FIRST FEDERAL BANCSHARES OF ARKANSAS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2004

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

		Commission File Number 0-28312

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

(Exact name of registrant as specified in its charter)

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

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

(870) 741-7641

(Registrant’s telephone number, including area code)

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

Yes 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’s classes of common stock, as of the latest practicable date: As of October 25, 2004, there were issued and outstanding 5,135,804 shares of the Registrant’s Common Stock, par value $.01 per share.

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

TABLE OF CONTENTS

Part I.	Financial Information	Page

Item 1.	Consolidated Financial Statements

	Consolidated Statements of Financial Condition as of September 30, 2004 and December 31, 2003 (unaudited)	1

	Consolidated Statements of Income for the three and nine months ended September 30, 2004 and 2003 (unaudited)	2

	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2004 (unaudited)	3

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	21

Part II.	Other Information

Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	22
Item 6.	Exhibits	22

Signatures		23

Exhibits
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14a 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-14a of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Section 906 Certification of the CEO
32.2	Section 906 Certification of the CFO

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

(Unaudited)

	September 30, 2004			December 31, 2003
ASSETS

Cash and cash equivalents	$	13,015		$	56,201
Investment securities held to maturity	68,347			80,379
Federal Home Loan Bank stock	3,825			3,749
Loans receivable, net	603,613			512,756
Accrued interest receivable	4,376			4,089
Real estate acquired in settlement of loans, net	340			822
Office properties and equipment, net	14,511			14,238
Cash surrender value of life insurance	17,699			17,102
Prepaid expenses and other assets	612			1,317

TOTAL ASSETS	$	726,338		$	690,653

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Deposits	$	582,394		$	573,580
Federal Home Loan Bank advances	65,219			39,562
Advance payments by borrowers for taxes and insurance	634			725
Other liabilities	3,248			1,708
Total liabilities	651,495			615,575

STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, none issued
Common stock, $.01 par value, 20,000,000 shares authorized, 10,307,502 shares issued, 5,133,804 and 5,340,086 shares outstanding at September 30, 2004 and December 31, 2003, respectively	103			103
Additional paid-in capital	54,011			52,950
Employee stock benefit plans	(693		)	(1,025		)
Retained earnings-substantially restricted	76,804			72,634
	130,225			124,662
Treasury stock, at cost, 5,173,698 and 4,967,416 shares at September 30, 2004 and December 31, 2003, respectively	(55,382		)	(49,584		)
Total stockholders’ equity	74,843			75,078

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	726,338		$	690,653

See notes to unaudited consolidated financial statements.

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30, 2004		September 30, 2003		September 30, 2004		September 30, 2003

INTEREST INCOME:
Loans receivable	$	9,160	$	8,450	$	26,234	$	25,842
Investment securities:
Taxable	727		702		2,299		2,579
Nontaxable	178		143		515		362
Other	18		180		128		498
Total interest income	10,083		9,475		29,176		29,281

INTEREST EXPENSE:
Deposits	3,178		3,459		9,472		11,247
FHLB advances	442		340		1,087		1,058
Total interest expense	3,620		3,799		10,559		12,305

NET INTEREST INCOME	6,463		5,676		18,617		16,976

PROVISION FOR LOAN LOSSES	202		204		663		619

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	6,261		5,472		17,954		16,357

NONINTEREST INCOME:
Deposit fee income	883		667		2,378		1,869
Earnings on life insurance policies	190		211		597		637
Gain on sale of loans	141		600		463		1,512
Gain on contributed assets	—		—		—		414
Other	359		383		1,150		1,117
Total noninterest income	1,573		1,861		4,588		5,549

NONINTEREST EXPENSES:
Salaries and employee benefits	2,830		2,644		8,266		7,654
Net occupancy expense	493		484		1,494		1,371
Data processing	394		409		1,191		1,163
Professional fees	117		67		346		261
Advertising and public relations	294		165		726		468
Postage and supplies	149		193		497		576
Contributions	15		4		24		523
Other	442		581		1,487		1,558
Total noninterest expenses	4,734		4,547		14,031		13,574

INCOME BEFORE INCOME TAXES	3,100		2,786		8,511		8,332
INCOME TAX PROVISION	1,002		914		2,723		2,589
NET INCOME	$	2,098	$	1,872	$	5,788	$	5,743

EARNINGS PER SHARE:
Basic	$	0.42	$	0.37	$	1.14	$	1.13

Diluted	$	0.39	$	0.35	$	1.07	$	1.07

Cash Dividends Declared	$	0.11	$	0.09	$	0.31	$	0.25

See notes to unaudited consolidated financial statements.

