FIRST FEDERAL BANCSHARES OF ARKANSAS INC, DEF 14A, 1998-03-24

FIRST FEDERAL BANCSHARES OF ARKANSAS INC
DEF 14A, 1998-03-24
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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<PAGE>
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant /x/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

First Federal Bancshares of Arkansas, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

Larry J. Brandt
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/x/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>

March 24, 1998

Dear Stockholder:

You are cordially invited to attend the second Annual Meeting of
Stockholders of First Federal Bancshares of Arkansas, Inc. The meeting will be
held at the Comfort Inn located at 1210 Highway 62-65 North, Harrison, Arkansas
72601, on Thursday, April 23, 1998 at 10:00 a.m., Central Time. The matters to
be considered by stockholders at the Annual Meeting are described in the
accompanying materials.

It is very important that you be represented at the Annual Meeting
regardless of the number of shares you own or whether you are able to attend the
meeting in person. We urge you to mark, sign, and date your proxy card today and
return it in the envelope provided, even if you plan to attend the Annual
Meeting. This will not prevent you from voting in person, but will ensure that
your vote is counted if you are unable to attend. For the reasons set forth in
the Proxy Statement, the Board unanimously recommends that you vote "FOR" each
matter to be considered.

Your continued support of and interest in First Federal Bancshares of
Arkansas, Inc. are sincerely appreciated.

Sincerely,

/s/Larry J. Brandt

Larry J. Brandt
President

<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
200 West Stephenson
Harrison, Arkansas 72601
(870) 741-7641

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on April 23, 1998

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual
Meeting") of First Federal Bancshares of Arkansas, Inc. (the "Company") will be
held at the Comfort Inn located at 1210 Highway 62-65 North, Harrison, Arkansas
72601, on Thursday, April 23, 1998 at 10:00 a.m., Central Time, for the
following purposes, all of which are more completely set forth in the
accompanying Proxy Statement:

(1) To elect one director for a term of three years and until his
successor is elected and qualified;

(2) To ratify the appointment by the Board of Directors of Deloitte &
Touche LLP as the Company's independent auditors for the year ending December
31, 1998; and

(3) To transact such other business as may properly come before the
meeting or any adjournment thereof. Management is not aware of any other such
business.

The Board of Directors has fixed March 4, 1998 as the voting
record date for the determination of stockholders entitled to notice of and to
vote at the Annual Meeting. Only those stockholders of record as of the close of
business on that date will be entitled to vote at the Annual Meeting.

BY ORDER OF THE BOARD OF DIRECTORS

/s/Carolyn M. Thomason

Carolyn M. Thomason
Secretary

Harrison, Arkansas
March 24, 1998

YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO
BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY VOTE
EITHER IN PERSON OR BY PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING
OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.

<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

----------

PROXY STATEMENT

----------

ANNUAL MEETING OF STOCKHOLDERS

April 23, 1998

This Proxy Statement is furnished to holders of common stock, $.01 par
value per share ("Common Stock"), of First Federal Bancshares of Arkansas, Inc.
(the "Company"), the holding company of First Federal Bank of Arkansas, FA (the
"Bank"). The Company acquired all of the Bank's common stock issued in
connection with the conversion of the Bank from mutual to stock form in May
1996. Proxies are being solicited on behalf of the Board of Directors of the
Company to be used at the Annual Meeting of Stockholders ("Annual Meeting") to
be held at the Comfort Inn located at 1210 Highway 62-65 North, Harrison,
Arkansas 72601, on April 23, 1998 at 10:00 a.m., Central Time, for the purposes
set forth in the Notice of Annual Meeting of Stockholders. This Proxy Statement
is first being mailed to stockholders on or about March 24, 1998.

The proxy solicited hereby, if properly signed and returned to the
Company and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted FOR the matters described below and, upon the
transaction of such other business as may properly come before the meeting, in
accordance with the best judgment of the persons appointed as proxies. Any
stockholder giving a proxy has the power to revoke it at any time before it is
exercised by (i) filing with the Secretary of the Company written notice thereof
(Carolyn M. Thomason, Secretary, First Federal Bancshares of Arkansas, Inc.,
P.O. Box 550, Harrison, Arkansas 72602); (ii) submitting a duly-executed proxy
bearing a later date; or (iii) appearing at the Annual Meeting and giving the
Secretary notice of his or her intention to vote in person. Proxies solicited
hereby may be exercised only at the Annual Meeting and any adjournment thereof
and will not be used for any other meeting.

