**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                         |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | **For the quarterly period ended September  30, 2007**                                                                                                                                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                 |
| **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 by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes    x    No o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer or a non-accelerated filer.

Largeaccelerated filer o      Acceleratedfiler x      Non-accelerated filer o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    o    No x

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:  As of October 25,2007, there were issued and outstanding 4,865,401 shares of the Registrant’sCommon Stock, par value $.01 per share.

 

 

----

 

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

 

**TABLE OF CONTENTS**

 
| **Part I.**    | ** ** | **Financial Information**                                                                                                                                   |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                        |
| Item 1.        |       | Consolidated Financial Statements                                                                                                                           |
|           |       |                                                                                                                                                        |
|           |       | Consolidated Statements of Financial  Condition as of September 30, 2007 and December 31, 2006 (unaudited)                                                  |
|           |       |                                                                                                                                                        |
|           |       | Consolidated Statements of Income for the  three and nine months ended September 30, 2007 and 2006 (unaudited)                                              |
|           |       |                                                                                                                                                        |
|           |       | Consolidated Statement of Stockholders’  Equity for the nine months ended September 30, 2007 (unaudited)                                               |
|           |       |                                                                                                                                                        |
|           |       | Consolidated Statements of Cash Flows for  the nine months ended September 30, 2007 and 2006 (unaudited)                                                    |
|           |       |                                                                                                                                                        |
|           |       | Notes to Unaudited Consolidated Financial  Statements                                                                                                       |
|           |       |                                                                                                                                                        |
| Item 2.        |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                 |
|           |       |                                                                                                                                                        |
| Item 3.        |       | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                 |
|           |       |                                                                                                                                                        |
| Item 4.        |       | Controls and Procedures                                                                                                                                     |
|           |       |                                                                                                                                                        |
| **Part II.**   | ** ** | **Other  Information**                                                                                                                                      |
|           |       |                                                                                                                                                        |
| Item 1.        |       | Legal Proceedings                                                                                                                                           |
| Item 1A.       |       | Risk Factors                                                                                                                                                |
| Item 2.        |       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                |
| Item 3.        |       | Defaults Upon Senior Securities                                                                                                                             |
| Item 4.        |       | Submission of Matters to a Vote of Security  Holders                                                                                                        |
| Item 5.        |       | Other Information                                                                                                                                           |
| Item 6.        |       | Exhibits                                                                                                                                                    |
|           |       |                                                                                                                                                        |
| **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                                                                                                                        |

 

----

 

**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

(In thousands, except share data)

(Unaudited)

 
| ** **                                                                                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ASSETS                                                                                                                                                                                        |       |                   |       |                  |       |
|                                                                                                                                                                                          |       |                   |       |                  |       |
| Cash and  cash equivalents                                                                                                                                                                    |       | $                      | 27,869     |                  | $          | 35,518 |   |
| Investment  securities held to maturity                                                                                                                                                       |       | 84,998                 |       | 60,746                |       |
| Federal Home  Loan Bank stock                                                                                                                                                                 |       | 4,376                  |       | 7,089                 |       |
| Loans  receivable, net                                                                                                                                                                        |       | 619,239                |       | 693,095               |       |
| Accrued  interest receivable                                                                                                                                                                  |       | 9,958                  |       | 9,999                 |       |
| Real estate  owned, net                                                                                                                                                                       |       | 8,848                  |       | 3,858                 |       |
| Office  properties and equipment, net                                                                                                                                                         |       | 20,856                 |       | 20,384                |       |
| Cash  surrender value of life insurance                                                                                                                                                       |       | 19,962                 |       | 19,396                |       |
| Prepaid  expenses and other assets                                                                                                                                                            |       | 1,687                  |       | 2,390                 |       |
|                                                                                                                                                                                          |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                  |       | $                      | 797,793    |                  | $          | 852,475 |   |
|                                                                                                                                                                                          |       |                   |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                                                          |       |                   |       |                  |       |
| LIABILITIES:                                                                                                                                                                                  |       |                   |       |                  |       |
| Deposits                                                                                                                                                                                      |       | $                      | 640,903    |                  | $          | 652,265 |   |
| Federal Home  Loan Bank advances                                                                                                                                                              |       | 79,749                 |       | 120,305               |       |
| Advance  payments by borrowers for taxes and insurance                                                                                                                                        |       | 525                    |       | 666                   |       |
| Other  liabilities                                                                                                                                                                            |       | 2,521                  |       | 3,666                 |       |
| Total  liabilities                                                                                                                                                                            |       | 723,698                |       | 776,902               |       |
|                                                                                                                                                                                          |       |                   |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                   |       |                   |       |                  |       |
| Preferred  stock, no par value, 5,000,000 shares authorized, none issued                                                                                                                      |       |                   |       |                  |       |
| Common  stock, $.01 par value, 20,000,000 shares authorized, 10,307,502 shares issued,  4,865,401 and 4,838,962 shares outstanding at September 30, 2007 and December  31, 2006, respectively |       | 103                    |       | 103                   |       |
| Additional  paid-in capital                                                                                                                                                                   |       | 56,650                 |       | 56,617                |       |
| Employee  stock benefit plans                                                                                                                                                                 |       | (48                    | )          | (72                   | )          |
| Retained  earnings-substantially restricted                                                                                                                                                   |       | 87,726                 |       | 88,068                |       |
|                                                                                                                                                                                          |       | 144,431                |       | 144,716               |       |
| Treasury  stock, at cost, 5,442,101 and 5,468,540 shares at September 30, 2007 and  December 31, 2006, respectively                                                                           |       | (70,336                | )          | (69,143               | )          |
| Total  stockholders’ equity                                                                                                                                                              |       | 74,095                 |       | 75,573                |       |
|                                                                                                                                                                                          |       |                   |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                              |       | $                      | 797,793    |                  | $          | 852,475 |   |

 

See notes to unaudited consolidated financialstatements.

 

1

----

 

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

**CONSOLIDATEDSTATEMENTS OF INCOME**

(In thousands, except share data)

(Unaudited)

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| INTEREST  INCOME:                                    |       |                             |       |                            |       |   |   |   |   |
| Loans  receivable                                    |       | $                                | 11,020     |                            | $          | 12,627 |   | $ | 35,225 |   | $ | 37,703 |   |
| Investment  securities:                              |       |                             |       |                            |       |   |   |   |   |
| Taxable                                              |       | 952                              |       | 650                             |       | 2,319 |   | 1,853 |   |
| Nontaxable                                           |       | 177                              |       | 185                             |       | 537 |   | 558 |   |
| Other                                                |       | 232                              |       | 219                             |       | 722 |   | 393 |   |
| Total  interest income                               |       | 12,381                           |       | 13,681                          |       | 38,803 |   | 40,507 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| INTEREST  EXPENSE:                                   |       |                             |       |                            |       |   |   |   |   |
| Deposits                                             |       | 6,099                            |       | 5,449                           |       | 17,991 |   | 14,819 |   |
| Federal Home  Loan Bank advances                     |       | 987                              |       | 1,858                           |       | 3,353 |   | 5,378 |   |
| Total  interest expense                              |       | 7,086                            |       | 7,307                           |       | 21,344 |   | 20,197 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| NET INTEREST  INCOME                                 |       | 5,295                            |       | 6,374                           |       | 17,459 |   | 20,310 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| PROVISION  FOR LOAN LOSSES                           |       | 1,330                            |       | 484                             |       | 3,662 |   | 1,128 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES |       | 3,965                            |       | 5,890                           |       | 13,797 |   | 19,182 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| NONINTEREST  INCOME:                                 |       |                             |       |                            |       |   |   |   |   |
| Deposit fee  income                                  |       | 1,235                            |       | 1,264                           |       | 3,661 |   | 3,579 |   |
| Earnings on  life insurance policies                 |       | 194                              |       | 187                             |       | 566 |   | 556 |   |
| Gain on sale  of loans                               |       | 201                              |       | 310                             |       | 664 |   | 841 |   |
| Other                                                |       | 365                              |       | 252                             |       | 924 |   | 1,356 |   |
| Total  noninterest income                            |       | 1,995                            |       | 2,013                           |       | 5,815 |   | 6,332 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| NONINTEREST  EXPENSES:                               |       |                             |       |                            |       |   |   |   |   |
| Salaries and  employee benefits                      |       | 3,287                            |       | 3,195                           |       | 10,016 |   | 10,174 |   |
| Net  occupancy expense                               |       | 560                              |       | 613                             |       | 1,752 |   | 1,784 |   |
| Real estate  owned, net                              |       | 543                              |       | 62                              |       | 826 |   | 41 |   |
| Data  processing                                     |       | 339                              |       | 341                             |       | 1,143 |   | 1,100 |   |
| Professional  fees                                   |       | 119                              |       | 93                              |       | 401 |   | 288 |   |
| Advertising  and public relations                    |       | 239                              |       | 342                             |       | 849 |   | 971 |   |
| Postage and  supplies                                |       | 187                              |       | 188                             |       | 646 |   | 616 |   |
| Other                                                |       | 535                              |       | 615                             |       | 1,701 |   | 1,793 |   |
| Total  noninterest expenses                          |       | 5,809                            |       | 5,449                           |       | 17,334 |   | 16,767 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| INCOME  BEFORE INCOME TAXES                          |       | 151                              |       | 2,454                           |       | 2,278 |   | 8,747 |   |
| INCOME TAX  PROVISION (BENEFIT)                      |       | (150                             | )          | 754                             |       | 284 |   | 2,787 |   |
| NET INCOME                                           |       | $                                | 301        |                            | $          | 1,700 |   | $ | 1,994 |   | $ | 5,960 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| EARNINGS PER  SHARE:                                 |       |                             |       |                            |       |   |   |   |   |
| Basic                                                |       | $                                | 0.06       |                            | $          | 0.34 |   | $ | 0.41 |   | $ | 1.19 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Diluted                                              |       | $                                | 0.06       |                            | $          | 0.33 |   | $ | 0.41 |   | $ | 1.16 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Cash  Dividends Declared                             |       | $                                | 0.16       |                            | $          | 0.15 |   | $ | 0.48 |   | $ | 0.43 |   |

 

See notes to unaudited consolidated financial statements.