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

(In thousands, except share data)

(Unaudited)

				Additional Paid-In Capital			Employee Stock Benefit Plans			Retained Earnings
	Issued Common Stock
	Shares	Amount

Balance, January 1, 2004	10,307,502	$	103	$	52,950		$	(1,025	)	$	72,634
Net income										5,788
Release of ESOP shares				949			312
Tax effect of stock compensation plan				211
Treasury shares reissued due to exercise of stock options				(99		)
Purchase of treasury stock, at cost
Vesting of MRP shares							20
Dividends paid										(1,618		)

Balance, September 30, 2004	10,307,502	$	103	$	54,011		$	(693	)	$	76,804

						Total Stockholders’ Equity
	Treasury Stock
	Shares		Amount

Balance, January 1, 2004	4,967,416		$	(49,584	)	$	75,078
Net income							5,788
Release of ESOP shares							1,261
Tax effect of stock compensation plan							211
Treasury shares reissued due to exercise of stock options	(153,418	)		1,575			1,476
Purchase of treasury stock, at cost	359,700			(7,373	)		(7,373	)
Vesting of MRP shares							20
Dividends paid							(1,618	)

Balance, September 30, 2004	5,173,698		$	(55,382	)	$	74,843

See notes to unaudited consolidated financial statements.

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2004			2003

OPERATING ACTIVITIES:
Net income	$	5,788		$	5,743
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	663			619
Provision for real estate losses	32			34
Deferred tax provision (benefit)	(140		)	(29		)
Accretion of discounts on investment securities, net	(34		)	(66		)
Federal Home Loan Bank stock dividends	(44		)	(89		)
(Gain) loss on disposition of office properties and equipment	(38		)	90
(Gain) loss on sale of repossessed assets, net	(1		)	5
Originations of loans held for sale	(35,354		)	(107,100		)
Proceeds from sales of loans	36,213			113,441
Gain on sale of loans originated to sell	(463		)	(1,512		)
Depreciation	887			842
Amortization (accretion) of deferred loan fees, net	49			(350		)
Release of ESOP shares	1,261			921
MRP compensation expense	20			38
Earnings on life insurance policies	(597		)	(637		)
Changes in operating assets and liabilities:
Accrued interest receivable	(287		)	462
Prepaid expenses and other assets	700			79
Other liabilities	541			77
Net cash provided by operating activities	9,196			12,568

INVESTING ACTIVITIES:
Purchases of investment securities held to maturity	(84,744		)	(245,963		)
Proceeds from maturities/calls of investment securities held to maturity	97,810			274,027
Purchases of FHLB stock	(711		)	—
Redemptions of FHLB stock	679			—
Loan participations sold	3,970			—
Loan originations, net of repayments	(96,045		)	(13,705		)
Proceeds from sales of repossessed assets	582			599
Proceeds from sales of office properties and equipment	581			38
Purchases of office properties and equipment	(1,369		)	(4,772		)
Net cash provided by (used in) investing activities	(79,247		)	10,224

FINANCING ACTIVITIES:
Net increase in deposits	8,814			4,135
Advances from FHLB	41,733			20,000
Repayment of advances from FHLB	(16,076		)	(15,088		)
Net decrease in advance payments by borrowers for taxes and insurance	(91		)	(247		)
Purchase of treasury stock	(7,373		)	(2,367		)
Reissued treasury stock	1,476			1,065
Dividends paid	(1,618		)	(1,334		)
Net cash provided by financing activities	26,865			6,164

Net increase (decrease) in cash and cash equivalents	(43,186		)	28,956

CASH AND CASH EQUIVALENTS:
Beginning of period	$	56,201		$	44,493
End of period	$	13,015		$	73,449

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	10,517		$	12,379
Income taxes	$	2,294		$	2,489

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate and other assets acquired in settlement of loans	$	307		$	1,714
Loans to facilitate sales of real estate owned	$	197		$	456
Investment securities traded, recorded in investments not yet settled in cash	$	1,000		$	3,000

See notes to unaudited consolidated financial statements.

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation and Principles of Consolidation

First Federal Bancshares of Arkansas, Inc. (the “Company”) is a unitary holding company which owns all of the stock of First Federal Bank of Arkansas, FA (the “Bank”). The Bank provides a broad line of financial products to individuals and small- to medium-sized businesses in Northwest and Northcentral Arkansas. The consolidated financial statements 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 the Company have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

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

The results of operations for the nine months ended September 30, 2004, are not necessarily indicative of the results to be expected for the year ending December 31, 2004. The unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report to Stockholders.

Certain amounts in the September 30, 2003, unaudited consolidated financial statements have been reclassified to conform to the classifications adopted for reporting in 2004.

