**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| ** ** | **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                |
|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |       |                                                                                                                                                                                                                                                   |
|       |       |       | **For the quarterly period ended March 31,  2005**                                                                                                                                                                                                |
|       |       |       |                                                                                                                                                                                                                                                   |
| **OR**     |
|       |       |       |                                                                                                                                                                                                                                                   |
| ** ** | **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                               |
|       |       |       |                                                                                                                                                                                                                                                   |
|       |       |       | **For the transition period from                     to                   ** |

 

**CommissionFile Number 0-28312**

 

**FIRST FEDERAL BANCSHARES OFARKANSAS, INC.**

(Exact name of registrant asspecified in its charter)

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o

 

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

Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:  As of April 15, 2005, there were issuedand outstanding 5,084,408 shares of the Registrant’s Common Stock, par value$.01 per share.

 

 

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**TABLEOF CONTENTS**

 
| **Part I.**  | **Financial  Information**                                                                                                                                                  |       |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                                                                        |       |
| Item 1.           | Consolidated Financial Statements                                                                                                                                           |       |
|              |                                                                                                                                                                        |       |
|              | Consolidated Statements of Financial  Condition as of March 31, 2005 and December 31, 2004 (unaudited)                                                            |       |
|              |                                                                                                                                                                        |       |
|              | Consolidated Statements of Income for the  three months ended March 31, 2005 and 2004 (unaudited)                                                                      |       |
|              |                                                                                                                                                                        |       |
|              | Consolidated Statement of Stockholders’  Equity for the three months ended March 31, 2005 (unaudited)                                                             |       |
|              |                                                                                                                                                                        |       |
|              | Consolidated Statements of Cash Flows for  the three months ended March 31, 2005 and 2004 (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                                                                                                                                                     |       |
|              |                                                                                                                                                                        |       |
| P**art II**. | O**ther Informatio**n                                                                                                                                                       | ** ** |
|              |                                                                                                                                                                        |       |
| Item 1.           | Legal Proceedings                                                                                                                                                           |       |
|              |                                                                                                                                                                        |       |
| Item 2.           | Changes in Securities, Use of Proceeds, and Issuer Purchases of  Equity Securities                                                                                          |       |
|              |                                                                                                                                                                        |       |
| 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                                                                                                                                  |       |

 

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATED STATEMENTS OF FINANCIALCONDITION**

(In thousands, except sharedata)

(Unaudited)

 
| ** **                                                                                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ASSETS                                                                                                                                                                                              |       |               |       |                  |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                                                                          |       | $                  | 13,097     |                  | $          | 16,003 |   |
| Investment  securities held to maturity                                                                                                                                                             |       | 55,445             |       | 56,660                |       |
| Federal Home  Loan Bank stock                                                                                                                                                                       |       | 5,958              |       | 4,876                 |       |
| Loans  receivable, net                                                                                                                                                                              |       | 666,140            |       | 634,217               |       |
| Accrued  interest receivable                                                                                                                                                                        |       | 5,074              |       | 4,427                 |       |
| Real estate  acquired in settlement of loans, net                                                                                                                                                   |       | 458                |       | 563                   |       |
| Office  properties and equipment, net                                                                                                                                                               |       | 16,011             |       | 15,295                |       |
| Cash  surrender value of life insurance                                                                                                                                                             |       | 18,094             |       | 17,897                |       |
| Prepaid  expenses and other assets                                                                                                                                                                  |       | 1,756              |       | 1,727                 |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                        |       | $                  | 782,033    |                  | $          | 751,665 |   |
|                                                                                                                                                                                                |       |               |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                          |       |               |       |                  |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| LIABILITIES:                                                                                                                                                                                        |       |               |       |                  |       |
| Deposits                                                                                                                                                                                            |       | $                  | 588,758    |                  | $          | 582,424 |   |
| Federal Home  Loan Bank advances                                                                                                                                                                    |       | 113,889            |       | 89,756                |       |
| Advance  payments by borrowers for taxes and insurance                                                                                                                                              |       | 938                |       | 757                   |       |
| Other  liabilities                                                                                                                                                                                  |       | 2,880              |       | 3,427                 |       |
| Total  liabilities                                                                                                                                                                                  |       | 706,465            |       | 676,364               |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                         |       |               |       |                  |       |
| Preferred  stock, no par value, 5,000,000 shares authorized, none issued                                                                                                                            |       |               |       |                  |       |
| Common  stock, $.01 par value, 20,000,000 shares authorized, 10,307,502 shares  issued, 5,084,408 and 5,094,020 shares outstanding at March 31, 2005 and  December 31, 2004, respectively |       | 103                |       | 103                   |       |
| Additional  paid-in capital                                                                                                                                                                         |       | 55,124             |       | 54,427                |       |
| Employee  stock benefit plans                                                                                                                                                                       |       | (472               | )          | (582                  | )          |
| Retained  earnings-substantially restricted                                                                                                                                                         |       | 79,615             |       | 78,261                |       |
|                                                                                                                                                                                                |       | 134,370            |       | 132,209               |       |
| Treasury  stock, at cost, 5,223,094 and 5,213,482 shares at March 31, 2005 and December 31,  2004, respectively                                                                           |       | (58,802            | )          | (56,908               | )          |
| Total  stockholders’ equity                                                                                                                                                                    |       | 75,568             |       | 75,301                |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                    |       | $                  | 782,033    |                  | $          | 751,665 |   |

 

See notes to unaudited consolidated financialstatements.

 

1

----

 

**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

(In thousands, except sharedata)

(Unaudited)