 

2

----

 

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

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2007**

(In thousands, except share data)

(Unaudited)

 
| ** **                                                 | ** ** | **Issued  Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Employee  Stock  Benefit** | ** ** | **Retained** | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|------------------------------|------------|--------------|------------|
| ** **                                                 | ** ** | **Shares**                    | ** ** | **Amount**              | ** ** | **Capital**                  | ** ** | **Plans**    | ** ** | **Earnings** | ** ** |
|                                                       |       |                          |       |                    |       |                         |       |         |       |   |   |
| Balance,  January 1, 2007                                  |       | 10,307,502                    |       | $                       | 103        |                         | $          | 56,617       |       | $ | (72 | ) | $ | 88,068 |   |
| Net income                                                 |       |                          |       |                    |       |                         |       |         |       | 1,994 |   |
| Tax effect  of stock compensation plan                     |       |                          |       |                    |       | 480                          |       |         |       |   |   |
| Treasury  shares reissued due to exercise of stock options |       |                          |       |                    |       | (454                         | )          |         |       |   |   |
| Purchase of  treasury stock, at cost                       |       |                          |       |                    |       |                         |       |         |       |   |   |
| Stock  compensation expense                                |       |                          |       |                    |       | 7                            |       | 24           |       |   |   |
| Dividends  paid                                            |       |                          |       |                    |       |                         |       |         |       | (2,336 | ) |
|                                                       |       |                          |       |                    |       |                         |       |         |       |   |   |
| Balance,  September 30, 2007                               |       | 10,307,502                    |       | $                       | 103        |                         | $          | 56,650       |       | $ | (48 | ) | $ | 87,726 |   |

 
| ** **                                                 | ** ** | **Treasury Stock** | ** ** | **Total  Stockholders’** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|------------|------------|------------|------------|
| ** **                                                 | ** ** | **Shares**              | ** ** | **Amount**                    | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                       |       |                    |       |                          |       |       |       |       |       |   |   |
| Balance,  January 1, 2007                                  |       | 5,468,540               |       | $                             | (69,143    | )          | $          | 75,573     |       |   |   |   |   |
| Net income                                                 |       |                    |       |                          |       | 1,994      |       |       |       |   |   |
| Tax effect  of stock compensation plan                     |       |                    |       |                          |       | 480        |       |       |       |   |   |
| Treasury  shares reissued due to exercise of stock options |       | (106,965                | )          | 804                           |       | 350        |       |       |       |   |   |
| Purchase of  treasury stock, at cost                       |       | 80,526                  |       | (1,997                        | )          | (1,997     | )          |       |       |   |   |
| Stock  compensation expense                                |       |                    |       |                          |       | 31         |       |       |       |   |   |
| Dividends  paid                                            |       |                    |       |                          |       | (2,336     | )          |       |       |   |   |
|                                                       |       |                    |       |                          |       |       |       |       |       |   |   |
| Balance,  September 30, 2007                               |       | 5,442,101               |       | $                             | (70,336    | )          | $          | 74,095     |       |   |   |   |   |

 

See notes to unaudited consolidated financialstatements.

 

3

----

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                                                                               |       |                                                    |       |   |   |
| OPERATING  ACTIVITIES:                                                             |       |                                                    |       |   |   |
| Net income                                                                         |       | $                                                       | 1,994      |   | $ | 5,960 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                                    |       |   |   |
| Provision  for loan losses                                                         |       | 3,662                                                   |       | 1,128 |   |
| Provision  for real estate losses                                                  |       | 390                                                     |       | — |   |
| Deferred tax  (benefit) provision                                                  |       | (1,516                                                  | )          | 9 |   |
| Accretion of  discounts on investment securities, net                              |       | (14                                                     | )          | (5 | ) |
| Federal Home  Loan Bank stock dividends                                            |       | (246                                                    | )          | (294 | ) |
| Gain on disposition  of office properties and equipment                            |       | (4                                                      | )          | (233 | ) |
| Loss (gain)  on sale of repossessed assets, net                                    |       | 97                                                      |       | (43 | ) |
| Originations  of loans held for sale                                               |       | (48,077                                                 | )          | (52,436 | ) |
| Proceeds  from sales of loans held for sale                                        |       | 47,787                                                  |       | 53,518 |   |
| Gain on sale  of loans originated to sell                                          |       | (664                                                    | )          | (841 | ) |
| Depreciation                                                                       |       | 1,047                                                   |       | 966 |   |
| Amortization  of deferred loan costs, net                                          |       | 334                                                     |       | 192 |   |
| Release of  ESOP shares                                                            |       | —                                                  |       | 511 |   |
| Stock  compensation expense                                                        |       | 31                                                      |       | 66 |   |
| Earnings on  life insurance policies                                               |       | (566                                                    | )          | (556 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                                    |       |   |   |
| Accrued  interest receivable                                                       |       | 41                                                      |       | (2,521 | ) |
| Prepaid  expenses and other assets                                                 |       | 693                                                     |       | 187 |   |
| Other  liabilities                                                                 |       | 691                                                     |       | (255 | ) |
| Net cash  provided by operating activities                                         |       | 5,680                                                   |       | 5,353 |   |
|                                                                               |       |                                                    |       |   |   |
| INVESTING  ACTIVITIES:                                                             |       |                                                    |       |   |   |
| Purchases of  investment securities held to maturity                               |       | (29,118                                                 | )          | (6,445 | ) |
| Proceeds  from maturities/calls of investment securities held to maturity          |       | 5,050                                                   |       | 2,290 |   |
| Federal Home  Loan Bank stock redeemed                                             |       | 2,959                                                   |       | 377 |   |
| Loan  participations purchased                                                     |       | (2,552                                                  | )          | — |   |
| Loan  participations sold                                                          |       | 7,208                                                   |       | 3,419 |   |
| Net loan  (originations) repayments                                                |       | 57,871                                                  |       | (5,964 | ) |
| Proceeds  from sales of repossessed assets                                         |       | 3,389                                                   |       | 2,775 |   |
| Improvements  to real estate owned                                                 |       | (579                                                    | )          | — |   |
| Proceeds  from sales of office properties and equipment                            |       | 10                                                      |       | 251 |   |
| Purchases of  office properties and equipment                                      |       | (1,525                                                  | )          | (1,971 | ) |
| Net cash  provided by (used in) investing activities                               |       | 42,713                                                  |       | (5,268 | ) |
|                                                                               |       |                                                    |       |   |   |
| FINANCING  ACTIVITIES:                                                             |       |                                                    |       |   |   |
| Net increase  (decrease) in deposits                                               |       | (11,362                                                 | )          | 29,933 |   |
| Advances  from FHLB                                                                |       | 9,700                                                   |       | 55,000 |   |
| Repayment of  advances from FHLB                                                   |       | (50,256                                                 | )          | (69,208 | ) |
| Net decrease  in advance payments by borrowers for taxes and insurance             |       | (141                                                    | )          | (319 | ) |
| Purchase of  treasury stock                                                        |       | (1,997                                                  | )          | (4,667 | ) |
| Reissued  treasury stock                                                           |       | 350                                                     |       | 906 |   |
| Dividends  paid                                                                    |       | (2,336                                                  | )          | (2,168 | ) |
| Net cash  provided by (used in) financing activities                               |       | (56,042                                                 | )          | 9,477 |   |
|                                                                               |       |                                                    |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | (7,649                                                  | )          | 9,562 |   |
|                                                                                    |            |                                                         |            |  |  |  |  |

 

4

----

 
| ** **                                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                                                                           |       |                                                    |       |   |   |
| CASH AND  CASH EQUIVALENTS:                                                    |       |                                                    |       |   |   |
| Beginning of  period                                                           |       | $                                                       | 35,518     |   | $ | 21,109 |   |
| End of  period                                                                 |       | $                                                       | 27,869     |   | $ | 30,671 |   |
|                                                                           |       |                                                    |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                            |       |                                                    |       |   |   |
| Cash paid  for:                                                                |       |                                                    |       |   |   |
| Interest                                                                       |       | $                                                       | 21,515     |   | $ | 19,820 |   |
| Income taxes                                                                   |       | $                                                       | 951        |   | $ | 2,625 |   |
|                                                                           |       |                                                    |       |   |   |
| SUPPLEMENTAL  SCHEDULE OF NONCASH INVESTING ACTIVITIES:                        |       |                                                    |       |   |   |
| Real estate  and other assets acquired in settlement of loans                  |       | $                                                       | 9,297      |   | $ | 3,529 |   |
| Loans to  facilitate sales of real estate owned                                |       | $                                                       | 1,010      |   | $ | — |   |
| Investment  securities traded, recorded in investments not yet settled in cash |       | $                                                       | 170        |   | $ | — |   |

 

See notes to unaudited consolidated financialstatements.

 

5

----

 

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

 

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 -Basis of Presentation and Principles of Consolidation**

 

First Federal Bancshares of Arkansas, Inc.(the “Company”) is a unitary holding company which owns all of the stock ofFirst Federal Bank (the “Bank”). The Bank provides a broad line of financialproducts to individuals and small- to medium-sized businesses. The unauditedconsolidated financial statements also include the accounts of the Bank’s wholly-ownedsubsidiary, 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 theinformation and footnotes required by generally accepted accounting principlesfor 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. Allmaterial intercompany transactions have been eliminated in consolidation.

 

The results of operations for thenine months ended September 30, 2007, are not necessarily indicative of theresults to be expected for the year ending December 31, 2007. The unauditedconsolidated financial statements and notes thereto should be read inconjunction with the audited financial statements and notes thereto for theyear ended December 31, 2006, contained in the Company’s 2006 AnnualReport to Stockholders.

 

Certain amounts in the September 30, 2006,unaudited consolidated financial statements have been reclassified to conformto the classifications adopted for reporting in 2007.

 

# **Note 2 – Recently Adopted Accounting Standard**

 

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

 

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

 

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

 

**Note 3 – Accounting Standards Issued Not Yet Effective**

** **

In September 2006, the FASBissued SFAS No. 157, *Fair Value Measurements*.SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosures regarding fair value measurements. The statementapplies whenever other standards require or permit that assets or liabilitiesbe measured at fair value. The statement does not require new fair valuemeasurements, but rather provides a definition and framework for measuring fairvalue which will result in greater consistency and comparability amongfinancial statements prepared under accounting principles generally accepted inthe United States of America. The statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007. TheCompany has not yet completed its assessment of the impact of SFAS No. 157.

 

In February 2007, the FASB issued SFAS No.159, *The Fair Value Option for FinancialAssets and Financial Liabilities – Including an amendment of FASB Statement No.115.* SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value at specified

 

6

----

 

election dates. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. The Company has not yetcompleted its assessment of the impact of SFAS No. 159.