Note 2 - Earnings per Share

The weighted average number of common shares used to calculate earnings per share for the periods ended September 30, 2004 and 2003 were as follows:

	Three months ended September 30,		Nine months ended September 30,
	2004	2003	2004	2003
Basic weighted - average shares	5,022,009	5,105,834	5,093,719	5,093,162
Effect of dilutive securities	299,808	306,972	319,389	256,038
Diluted weighted - average shares	5,321,817	5,412,806	5,413,108	5,349,200

Note 3 – Stock Option Plan

At September 30, 2004, the Company had one stock option plan in effect covering key employees and directors. The plan is more fully described in the Notes to Consolidated Financial Statements included in the Company’s 2003 Annual Report to Stockholders. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee or director compensation cost is recognized in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement 123, Accounting for Stock-Based Compensation, to stock-based employee and director compensation:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Net income (in thousands):
As reported	$	2,098	$	1,872	$	5,788	$	5,743
Proforma	2,092		1,865		5,774		5,727
Earnings per share:
Basic, as reported	$	0.42	$	0.37	$	1.14	$	1.13
Basic, proforma	0.42		0.37		1.13		1.12
Diluted, as reported	0.39		0.35		1.07		1.07
Diluted, proforma	0.39		0.34		1.07		1.07

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

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

In estimating the amount of credit losses inherent in our loan portfolio, various judgments and assumptions are made. For example, when assessing the condition of the overall economic environment, assumptions are made regarding future market conditions and their impact on the loan portfolio. In the event the national or local economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan losses. For impaired loans that are collateral-dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

CHANGES IN FINANCIAL CONDITION

Changes in financial condition between September 30, 2004 and December 31, 2003 are presented in the following table (dollars in thousands). Material changes between the periods are discussed in the sections which follow the table.

	September 30, 2004			December 31, 2003			Increase (Decrease)			Percentage Change
ASSETS
Cash and cash equivalents	$	13,015		$	56,201		$	(43,186	)	(76.8	)%
Investment securities held to maturity	68,347			80,379			(12,032		)	(15.0	)%
Loans receivable, net	603,613			512,756			90,857			17.7	%
Prepaid expenses and other assets	41,363			41,317			46			0.1	%

TOTAL	$	726,338		$	690,653		$	35,685		5.2	%

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	582,394		$	573,580		$	8,814		1.5	%
Federal Home Loan Bank advances	65,219			39,562			25,657			64.9	%
Other liabilities	3,882			2,433			1,449			59.6	%

Total liabilities	651,495			615,575			35,920			5.8	%

STOCKHOLDERS’ EQUITY	74,843			75,078			(235		)	(0.3	)%

TOTAL	$	726,338		$	690,653		$	35,685		5.2	%

BOOK VALUE PER SHARE	$	14.58		$	14.06

EQUITY TO ASSETS	10.3		%	10.9		%

Loans Receivable. Changes in loan composition between September 30, 2004 and December 31, 2003 are presented in the following table (dollars in thousands).

	September 30, 2004			December 31, 2003			Increase (Decrease)			Percentage Change

One- to four- family residential	$	276,535		$	259,121		$	17,414
Multi-family residential	9,683			7,673			2,010
Commercial real estate	136,581			97,310			39,271
Construction	143,327			89,332			53,995
Total first mortgage loans	566,126			453,436			112,690			24.9	%

Commercial	26,150			21,491			4,659			21.7	%

Home equity and second mortgage	44,822			42,421			2,401
Automobile	20,126			22,087			(1,961		)
Other	10,781			10,780			1
Total consumer	75,729			75,288			441			0.6	%

Total loans receivable	668,005			550,215			117,790			21.4	%
Less:
Undisbursed construction loan funds	(62,155		)	(35,181		)	(26,974		)
Unearned discounts and net deferred loan fees	(501		)	(657		)	156
Allowance for loan losses	(1,736		)	(1,621		)	(115		)

Total loans receivable, net	$	603,613		$	512,756		$	90,857		17.7	%

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

The interest rate environment and robust economies of our market areas have continued to provide increased demand for our loan products. The Bank has continued its emphasis on real estate lending, particularly commercial real estate lending, to increase the average yield on its portfolio, expand its operations, and provide greater opportunities to cross-sell its products. We experienced an increase in one-to four- family residential loans held for investment, primarily due to an increase in adjustable rate mortgages. The $39.2 million increase in commercial real estate lending resulted primarily from an increase of approximately $13.0 million in land and land development loans and an increase of $8.9 million in loans on motel properties. The increase in land and land development loans was primarily due to loans for the purchase or development of land for residential building lots. Construction lending has continued to increase, with $39.9 million of the increase due to one- to four- family residential construction, $6.8 million due to multi-family construction, and $7.3 million due to commercial real estate construction.

Asset Quality. The following table sets forth the amounts and categories of the Bank’s nonperforming assets at the dates indicated (dollars in thousands).