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                           | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                 |       |                   |       |   |   |
| INTEREST  INCOME:                                    |       |                   |       |   |   |
| Loans  receivable                                    |       | $                      | 9,884      |   | $ | 8,329 |   |
| Investment  securities:                              |       |                   |       |   |   |
| Taxable                                              |       | 518                    |       | 794 |   |
| Nontaxable                                           |       | 180                    |       | 166 |   |
| Other                                                |       | 13                     |       | 91 |   |
| Total  interest income                               |       | 10,595                 |       | 9,380 |   |
|                                                 |       |                   |       |   |   |
| INTEREST  EXPENSE:                                   |       |                   |       |   |   |
| Deposits                                             |       | 3,283                  |       | 3,187 |   |
| Other  borrowings                                    |       | 844                    |       | 319 |   |
| Total  interest expense                              |       | 4,127                  |       | 3,506 |   |
|                                                 |       |                   |       |   |   |
| NET INTEREST  INCOME                                 |       | 6,468                  |       | 5,874 |   |
|                                                 |       |                   |       |   |   |
| PROVISION  FOR LOAN LOSSES                           |       | 249                    |       | 259 |   |
|                                                 |       |                   |       |   |   |
| NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES |       | 6,219                  |       | 5,615 |   |
|                                                 |       |                   |       |   |   |
| NONINTEREST  INCOME:                                 |       |                   |       |   |   |
| Deposit fee  income                                  |       | 1,008                  |       | 770 |   |
| Earnings on  life insurance policies                 |       | 197                    |       | 211 |   |
| Gain on sale  of loans                               |       | 134                    |       | 127 |   |
| Other                                                |       | 231                    |       | 324 |   |
| Total  noninterest income                            |       | 1,570                  |       | 1,432 |   |
|                                                 |       |                   |       |   |   |
| NONINTEREST  EXPENSES:                               |       |                   |       |   |   |
| Salaries and  employee benefits                      |       | 3,003                  |       | 2,679 |   |
| Net  occupancy expense                               |       | 499                    |       | 492 |   |
| Data  processing                                     |       | 341                    |       | 408 |   |
| Professional  fees                                   |       | 114                    |       | 108 |   |
| Advertising  and public relations                    |       | 241                    |       | 128 |   |
| Postage and  supplies                                |       | 190                    |       | 179 |   |
| Other                                                |       | 508                    |       | 480 |   |
| Total  noninterest expenses                          |       | 4,896                  |       | 4,474 |   |
|                                                 |       |                   |       |   |   |
| INCOME  BEFORE INCOME TAXES                          |       | 2,893                  |       | 2,573 |   |
| INCOME TAX  PROVISION                                |       | 929                    |       | 813 |   |
| NET INCOME                                           |       | $                      | 1,964      |   | $ | 1,760 |   |
|                                                 |       |                   |       |   |   |
| EARNINGS PER  SHARE:                                 |       |                   |       |   |   |
| Basic                                                |       | $                      | 0.39       |   | $ | 0.34 |   |
|                                                 |       |                   |       |   |   |
| Diluted                                              |       | $                      | 0.37       |   | $ | 0.32 |   |
|                                                 |       |                   |       |   |   |
| Cash  Dividends Declared                             |       | $                      | 0.12       |   | $ | 0.10 |   |

 

See notes tounaudited consolidated financial statements.

 

2

----

 

**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**FOR THE THREE MONTHS ENDED MARCH 31, 2005**

(In thousands, except share data)

(Unaudited)

 
| ** **                                                 | ** ** | **Issued  Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Employee  Stock  Benefit** | ** ** | **Retained** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|--------------|------------|
| ** **                                                 | ** ** | **Shares**               | ** ** | **Amount**              | ** ** | **Capital**                  | ** ** | **Plans**    | ** ** | **Earnings** | ** ** |
| ** **                                                 | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **   | ** ** | ** ** | ** ** |
| Balance, December 31,  2004                           |       | 10,307,502               |       | $                       | 103        |                         | $          | 54,427       |       | $ | (582 | ) | $ | 78,261 |   |
| Net income                                                 |       |                     |       |                    |       |                         |       |         |       | 1,964 |   |
| Release of  ESOP shares                                    |       |                     |       |                    |       | 389                          |       | 104          |       |   |   |
| Tax effect  of stock compensation plan                     |       |                     |       |                    |       | 481                          |       |         |       |   |   |
| Treasury  shares reissued due to exercise of stock options |       |                     |       |                    |       | (173                         | )          |         |       |   |   |
| Purchase of  treasury stock, at cost                       |       |                     |       |                    |       |                         |       |         |       |   |   |
| MRP shares                                                 |       |                     |       |                    |       |                         |       | 6            |       |   |   |
| Dividends  paid                                            |       |                     |       |                    |       |                         |       |         |       | (610 | ) |
|                                                       |       |                     |       |                    |       |                         |       |         |       |   |   |
| Balance, March 31,  2005                              |       | 10,307,502               |       | $                       | 103        |                         | $          | 55,124       |       | $ | (472 | ) | $ | 79,615 |   |

 
| ** **                                                 | ** ** | **Treasury Stock** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **Shares**         | ** ** | **Amount**                    | ** ** | **Equity** | ** ** |
| ** **                                                 | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance, December 31,  2004                           |       | 5,213,482          |       | $                             | (56,908    | ) | $ | 75,301 |   |
| Net income                                                 |       |               |       |                          |       | 1,964 |   |
| Release of  ESOP shares                                    |       |               |       |                          |       | 493 |   |
| Tax effect  of stock compensation plan                     |       |               |       |                          |       | 481 |   |
| Treasury  shares reissued due to exercise of stock options |       | (126,388           | )          | 1,397                         |       | 1,224 |   |
| Purchase of  treasury stock, at cost                       |       | 136,000            |       | (3,291                        | )          | (3,291 | ) |
| MRP shares                                                 |       |               |       |                          |       | 6 |   |
| Dividends  paid                                            |       |               |       |                          |       | (610 | ) |
|                                                       |       |               |       |                          |       |   |   |
| Balance, March 31,  2005                              |       | 5,223,094          |       | $                             | (58,802    | ) | $ | 75,568 |   |

 

See notes to unaudited consolidated financial statements.

 

3

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                               |       |                                  |       |   |   |
| OPERATING  ACTIVITIES:                                                             |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 1,964      |   | $ | 1,760 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                  |       |   |   |
| Provision  for loan losses                                                         |       | 249                                   |       | 259 |   |
| Provision  for real estate losses                                                  |       | 24                                    |       | — |   |
| Deferred tax  provision (benefit)                                                  |       | (50                                   | )          | 43 |   |
| Accretion of  discounts on investment securities, net                              |       | (3                                    | )          | (33 | ) |
| Federal Home  Loan Bank stock dividends                                            |       | (39                                   | )          | (14 | ) |
| Gain on  disposition of office properties and equipment                            |       | —                                |       | (34 | ) |
| Gain on sale  of repossessed assets, net                                           |       | (5                                    | )          | (6 | ) |
| Originations  of loans held for sale                                               |       | (9,446                                | )          | (10,604 | ) |
| Proceeds  from sales of loans                                                      |       | 9,742                                 |       | 10,613 |   |
| Gain on sale  of loans originated to sell                                          |       | (134                                  | )          | (127 | ) |
| Depreciation                                                                       |       | 294                                   |       | 298 |   |
| Amortization  of deferred loan fees, net                                           |       | 38                                    |       | 3 |   |
| Release of  ESOP shares                                                            |       | 493                                   |       | 429 |   |
| MRP  compensation expense                                                          |       | 6                                     |       | 7 |   |
| Earnings on  life insurance policies                                               |       | (197                                  | )          | (211 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                  |       |   |   |
| Accrued  interest receivable                                                       |       | (647                                  | )          | (235 | ) |
| Prepaid  expenses and other assets                                                 |       | (13                                   | )          | 323 |   |
| Other  liabilities                                                                 |       | (16                                   | )          | 298 |   |
| Net cash  provided by operating activities                                         |       | 2,260                                 |       | 2,769 |   |
|                                                                               |       |                                  |       |   |   |
| INVESTING  ACTIVITIES:                                                             |       |                                  |       |   |   |
| Purchases of  investment securities held to maturity                               |       | (100                                  | )          | (63,878 | ) |
| Proceeds  from maturities/calls of investment securities held to maturity          |       | 1,318                                 |       | 55,879 |   |
| Purchase of  FHLB stock                                                            |       | (1,043                                | )          | — |   |
| Loan participations  sold                                                          |       | 1,787                                 |       | 2,709 |   |
| Loan  originations, net of repayments                                              |       | (34,231                               | )          | (24,404 | ) |
| Proceeds  from sales of repossessed assets                                         |       | 142                                   |       | 215 |   |
| Proceeds  from sales of office properties and equipment                            |       | —                                |       | 546 |   |
| Purchases of  office properties and equipment                                      |       | (1,010                                | )          | (958 | ) |
| Net cash  used in investing activities                                             |       | (33,137                               | )          | (29,891 | ) |
|                                                                               |       |                                  |       |   |   |
| FINANCING  ACTIVITIES:                                                             |       |                                  |       |   |   |
| Net increase  in deposits                                                          |       | 6,334                                 |       | 7,267 |   |
| Advances  from FHLB                                                                |       | 45,900                                |       | 2,033 |   |
| Repayment of  advances from FHLB                                                   |       | (21,767                               | )          | (4,105 | ) |
| Net increase  in advance payments by borrowers for taxes and insurance             |       | 181                                   |       | 162 |   |
| Purchase of  treasury stock                                                        |       | (3,291                                | )          | (2,045 | ) |
| Reissued  treasury stock                                                           |       | 1,224                                 |       | 714 |   |
| Dividends  paid                                                                    |       | (610                                  | )          | (532 | ) |
| Net cash  provided by financing activities                                         |       | 27,971                                |       | 3,494 |   |
|                                                                               |       |                                  |       |   |   |
| Net decrease  in cash and cash equivalents                                         |       | (2,906                                | )          | (23,628 | ) |
|                                                                                    |            |                                       |            |  |  |  |  |

