 

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

 

Reports on Form 8-K

On January 27, 2004, a Form 8-K was filed for the Company’sJanuary 26, 2004 press release that announced results of operations forthe quarter ended December 31, 2003.

 

On February 26, 2004, a Form 8-K was filed for the Company’sFebruary 26, 2004 press release that announced a quarterly cash dividendof $.10 per share.

 

20

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**SIGNATURES**

 

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

 

 
| **FIRST FEDERAL  BANCSHARES OF ARKANSAS, INC.** |
|-------------------------------------------------|
|                                            |   |
|                                            |   |
| Date: May 7, 2004                               | By: | /s/Larry J. Brandt |   |
|                                            |   |  Larry J. Brandt |
|                                            |   |  President/CEO |
|                                            |   |   |
|                                            |   |   |
| Date: May 7, 2004                               | By: | /s/Sherri R. Billings |   |
|                                            |   |  Sherri R. Billings |
|                                            |   |  EVP/CFO |

 

21

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