	September 30, 2004			December 31, 2003

Nonaccrual loans:
One- to four-family residential	$	2,235		$	1,537
Multi-family residential	—			—-
Construction loans	—			—
Commercial real estate	246			99
Commercial loans	201			131
Consumer loans	526			564
Total nonaccrual loans	3,208			2,331

Nonperforming restructured loans	—			1,352
Real estate owned	340			822

Nonperforming assets	$	3,548		$	4,505

Total nonaccrual and restructured loans as a percentage of total loans receivable	0.48		%	0.67		%

Total nonperforming assets as a percentage of total assets	0.49		%	0.65		%

The amount of restructured loans reported at December 31, 2003 was comprised of a group of loans to related borrowers. At that date the loans were not over 90 days past due, but such loans were maintained on nonaccrual status. At September 30, 2004, there were no nonperforming restructured loans.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Balance at beginning of period	$	1,690		$	1,717		$	1,621		$	1,529
Provisions for estimated losses	202			204			663			619
Recoveries	30			13			79			54
Losses charged off	(186		)	(193		)	(627		)	(461		)
Balance at end of period	$	1,736		$	1,741		$	1,736		$	1,741

Changes in the composition of the allowance for loan losses between September 30, 2004 and December 31, 2003 are presented in the following table (in thousands):

	September 30, 2004		December 31, 2003		Increase (Decrease)
General	$	1,429	$	1,306	$	123
Specific	257		252		5
Unallocated	50		63		(13		)
	$	1,736	$	1,621	$	115

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as conditions change and more information becomes available.

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

The Bank reviews its non-homogeneous loans for impairment on a quarterly basis. The Bank considers commercial real estate, construction, multi-family, and commercial loans to be non-homogeneous loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. Homogeneous loans are those that are considered to have common characteristics that provide for evaluation on an aggregate or pool basis. The Bank considers the characteristics of (1) one- to four- family residential first mortgage loans; (2) unsecured consumer loans; and (3) collateralized consumer loans to permit consideration of the appropriateness of the allowance for losses of each group of loans on a pool basis. Homogeneous loans and non-homogeneous loans which are not judged to be impaired are aggregated into pools by purpose and type of collateral. The primary methodology used to determine the appropriateness of the allowance for losses includes segregating certain specific, poorly performing loans based on their performance characteristics from the pools of loans as to type, valuing these loans, and then applying a loss factor to the remaining pool balance based on several factors, including past loss experience, inherent risks, and economic conditions in the primary market areas.

Although we consider the allowance for loan losses of approximately $1.7 million adequate to cover losses inherent in our loan portfolio at September 30, 2004, no assurance can be given that we will not sustain loan losses that are significantly different from the amount provided, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, would not result in a significant change in the allowance for loan losses.

Investment Securities. Changes in the composition of investment securities held to maturity between September 30, 2004 and December 31, 2003 are presented in the following table (in thousands).

	September 30, 2004			December 31, 2003		Increase (Decrease)
Certificates of deposit	$		3,000	$	9,000	$	(6,000	)
U.S. Government and agency obligations	49,628			57,076		(7,448		)
Municipal securities	15,719			14,303		1,416
Total	$	68,347		$	80,379	$	(12,032	)

During the first nine months of 2004, investment securities totaling $85.7 million were purchased and $97.8 million matured or were called. The majority of these purchases and maturities were shorter-term certificates of deposit. The decrease in U.S. Government and agency obligations was due to calls and maturities in excess of purchases.

At September 30, 2004, estimated fair values of investment securities held to maturity were as follows (in thousands):

	Amortized Cost		Fair Value

Certificates of deposit	$	3,000	$	3,000
U.S. Government and agency obligations		49,628		49,388
Municipal securities		15,719		16,057
Total	$	68,347	$	68,445

Deposits. Changes in the composition of deposits between September 30, 2004 and December 31, 2003 are presented in the following table (dollars in thousands).

	September 30, 2004		December 31, 2003		Increase (Decrease)			Percentage Change

DDA and NOW accounts	$	108,160	$	96,090	$	12,070		12.6	%
Money Market accounts	111,195		108,400		2,795			2.6	%
Savings accounts	31,770		29,269		2,501			8.5	%
Certificates of deposit	331,269		339,821		(8,552		)	(2.5	)%

Total deposits	$	582,394	$	573,580	$	8,814		1.5	%

The Bank continued to experience a change in the mix of deposits due to the low interest rate environment during the nine months ended September 30, 2004. Certificates of deposit decreased while money market, savings, and demand and NOW deposit accounts increased. During the second quarter of 2004, the Bank launched a new marketing program aimed at increasing checking accounts. As part of this program, the Bank changed its checking account offerings to make them more attractive to potential customers as well as offering “thank you” gifts with account openings and referrals. Checking accounts are an attractive source of funds for the Bank as they offer low-interest deposits, fee income potential, and the opportunity to cross-sell other financial services. The Bank does not advertise for deposits outside of its primary market area of Northwest and Northcentral Arkansas.

Federal Home Loan Bank Advances. FHLB advances increased primarily due to new advances which were used to help fund loan growth.

Stockholders’ Equity. Stockholders’ equity decreased $235,000 from December 31, 2003 to September 30, 2004. The decrease in stockholders’ equity was primarily due to the purchase of treasury stock totaling $7.4 million during the first nine months of 2004, offset by net income of $5.8 million and the issuance of treasury stock due to exercise of stock options of $1.5 million. In addition, during the nine months ended September 30, 2004, cash dividends of $1.6 million were paid. See the Unaudited Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2004 for more detail.