 

(Continued)

 

4

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| ** **                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                           |       |                                  |       |   |   |
| CASH AND  CASH EQUIVALENTS:                                                    |       |                                  |       |   |   |
| Beginning of  period                                                           |       | $                                     | 16,003     |   | $ | 56,201 |   |
| End of  period                                                                 |       | $                                     | 13,097     |   | $ | 32,573 |   |
|                                                                           |       |                                  |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                            |       |                                  |       |   |   |
| Cash paid  for:                                                                |       |                                  |       |   |   |
| Interest                                                                       |       | $                                     | 4,023      |   | $ | 3,489 |   |
| Income taxes                                                                   |       | $                                     | 2          |   | $ | 168 |   |
|                                                                           |       |                                  |       |   |   |
| SUPPLEMENTAL  SCHEDULE OF NONCASH INVESTING ACTIVITIES:                   |       |                                  |       |   |   |
| Real estate  and other assets acquired in settlement of loans                  |       | $                                     | 72         |   | $ | 151 |   |
| Loans to  facilitate sales of real estate owned                                |       | $                                     | —     |   | $ | 197 |   |
| Investment  securities traded, recorded in investments not yet settled in cash |       | $                                     | —     |   | $ | 250 |   |

 

See notes tounaudited consolidated financial statements.

 

(Concluded)

 

5

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

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

 

The accompanying unaudited consolidated financial statements of theCompany have been prepared in accordance with instructions 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 all adjustments which are, in theopinion of management, necessary for a fair statement of results for theinterim periods.

 

The accompanying unaudited consolidated financial statements includethe accounts of the Company and the Bank. All material intercompany transactions have been eliminated inconsolidation.

 

The results ofoperations for the three months ended March 31, 2005, are not necessarilyindicative of the results to be expected for the year ending December 31,2005.  The unaudited consolidatedfinancial statements and notes thereto should be read in conjunction with theaudited financial statements and notes thereto for the year ended December 31,2004, contained in the Company’s 2004 Annual Report to Stockholders.

 

Certain amounts in the March 31, 2004, unaudited consolidatedfinancial statements have been reclassified to conform to the classificationsadopted for reporting in 2005.

 

**Note 2 - Earnings per Share**

 

The weightedaverage number of common shares used to calculate earnings per share for theperiods ended March 31, 2005 and 2004 were as follows:

 
| ** **                         | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Basic  weighted - average shares   |       | 4,987,228                              |       | 5,146,747 |   |
| Effect of  dilutive securities     |       | 280,357                                |       | 345,290 |   |
| Diluted  weighted - average shares |       | 5,267,585                              |       | 5,492,037 |   |

 

6

----

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

### **CRITICAL ACCOUNTING POLICIES**

###  

Various elements of our accounting policies,by their nature, are inherently subject to estimation techniques, valuationassumptions and other subjective assessments. In particular, the methodology for the determination of our allowancefor loan losses, due to the judgments, estimates and assumptions inherent inthat policy, is critical to preparation of our financial statements.  This policy and the judgments, estimates andassumptions are described in greater detail in subsequent sections ofManagement’s Discussion and Analysis and in the notes to the unauditedfinancial statements included herein.  Webelieve that the judgments, estimates and assumptions used in the preparationof our financial statements are appropriate given the factual circumstances atthe time.  However, given the sensitivityof our financial statements to this critical accounting policy, the use ofother judgments, estimates and assumptions could result in material differencesin our financial condition or results of operations.

 

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

 

## **CHANGES IN FINANCIAL CONDITION**

##  

Changes in financial condition between March 31,2005 and December 31, 2004 are presented in the following table (dollarsin thousands).  Material changes betweenperiods will be discussed in the sections which follow the table.

 
| ** **                                     | ** ** | **March 31,****2005** | ** ** | **December 31,  2004** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage****Change** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|--------------------------|------------|--------------------------|------------|
| **ASSETS**                                     |       |                       |       |                        |       |                     |       |                     |       |
| Cash and  cash equivalents                     |       | $                          | 13,097     |                        | $          | 16,003                   |       | $                        | (2,906     | ) | (18.2 | )% |
| Investment  securities held to maturity        |       | 55,445                     |       | 56,660                      |       | (1,215                   | )          | (2.1                     | )%         |
| Loans  receivable, net                         |       | 666,140                    |       | 634,217                     |       | 31,923                   |       | 5.0                      | %          |
| Federal Home  Loan Bank stock                  |       | 5,958                      |       | 4,876                       |       | 1,082                    |       | 22.2                     | %          |
| Prepaid  expenses and other assets             |       | 41,393                     |       | 39,909                      |       | 1,484                    |       | 3.7                      | %          |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| TOTAL                                          |       | $                          | 782,033    |                        | $          | 751,665                  |       | $                        | 30,368     |   | 4.0 | % |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY** |       |                       |       |                        |       |                     |       |                     |       |
| LIABILITIES:                                   |       |                       |       |                        |       |                     |       |                     |       |
| Deposits                                       |       | $                          | 588,758    |                        | $          | 582,424                  |       | $                        | 6,334      |   | 1.1 | % |
| Other  borrowings                              |       | 113,889                    |       | 89,756                      |       | 24,133                   |       | 26.9                     | %          |
| Other  liabilities                             |       | 3,818                      |       | 4,184                       |       | (366                     | )          | (8.7                     | )%         |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| Total  liabilities                             |       | 706,465                    |       | 676,364                     |       | 30,101                   |       | 4.4                      | %          |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| STOCKHOLDERS’  EQUITY                     |       | 75,568                     |       | 75,301                      |       | 267                      |       | 0.4                      | %          |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| TOTAL                                          |       | $                          | 782,033    |                        | $          | 751,665                  |       | $                        | 30,368     |   | 4.0 | % |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| BOOK VALUE  PER SHARE                          |       | $                          | 14.86      |                        | $          | 14.78                    |       |                     |       |   |   |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| EQUITY TO  ASSETS                              |       | 9.7                        | %          | 10.0                        | %          |                     |       |                     |       |