 

**Note 4 - Earnings per Share**

 

The weighted average number of common sharesused to calculate earnings per share for the periods ended September 30, 2007and 2006 were as follows:

 
| ** **                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Basic  weighted - average shares   |       | 4,865,007                                            |       | 5,006,730                                           |       | 4,867,729 |   | 5,021,110 |   |
| Effect of  dilutive securities     |       | 7,700                                                |       | 111,206                                             |       | 20,243 |   | 124,131 |   |
| Diluted  weighted - average shares |       | 4,872,707                                            |       | 5,117,936                                           |       | 4,887,972 |   | 5,145,241 |   |

 

**Note 5 – Allowances for Loan and Real Estate Losses**

 

A summary of the activity in the allowancesfor loan and real estate losses is as follows for the periods ended September30 (in thousands):

 
| ** **                        | ** ** | **Three Months Ended  September 30,****2007** | ** ** | **Three Months Ended  September 30,****2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                        | ** ** | **Loans**                                                    | ** ** | **Real Estate**                                         | ** ** | **Loans** | ** ** | **Real Estate** | ** ** |
|                              |       |                                                         |       |                                                         |       |   |   |   |   |
| Balance—beginning  of period |       | $                                                            | 4,291      |                                                         | $          | — |   | $ | 2,448 |   | $ | — |   |
|                              |       |                                                         |       |                                                         |       |   |   |   |   |
| Provisions  for estimated losses  |       | 1,330                                                        |       | 312                                                          |       | 484 |   | 7 |   |
| Recoveries                        |       | 43                                                           |       | —                                                       |       | 55 |   | — |   |
| Losses  charged off               |       | (628                                                         | )          | (312                                                         | )          | (556 | ) | (7 | ) |
|                              |       |                                                         |       |                                                         |       |   |   |   |   |
| Balance—end  of period       |       | $                                                            | 5,036      |                                                         | $          | — |   | $ | 2,431 |   | $ | — |   |

 
| ** **                        | ** ** | **Nine Months Ended  September 30,  2007** | ** ** | **Nine Months Ended  September 30,  2006** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                        | ** ** | **Loans**                                                 | ** ** | **Real Estate**                                      | ** ** | **Loans** | ** ** | **Real Estate** | ** ** |
|                              |       |                                                      |       |                                                      |       |   |   |   |   |
| Balance—beginning  of period |       | $                                                         | 2,572      |                                                      | $          | — |   | $ | 2,114 |   | $ | — |   |
|                              |       |                                                      |       |                                                      |       |   |   |   |   |
| Provisions  for estimated losses  |       | 3,662                                                     |       | 390                                                       |       | 1,128 |   | 7 |   |
| Recoveries                        |       | 132                                                       |       | —                                                    |       | 139 |   | — |   |
| Losses  charged off               |       | (1,330                                                    | )          | (390                                                      | )          | (950 | ) | (7 | ) |
|                              |       |                                                      |       |                                                      |       |   |   |   |   |
| Balance—end  of period       |       | $                                                         | 5,036      |                                                      | $          | — |   | $ | 2,431 |   | $ | — |   |

 

The allowance for loan losses increasedbetween the periods listed above primarily due to specific loan loss allowanceson two subdivisions totaling $2.2 million recorded during the nine months endedSeptember 30, 2007.

 

7

----

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

### **CRITICAL ACCOUNTING POLICIES**

### ** **

Variouselements of our accounting policies, by their nature, are inherently subject toestimation techniques, valuation assumptions and other subjective assessments. Inparticular, the methodology for the determination of our allowance for loan losses,due to the judgments, estimates and assumptions inherent in that policy, iscritical to preparation of our financial statements. This policy and thejudgments, estimates and assumptions are described in greater detail insubsequent sections of Management’s Discussion and Analysis and in the notes tothe unaudited financial statements included herein. We believe that thejudgments, estimates and assumptions used in the preparation of our financialstatements are appropriate given the factual circumstances at the time. However,given the sensitivity of our financial statements to this critical accountingpolicy, the use of other judgments, estimates and assumptions could result inmaterial differences in our financial condition or results of operations.

 

Inestimating the amount of credit losses inherent in our loan portfolio, variousjudgments and assumptions are made. For example, when assessing the conditionof the overall economic environment, data is collected regarding current marketconditions and their impact on the loan portfolio. Loss factors have beenrevised as a result of the downturn in the housing market, specifically theoversupply of speculative single-family homes and lots in our market area. Ifthe housing market sustains a prolonged downturn, the loss factors applied toour portfolios may need to be further revised, which may significantly impactthe measurement of the allowance for loan losses. For impaired loans that arecollateral-dependent, the estimated fair value of the collateral may deviatesignificantly from the proceeds received when the collateral is sold in theevent that the Bank has to foreclose or repossess the collateral.

 

## **CHANGESIN FINANCIAL CONDITION**

##  

Changesin financial condition between September 30, 2007 and December 31, 2006 arepresented in the following table (dollars in thousands). Material changesbetween the periods are discussed in the sections which follow the table.

 
| ** **                                     | ** ** | **September ****30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **Percentage** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|
| ** **                                     | ** ** | **2007**                   | ** ** | **2006**              | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| **ASSETS**                                     |       |                       |       |                  |       |           |       |           |       |
| Cash and  cash equivalents                     |       | $                          | 27,869     |                  | $          | 35,518         |       | $              | (7,649     | ) | (21.5 | )% |
| Investment  securities held to maturity        |       | 84,998                     |       | 60,746                |       | 24,252         |       | 39.9           |       |
| Federal Home  Loan Bank stock                  |       | 4,376                      |       | 7,089                 |       | (2,713         | )          | (38.3          | )          |
| Loans  receivable, net                         |       | 619,239                    |       | 693,095               |       | (73,856        | )          | (10.7          | )          |
| Real estate  owned, net                        |       | 8,848                      |       | 3,858                 |       | 4,990          |       | 129.3          |       |
| Other assets                                   |       | 52,463                     |       | 52,169                |       | 294            |       | 0.1            |       |
|                                           |       |                       |       |                  |       |           |       |           |       |
| TOTAL                                          |       | $                          | 797,793    |                  | $          | 852,475        |       | $              | (54,682    | ) | (6.4 | )% |
|                                           |       |                       |       |                  |       |           |       |           |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY** |       |                       |       |                  |       |           |       |           |       |
| LIABILITIES:                                   |       |                       |       |                  |       |           |       |           |       |
| Deposits                                       |       | $                          | 640,903    |                  | $          | 652,265        |       | $              | (11,362    | ) | (1.7 | )% |
| Federal Home  Loan Bank advances               |       | 79,749                     |       | 120,305               |       | (40,556        | )          | (33.7          | )          |
| Other  liabilities                             |       | 3,046                      |       | 4,332                 |       | (1,286         | )          | (29.7          | )          |
|                                           |       |                       |       |                  |       |           |       |           |       |
| Total  liabilities                             |       | 723,698                    |       | 776,902               |       | (53,204        | )          | (6.9           | )          |
|                                           |       |                       |       |                  |       |           |       |           |       |
| STOCKHOLDERS’  EQUITY                     |       | 74,095                     |       | 75,573                |       | (1,478         | )          | (2.0           | )          |
|                                           |       |                       |       |                  |       |           |       |           |       |
| TOTAL                                          |       | $                          | 797,793    |                  | $          | 852,475        |       | $              | (54,682    | ) | (6.4 | )% |
|                                           |       |                       |       |                  |       |           |       |           |       |
| BOOK VALUE  PER SHARE                          |       | $                          | 15.23      |                  | $          | 15.62          |       |           |       |   |   |
|                                           |       |                       |       |                  |       |           |       |           |       |
| EQUITY TO  ASSETS                              |       | 9.3                        | %          | 8.9                   | %          |           |       |           |       |

 

8

----

 

**Loans Receivable.**Changes in loan composition between September 30,2007 and December 31, 2006 are presented in the following table (dollars inthousands).

 
| ** **                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | ** **        | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2007**               | ** ** | **2006**              | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
|                                             |       |                   |       |                  |       |           |       |              |       |
| One- to  four-family residences                  |       | $                      | 237,304    |                  | $          | 257,978        |       | $                 | (20,674    | ) | (8.0 | )% |
| Home equity  lines of credit and second mortgage |       | 34,680                 |       | 34,971                |       | (291           | )          | (0.8              | )          |
| Multi-family                                     |       | 12,585                 |       | 12,203                |       | 382            |       | 3.1               |       |
| Commercial  real estate                          |       | 129,791                |       | 133,647               |       | (3,856         | )          | (2.9              | )          |
| Land                                             |       | 43,605                 |       | 48,737                |       | (5,132         | )          | (10.5             | )          |
| Construction:                                    |       |                   |       |                  |       |           |       |              |       |
| One- to  four-family residences                  |       | 21,851                 |       | 32,036                |       | (10,185        | )          | (31.8             | )          |
| Speculative  one- to four-family residences      |       | 46,281                 |       | 80,311                |       | (34,030        | )          | (42.4             | )          |
| Multi-family                                     |       | 17,292                 |       | 14,120                |       | 3,172          |       | 22.5              |       |
| Commercial  real estate                          |       | 31,857                 |       | 21,896                |       | 9,961          |       | 45.5              |       |
| Land development                                 |       | 43,941                 |       | 47,439                |       | (3,498         | )          | (7.4              | )          |
| Total  mortgage loans                            |       | 619,187                |       | 683,338               |       | (64,151        | )          | (9.4              | )          |
|                                             |       |                   |       |                  |       |           |       |              |       |
| Commercial                                       |       | 22,128                 |       | 26,355                |       | (4,227         | )          | (16.0             | )          |
|                                             |       |                   |       |                  |       |           |       |              |       |
| Automobile                                       |       | 10,431                 |       | 12,210                |       | (1,779         | )          | (14.6             | )          |
| Other                                            |       | 13,978                 |       | 13,690                |       | 288            |       | 2.1               |       |
| Total  consumer                                  |       | 24,409                 |       | 25,900                |       | (1,491         | )          | (5.8              | )          |
|                                             |       |                   |       |                  |       |           |       |              |       |
| Total loans  receivable                          |       | 665,724                |       | 735,593               |       | (69,869        | )          | (9.5              | )          |
|                                             |       |                   |       |                  |       |           |       |              |       |
| Undisbursed  loan funds                          |       | (41,704                | )          | (40,069               | )          | (1,635         | )          | 4.1               |       |
| Deferred  loan costs – net                  |       | 255                    |       | 143                   |       | 112            |       | 78.3              |       |
| Allowance  for loan losses                       |       | (5,036                 | )          | (2,572                | )          | (2,464         | )          | 95.8              |       |
|                                             |       |                   |       |                  |       |           |       |              |       |
| Loans  receivable, net                           |       | $                      | 619,239    |                  | $          | 693,095        |       | $                 | (73,856    | ) | (10.7 | )% |

 

The decrease in the Bank’s loanportfolio was primarily due to a softening of the housing market in NorthwestArkansas. Market data indicates an overall decrease in home sales in Benton andWashington counties in 2007 and 2006 compared to 2005. The Bank’s loanoriginations were down 41% for the nine months ended September 30, 2007,compared to the same period in 2006. Although the economy in the NorthwestArkansas region continues to be strong as reflected in sustained job andpopulation growth, the supply of new residential lots and new speculative homesfor sale has outpaced demand during the last few years.