Average Balance Sheets

The following table sets forth certain information relating to the Company’s average balance sheets and reflects the average yield on assets and average cost of liabilities for the periods indicated and the yields earned and rates paid at September 30, 2004. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are based on daily balances during the period.

	September 30, 2004		Quarter Ended September 30,
	September 30, 2004		2004						2003
	Yield/Cost		Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
			(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)	6.19	%	$	594,460	$	9,160	6.16	%	$	492,229	$	8,450	6.87	%
Investment securities(2)	4.79		75,072		905		4.82		77,684		845		4.35
Other interest-earning assets	1.81		5,483		18		1.31		78,404		180		.92
Total interest-earning assets	6.03		675,015		10,083		5.98		648,317		9,475		5.85
Noninterest-earning assets			48,247						47,225
Total assets			$	723,262					$	695,542
Interest-bearing liabilities:
Deposits	2.18		582,552		3,178		2.18		573,593		3,459		2.41
FHLB advances	3.07		61,195		442		2.89		44,886		340		3.04
Total interest-bearing liabilities	2.27		643,747		3,620		2.25		618,479		3,799		2.46
Noninterest-bearing liabilities			4,617						3,560
Total liabilities			648,364						622,039
Stockholders’ equity			74,898						73,503
Total liabilities and stockholders’ equity			$	723,262					$	695,542
Net interest income					$	6,463					$	5,676
Net earning assets			$	31,268					$	29,838
Interest rate spread	3.76	%					3.73	%					3.39	%
Net interest margin							3.83	%					3.50	%
Ratio of interest-earning assets to interest-bearing liabilities							104.86	%					104.82	%

	Nine Months Ended September 30,
	2004						2003
	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)	$	557,909	$	26,234	6.27	%	$	489,302	$	25,842	7.04	%
Investment securities(2)	83,700		2,814		4.48		94,037		2,941		4.17
Other interest-earning assets	18,278		128		0.93		63,425		498		1.05
Total interest-earning assets	659,887		29,176		5.89		646,764		29,281		6.04
Noninterest-earning assets	47,772						44,834
Total assets	707,659						$	691,598
Interest-bearing liabilities:
Deposits	580,284		9,472		2.18		571,403		11,247		2.62
FHLB advances	47,138		1,087		3.07		44,280		1,058		3.19
Total interest-bearing liabilities	627,422		10,559		2.24		615,683		12,305		2.66
Noninterest-bearing liabilities	4,892						3,896
Total liabilities	632,314						619,579
Stockholders’ equity	75,345						72,019
Total liabilities and stockholders’ equity	$	707,659					$	691,598
Net interest income			$	18,617					$	16,976
Net earning assets	$	32,465					$	31,081
Interest rate spread					3.65	%					3.38	%
Net interest margin					3.76	%					3.50	%
Ratio of interest-earning assets to interest-bearing liabilities					105.17	%					105.05	%

(1) Includes nonaccrual loans.

(2) Includes FHLB of Dallas stock.

Rate/Volume Analysis

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

	Quarter Ended September 30, 2004 vs. 2003
	Increase (Decrease) Due to									Total Increase (Decrease)
	Volume			Rate			Rate/ Volume
	(In Thousands)
Interest income:
Loans receivable	$	1,755		$	(865	)	$	(180	)	$	710
Investment securities	(28		)	91			(3		)	60
Other interest-earning assets	(168		)	77			(71		)	(162		)
Total interest-earning assets	1,559			(697		)	(254		)	608

Interest expense:
Deposits	54			(330		)	(5		)	(281		)
FHLB advances	124			(17		)	(5		)	102
Total interest-bearing liabilities	178			(347		)	(10		)	(179		)
Net change in net interest income	$	1,381		$	(350	)	$	(244	)	$	787

	Nine Months Ended September 30, 2004 vs. 2003
	Increase (Decrease) Due to									Total Increase (Decrease)
	Volume			Rate			Rate/ Volume
	(In Thousands)
Interest income:
Loans receivable	$	3,623		$	(2,834	)	$	(397	)	$	392
Investment securities	(323		)	220			(24		)	(127		)
Other interest-earning assets	(355		)	(54		)	39			(370		)
Total interest-earning assets	2,945			(2,668		)	(382		)	(105		)

Interest expense:
Deposits	175			(1,920		)	(30		)	(1,775		)
FHLB advances	68			(37		)	(2		)	29
Total interest-bearing liabilities	243			(1,957		)	(32		)	(1,746		)
Net change in net interest income	$	2,702		$	(711	)	$	(350	)	$	1,641

CHANGES IN RESULTS OF OPERATIONS

The table below presents a comparison of results of operations for the three months ended September 30, 2004 and 2003 (dollars in thousands). Specific changes in captions are discussed in the sections which follow the table.