 

7

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**Loans Receivable. **Changes in loan composition between March 31,2005 and December 31, 2004 are presented in the following table (dollarsin thousands).

 
| ** **                                     | ** ** | **March 31,****2005** | ** ** | **December 31,  2004** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage****Change** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| One- to  four-family residential               |       | $                          | 282,947    |                        | $          | 282,144                  |       | $                        | 803        |   |   |   |
| Multi-family  residential                      |       | 14,429                     |       | 9,454                       |       | 4,975                    |       |                     |       |
| Commercial  real estate                        |       | 150,348                    |       | 145,909                     |       | 4,439                    |       |                     |       |
| Construction                                   |       | 182,977                    |       | 159,111                     |       | 23,866                   |       |                     |       |
| Total first  mortgage loans                    |       | 630,701                    |       | 596,618                     |       | 34,083                   |       | 5.7                      | %          |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| Commercial                                     |       | 29,679                     |       | 27,545                      |       | 2,134                    |       | 7.7                      | %          |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| Home equity  and second mortgage               |       | 48,089                     |       | 45,256                      |       | 2,833                    |       |                     |       |
| Automobile                                     |       | 18,399                     |       | 19,101                      |       | (702                     | )          |                     |       |
| Other                                          |       | 11,323                     |       | 10,685                      |       | 638                      |       |                     |       |
| Total  consumer                                |       | 77,811                     |       | 75,042                      |       | 2,769                    |       | 3.7                      | %          |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| Total loans  receivable                        |       | 738,191                    |       | 699,205                     |       | 38,986                   |       | 5.6                      | %          |
| Less:                                          |       |                       |       |                        |       |                     |       |                     |       |
| Undisbursed  loan funds                        |       | (69,732                    | )          | (62,661                     | )          | (7,071                   | )          |                     |       |
| Unearned  discounts and net deferred loan fees |       | (369                       | )          | (481                        | )          | 112                      |       |                     |       |
| Allowance  for loan losses                     |       | (1,950                     | )          | (1,846                      | )          | (104                     | )          |                     |       |
|                                           |       |                       |       |                        |       |                     |       |                     |       |
| Total loans  receivable, net                   |       | $                          | 666,140    |                        | $          | 634,217                  |       | $                        | 31,923     |   | 5.0 | % |

 

The Bankcontinued to experience demand for multi-family loans, commercial real estateloans, construction loans, and commercial loans.  Generally, the Bank’s construction loans werefor the purpose of constructing single-family residential properties.  The interest rate environment and robusteconomy of our market area provided continued demand and opportunity for ourother loan products as well.  In recentyears, the Bank has placed an increased emphasis on commercial real estatelending, construction lending, and commercial lending to diversify its loanportfolio, take advantage of market opportunities in these types of loans, andhelp the Bank transition to a more full-service community bank, as well as toprovide opportunities to cross-sell its other banking products.

 

8

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**Asset Quality. **The following table sets forth the amounts andcategories of the Bank’s nonperforming assets at the dates indicated.

 
| ** **                                                                         | ** ** | **March 31, 2005**    | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual  loans:                                                                 |       |                       |       |                       |       |
| One- to  four-family residential                                                   |       | $                          | 2,216      |                       | $          | 2,619 |   |
| Construction  loans                                                                |       | 639                        |       | 634                        |       |
| Commercial  real estate                                                            |       | 574                        |       | —                     |       |
| Commercial  loans                                                                  |       | 573                        |       | 186                        |       |
| Consumer  loans                                                                    |       | 603                        |       | 723                        |       |
| Total  nonaccrual loans                                                            |       | 4,605                      |       | 4,162                      |       |
|                                                                               |       |                       |       |                       |       |
| Restructured  loans                                                                |       | 3,746                      |       | 3,790                      |       |
| Real estate  owned                                                                 |       | 458                        |       | 563                        |       |
|                                                                               |       |                       |       |                       |       |
| Nonperforming  assets                                                              |       | $                          | 8,809      |                       | $          | 8,515 |   |
|                                                                               |       |                       |       |                       |       |
| Total  nonaccrual and restructured loans as a percentage of total loans receivable |       | 1.13                       | %          | 1.14                       | %          |
|                                                                               |       |                       |       |                       |       |
| Total  nonperforming assets as a percentage of total assets                        |       | 1.13                       | %          | 1.13                       | %          |

 

Restructured loans reported at March 31,2005 and December 31, 2004, were comprised of a group of loans to relatedborrowers.  At those dates the loans werenot over 90 days past due.

 

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

 
| ** **                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Balance at  beginning of period  |       | $                                     | 1,846      |   | $ | 1,621 |   |
| Provisions  for estimated losses |       | 249                                   |       | 259 |   |
| Recoveries                       |       | 25                                    |       | 24 |   |
| Losses  charged off              |       | (170                                  | )          | (201 | ) |
| Balance at  end of period        |       | $                                     | 1,950      |   | $ | 1,703 |   |

 

Changes in the composition of the allowancefor loan losses between March 31, 2005 and December 31, 2004 arepresented in the following table (in thousands):

 
| ** **  | ** ** | **March 31,****2005** | ** ** | **December 31,  2004** | ** ** | **Increase  (Decrease)** | ** ** |
|-------------|------------|----------------------------|------------|-----------------------------|------------|--------------------------|------------|
| General     |       | $                          | 1,558      |                        | $          | 1,476                    |       | $ | 82 |   |
| Specific    |       | 306                        |       | 318                         |       | (12                      | )          |
| Unallocated |       | 86                         |       | 52                          |       | 34                       |       |
|        |       | $                          | 1,950      |                        | $          | 1,846                    |       | $ | 104 |   |

 

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

 

The allowance consists ofspecific, general and unallocated components. The specific component relates toloans that are classified as loss, doubtful, substandard or special mention.For such loans that are also classified as impaired, an allowance isestablished when the discounted cash flows (or collateral value or observablemarket

 

9

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price) of the impaired loanis lower than the carrying value of that loan. The general component coversnon-classified loans and is based primarily on historical loss experience. Anunallocated component is maintained to cover uncertainties that could affectmanagement’s estimate of probable losses. The unallocated component of theallowance reflects the margin of imprecision inherent in the underlyingassumptions used in the methodologies for estimating specific and generallosses in the portfolio.

 

TheBank reviews its non-homogeneous loans for impairment on a quarterlybasis.  The Bank considers commercialreal estate, construction, multi-family, and commercial loans to be non-homogeneousloans.  A loan is considered impairedwhen, based on current information and events, it is probable that the Bankwill be unable to collect the scheduled payments of principal or interest whendue according to the contractual terms of the loan agreement.  Factors considered by management indetermining impairment include payment status, collateral value, and theprobability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant paymentdelays and payment shortfalls generally are not classified as impaired.  Management determines the significance ofpayment delays and payment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and the borrower,including the length of the delay, the reasons for the delay, the borrower’sprior payment record, and the amount of the shortfall in relation to theprincipal and interest owed.  Impairmentis measured on a loanby loan basis by either the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the loan’s obtainable marketprice, or the fair value of the collateral if the loan is collateral dependent.