 

Several years ago, the Bank began toemphasize commercial real estate lending, construction lending, and commerciallending to diversify its loan portfolio, take advantage of market opportunitiesin these types of loans, and help the Bank transition to a more full-servicecommunity bank, as well as to provide opportunities to cross-sell its otherbanking products. Although the Bank plans to continue this emphasis, the volumeof such lending will continue to be subject to the economic and marketconditions discussed above and the availability of prudent lendingopportunities.

 

9

----

 

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

 
| ** **                                                                                               | ** ** | **September 30,  2007**         | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                               | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual  loans:                                                                                       |       |                                 |       |                        |       |
| One- to  four-family residential                                                                         |       | $                                    | 5,998      |                        | $          | 3,689 |   |
| Home equity                                                                                              | ** ** | 1,019                                |       | 994                         |       |
| Speculative  one- to four-family construction                                                            | ** ** | 3,625                                |       | 5,417                       |       |
| Acquisition  and development                                                                             | ** ** | 7,776                                |       | 5,324                       |       |
| Land                                                                                                     | ** ** | 532                                  |       | 1,372                       |       |
| Commercial  real estate                                                                                  |       | 3,281                                |       | 738                         |       |
| Commercial  loans                                                                                        |       | 539                                  |       | 1,268                       |       |
| Consumer  loans                                                                                          |       | 227                                  |       | 213                         |       |
| Total  nonaccrual loans                                                                                  |       | 22,997                               |       | 19,015                      |       |
|                                                                                                     |       |                                 |       |                        |       |
| Accruing  loans 90 days or more past due                                                                 |       | 4,892                                |       | 668                         |       |
| Real estate  owned                                                                                       |       | 8,848                                |       | 3,858                       |       |
|                                                                                                     |       |                                 |       |                        |       |
| Total  nonperforming assets                                                                              |       | $                                    | 36,737     |                        | $          | 23,541 |   |
|                                                                                                     |       |                                 |       |                        |       |
| Total  nonaccrual and accruing loans 90 days or more past due as a percentage of  total loans receivable |       | 4.19                                 | %          | 2.68                        | %          |
|                                                                                                     |       |                                 |       |                        |       |
| Total  nonperforming assets as a percentage of total assets                                              |       | 4.60                                 | %          | 2.76                        | %          |

 

The increase in nonaccrualloans is primarily related to increases in nonaccrual commercial real estateloans and nonaccrual acquisition and development loans, offset by decreases innonaccrual land loans and nonaccrual commercial loans. The Northwest Arkansasmarket continues to experience an oversupply of lots and speculative homes.Certain of the Bank’s homebuilders are experiencing extended marketing timesfor the sale of their homes which has resulted in inadequate cash flow toservice the interest carry on their loans. The specific loan loss allowancerelated to loans to builders and developers was approximately $2.5 million atSeptember 30, 2007.

 

The level of nonaccrual speculativeconstruction loans, acquisition and development loans and commercial realestate loans is attributable primarily to four loan relationships. Theserelationships are described in more detail in the paragraphs that follow.

 

The first relationship totaled $5.9 millionat September30, 2007, and is comprised of two subdivision loans totaling $5.4 millionand the borrower’s primary residence totaling approximately $520,000. Foreclosureproceedings have begun on the subdivision and the borrower has filed forbankruptcy protection. The subdivision loans represent two phases of the samesubdivision located in Lowell, Arkansas, one of which is complete and the otheris approximately 10% complete. At December 31, 2006, we estimated no loss onthe subdivision based on estimated sales prices of the lots and the estimatedcosts to complete the incomplete phase of the subdivision. Since that time,market conditions have deteriorated and a subdivision across the street fromthis subdivision has gone into default. We are aware that the financialinstitution in that case is trying to liquidate the lots quickly at adiscounted price, which has in turn decreased the value of the lots in oursubdivision. As a result, we obtained new appraisals on both phases of oursubdivision which used discounted cash flow analysis for the complete phase,given the extended selling period that would be necessary to recover our costs,and a land only valuation on the incomplete phase given the decreasinglikelihood that we would develop these lots. The new appraisals resulted in aspecific loan loss allowance totaling $1.4 million on this subdivision whichwas recorded in the first quarter of 2007. These subdivision loans are also thesubject of litigation alleging fraud and negligence, among other complaints,that the Bank has filed against various parties to the loan. The Bank may beable to recover some of its loss through this litigation, although at this timethe Bank cannot give any assurances as to the amount of a recovery, if any. Dueto the nature of these

 

10

----

 

loans, the uncertain nature of the legalprocess, and the possibility of continued adverse changes in market conditions,we may incur losses in the future in excess of the amount estimated as of September 30, 2007.

 

The second relationship totaled $2.2 millionat September 30, 2007, and is comprised of a subdivision located in CaveSprings, Arkansas. The subdivision is 100% complete. The Bank obtained anupdated valuation on the subdivision using discounted cash flow analysis. Dueto the market conditions and the oversupply of lots in Northwest Arkansas, thevaluation indicated lower lot prices and extended marketing time over that inthe original appraisal obtained when the loan was originated. Based on theestimated fair value of the collateral, a specific loan loss allowance totaling$865,000 was recorded during the third quarter of 2007. Based on the nature ofthis loan and the possibility of continued adverse changes in the marketconditions, we may incur losses in the future in excess of the amount estimatedas of September 30, 2007.

 

The third relationship totaled $2.4 millionat September 30, 2007, and is comprised of $840,000 of speculativesingle-family construction loans on two properties, a $560,000 single-familyconstruction loan, approximately $390,000 of land and lot loans, approximately$280,000 of commercial loans and the borrower’s primary residence totaling$350,000. All of the real estate loans are in foreclosure. The commercial loansconsist of a fully reserved unsecured loan of approximately $75,000, and juniorliens on the lots and speculative homes totaling approximately $205,000, withan estimated loss allowance of $80,000. Additionally, there is an approximate$10,000 loss allowance on the land and lot loans. Based on factors such as thecomplexity of this relationship, the difficulty in estimating completion costs,and potential adverse changes in market conditions, we may incur losses in thefuture in excess of the amount estimated at September 30, 2007.

 

The fourth relationship totaled $2.6 millionat September30, 2007, and is comprised of loans to construct a shopping center. Theshopping center construction loan matured in March and during the secondquarter the borrower indicated he would be unable to pay the interest due inorder to extend the construction loan. The Bank obtained an updated appraisalon the shopping center and based on the appraised amount, principal balanceoutstanding, and an estimate of costs to complete the construction of theshopping center, the Bank currently estimates no loss on the shopping centerloans. The Bank intends to complete construction of the property and hold it asBank-owned property. The Bank plans to occupy approximately 25% of the spacewith a branch and lease the rest to other tenants.

 

Accruing loans 90 days or more past due atSeptember 30, 2007, consisted of three loans to two borrowers. The firstrelationship consisted of two loans totaling $2.8 million secured by theborrower’s primary residence, commercial real estate, franchise rights,inventory and equipment. This borrower is in the process of liquidating hisassets and we expect to receive all principal and interest due. The secondborrower relationship totaled $2.1 million and represents a single commercialreal estate loan secured by a convenience store, retail strip center and carwash. The loan is personally guaranteed by several individuals and relatedentities. One of the principals, who was the managing member, has experiencedsevere financial difficulties. The other principals/guarantors have indicatedthat they are in the process of formulating a workout plan that may includeliquidation of the collateral to satisfy the obligation. In the event of aforeclosure and a possible deficiency judgment, we believe sufficient net worthexists among the guarantors to satisfy their obligation. The loans discussedabove were kept on accrual status at September 30, 2007, based on the factorsindicated. However, depending on the outcome of the borrowers’ workout plans,it is possible that the bank my incur losses on these loans in the future.

 

The increase in real estate owned wasprimarily due to foreclosures on properties related to three borrowers. Thefirst borrower had properties totaling $3.0 million, which was comprised of$1.3 million in single-family rental properties and $1.7 million in speculativesingle-family homes under construction. The speculative homes are in variousstages of completion ranging from approximately 85% to 100%. The secondborrower had properties totaling $2.2 million comprised of 18 speculativesingle-family construction loans. The homes are complete and the Bank isactively selling these properties. The third borrower had loans totaling $1.1million comprised of three speculative single-family construction loans invarious stages of completion ranging from approximately 85% to 100%. Constructioncosts on the real estate owned are added to the real estate balance to theextent that the resulting balance does not exceed the estimated fair value ofthe property less estimated selling costs. Since December 31, 2006,approximately $9.2 million has been added to real estate owned and $4.4 millionhas been sold. As

 

11

----

 

discussed above, certain nonaccrual loans arein various stages of the foreclosure process at September 30, 2007. To theextent that these loans are foreclosed and ownership transferred to the Bank,real estate owned and associated expenses could continue to increase in thefuture.

 

**Allowancefor Loan Losses**. A summary of the activity in the allowance for loan lossesis as follows (in thousands):

 
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended****September ****30,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                             | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance at  beginning of period  |       | $                                                    | 4,291      |                                                      | $          | 2,448 |   | $ | 2,572 |   | $ | 2,114 |   |
| Provisions for  estimated losses |       | 1,330                                                |       | 484                                                       |       | 3,662 |   | 1,128 |   |
| Recoveries                       |       | 43                                                   |       | 55                                                        |       | 132 |   | 139 |   |
| Losses  charged off              |       | (628                                                 | )          | (556                                                      | )          | (1,330 | ) | (950 | ) |
| Balance at  end of period        |       | $                                                    | 5,036      |                                                      | $          | 2,431 |   | $ | 5,036 |   | $ | 2,431 |   |

 

Changesin the composition of the allowance for loan losses between September 30, 2007and December 31, 2006 are presented in the following table (in thousands):

 
| ** ** | ** ** | **September ****30,** | ** ** | **December 31,** | ** ** | ** **   | ** ** |
|------------|------------|----------------------------|------------|-----------------------|------------|--------------|------------|
| ** ** | ** ** | **2007**                   | ** ** | **2006**              | ** ** | **Increase** | ** ** |
| General    |       | $                          | 2,268      |                  | $          | 1,966        |       | $ | 302 |   |
| Specific   |       | 2,768                      |       | 606                   |       | 2,162        |       |
|       |       | $                          | 5,036      |                  | $          | 2,572        |       | $ | 2,464 |   |

 

The general component of the allowance forloan losses increased due to the loss factor applied to speculativesingle-family construction loans and acquisition and development loans. Theseloss factors were increased due to the recent loss history on these types ofloans. The specific component of the allowance for loan losses increasedprimarily due to specific allowances on a subdivision in Lowell, Arkansas, anda subdivision in Cave Springs, Arkansas, as discussed in “Asset Quality” previously.