	Three Months Ended September 30,						Increase (Decrease)			Percentage Change
	2004			2003			2004 vs 2003			2004 vs 2003
Interest income:
Loans receivable	$	9,160		$	8,450		$	710
Investment securities	905			845			60
Other	18			180			(162		)
Total interest income	10,083			9,475			608			6.4	%
Interest expense:
Deposits	3,178			3,459			(281		)
Other borrowings	442			340			102
Total interest expense	3,620			3,799			(179		)	(4.7	)%
Net interest income before provision for loan losses	6,463			5,676			787
Provision for loan losses	202			204			(2		)
Net interest income after provision for loan losses	6,261			5,472			789			14.4	%
Noninterest income:
Deposit fee income	883			667			216
Gain on sale of loans	141			600			(459		)
Other	549			594			(45		)
Total noninterest income	1,573			1,861			(288		)	(15.5	)%
Noninterest expenses:
Salaries and employee benefits	2,830			2,644			186
Net occupancy expense	493			484			9
Advertising and public relations	294			165			129
Contributions	15			4			11
Other	1,102			1,250			(148		)
Total noninterest expenses	4,734			4,547			187			4.1	%
Income before income taxes	3,100			2,786			314
Provision for income taxes	1,002			914			88
Net income	2,098			1,872			226			12.1	%

Basic earnings per share	$	0.42		$	0.37		$	0.05		13.5	%
Diluted earnings per share	$	0.39		$	0.35		$	0.04		11.4	%

Interest rate spread	3.73		%	3.39		%	0.34		%	10.0	%
Net interest margin	3.83		%	3.50		%	0.33		%	9.4	%

Average full-time equivalents	244			254			(10		)	(3.9	)%

The table below presents a comparison of results of operations for the nine months ended September 30, 2004 and 2003 (dollars in thousands). Specific changes in captions are discussed in the sections which follow the table.

	Nine Months Ended September 30,						Increase (Decrease)			Percentage Change
	2004			2003			2004 vs 2003			2004 vs 2003
Interest income:
Loans receivable	$	26,234		$	25,842		$	392
Investment securities	2,814			2,941			(127		)
Other	128			498			(370		)
Total interest income	29,176			29,281			(105		)	(0.4	)%
Interest expense:
Deposits	9,472			11,247			(1,775		)
Other borrowings	1,087			1,058			29
Total interest expense	10,559			12,305			(1,746		)	(14.2	)%
Net interest income before provision for loan losses	18,617			16,976			1,641
Provision for loan losses	663			619			44
Net interest income after provision for loan losses	17,954			16,357			1,597			9.8	%
Noninterest income:
Deposit fee income	2,378			1,869			509
Gain on sale of loans	463			1,512			(1,049		)
Gain on contributed assets	—			414			(414		)
Other	1,747			1,754			(7		)
Total noninterest income	4,588			5,549			(961		)	(17.3	)%
Noninterest expenses:
Salaries and employee benefits	8,266			7,654			612
Net occupancy expense	1,494			1,371			123
Advertising and public relations	726			468			258
Contributions	24			523			(499		)
Other	3,521			3,558			(37		)
Total noninterest expenses	14,031			13,574			457			3.4	%
Income before income taxes	8,511			8,332			179
Provision for income taxes	2,723			2,589			134
Net income	5,788			5,743			45			0.8	%

Basic earnings per share	$	1.14		$	1.13		$	0.01		0.9	%
Diluted earnings per share	$	1.07		$	1.07		$	0.00		—

Interest rate spread	3.65		%	3.38		%	0.27		%	8.0	%
Net interest margin	3.76		%	3.50		%	0.26		%	7.4	%

Average full-time equivalents	248			247			1			0.4	%

Net Interest Income. Net interest income is determined by the Company’s interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s net interest income increased due to increases in interest rate spread and interest rate margin. In the 2004 vs. 2003 period, due to the Bank’s negative interest rate repricing gap, rates paid on deposits decreased more quickly than rates on earning assets. As a result, the Company experienced an increase in the interest rate spread and net interest margin.

INTEREST INCOME AND INTEREST EXPENSE

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

Interest Income. The increase for the three month comparative period was primarily due to an increase in the average balance of loans and an increase in the average yield earned on investment securities, partially offset by a decrease in the average balance of investment securities and other interest-earning assets and a decrease in the average yield earned on loans. The decrease for the nine month comparative period was due primarily to a decrease in the average yield earned on loans and a decrease in the average balance of investment securities and other interest-earning assets, offset by an increase in the average balance of loans and an increase in the average yield earned on investment securities. The average balance of loans increased primarily due to increased construction, commercial real estate, and one- to four- family loan origination activity during 2004. The average yield earned on investment securities increased due to a change in the mix of the portfolio with less funds being invested in lower-yielding FHLB CDs. The decrease in the average yield earned on loans was primarily due to an overall decline in rates during the periods and customers’ refinancing to lower rates. The decrease in the average balance of investment securities held to maturity was primarily the result of called U.S. Government and agency securities and maturing certificates of deposit. The average balance of other interest-earning assets decreased as such assets were used to fund loan growth.