 

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

 

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

 

Although we consider the allowance forloan losses of $2.0 million appropriate and adequate to cover losses inherentin our loan portfolio at March 31, 2005, no assurance can be given that wewill not sustain loan losses that are significantly different from the amountprovided, or that subsequent evaluations of the loan portfolio, in light offactors then prevailing, would not result in a significant change in theallowance for loan losses.

 

10

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**Investment Securities. **Changes in the composition of investment securities held to maturitybetween March 31, 2005 and December 31, 2004 are presented in thefollowing table (in thousands).

 
| ** **                              | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Increase   (Decrease)** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Certificates  of deposit                |       | $                        | 2,000      |                        | $          | 3,000                     |       | $ | (1,000 | ) |
| U.S.  Government and agency obligations |       | 37,756                   |       | 37,821                      |       | (65                       | )          |
| Municipal  securities                   |       | 15,689                   |       | 15,839                      |       | (150                      | )          |
| Total                                   |       | $                        | 55,445     |                        | $          | 56,660                    |       | $ | (1,215 | ) |

 

During the first quarter of 2005, investmentsecurities totaling $100,000 were purchased and $1.3 million matured or werecalled.  The decrease in certificates ofdeposit and municipal securities was due to calls and maturities in excess ofpurchases.

 

At March 31,2005, estimated fair values of investment securities held to maturity were asfollows (in thousands):

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------|------------|
|                                   |       |                |       |            |       |
| Certificates of deposit                |       | $                   | 2,000      |            | $          | 2,000 |   |
| U.S. Government and agency obligations |       | 37,756              |       | 36,905          |       |
| Municipal securities                   |       | 15,689              |       | 15,745          |       |
| Total                                  |       | $                   | 55,445     |            | $          | 54,650 |   |

 

**Federal Home Loan Bank Stock.**  Federal Home Loan Bank (“FHLB”) stock increasedby approximately $1.1 million due to required purchases related to the increasein FHLB advances.

 

**Deposits. **Changesin the composition of deposits between March 31, 2005 and December 31,2004 are presented in the following table (dollars in thousands).

 
| ** **               | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|--------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|------------------------|------------|
|                     |       |                     |       |                        |       |                     |       |                   |       |
| DDA and NOW  accounts    |       | $                        | 113,636    |                        | $          | 109,772                  |       | $                      | 3,864      |   | 3.5 | % |
| Money market  accounts   |       | 93,943                   |       | 106,063                     |       | (12,120                  | )          | (11.4                  | )%         |
| Savings  accounts        |       | 31,961                   |       | 31,611                      |       | 350                      |       | 1.1                    | %          |
| Certificates  of deposit |       | 349,218                  |       | 334,978                     |       | 14,240                   |       | 4.3                    | %          |
|                     |       |                     |       |                        |       |                     |       |                   |       |
| Total  deposits          |       | $                        | 588,758    |                        | $          | 582,424                  |       | $                      | 6,334      |   | 1.1 | % |

 

The Bank experienced a shift in the mix ofdeposits from money market accounts to certificates of deposit during thequarter.  Certificates of depositincreased as interest rates began to rise. Further, the Bank has advertised several CD products with special ratesand terms ranging from 7 to 40 months. The cost of deposit funds increased from 2.26% at December 31, 2004to 2.33% at March 31, 2005.  TheBank will continue to aggressively promote checking accounts with plans toexpand its promotion of checking accounts by targeting small- and medium-sizedbusiness accounts with its direct mail campaign and “thank you” gifts beginningin the second quarter.  Checking accountsare an attractive source of funds for the Bank as they offer low-interestdeposits, fee income potential, and the opportunity to cross-sell otherfinancial services.

 

**Federal Home Loan Bank Advances.**  The Bank experienced $24.1 million or26.9% growth in FHLB of Dallas advances during the quarter.  The advances were used to fund loan growthduring the quarter.  The balance of advancesat March 31, 2005 of $113.9 million consisted of $66.7 million of fixedrate advances with an average cost of 3.69% and $47.2 million of floating rateadvances with an average cost of 2.87%.

 

**OtherLiabilities.** Other liabilities decreased primarily due to a decrease in the payablefor unsettled investment transactions of $1 million, offset by increases inincome taxes payable of approximately $200,000 and accrued interest payable ofapproximately $100,000.

 

11

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**Stockholders’ Equity. **Stockholders’ equity increased $267,000from December 31, 2004 to March 31, 2005.  The increase in stockholders’ equity wasprimarily due to net income of $2.0 million and the issuance of treasury stockdue to exercise of stock options of $1.2 million, offset by the purchase oftreasury stock totaling $3.3 million during the first quarter of 2005.  In addition, during the quarter ended March 31,2005 cash dividends of $610,000 were paid. See the Unaudited Consolidated Statement of Stockholders’ Equity for thethree months ended March 31, 2005 for more detail.

 

### **AverageBalance Sheets**

 

The followingtable sets forth certain information relating to the Company’s average balancesheets and reflects the average yield on assets and average cost of liabilitiesfor the periods indicated and the yields earned and rates paid at March 31,2005.  Such yields and costs are derivedby dividing income or expense by the average balance of assets or liabilities,respectively, for the periods presented and outstanding balances at March 31,2005.  Average balances are based ondaily balances during the period.