 

The allowance for loan losses is establishedas losses are estimated to have occurred through a provision for loan lossescharged to earnings. Loan losses are charged against the allowance whenmanagement believes it is likely that a loan balance is uncollectible. Subsequentrecoveries, if any, are credited to the allowance.

 

The allowance for loan losses representsmanagement’s estimate of incurred credit losses inherent in the Company’s loanportfolio as of the balance sheet date. The estimation of the allowance isbased on a variety of factors, including past loan loss experience, the currentcredit profile of the Company’s borrowers, adverse situations that haveoccurred that may affect the borrowers’ ability to repay, the estimated valueof underlying collateral, and general economic conditions. Losses arerecognized when available information indicates that it is probable that a losshas been incurred and the amount of the loss can be reasonably estimated. Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available orconditions change.

 

In determining the allowance for loan losses,the Company allocates a portion of the allowance to its various loan categoriesbased on an analysis of individual loans and pools of loans. However, theentire allowance is available to absorb credit losses inherent in the totalloan portfolio as of the balance sheet date.

 

A loan is considered impaired when, based oncurrent information and events, it is probable that the Bank will be unable tocollect the scheduled payments of principal or interest when due according tothe contractual terms of the loan agreement. Factors considered by managementin determining impairment include payment status, collateral value, and theprobability of collecting scheduled principal and interest payments when due.Loans that experience insignificant payment delays and payment shortfallsgenerally are not classified as impaired. 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, the

 

12

----

 

borrower’s prior payment record, and theamount of the short fall in relation to the principal and interest owed.Impairment is measured on a loan by loan basis by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price, or the fair value of the collateral if theloan is collateral dependent. Multi-family residential, commercial real estate,land and land development, and commercial loans that are delinquent or wherethe borrower’s total loan relationship exceeds $1 million are evaluated on aloan by loan basis at least annually.

 

Large groups of smaller balance homogeneousloans are collectively evaluated for impairment. Accordingly, the Bank does notseparately identify individual consumer and residential loans for impairmentdisclosures. Homogeneous loans are those that are considered to have commoncharacteristics that provide for evaluation on an aggregate or pool basis. TheBank considers the characteristics of (1) one- to four-family residential firstmortgage loans; (2) unsecured consumer loans; and (3) collateralized consumerloans to permit consideration of the appropriateness of the allowance forlosses of each group of loans on a pool basis. The primary methodology used todetermine the appropriateness of the allowance for losses includes segregatingcertain specific, poorly performing loans based on their performancecharacteristics from the pools of loans as to type, valuing these loans, andthen applying a loss factor to the remaining pool balance based on severalfactors including past loss experience, inherent risks, and economic conditionsin the primary market areas.

 

In estimating theamount of credit losses inherent in our loan portfolio, various judgments andassumptions are made. Forexample, when assessing the condition of the overall economic environment, datais collected regarding current market conditions and their impact on the loanportfolio. Loss factors have been revised as a result of the downturn in thehousing market, specifically the oversupply of speculative single-family homesand lots in our market area. If the housing market sustains a prolongeddownturn, the loss factors applied to our portfolios may need to be furtherrevised, which may significantly impact the measurement of the allowance forloan losses. For impaired loans that are collateral dependent, the estimated fairvalue of the collateral may deviate significantly from the proceeds receivedwhen the collateral is sold in the event that the Bank has to foreclose orrepossess the collateral.

 

Although we considerthe allowance for loan losses of approximately $5.0 million adequate to coverlosses inherent in our loan portfolio at September 30, 2007, no assurance canbe given that we will not sustain loan losses that are significantly differentfrom the amount recorded, or that subsequent evaluations of the loan portfolio,in light of factors then prevailing, would not result in a significant changein the allowance for loan losses.

 

**Investment Securities.**Changes in the composition ofinvestment securities held to maturity between September 30, 2007 and December 31, 2006 are presented inthe following table (in thousands).

 
| ** **                              | ** ** | **September ****30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                              | ** ** | **2007**                   | ** ** | **2006**              | ** ** | **(Decrease)** | ** ** |
| U.S.  Government and agency obligations |       | $                          | 68,760     |                  | $          | 43,857         |       | $ | 24,903 |   |
| Municipal  securities                   |       | 16,238                     |       | 16,889                |       | (651           | )          |
| Total                                   |       | $                          | 84,998     |                  | $          | 60,746         |       | $ | 24,252 |   |

 

During the first nine monthsof 2007, investment securities totaling $29.3 million were purchased and $5.1million matured or were called. Due to lower loan demand, the Bank used fundsfrom loan repayments to purchase investment securities.

 

13

----

 

At September 30, 2007,estimated fair values of investment securities held to maturity were as follows(in thousands):

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------|------------|
|                                   |       |                |       |            |       |
| U.S. Government and agency obligations |       | $                   | 68,760     |            | $          | 68,383 |   |
| Municipal securities                   |       | 16,238              |       | 16,161          |       |
| Total                                  |       | $                   | 84,998     |            | $          | 84,544 |   |

 

**Federal Home Loan Bank Stock.**FHLB stock decreased by $2.7 milliondue to a lower balance requirement related to the decrease in FHLB advances.

 

**Real Estate Owned.**The increase in real estate owned wasprimarily due to an increase in foreclosures related to speculative homes. See “AssetQuality”.

 

**Deposits.**Changes in the composition of depositsbetween September 30, 2007 andDecember 31, 2006 are presented in the following table (dollars in thousands).

 
| ** **               | ** ** | **September ****30,  2007** | ** ** | **December 31,  2006** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|--------------------------|------------|----------------------------------|------------|-----------------------------|------------|--------------------------|------------|------------------------|------------|
|                     |       |                             |       |                        |       |                     |       |                   |       |
| Checking  accounts       |       | $                                | 137,683    |                        | $          | 139,372                  |       | $                      | (1,689     | ) | (1.2 | )% |
| Money Market  accounts   |       | 49,756                           |       | 51,827                      |       | (2,071                   | )          | (4.0                   | )%         |
| Savings  accounts        |       | 25,786                           |       | 26,824                      |       | (1,038                   | )          | (3.9                   | )%         |
| Certificates  of deposit |       | 427,678                          |       | 434,242                     |       | (6,564                   | )          | (1.5                   | )%         |
| Total  deposits          |       | $                                | 640,903    |                        | $          | 652,265                  |       | $                      | (11,362    | ) | (1.7 | )% |

 

Deposits decreased in the comparison period,primarily due to a decrease in public unit deposits.

 

**Federal HomeLoan Bank Advances.**The Bank used funds from loan repayments to repay FHLB of Dallasadvances during the quarter. FHLB advances decreased by $40.6 million or 33.7%during the nine months ended September 30, 2007. The balance of advances atSeptember 30, 2007 of $79.7 million consisted of $63.7 million of fixed rateadvances with an average cost of 4.30% and $16.0 million of floating rateadvances with an average cost of 5.57%.

 

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

 

**Stockholders’Equity.**Stockholders’equity decreased approximately $1.5 million from December 31, 2006 to September30,2007. The decrease instockholders’ equity was primarily due to the purchase of treasury stocktotaling $2.0 million during the first nine months of 2007. In addition, duringthe nine months ended September 30, 2007, cash dividends of approximately $2.3 million were paid. Suchdecreases were partially offset by net income of $2.0 million during the ninemonths ended September 30, 2007. See the Unaudited Consolidated Statementof Stockholders’ Equity for the nine months ended September 30, 2007 for more detail.

 

14

----

 

**Average Balance Sheets**

 

The following table sets forth certain information relating to theCompany’s average balance sheets and reflects the average yield on assets andaverage cost of liabilities for the periods indicated. Such yields and costsare derived by dividing income or expense by the average balance of assets orliabilities, respectively, for the periods presented. Average balances arebased on daily balances during the period.

 
| ** **                                                         | ** ** | **Three Months Ended September********30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **Average  Balance**                        | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** |
| ** **                                                         | ** ** | **(Dollars in Thousands)**                  | ** ** |
| Interest-earning  assets:                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
|  Loans receivable(1)                                          |       | $                                           | 632,106    |   | $ | 11,020 |   | 6.97 | % | $ | 730,630 |   | $ | 12,627 |   | 6.91 | % |
|  Investment securities(2)                                     |       | 85,666                                      |       | 1,129 |   | 5.27 |   | 68,496 |   | 835 |   | 4.87 |   |
|  Other interest-earning assets                                |       | 18,111                                      |       | 232 |   | 5.13 |   | 16,972 |   | 219 |   | 5.17 |   |
| Total  interest-earning assets                                     |       | 735,883                                     |       | 12,381 |   | 6.73 |   | 816,098 |   | 13,681 |   | 6.71 |   |
| Noninterest-earning  assets                                        |       | 70,399                                      |       |   |   |   |   | 62,556 |   |   |   |   |   |
| Total assets                                                       |       | 806,282                                     |       |   |   |   |   | 878,654 |   |   |   |   |   |
| Interest-bearing  liabilities:                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
|  Deposits                                                     |       | 639,452                                     |       | 6,099 |   | 3.82 |   | 635,245 |   | 5,449 |   | 3.43 |   |
|  FHLB advances                                                |       | 85,806                                      |       | 987 |   | 4.60 |   | 157,615 |   | 1,858 |   | 4.72 |   |
| Total  interest-bearing liabilities                                |       | 725,258                                     |       | 7,086 |   | 3.91 |   | 792,860 |   | 7,307 |   | 3.69 |   |
| Noninterest-bearing  liabilities                                   |       | 5,803                                       |       |   |   |   |   | 6,216 |   |   |   |   |   |
| Total  liabilities                                                 |       | 731,061                                     |       |   |   |   |   | 799,076 |   |   |   |   |   |
| Stockholders’  equity                                         |       | 75,221                                      |       |   |   |   |   | 79,578 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                   |       | $                                           | 806,282    |   |   |   |   |   | $ | 878,654 |   |   |   |   |   |
| Net interest  income                                               |       |                                        |       | $ | 5,295 |   |   |   |   |   | $ | 6,374 |   |   |   |
| Net earning  assets                                                |       | $                                           | 10,625     |   |   |   |   |   | $ | 23,238 |   |   |   |   |   |
| Interest  rate spread                                              |       |                                        |       |   |   | 2.82 | % |   |   |   |   | 3.02 | % |
| Net interest  margin                                               |       |                                        |       |   |   | 2.88 | % |   |   |   |   | 3.12 | % |
| Ratio of  interest-earning assets to  interest-bearing liabilities |       |                                        |       |   |   | 101.46 | % |   |   |   |   | 102.93 | % |
|                                                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                         | ** ** | **Nine Months Ended September********30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **Average  Balance**                       | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** |
| ** **                                                         | ** ** | **(Dollars in Thousands)**                 | ** ** |
| Interest-earning  assets:                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
|  Loans receivable(1)                                          |       | $                                          | 661,297    |   | $ | 35,225 |   | 7.10 | % | $ | 733,842 |   | $ | 37,703 |   | 6.85 | % |
|  Investment securities(2)                                     |       | 74,260                                     |       | 2,856 |   | 5.13 |   | 66,917 |   | 2,411 |   | 4.80 |   |
|  Other interest-earning assets                                |       | 18,730                                     |       | 722 |   | 5.14 |   | 10,769 |   | 393 |   | 4.87 |   |
| Total  interest-earning assets                                     |       | 754,287                                    |       | 38,803 |   | 6.86 |   | 811,528 |   | 40,507 |   | 6.66 |   |
| Noninterest-earning  assets                                        |       | 67,917                                     |       |   |   |   |   | 61,233 |   |   |   |   |   |
| Total assets                                                       |       | 822,204                                    |       |   |   |   |   | 872,761 |   |   |   |   |   |
| Interest-bearing  liabilities:                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
|  Deposits                                                     |       | 643,475                                    |       | 17,991 |   | 3.73 |   | 626,745 |   | 14,819 |   | 3.15 |   |
|  FHLB advances                                                |       | 97,747                                     |       | 3,353 |   | 4.57 |   | 161,103 |   | 5,378 |   | 4.45 |   |
| Total  interest-bearing liabilities                                |       | 741,222                                    |       | 21,344 |   | 3.84 |   | 787,848 |   | 20,197 |   | 3.42 |   |
| Noninterest-bearing  liabilities                                   |       | 5,644                                      |       |   |   |   |   | 6,194 |   |   |   |   |   |
| Total  liabilities                                                 |       | 746,866                                    |       |   |   |   |   | 794,042 |   |   |   |   |   |
| Stockholders’  equity                                         |       | 75,338                                     |       |   |   |   |   | 78,719 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                   |       | $                                          | 822,204    |   |   |   |   |   | $ | 872,761 |   |   |   |   |   |
| Net interest  income                                               |       |                                       |       | $ | 17,459 |   |   |   |   |   | $ | 20,310 |   |   |   |
| Net earning  assets                                                |       | $                                          | 13,065     |   |   |   |   |   | $ | 23,680 |   |   |   |   |   |
| Interest  rate spread                                              |       |                                       |       |   |   | 3.02 | % |   |   |   |   | 3.24 | % |
| Net interest  margin                                               |       |                                       |       |   |   | 3.09 | % |   |   |   |   | 3.34 | % |
| Ratio of  interest-earning assets to  interest-bearing liabilities |       |                                       |       |   |   | 101.76 | % |   |   |   |   | 103.01 | % |
|                                                                    |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includes nonaccrualloans.