Interest Expense. The decreases for both the three and nine month comparative periods were primarily due to a decrease in the average rate paid on deposit accounts, offset slightly by an increase in the average balance of deposits and FHLB advances. The decrease in the average interest rate paid on deposits was primarily the result of maturing certificates and variable interest bearing deposits being repriced to lower interest rates.

Provision for Loan Losses. The provision for loan losses includes charges to maintain an allowance for loan losses adequate to cover probable credit losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of the balance sheet date. Such provision and the adequacy of the allowance for loan losses is evaluated quarterly by management of the Bank based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions.

While total loans receivable increased by $117.8 million since December 31, 2003, the estimated allowance for loan losses did not increase significantly since the majority of the growth was in real estate loans, which have lower estimated loss rates than consumer loans. Further, there was a decrease in the balance of automobile loans as well as a trend of decreasing charge-offs on all categories of consumer loans except unsecured loans. Specifically, there was a decrease of $2.0 million in the balance of automobile loans as well as a decrease in automobile loan charge-offs, which accounted for approximately $161,000 of the decrease in the allowance for loan losses on consumer loans. Since the balance of unsecured loans is only approximately $2.9 million, the increased loss rate on those loans did not materially affect the overall allowance for loan losses.

The composition of the allowance for loan losses at September 30, 2004 and December 31, 2003 is presented below (in thousands):

	September 30, 2004		December 31, 2003

One- to four-family residential	$	313	$	239
Multi-family residential	39		31
Commercial real estate	431		256
Commercial loans	484		404
Consumer loans	419		628
Unallocated	50		63
Total allowance for loan losses	$	1,736	$	1,621

Noninterest Income. Deposit fee income increased as a result of the Bank’s continued promotion of Bounce Protection^TMoverdraft service as well as an increase in the number of checking accounts and a change in the insufficient funds fee structure. The number of checking accounts increased approximately 7.7% from September 30, 2003 to September 30, 2004. The Bank began aggressively promoting checking accounts in the second quarter of 2004 through direct mail campaigns to expand its checking accounts and increase deposit fee income.

Gain on sale of loans decreased due to a decrease in originations of loans for sale. Sales of loans peaked in 2003 due to record low interest rates in 2003 and the resulting refinancing activity.

The gain on contributed assets was recorded in connection with an adjustment of the carrying value of donated real estate to estimated fair value in the second quarter of 2003. A corresponding expense in the amount of $500,000 was also recorded and is included in the balance of contributions expense. The effect of this contribution is further described below.

Noninterest Expense

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

	Three Months Ended September 30,				Increase (Decrease)			Nine Months Ended September 30,				Increase (Decrease)
	2004		2003		2004 vs 2003			2004		2003		2004 vs 2003
Salaries	$	1,947	$	1,821	$	126		$	5,710	$	5,478	$	232
ESOP expense (1)	426		329		97			1,230		853		377
Defined benefit plan contribution	121		165		(44		)	234		273		(39		)
Other	336		329		7			1,092		1,050		42
Total	$	2,830	$	2,644	$	186		$	8,266	$	7,654	$	612

(1) Employee Stock Ownership Plan

The increase in salaries and employee benefits for both the three and nine month comparative periods was due primarily to increases in salaries and ESOP expense. The increase in ESOP expense was due to an increase in the Company’s average stock price in 2004 compared to the same periods in 2003. The increase in salaries for the three and nine month comparative periods was primarily due to normal salary and merit increases.

Net occupancy expense. The changes in the composition of this line item are presented below (in thousands):

	Three Months Ended September 30,				Increase (Decrease)			Nine Months Ended September 30,				Increase (Decrease)
	2004		2003		2004 vs 2003			2004		2003		2004 vs 2003
Depreciation	$	274	$	283	$	(9	)	$	824	$	758	$	66
Furniture, fixtures, and equipment expense	39		39		—			129		202		(73		)
Utilities	55		54		1			166		137		29
Building repairs and maintenance	63		58		5			191		134		57
Taxes and insurance	45		36		9			134		90		44
Rent	17		14		3			50		50		—
Total	$	493	$	484	$	9		$	1,494	$	1,371	$	123

The increase in net occupancy expense for the nine month comparative period was due primarily to increases in depreciation, building repairs and maintenance, and taxes and insurance related to nine months of expense associated with the new corporate office in 2004 compared to four months in 2003, offset by a decrease in furniture, fixtures and equipment expense. Such decrease was primarily due to furniture and accessories for the new corporate office that opened June 2, 2003. Furniture and accessories totaling $120,000 were expensed in the nine months ended September 30, 2003.

Advertising and public relations. The increase in advertising and public relations for the three and nine month comparative periods was due to costs incurred in the second and third quarters associated with the new checking account marketing program, including direct mail, “thank you” gifts, marketing brochures, posters, and billboards. For the three month and nine month comparative periods, approximately $106,000 and $223,000, respectively, was due to this program.