 
| ** **                                                        | ** ** | ** **               | ** ** | **Quarter  Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | ** **               | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **March 31,  2005** | ** ** | **Average  Balance**              | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** |
| **Yield/Cost**                                                    |
| ** **                                                        | ** ** | ** **               | ** ** | **(Dollars  in Thousands)**       | ** ** |
| Interest-earning assets:                                          |       |                     |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                               |       | 6.15                     | %          | $                                 | 651,582    |   | $ | 9,884 |   | 6.07 | % | $ | 520,908 |   | $ | 8,329 |   | 6.40 | % |
| Investment securities(2)                                          |       | 4.49                     |       | 61,783                            |       | 698 |   | 4.52 |   | 88,051 |   | 960 |   | 4.36 |   |
| Other interest-earning assets                                     |       | 2.75                     |       | 2,348                             |       | 13 |   | 2.31 |   | 41,057 |   | 91 |   | 0.89 |   |
| Total interest-earning assets                                     |       | 6.00                     |       | 715,713                           |       | 10,595 |   | 5.92 |   | 650,016 |   | 9,380 |   | 5.77 |   |
| Noninterest-earning assets                                        |       |                     |       | 50,914                            |       |   |   |   |   | 46,961 |   |   |   |   |   |
| Total assets                                                      |       |                     |       | $                                 | 766,627    |   |   |   |   |   | $ | 696,977 |   |   |   |   |   |
| Interest-bearing liabilities:                                     |       |                     |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                          |       | 2.33                     |       | $                                 | 582,420    |   | 3,283 |   | 2.25 |   | $ | 577,829 |   | 3,187 |   | 2.21 |   |
| Other borrowings                                                  |       | 3.35                     |       | 103,542                           |       | 844 |   | 3.26 |   | 38,490 |   | 319 |   | 3.31 |   |
| Total interest-bearing liabilities                                |       | 2.49                     |       | 685,962                           |       | 4,127 |   | 2.41 |   | 616,319 |   | 3,506 |   | 2.27 |   |
| Noninterest-bearing liabilities                                   |       |                     |       | 5,173                             |       |   |   |   |   | 5,192 |   |   |   |   |   |
| Total liabilities                                                 |       |                     |       | 691,135                           |       |   |   |   |   | 621,511 |   |   |   |   |   |
| Stockholders’ equity                                         |       |                     |       | 75,492                            |       |   |   |   |   | 75,466 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |       |                     |       | $                                 | 766,627    |   |   |   |   |   | $ | 696,977 |   |   |   |   |   |
|                                                              |       |                     |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                               |       |                     |       |                              |       | $ | 6,468 |   |   |   |   |   | $ | 5,874 |   |   |   |
| Net earning assets                                                |       |                     |       | $                                 | 29,751     |   |   |   |   |   | $ | 33,697 |   |   |   |   |   |
| Interest rate spread                                              |       | 3.51                     | %          |                              |       |   |   | 3.51 | % |   |   |   |   | 3.50 | % |
| Net interest margin                                               |       |                     |       |                              |       |   |   | 3.61 | % |   |   |   |   | 3.61 | % |
| Ratio of interest-earning assets to interest-bearing  liabilities |       |                     |       |                              |       |   |   | 104.34 | % |   |   |   |   | 105.47 | % |

 

----

(1)  Includes nonaccrual loans.

(2)  Includes FHLB stock.

 

12

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## **Rate/Volume Analysis**

##  

The tablebelow sets forth certain information regarding changes in interest income andinterest expense of the Company for the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (i) changes in volume (changes in average volumemultiplied by prior rate); (ii) changes in rate (change in rate multipliedby prior average volume); (iii) changes in rate-volume (changes in ratemultiplied by the change in average volume); and (iv) the net change.

 
| ** **                         | ** ** | **Quarter  Ended March 31,  2005 vs. 2004** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **Increase  (Decrease)  Due to**                 | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **Volume**                                       | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Increase  (Decrease)** | ** ** |
| ** **                         | ** ** | **(In Thousands)**                               | ** ** |
| Interest income:                   |       |                                             |       |   |   |   |   |   |   |
| Loans receivable                   |       | $                                                | 2,089      |   | $ | (427 | ) | $ | (107 | ) | $ | 1,555 |   |
| Investment securities              |       | (286                                             | )          | 35 |   | (11 | ) | (262 | ) |
| Other interest-earning assets      |       | (86                                              | )          | 145 |   | (137 | ) | (78 | ) |
| Total interest-earning assets      |       | 1,717                                            |       | (247 | ) | (255 | ) | 1,215 |   |
|                               |       |                                             |       |   |   |   |   |   |   |
| Interest expense:                  |       |                                             |       |   |   |   |   |   |   |
| Deposits                           |       | 25                                               |       | 70 |   | 1 |   | 96 |   |
| Other borrowings                   |       | 539                                              |       | (5 | ) | (9 | ) | 525 |   |
| Total interest-bearing liabilities |       | 564                                              |       | 65 |   | (8 | ) | 621 |   |
| Net change in net interest income  |       | $                                                | 1,153      |   | $ | (312 | ) | $ | (247 | ) | $ | 594 |   |

 

13

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**CHANGES IN RESULTS OFOPERATIONS**

 

The table below presents a comparison ofresults of operations for the three months ended March 31,2005 and 2004 (dollars in thousands). Specific changes in captions will be discussed below the table.

 
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **2005**                               | ** ** | **2004**                 | ** ** | **2005 vs 2004**       | ** ** | **2005 vs 2004** | ** ** |
| Interest  income:                                     |       |                                   |       |                     |       |                   |       |   |   |
| Loans  receivable                                     |       | $                                      | 9,884      |                     | $          | 8,329                  |       | $ | 1,555 |   |   |   |
| Investment  securities                                |       | 698                                    |       | 960                      |       | (262                   | )          |   |   |
| Other                                                 |       | 13                                     |       | 91                       |       | (78                    | )          |   |   |
| Total  interest income                                |       | 10,595                                 |       | 9,380                    |       | 1,215                  |       | 13.0 | % |
| Interest  expense:                                    |       |                                   |       |                     |       |                   |       |   |   |
| Deposits                                              |       | 3,283                                  |       | 3,187                    |       | 96                     |       |   |   |
| Other  borrowings                                     |       | 844                                    |       | 319                      |       | 525                    |       |   |   |
| Total  interest expense                               |       | 4,127                                  |       | 3,506                    |       | 621                    |       | 17.7 | % |
| Net interest  income before provision for loan losses |       | 6,468                                  |       | 5,874                    |       | 594                    |       | 10.1 | % |
| Provision  for loan losses                            |       | 249                                    |       | 259                      |       | (10                    | )          | (3.9 | )% |
| Net interest  income after provision for loan losses  |       | 6,219                                  |       | 5,615                    |       | 604                    |       | 10.8 | % |
| Noninterest  income:                                  |       |                                   |       |                     |       |                   |       |   |   |
| Deposit fee  income                                   |       | 1,008                                  |       | 770                      |       | 238                    |       |   |   |
| Gain on sale  of loans                                |       | 134                                    |       | 127                      |       | 7                      |       |   |   |
| Earnings on  life insurance policies                  |       | 197                                    |       | 211                      |       | (14                    | )          |   |   |
| Other                                                 |       | 231                                    |       | 324                      |       | (93                    | )          |   |   |
| Total  noninterest income                             |       | 1,570                                  |       | 1,432                    |       | 138                    |       | 9.6 | % |
| Noninterest  expenses:                                |       |                                   |       |                     |       |                   |       |   |   |
| Salaries and  employee benefits                       |       | 3,003                                  |       | 2,679                    |       | 324                    |       |   |   |
| Net  occupancy expense                                |       | 499                                    |       | 492                      |       | 7                      |       |   |   |
| Data  processing                                      |       | 341                                    |       | 408                      |       | (67                    | )          |   |   |
| Advertising  and public relations                     |       | 241                                    |       | 128                      |       | 113                    |       |   |   |
| Other                                                 |       | 812                                    |       | 767                      |       | 45                     |       |   |   |
| Total  noninterest expenses                           |       | 4,896                                  |       | 4,474                    |       | 422                    |       | 9.4 | % |
| Income  before income taxes                           |       | 2,893                                  |       | 2,573                    |       | 320                    |       |   |   |
| Provision  for income taxes                           |       | 929                                    |       | 813                      |       | 116                    |       |   |   |
| Net income                                            |       | 1,964                                  |       | 1,760                    |       | 204                    |       | 11.6 | % |
|                                                  |       |                                   |       |                     |       |                   |       |   |   |
| Basic  earnings per share                             |       | $                                      | 0.39       |                     | $          | 0.34                   |       | $ | 0.05 |   | 14.7 | % |
| Diluted  earnings per share                           |       | $                                      | 0.37       |                     | $          | 0.32                   |       | $ | 0.05 |   | 15.6 | % |
|                                                  |       |                                   |       |                     |       |                   |       |   |   |
| Interest  rate spread                                 |       | 3.51                                   | %          | 3.50                     | %          |                   |       |   |   |
| Net interest  margin                                  |       | 3.61                                   | %          | 3.61                     | %          |                   |       |   |   |
|                                                  |       |                                   |       |                     |       |                   |       |   |   |
| Full-time  equivalents                                |       | 252                                    |       | 248                      |       |                   |       |   |   |
| Full-service  offices                                 |       | 15                                     |       | 15                       |       |                   |       |   |   |