(2) Includes FHLB of Dallasstock.

 

15

----

 

**Rate/VolumeAnalysis**

 

The table below sets forth certain information regarding changes ininterest income and interest expense of the Company for the periods indicated. Foreach category of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to (i) changes in volume(changes in average volume multiplied by prior rate); (ii) changes in rate(change in rate multiplied by prior average volume); (iii) changes inrate-volume (changes in rate multiplied by the change in average volume); and(iv) the net change.

 
| ** **                          | ** ** | **Three Months Ended September 30,  2007 vs. 2006** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **Increase (Decrease)  Due to**                     | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Volume**                                          | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total  Increase (Decrease)** | ** ** |
| ** **                          | ** ** | **(In Thousands)**                                  | ** ** |
| Interest  income:                   |       |                                                |       |   |   |   |   |   |   |
| Loans  receivable                   |       | $                                                   | (1,703     | ) | $ | 111 |   | $ | (15 | ) | $ | (1,607 | ) |
| Investment  securities              |       | 209                                                 |       | 68 |   | 17 |   | 294 |   |
| Other  interest-earning assets      |       | 15                                                  |       | (2 | ) | — |   | 13 |   |
| Total  interest-earning assets      |       | (1,479                                              | )          | 177 |   | 2 |   | (1,300 | ) |
|                                |       |                                                |       |   |   |   |   |   |   |
| Interest  expense:                  |       |                                                |       |   |   |   |   |   |   |
| Deposits                            |       | 36                                                  |       | 610 |   | 4 |   | 650 |   |
| FHLB  advances                      |       | (847                                                | )          | (45 | ) | 21 |   | (871 | ) |
| Total  interest-bearing liabilities |       | (811                                                | )          | 565 |   | 25 |   | (221 | ) |
| Net change  in net interest income  |       | $                                                   | (668       | ) | $ | (388 | ) | $ | (23 | ) | $ | (1,079 | ) |

 

 
| ** **                          | ** ** | **Nine Months Ended September 30,  2007 vs. 2006** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **Increase (Decrease)  Due to**                    | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Volume**                                         | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total  Increase (Decrease)** | ** ** |
| ** **                          | ** ** | **(In Thousands)**                                 | ** ** |
| Interest  income:                   |       |                                               |       |   |   |   |   |   |   |
| Loans  receivable                   |       | $                                                  | (3,727     | ) | $ | 1,386 |   | $ | (137 | ) | $ | (2,478 | ) |
| Investment  securities              |       | 264                                                |       | 163 |   | 18 |   | 445 |   |
| Other  interest-earning assets      |       | 291                                                |       | 22 |   | 16 |   | 329 |   |
| Total  interest-earning assets      |       | (3,172                                             | )          | 1,571 |   | (103 | ) | (1,704 | ) |
|                                |       |                                               |       |   |   |   |   |   |   |
| Interest  expense:                  |       |                                               |       |   |   |   |   |   |   |
| Deposits                            |       | 396                                                |       | 2,704 |   | 72 |   | 3,172 |   |
| FHLB  advances                      |       | (2,115                                             | )          | 148 |   | (58 | ) | (2,025 | ) |
| Total  interest-bearing liabilities |       | (1,719                                             | )          | 2,852 |   | 14 |   | 1,147 |   |
| Net change  in net interest income  |       | $                                                  | (1,453     | ) | $ | (1,281 | ) | $ | (117 | ) | $ | (2,851 | ) |

 

16

----

 

**CHANGES IN RESULTS OF OPERATIONS**

 

The table below presents a comparison of results of operations for thethree months ended September 30, 2007 and 2006 (dollars in thousands). Specificchanges in captions are discussed in the sections which follow the table.

 
| ** **                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage Change** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2007**                              | ** ** | **2006**                 | ** ** | **2007 vs 2006**      | ** ** | **2007 vs 2006** | ** ** |
| Interest  income:                                     |       |                                  |       |                     |       |                  |       |   |   |
|  Loans receivable                                |       | $                                     | 11,020     |                     | $          | 12,627                |       | $ | (1,607 | ) | (12.7 | )% |
|  Investment securities                           |       | 1,129                                 |       | 835                      |       | 294                   |       | 35.2 |   |
|  Other                                           |       | 232                                   |       | 219                      |       | 13                    |       | 5.9 |   |
| Total  interest income                                |       | 12,381                                |       | 13,681                   |       | (1,300                | )          | (9.5 | ) |
| Interest  expense:                                    |       |                                  |       |                     |       |                  |       |   |   |
|  Deposits                                        |       | 6,099                                 |       | 5,449                    |       | 650                   |       | 11.9 |   |
|  FHLB advances                                   |       | 987                                   |       | 1,858                    |       | (871                  | )          | (46.9 | ) |
| Total  interest expense                               |       | 7,086                                 |       | 7,307                    |       | (221                  | )          | (3.0 | ) |
| Net interest  income before provision for loan losses |       | 5,295                                 |       | 6,374                    |       | (1,079                | )          | (16.9 | ) |
| Provision  for loan losses                            |       | 1,330                                 |       | 484                      |       | 846                   |       | 174.8 |   |
| Net interest  income after provision for loan losses  |       | 3,965                                 |       | 5,890                    |       | (1,925                | )          | (32.7 | ) |
| Noninterest  income:                                  |       |                                  |       |                     |       |                  |       |   |   |
|  Deposit fee income                              |       | 1,235                                 |       | 1,264                    |       | (29                   | )          | (2.3 | ) |
|  Gain on sale of loans                           |       | 201                                   |       | 310                      |       | (109                  | )          | (35.2 | ) |
|  Other                                           |       | 559                                   |       | 439                      |       | 120                   |       | 27.3 |   |
| Total  noninterest income                             |       | 1,995                                 |       | 2,013                    |       | (18                   | )          | (0.9 | ) |
| Noninterest  expenses:                                |       |                                  |       |                     |       |                  |       |   |   |
|  Salaries and employee benefits                  |       | 3,287                                 |       | 3,195                    |       | 92                    |       | 2.9 |   |
|  Real estate owned, net                          |       | 543                                   |       | 62                       |       | 481                   |       | 775.8 |   |
|  Advertising and public relations                |       | 239                                   |       | 342                      |       | (103                  | )          | (30.1 | ) |
|  Other                                           |       | 1,740                                 |       | 1,850                    |       | (110                  | )          | (5.9 | ) |
| Total  noninterest expenses                           |       | 5,809                                 |       | 5,449                    |       | 360                   |       | 6.6 |   |
| Income  before income taxes                           |       | 151                                   |       | 2,454                    |       | (2,303                | )          | (93.9 | ) |
| Income tax  provision                                 |       | (150                                  | )          | 754                      |       | (904                  | )          | (119.9 | ) |
| Net income                                            |       | $                                     | 301        |                     | 1,700      |                  | $          | (1,399 | ) | (82.3 | )% |
|                                                  |       |                                  |       |                     |       |                  |       |   |   |
| Basic  earnings per share                             |       | $                                     | 0.06       |                     | $          | 0.34                  |       | $ | (0.28 | ) | (82.4 | )% |
| Diluted  earnings per share                           |       | $                                     | 0.06       |                     | $          | 0.33                  |       | $ | (0.27 | ) | (81.8 | )% |
|                                                  |       |                                  |       |                     |       |                  |       |   |   |
| Interest  rate spread                                 |       | 2.82                                  | %          | 3.02                     | %          |                  |       |   |   |
| Net interest  margin                                  |       | 2.88                                  | %          | 3.12                     | %          |                  |       |   |   |
|                                                  |       |                                  |       |                     |       |                  |       |   |   |
| Average  full-time equivalents                        |       | 301                                   |       | 305                      |       |                  |       |   |   |
|                                                  |       |                                  |       |                     |       |                  |       |   |   |
| Full-service  offices                                 |       | 18                                    |       | 18                       |       |                  |       |   |   |

 

17

----

 