Contributions. Contributions expense decreased in the nine month period ended September 30 mainly due to the contribution of real estate discussed above. The fair value of the donated real estate of $500,000 is included in contributions expense for the nine months ended September 30, 2003.

Other expenses. The changes in the composition of this line item are presented below (in thousands):

	Three Months Ended September 30,				Increase (Decrease)			Nine Months Ended September 30,				Increase (Decrease)
	2004		2003		2004 vs 2003			2004		2003		2004 vs 2003
Consultant and management fees	$	22	$	132	$	(110	)	$	226	$	232	$	(6	)
Other	1,080		1,118		(38		)	3,295		3,326		(31		)
Total	$	1,102	$	1,250	$	(148	)	$	3,521	$	3,558	$	(37	)

Other expenses decreased in the three month comparative periods primarily due to consultant and management fees. These fees decreased primarily due to fees paid in 2003 to a consulting firm related to preparation for internal control assertion and attestation under the new requirements of the Sarbanes-Oxley Act of 2002. Fees paid to a third party vendor related to the Bounce Protection^TMprogram also decreased for the three month comparative periods.

Income Taxes.

The increase in income tax expense for the three month and nine month periods ended September 30, 2004 compared to the same periods in 2003 was primarily due to an increase in taxable income.

OFF-BALANCE SHEET ARRANGEMENTS

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

• the origination, purchase or sale of loans;

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

• the commitment to fund withdrawals of certificates of deposit at maturity.

At September 30, 2004, the Bank’s off-balance sheet arrangements principally included lending commitments, which are described below. At September 30, 2004, the Company had no interests in non-consolidated special purpose entities.

At September 30, 2004, commitments included:

• total approved commitments to originate loans amounting to $28.6 million, including $18.4 million of loans committed to sell;

• rate lock agreements with customers of $5.5 million, all of which have been locked with an investor;

• funded mortgage loans committed to sell of $1.3 million;

• undisbursed portion of construction loans of $62.2 million;

• unused lines of credit of $20.8 million;

• outstanding standby letters of credit of $1.8 million;

• total predetermined overdraft protection limits of $10.2 million; and

• certificates of deposit scheduled to mature in one year or less totaling $140.1 million.

Total unfunded commitments to originate loans for sale and the related commitments to sell of $5.5 million meet the definition of a derivative financial instrument. The related asset and liability are considered immaterial at September 30, 2004.

Historically, a very small percentage of predetermined overdraft limits have been used. At September 30, 2004, overdrafts of accounts with Bounce Protection^TM represented usage of 2.4% of the limit. We expect utilization of these overdraft limits to remain at comparable levels in the future.

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

LIQUIDITY AND CAPITAL RESOURCES

The Bank’s liquidity, represented by cash and cash equivalents and eligible investment securities, is a product of its operating, investing and financing activities. The Bank’s primary sources of funds are deposits, collections on outstanding loans, maturities and calls of investment securities and other short-term investments and funds provided from operations. While scheduled loan amortization and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank manages the pricing of its deposits to maintain a steady deposit balance. In addition, the Bank invests excess funds in overnight deposits and other short-term interest-earning assets which provide liquidity to meet lending requirements. The Bank has generally been able to generate enough cash through the retail deposit market, its traditional funding source, to offset the cash utilized in investing activities. As an additional source of funds, the Bank has borrowed from the FHLB of Dallas. At September 30, 2004, available borrowing capacity with the FHLB was approximately $196 million.

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

As of September 30, 2004, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. At September 30, 2004, the Bank’s tangible, core and risk-based capital ratios amounted to 10.05%, 10.05% and 14.46%, respectively, compared to regulatory requirements of 1.5%, 4.0% and 8.0%, respectively.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.

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

FORWARD-LOOKING STATEMENTS

The Company’s Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in this document, the words “anticipate”, “believe,” “estimate,” “expect,” “intend,” “should” and similar expressions, or the negative thereof, as they relate to the Company or the Company’s management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

For a discussion of the Company’s asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Bank’s portfolio equity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2003 Annual Report to Stockholders. There has been no material change in the Company’s asset and liability position or the market value of the Bank’s portfolio equity since December 31, 2003.

CONTROLS AND PROCEDURES

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

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

FIRST FEDERAL 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. Unregistered Sales of Equity Securities and Use of Proceeds

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

August 1 to August 31, 2004	76,000	$	20.57	76,000	174,591
September 1 to September 30, 2004	27,000	$	21.00	27,000	147,591

The Company is in its 16^th announced repurchase program, which was approved by the board of directors on May 26, 2004, and publicly announced on June 8, 2004. Total shares approved to be purchased in this program are 260,257, of which 112,666 have been purchased as of September 30, 2004. 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)

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 the undersigned thereunto duly authorized.

	FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.


Date: October 27, 2004		By:	/s/Larry J. Brandt
			Larry J. Brandt
			President/CEO


Date: October 27, 2004		By:	/s/Sherri R. Billings
			Sherri R. Billings
			EVP/CFO

Part I.

Financial Information

Page

Part II.

Other Information