 

**NetInterest Income. **Netinterest income is determined by the Company’s interest rate spread (i.e., thedifference between the yields earned on its interest-earning assets and therates paid on its interest-bearing liabilities) and the relative amounts ofinterest-earning assets and interest-bearing liabilities.

 

14

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### **INTERESTINCOME AND INTEREST EXPENSE**

###  

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

 

**InterestIncome. **Theincrease in interest income was primarily due to an increase in the averagebalance of loans, partially offset by a decrease in the average yield earned onloans and a decrease in the average balance of investment securities.  The decrease in the average yield earned onloans was primarily due to the Company’s efforts to increase variable rateloans, which typically have lower rates at origination than those charged forfixed rate loans.  The average balance ofloans increased primarily due to increased construction loan originationactivity.  The average balance ofinvestment securities decreased due to calls and maturities.

 

**InterestExpense. **Theincrease in interest expense was primarily due to an increase in the averagebalance of FHLB advances.  The averagebalance of FHLB advances increased due to advances being used to fund loangrowth.

 

**Provisionfor Loan Losses.** The provision for loan losses includes charges to maintain an allowancefor loan losses adequate to cover probable credit losses related tospecifically identified loans as well as probable credit losses inherent in theremainder of the loan portfolio that have been incurred as of the balance sheetdate.  Such provision and the adequacy ofthe allowance 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.

 

While the loanportfolio has increased by $39.0 million since December 31, 2004, theestimated allowance for loan losses did not increase significantly since themajority of the growth was in real estate loans, which have lower estimatedloss rates than consumer and commercial loans. There were no changes in loss factors applied to pooled loans during thequarter.

 

**NoninterestIncome. **Deposit fee income increased as a result ofthe Bank’s continued promotion of Bounce ProtectionTM overdraftservice as well as an increasein the number of checking accounts and a change in the insufficient funds feestructure.  The number of checkingaccounts increased approximately 9.6% from March 31, 2004 to March 31,2005.  The Bank plans to continue toaggressively promote checking accounts in 2005 through direct mail campaigns tofurther expand its checking accounts and increase deposit fee income.

 

**Noninterest Expense**

 

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

 
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** | **Increase****(Decrease)** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **2005**                              | ** ** | **2004**                   | ** ** | **2005 vs 2004** | ** ** |
| Salaries                           |       | $                                     | 1,977      |                       | $          | 1,868 |   | $ | 109 |   |
| Payroll  taxes                     |       | 234                                   |       | 220                        |       | 14 |   |
| Insurance                          |       | 147                                   |       | 144                        |       | 3 |   |
| ESOP expense  (1)                  |       | 481                                   |       | 410                        |       | 71 |   |
| MRP expense  (2)                   |       | 7                                     |       | 7                          |       | — |   |
| Defined  benefit plan contribution |       | 122                                   |       | (8                         | )          | 130 |   |
| Other                              |       | 35                                    |       | 38                         |       | (3 | ) |
| Total                              |       | $                                     | 3,003      |                       | $          | 2,679 |   | $ | 324 |   |
|                                    |            |                                       |            |                            |            |  |  |  |  |  |  |

 

----

(1)          Employee Stock Ownership Plan

(2)          Management Recognition and Retention Plan

 

15

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The increasein salaries was due primarily to normal salary and merit increases.  Payroll taxes increased due to the increasein salaries.  The increase in employeestock ownership plan expense was due to an increase in the Company’s averagestock price from $20.60 for the quarter ended March 31, 2004 to $23.71 forthe same quarter in 2005.  Definedbenefit plan expense increased due to the unusual credit during the firstquarter of 2004.

 

**Dataprocessing expense.** Data processing expense decreased primarily due to the renegotiation ofthe Bank’s contract with its service provider.

 

**Advertising and public relations.** Advertising and public relations increased for the quarter ended March 31,2005 compared to the same period in 2004 primarily due to costs associated withthe new checking account marketing program, including direct mail, “thank you”gifts, marketing brochures, posters and billboards.

 

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

 
| ** **                      | ** ** | **Three Months Ended March 31,** | ** ** | **Increase****(Decrease)** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004**                   | ** ** | **2005 vs 2004** | ** ** |
| Consultant  and management fees |       | $                                     | 27         |                       | $          | 93 |   | $ | (66 | ) |
| Other                           |       | 785                                   |       | 674                        |       | 111 |   |
| Total                           |       | $                                     | 812        |                       | $          | 767 |   | $ | 45 |   |

 

Other expensesincreased approximately $45,000 on a net basis, consisting of increases in avariety of expense accounts, the largest of which was a $24,000 increase in theloss provision on real estate owned. These increases were offset by a decrease in consultant and managementfees of approximately $66,000.  Thedecrease in consultant and management fees was primarily due to fees paid to aconsulting firm in 2004 for assistance in promotion of checking accounts.  Fees paid to a third party vendorrelated to the Bounce ProtectionTM program also decreased due to the end of the contractual payment periodin May 2004.

 

**Income Taxes.**

 

The increasein income tax expense was primarily due to an increase in taxable income and,to a lesser extent, an increase in the effective tax rate.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

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

 

**•**                  the origination, purchase or sale ofloans;

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

**•**                  the commitment to fund withdrawals ofcertificates of deposit at maturity.

 

At March 31,2005, the Bank’s off-balance sheet arrangements principally included lendingcommitments, which are described below. At March 31, 2005, the Company had no interests in non-consolidatedspecial purpose entities.

 

At March 31,2005, commitments included:

 

**•**                  total approved loan originationcommitments outstanding amounting to $22.9 million, including $2.0 million ofloans committed to sell;

**•**                  rate lock agreements with customersof $6.4 million, all of which have been locked with an investor;

**•**                  funded mortgage loans committed tosell of $1.5 million;

**•**                  unadvanced portion of constructionloans of $69.7 million;

**•**                  unused lines of credit of $23.9million;

**•**                  outstanding standby letters of creditof $1.4 million;

 

16

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**•**                  total predetermined overdraftprotection limits of $10.5 million; and

**•**                  certificates of deposit scheduled tomature in one year or less totaling $141.7 million.

 

Total unfundedcommitments to originate loans for sale and the related commitments to sell of$6.4 million meet the definition of a derivative financial instrument.  The related asset and liability areconsidered immaterial at March 31, 2005.