The table below presents a comparison of results of operations for thenine months ended September 30, 2007 and 2006 (dollars in thousands). Specificchanges in captions are discussed in the sections which follow the table.

 
| ** **                                            | ** ** | **Nine Months Ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage Change** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2007**                             | ** ** | **2006**                 | ** ** | **2007 vs 2006**      | ** ** | **2007 vs 2006** | ** ** |
| Interest  income:                                     |       |                                 |       |                     |       |                  |       |   |   |
|  Loans receivable                                |       | $                                    | 35,225     |                     | $          | 37,703                |       | $ | (2,478 | ) | (6.6 | )% |
|  Investment securities                           |       | 2,856                                |       | 2,411                    |       | 445                   |       | 18.5 |   |
|  Other                                           |       | 722                                  |       | 393                      |       | 329                   |       | 83.7 |   |
| Total  interest income                                |       | 38,803                               |       | 40,507                   |       | (1,704                | )          | (4.2 | ) |
| Interest  expense:                                    |       |                                 |       |                     |       |                  |       |   |   |
|  Deposits                                        |       | 17,991                               |       | 14,819                   |       | 3,172                 |       | 21.4 |   |
|  FHLB advances                                   |       | 3,353                                |       | 5,378                    |       | (2,025                | )          | (37.7 | ) |
| Total  interest expense                               |       | 21,344                               |       | 20,197                   |       | 1,147                 |       | 5.7 |   |
| Net interest  income before provision for loan losses |       | 17,459                               |       | 20,310                   |       | (2,851                | )          | (14.0 | ) |
| Provision  for loan losses                            |       | 3,662                                |       | 1,128                    |       | 2,534                 |       | 224.7 |   |
| Net interest  income after provision for loan losses  |       | 13,797                               |       | 19,182                   |       | (5,385                | )          | (28.1 | ) |
| Noninterest  income:                                  |       |                                 |       |                     |       |                  |       |   |   |
|  Deposit fee income                              |       | 3,661                                |       | 3,579                    |       | 82                    |       | 2.3 |   |
|  Gain on sale of loans                           |       | 664                                  |       | 841                      |       | (177                  | )          | (21.1 | ) |
|  Other                                           |       | 1,490                                |       | 1,912                    |       | (422                  | )          | (22.1 | ) |
| Total  noninterest income                             |       | 5,815                                |       | 6,332                    |       | (517                  | )          | (8.2 | ) |
| Noninterest  expenses:                                |       |                                 |       |                     |       |                  |       |   |   |
|  Salaries and employee benefits                  |       | 10,016                               |       | 10,174                   |       | (158                  | )          | (1.6 | ) |
|  Real estate owned, net                          |       | 826                                  |       | 41                       |       | 785                   |       | 1,914.6 |   |
|  Advertising and public relations                |       | 849                                  |       | 971                      |       | (122                  | )          | (12.6 | ) |
|  Other                                           |       | 5,643                                |       | 5,581                    |       | 62                    |       | 1.1 |   |
| Total  noninterest expenses                           |       | 17,334                               |       | 16,767                   |       | 567                   |       | 3.4 |   |
| Income  before income taxes                           |       | 2,278                                |       | 8,747                    |       | (6,469                | )          | (74.0 | ) |
| Income tax  provision                                 |       | 284                                  |       | 2,787                    |       | (2,503                | )          | (89.8 | ) |
| Net income                                            |       | $                                    | 1,994      |                     | 5,960      |                  | $          | (3,966 | ) | (66.5 | )% |
|                                                  |       |                                 |       |                     |       |                  |       |   |   |
| Basic  earnings per share                             |       | $                                    | 0.41       |                     | $          | 1.19                  |       | $ | (0.78 | ) | (65.6 | )% |
| Diluted  earnings per share                           |       | $                                    | 0.41       |                     | $          | 1.16                  |       | $ | (0.75 | ) | (64.7 | )% |
|                                                  |       |                                 |       |                     |       |                  |       |   |   |
| Interest rate  spread                                 |       | 3.02                                 | %          | 3.24                     | %          |                  |       |   |   |
| Net interest  margin                                  |       | 3.09                                 | %          | 3.34                     | %          |                  |       |   |   |
|                                                  |       |                                 |       |                     |       |                  |       |   |   |
| Average  full-time equivalents                        |       | 304                                  |       | 306                      |       |                  |       |   |   |
|                                                  |       |                                 |       |                     |       |                  |       |   |   |
| Full-service  offices                                 |       | 18                                   |       | 18                       |       |                  |       |   |   |

 

18

----

 

**Net Interest Income.**Net interest income is determined by theCompany’s interest rate spread (i.e., the difference between the yields earnedon its interest-earning assets and the rates paid on its interest-bearingliabilities) and the relative amounts of interest-earning assets andinterest-bearing liabilities. The decrease in net interest income was primarilydue to the level of nonperforming loans, the Company’s negative gap positionand the more rapid increase in rates paid on deposits compared to the yield onthe Company’s interest earning assets.

 

**INTERESTINCOME AND INTEREST EXPENSE**

 

Dollar changes in interest income and interest expense for thecomparison periods are presented in the Rate/Volume Analysis table whichappears on a previous page.

 

**Interest Income.**The decreases in interest income for thethree and nine month comparative periods were primarily due to decreases in theaverage balance of loans receivable and increases in the nonperforming loans inthe loan portfolio, offset in the nine month comparative period by an increasein the average yield earned on loans receivable. The increase in average yieldearned during the nine month comparative period was due primarily to increasesin market interest rates during the year. The average balance of loans decreasedprimarily due to a decrease in loan originations.

 

**Interest Expense.**The increase in interest expense for the ninemonth comparative period was primarily due to an increase in the average ratepaid on deposits and an increase in the average balance of deposits, offset bya decrease in the average balance of FHLB advances. The decrease in interestexpense for the three month comparative period was due to a decrease in theaverage balance of FHLB advances, offset by an increase in the average rate paidon deposits. The average balance of FHLB advances decreased due to fundsgenerated from loan repayments being used to pay down maturing advances. Theincrease in the average rates paid on deposit accounts reflects the increase inmarket interest rates.

 

**Provision for Loan Losses.**The provision for loan losses includescharges to maintain an allowance for loan losses adequate to cover probablecredit losses related to specifically identified loans as well as probablecredit losses inherent in the remainder of the loan portfolio that have beenincurred as of the balance sheet date. Such provision and the adequacy of theallowance for loan losses is evaluated quarterly by management of the Bankbased on the Bank’s past loan loss experience, known and inherent risks in theportfolio, adverse situations that may affect the borrower’s ability to repay,the estimated value of any underlying collateral and current economicconditions.

 

Factors influencing management’s decision to increase the provision inthe 2007 vs. 2006 periods include an increase in nonaccrual loans, conditionsin the speculative single-family real estate market in Northwest Arkansas, andspecific loan loss allowances of $1.4 million on two phases of a subdivision inLowell, Arkansas and $865,000 on a subdivision located in Cave Springs,Arkansas, as discussed in “Asset Quality” previously. During the nine monthsended September 30, 2007, we recorded $397,000 in net charge-offs onspeculative single-family construction loans as well as $101,000 in netrealized losses on sales of speculative single-family real estate owned and$271,000 in fair value writedowns of speculative single-family real estateowned. This compares to total net charge-offs, losses on sales, and fair valuewritedowns of $326,000 for the year ended December 31, 2006, $77,000 for theyear ended December 31, 2005, and none for the year ended December 31,2004. The speculative single-family construction market demonstrated weaknessin late 2005 and we began reducing our exposure in this area at that time. However,the continued oversupply of available housing has impacted the value ofspeculative single-family homes and development projects, as discussed above. Furtherdeterioration in this market segment may impact the value of existingsingle-family home values as well as our provision for loan losses in thefuture.

 

**Noninterest Income.**Deposit fee income increased for the ninemonth comparative period in 2007 as a result of an increase in debit card usageand insufficient funds fee income. This increase resulted from an increase inthe number of checking accounts with overdrawn balances and a 4.2% increase inthe per item charge that was effective February 1, 2007. The Bank plans to continueto aggressively promote

 

19

----

 

checking accounts in 2007 through direct mail campaigns and offering “thankyou” gifts to further expand its checking accounts and increase deposit feeincome.

 

The decreases in gains on sales of loans for the three and nine monthcomparative periods ended September 30, 2007 were primarily related to adecrease in the number of loans sold.

 

The decrease in other noninterest income for the nine month comparativeperiod ended September 30, 2007 was primarily due to nonrecurring gains on thesales of two properties totaling approximately $528,000 during the quarterended March 31, 2006. These properties represented excess land and a buildingadjacent to two existing branches.

 

**Noninterest Expense**

 

**Salaries and Employee Benefits.**The changes in the composition of this lineitem are presented below (in thousands):

 
| ** **                         | ** ** | **Three Months Ended  September********30,** | ** ** | **Increase  (Decrease)** | ** ** | **Nine Months Ended  September********30,** | ** ** | **Increase  (Decrease)** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **2007**                                     | ** ** | **2006**                 | ** ** | **2007 vs 2006**                            | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2007 vs 2006** | ** ** |
| Salaries                           |       | $                                            | 2,588      |                     | $          | 2,495                                       |       | $                        | 93         |   | $ | 7,824 |   | $ | 7,620 |   | $ | 204 |   |
| Payroll  taxes                     |       | 197                                          |       | 194                      |       | 3                                           |       | 676                      |       | 662 |   | 14 |   |
| Insurance                          |       | 168                                          |       | 173                      |       | (5                                          | )          | 508                      |       | 517 |   | (9 | ) |
| ESOP (1)                           |       | —                                       |       | —                   |       | —                                      |       | —                   |       | 508 |   | (508 | ) |
| 401(k)                             |       | 77                                           |       | 72                       |       | 5                                           |       | 233                      |       | 94 |   | 139 |   |
| Stock compensation  (2)            |       | 5                                            |       | 12                       |       | (7                                          | )          | 24                       |       | 54 |   | (30 | ) |
| Defined  benefit plan contribution |       | 210                                          |       | 210                      |       | —                                      |       | 630                      |       | 603 |   | 27 |   |
| Other                              |       | 42                                           |       | 39                       |       | 3                                           |       | 121                      |       | 116 |   | 5 |   |
| Total                              |       | $                                            | 3,287      |                     | $          | 3,195                                       |       | $                        | 92         |   | $ | 10,016 |   | $ | 10,174 |   | $ | (158 | ) |
|                                    |            |                                              |            |                          |            |                                             |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Employee Stock Ownership Plan

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

 

The decrease in salaries and employee benefits for the nine monthsended September 30, 2007, was due primarily to the decrease in employee stockownership plan expense, as the plan shares became fully allocated as of March31, 2006. The Company implemented a 401(k) Plan on June 1, 2006. The 401(k)expense above relates to employer matching of employee 401(k) contributions. Salariesincreased in both comparison periods due to normal salary and merit increases.

 

**Real Estate Owned, net.**The changes in the composition of this lineitem are presented below (in thousands):

 
| ** **                | ** ** | **Three Months Ended  September********30,** | ** ** | **Increase  (Decrease)** | ** ** | **Nine Months Ended  September********30,** | ** ** | **Increase  (Decrease)** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|--------------------------|------------|
| ** **                | ** ** | **2007**                                     | ** ** | **2006**                 | ** ** | **2007 vs 2006**                            | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2007 vs 2006** | ** ** |
| Loss  provisions          |       | $                                            | 312        |                     | $          | 7                                           |       | $                        | 305        |   | $ | 390 |   | $ | 7 |   | $ | 383 |   |
| Net loss  (gain) on sales |       | 67                                           |       | 39                       |       | 28                                          |       | 119                      |       | (43 | ) | 162 |   |
| Taxes and  insurance      |       | 69                                           |       | 8                        |       | 61                                          |       | 161                      |       | 36 |   | 125 |   |
| Other                     |       | 95                                           |       | 8                        |       | 87                                          |       | 156                      |       | 41 |   | 115 |   |
| Total                     |       | $                                            | 543        |                     | $          | 62                                          |       | $                        | 481        |   | $ | 826 |   | $ | 41 |   | $ | 785 |   |

 

Expenses associated with real estate owned have increased due to theincrease in real estate owned balances. As discussed in “Asset Quality”, realestate owned is expected to continue to increase in the foreseeable future andreal estate owned expenses are expected to increase accordingly.

 

**Advertising and Public Relations.**The decrease in this line item in bothcomparison periods was primarily due to a decrease in direct mail advertisingas well as a decrease in expenses associated with branch openings.

 

20

----

 

**Income Taxes.**The provision for income taxes decreased inboth comparison periods due to a decrease in taxable income and certain nontaxableincome amounts remaining relatively constant and therefore representing alarger percentage of taxable income.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

The Company, in the normal course of business, makes commitments to buyor sell assets or to incur or fund liabilities. Commitments include, but arenot limited to:

 

•                  theorigination, purchase or sale of loans;

•                  thefulfillment of commitments under letters-of-credit, extensions of credit onhome equity lines of credit, construction loans, and predetermined overdraftprotection limits; and

•                  thecommitment to fund withdrawals of certificates of deposit at maturity.

 

At September 30, 2007, the Bank’s off-balance sheet arrangementsprincipally included lending commitments, which are described below. At September30, 2007, the Company had no interests in non-consolidated special purposeentities.

 

At September 30, 2007, commitments included:

 

•                  totalapproved commitments to originate or purchase loans amounting to $3.3 million,including $572,000 of loans committed to sell;

•                  ratelock agreements with customers of $3.8 million, all of which have been lockedwith an investor;

•                  fundedmortgage loans committed to sell of $2.1 million;

•                  unadvancedportion of construction loans of $41.7 million;

•                  unusedlines of credit of $27.0 million;

•                  outstandingstandby letters of credit of approximately $495,000;

•                  totalpredetermined overdraft protection limits of $13.2 million; and

•                  certificatesof deposit scheduled to mature in one year or less totaling $339.9 million.

 

Total unfunded commitments to originate loans for sale and the relatedcommitments to sell of $3.8 million meet the definition of a derivativefinancial instrument. The related asset and liability are considered immaterialat September 30, 2007.

 

Historically, a very small percentage of predetermined overdraft limitshave been used. At September 30, 2007, overdrafts of accounts with BounceProtectionTM represented usage of 3.2% of the limit. We expectutilization of these overdraft limits to remain at comparable levels in thefuture.

 

Based on historical experience, management believes that a significantportion of maturing deposits will remain with the Bank. We anticipate that wewill continue to have sufficient funds, through repayments, deposits and borrowings,to meet our current commitments.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Bank’s liquidity, represented by cash and cash equivalents andeligible investment securities, is a product of its operating, investing andfinancing activities. The Bank’s primary sources of funds are deposits,borrowings, collections on outstanding loans, maturities and calls ofinvestment securities and other short-term investments and funds provided fromoperations. While scheduled loan amortization and maturing investment securitiesand short-term investments are relatively predictable sources of funds, depositflows and loan prepayments are greatly influenced by general interest rates,economic conditions and competition. The Bank manages the pricing of itsdeposits to maintain a steady deposit balance. In addition, the Bank investsexcess funds in overnight deposits and other short-term interest-earning assetswhich provide liquidity to meet lending requirements. During the first ninemonths of 2007, the use of FHLB advances decreased due to the Bank’s usingfunds generated from loan repayments to pay down

 

21

----

 

maturing advances. At September 30, 2007, available borrowing capacitywith the FHLB was in excess of $217.0 million.

 

For the nine months ended September 30, 2007 and 2006, the Company paiddividends of $0.48 and $0.43 per share, respectively. The determination offuture dividends on the Company’s common stock will depend on conditionsexisting at that time with consideration given to the Company’s earnings,capital, and liquidity needs.

 

Liquidity management is both a daily and long-term function of businessmanagement. Excess liquidity is generally invested in short-term investmentssuch as overnight deposits and certificates of deposit. On a longer-term basis,the Bank maintains a strategy of investing in various lending products andinvestment securities. The Bank uses its sources of funds primarily to meet itsongoing commitments, to pay maturing savings certificates and savingswithdrawals, to repay maturing FHLB of Dallas advances, and to fund loancommitments.

 

As of September 30, 2007, the Bank’s regulatory capital was in excessof all applicable regulatory requirements. At September 30, 2007, the Bank’stangible, core and risk-based capital ratios amounted to 9.07%, 9.07% and12.83%, respectively, compared to regulatory requirements of 1.5%, 4.0% and8.0%, respectively.

 

22

----

 

**IMPACT OFINFLATION AND CHANGING PRICES**

 

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

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

The Company’s Quarterly Report on Form 10-Q contains certainforward-looking statements and information relating to the Company that arebased on the beliefs of management as well as assumptions made by andinformation currently available to management. In addition, in this document,the words “anticipate”, “believe,” “estimate,”****“expect,” “intend,” “should” and similar expressions, or thenegative thereof, as they relate to the Company or the Company’s management,are intended to identify forward-looking statements. Such statements reflectthe current views of the Company with respect to future looking events and aresubject to certain risks, uncertainties and assumptions. Should one or more ofthese risks or uncertainties materialize or should underlying assumptions proveincorrect, actual results may vary materially from those described herein asanticipated, believed, estimated, expected or intended. The Company does notintend to update these forward-looking statements.

 

**QUANTITATIVEAND QUALITATIVE DISCLOSURES**

**ABOUT MARKET RISK**

 

There has been no material change in the market value of the Bank’sportfolio equity since December 31, 2006. Similarly, while there has been nomaterial change in the Company’s asset and liability position since such time,the Bank’s negative gap position and the Bank’s level of nonperforming assetshave adversely impacted net income as interest expense during the nine monthsended September 30, 2007 increased at a greater pace than the comparableincrease in interest income. Correspondingly, the Bank’s net interest margindecreased from 3.34% for the nine months ended September 30, 2006 to 3.09% forthe same period in 2007. Based on the level of nonperforming assets andcompetitive pressures on loan and deposit rates, management anticipatescontinued pressure on the Bank’s interest rate spread and interest margin forthe fourth quarter of 2007.

 

**CONTROLS AND PROCEDURES**

 

Our management evaluated, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of theend of the period covered by this report. Based on such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and regulations and areoperating in an effective manner.

 

No change in the Company’s internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act)occurred during the most recent fiscal quarter that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting. However, late in the first quarter of 2007, the Companymigrated its operational software system from one product to another offered byits software vendor. This migration affected the deposit and loan processingfunctions of the Bank. Extensive data verification processes were performedthroughout the Bank leading up to the conversion. In addition, our internalaudit department reviewed the financial reporting control activities andnarratives for each of the Company’s business cycles that had previously beenidentified for the Company’s testing of internal control over financialreporting. Each

 

23

----

 

major area of the Company that has a direct impact on the creation ofdata that is used in the financial reporting process asserted that theconversion did not create material changes in the Company’s system of internalcontrols over financial reporting.

 

The Company continues to evaluate and resolve post-conversion issues.The Company’s internal audit department began detailed analysis to identify anysignificant changes in the quality of internal control over financial reportingas a result of the conversion in the latter part of the second quarter. Thisevaluation will continue into the fourth quarter.

 

24

----

 

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

 

**Part II**

 

Item 1.          Legal Proceedings

 

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

 

Item 1A.       Risk Factors

 

There have been no materialchanges in the Company’s risk factors from those previously disclosed in theCompany’s Form 10-K for the year ended December 31, 2006.

 

Item 2.          Unregistered Sales of EquitySecurities and Use of Proceeds

 

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** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                     | ** ** | ** **                                | ** ** | ** **                                                                                       | ** ** | ** **                                                                                     | ** ** |
| July 1 to  July 31, 2007           |       | —                                         |       | —                                    |       | —                                                                                           |       | —                                                                                         |       |
| August 1 to  August 31, 2007       |       | —                                         |       | —                                    |       | —                                                                                           |       | —                                                                                         |       |
| September 1  to September 30, 2007 |       | —                                         |       | —                                    |       | —                                                                                           |       | —                                                                                         |       |

 

The Company is in its 19thannounced repurchase program, which was approved by the board of directors onJuly 25, 2006, and publicly announced on November 8, 2006. Total sharesapproved to be purchased in this program are 245,197 of which 193,571 have beenpurchased as of September 30, 2007. All treasury stock purchases are made underpublicly announced repurchase programs.

 

Item 3.          Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.          Submission of Matters to a Vote ofSecurity Holders

 

Not applicable.

 

Item 5.          Other Information

 

None.

 

Item 6.          Exhibits

Exhibit 31.1 – Certificationof Chief Executive Officer,

Pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

Exhibit 31.2 – Certificationof Chief Financial Officer,

Pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

Exhibit 32.1 – Certificationof Chief Executive Officer,

Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

Exhibit 32.2 – Certificationof Chief Financial Officer,

Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

25

----

 

**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:  | October 31, 2007 | By:    | /s/ Larry J. Brandt     |
|--------|------------------|--------|-------------------------|
|   |             |   | Larry J. Brandt         |
|   |             |   | Chief Executive Officer |

 

 
| Date:  | October 31, 2007 | By:    | /s/ Sherri R. Billings                               |
|--------|------------------|--------|------------------------------------------------------|
|   |             |   | Sherri R. Billings                                   |
|   |             |   | Chief Financial Officer and Chief Accounting Officer |

 

26

----