 

Historically,a very small percentage of predetermined overdraft limits have been used.  At March 31, 2005, overdrafts ofaccounts with Bounce ProtectionTMrepresented usage of 2.5% of the limit. We expect utilization of these overdraft limits to remain at comparablelevels in the future.

 

Based onhistorical experience, management believes that a significant portion ofmaturing deposits will remain with the Bank. We anticipate that we will continue to have sufficient funds, throughrepayments, deposits and borrowings, to meet our current commitments.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

###  

The Bank’s liquidity, represented by cash andcash equivalents and eligible investment securities, is a product of itsoperating, investing and financing activities. The Bank’s primary sources of funds are deposits, borrowings, collectionson outstanding loans, maturities and calls of investment securities and othershort-term investments and funds provided from operations.  While scheduled loan amortization andmaturing investment securities and short-term investments are relativelypredictable sources of funds, deposit flows and loan prepayments are greatlyinfluenced by general interest rates, economic conditions and competition.  The Bank manages the pricing of its depositsto maintain a steady deposit balance.  Inaddition, the Bank invests excess funds in overnight deposits and other short-terminterest-earning assets which provide liquidity to meet lendingrequirements.  The Bank has generallybeen able to generate enough cash through the retail deposit market, itstraditional funding source, to offset the cash utilized in investing activities.  As an additional source of funds, the Bankhas borrowed from the FHLB of Dallas. During the first quarter of 2005, the use of FHLB advances increased dueto increased demand for the Bank’s loan products.  At March 31, 2005, available borrowing capacitywith the FHLB was in excess of $152 million.

 

Liquidity management is both a daily andlong-term function of business management. Excess liquidity is generally invested in short-term investments such asovernight deposits and certificates of deposit. On a longer-term basis, the Bank maintains a strategy of investing invarious lending products.  The Bank usesits sources of funds primarily to meet its ongoing commitments, to pay maturingsavings certificates and savings withdrawals, to repay maturing FHLB of Dallasadvances, and to fund loan commitments.

 

As of March 31, 2005, the Bank’sregulatory capital was in excess of all applicable regulatoryrequirements.  At March 31, 2005,the Bank’s tangible, core and risk-based capital ratios amounted to 9.43%, 9.43%and 13.16%, respectively, compared to regulatory requirements of 1.5%, 4.0% and8.0%, respectively.

 

### **IMPACT OFINFLATION AND CHANGING PRICES**

###  

The financialstatements and related financial data presented herein have been prepared inaccordance with generally accepted accounting principles, which require themeasurement of financial position and operating results in terms of historicaldollars, without considering changes in relative purchasing power over time dueto inflation.

 

Unlikemost industrial companies, virtually all of the Bank’s assets and liabilitiesare monetary in nature.  As a result,interest rates generally have a more significant impact on a financialinstitution’s performance than does the effect of inflation.

 

### **FORWARD-LOOKING STATEMENTS**

###  

The Company’sQuarterly Report on Form 10-Q contains certain forward-looking statementsand information relating to the Company that are based on the beliefs ofmanagement as well as assumptions made by and information currently availableto management.  In addition, in thisdocument, the words “anticipate”, “believe,”

 

17

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“estimate,”****“expect,” “intend,” “should” and similarexpressions, or the negative thereof, as they relate to the Company or theCompany’s management, are intended to identify forward-looking statements.  Such statements reflect the current views ofthe Company with respect to future looking events and are subject to certainrisks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or shouldunderlying assumptions prove incorrect, actual results may vary materially fromthose described herein as anticipated, believed, estimated, expected orintended.  The Company does not intend toupdate these forward-looking statements.

 

18

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**QUANTITATIVE AND QUALITATIVE DISCLOSURES**

**ABOUTMARKET RISK**

 

For adiscussion of the Company’s asset and liability management policies as well asthe potential impact of interest rate changes upon the market value of the Bank’sportfolio equity, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the Company’s 2004 Annual Report toStockholders.  There has been no materialchange in the Company’s asset and liability position or the market value of theBank’s portfolio equity since December 31, 2004.

 

**CONTROLS AND PROCEDURES**

 

Our managementevaluated, with the participation of our Chief Executive Officer and ChiefFinancial Officer, the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Based onsuch evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures are designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andregulations and are operating in an effective manner.

 

Nochange in the Company’s internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the fiscal quarter ended March 31, 2005 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

19

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**FIRSTFEDERAL BANCSHARES OF ARKANSAS, INC.**

 

**Part II**

 
| Item 1. |   | Legal Proceedings                                                                                                                                                       |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                    |
|    |   | Neither the Company nor the Bank is  involved in any pending legal proceedings other than non-material legal  proceedings occurring in the ordinary course of business. |
|    |   |                                                                                                                                                                    |
| Item 2. |   | Changes in Securities, Use of Proceeds, and  Issuer Purchases of Equity Securities                                                                                      |

 

ISSUER PURCHASES OF EQUITY SECURITIES

 
| ** **                                   | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid  per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **(d) Maximum Number  of Shares that May Yet  Be Purchased Under the  Plans or Programs** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                       | ** ** |                                        |       |                                                                                                   |       |                                                                                                | ** ** |
| February 1,  to  February 28, 2005 |       | 108,000                                          |       | $                                           | 23.93      |                                                                                                   | 108,000    |                                                                                                | 192,792    |   |
| March 1,  to  March 31, 2005       |       | 28,000                                           |       | $                                           | 25.23      |                                                                                                   | 28,000     |                                                                                                | 164,792    |   |

 
| ** ** | ** ** | The Company  is in its 17th announced repurchase program, which was approved by the board  of directors on November 30, 2004, and publicly announced on  February 8, 2005.  Total shares  approved to be purchased in this program are 251,801, of which 87,009 have  been purchased as of March 31, 2005.   All treasury stock purchases are made under publicly announced  repurchase programs. |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Item 3.    |       | Defaults Upon Senior Securities                                                                                                                                                                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Item 4.    |       | Submission of Matters to a Vote of Security  Holders                                                                                                                                                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Item 5.    |       | Other Information                                                                                                                                                                                                                                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | None.                                                                                                                                                                                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Item 6.    |       | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Exhibit 31.1  – Certification of Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  1350)                                                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Exhibit 31.2  – Certification of Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  1350)                                                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Exhibit 32.1  – Certification of Chief Executive Officer,  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  1350)                                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Exhibit 32.2  – Certification of Chief Financial Officer,  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  1350)                                                                                                                                                                                                                                                                      |

 

20

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**SIGNATURES**

 

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

 

 
|                       | **FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.** |
|----------------------------|------------------------------------------------|
|                       |                                           |
|                       |                                           |
| Date: April 27,  2005 | By:                                            | /s/Larry J. Brandt |   |
|                       |                                           | Larry J. Brandt |
|                       |                                           | President/CEO |
|                       |                                           |
|                       |                                           |
| Date: April 27,  2005 | By:                                            | /s/Sherri R. Billings |   |
|                       |                                           | Sherri R. Billings |
|                       |                                           | EVP/CFO |
|                            |                                                |  |  |  |

 

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