VOTING

Only stockholders of record at the close of business on March 4, 1998
("Voting Record Date") will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 4,896,063 shares of Common Stock outstanding and
the Company had no other class of equity securities outstanding. Each share of
Common Stock is entitled to one vote at the Annual Meeting on all matters
properly presented at the meeting. Directors are elected by a plurality of the
votes cast with a quorum present. Abstentions are considered in determining the
presence of a quorum and will not affect the plurality vote required for the
election of directors. The affirmative vote of the holders of a majority of the
total votes present in person or by proxy is required to ratify the appointment
of the independent auditors. Under rules of the New York Stock Exchange, the
proposal for ratification of the auditors is considered a "discretionary" item
upon which brokerage firms may vote in their discretion on behalf of their
clients if such clients have not furnished voting instructions and for which
there will not be "broker non-votes."

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<PAGE>

INFORMATION WITH RESPECT TO NOMINEES FOR DIRECTOR
AND EXECUTIVE OFFICERS

Election of Directors

The Bylaws of the Company presently provide that the Board of Directors
shall consist of five members, and the Articles of Incorporation and Bylaws of
the Company presently provide that the Board of Directors shall be divided into
three classes as nearly equal in number as possible. The members of each class
are to be elected for a term of three years or until their successors are
elected and qualified, with one class of directors to be elected annually. There
are no arrangements or understandings between the Company and any person
pursuant to which such person has been elected a director. Stockholders of the
Company are not permitted to cumulate their votes for the election of directors.

Other than Frank L. Coffman, Jr., who is the father-in-law of Larry J.
Brandt, no director or executive officer of the Company is related to any other
director or executive officer of the Company by blood, marriage or adoption, and
each of the nominees currently serve as a director of the Company.

Unless otherwise directed, each proxy executed and returned by a
stockholder will be voted for the election of the nominees for director listed
below. If the person or persons named as nominee should be unable or unwilling
to stand for election at the time of the Annual Meeting, the proxies will
nominate and vote for one or more replacement nominees recommended by the Board
of Directors. At this time, the Board of Directors knows of no reason why the
nominees listed below may not be able to serve as directors if elected. Ages are
reflected as of December 31, 1997.

Nominee for Director for Three-Year Term Expiring in 2001

<TABLE>
<CAPTION>
Positions Held with Director
Name Age the Company Since
- -------------------- --------- ------------------------------------ ------------
<S> <C> <C> <C>
Larry J. Brandt 49 President, Chief Operating Officer 1979
and Director

</TABLE>

The Board of Directors recommends that you vote FOR the election of the
above nominee for director.

Members of the Board of Directors Continuing in Office

Directors Whose Terms Expire in 1999

Positions Held with Director
Name Age the Company Since
- -------------------- --------- ------------------------------------ ------------
<S> <C> <C> <C>
James D. Heuer 80 Director 1957

William F. Smith 84 Director 1962

</TABLE>

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<PAGE>

Directors Whose Terms Expire in 2000

Positions Held with Director
Name Age the Company Since
- -------------------- --------- ------------------------------------ ------------
<S> <C> <C> <C>

Frank L. Coffman, Jr. 75 Chairman of the Board and Chief 1961
Executive Officer

John P. Hammerschmidt 75 Director 1966

</TABLE>

Set forth below is information with respect to the principal
occupations of the above listed individuals during at least the last five years.

Frank L. Coffman, Jr. Mr. Coffman is Chairman of the Board and Chief
Executive Officer of the Company and the Bank. He became Chairman of the Board
of the Bank in 1979 and its Chief Executive Officer in 1968. Mr. Coffman
initially was employed by the Bank in 1961.

Larry J. Brandt. Mr. Brandt is President and Chief Operating Officer
and a director of the Company and the Bank. He became President and Managing
Officer of the Bank in 1987 and its Chief Operating Officer in 1984. Mr. Brandt
initially was employed by the Bank in 1973.

John P. Hammerschmidt. Mr. Hammerschmidt is a director of the Company
and the Bank. He is a former United States Congressman from Arkansas
(1966-1993).

James D. Heuer. Mr. Heuer is a director of the Company and the Bank. He
is engaged in the raising of cattle in Harrison, Arkansas.

William F. Smith. Mr. Smith is a director of the Company and the Bank.
Now retired, he was a pharmacist serving the Harrison, Arkansas area.

Stockholder Nominations

Article VII.D of the Company's Articles of Incorporation governs
nominations for election to the Board of Directors and requires all such
nominations, other than those made by the Board, to be made at a meeting of
stockholders called for the election of directors, and only by a stockholder who
has complied with the notice provisions in that section. The Articles of
Incorporation set forth specific requirements with respect to stockholder
nominations.

Committees and Meetings of the Board of the Company and the Bank

The Board of Directors of the Company meets on a monthly basis and may
have additional special meetings. During the year ended December 31, 1997, the
Board of Directors of the Company met 13 times. No director attended fewer than
75% of the total number of Board meetings or committee meetings on which he
served that were held during this period.

The entire Board of Directors acts in the capacity of an audit
committee. The Board reviews the records and affairs of the Company, engages the
Company's external auditors and reviews their reports. The

Board meets with the Company's external auditors annually.

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<PAGE>

The Compensation Committee consists of Messrs. Hammerschmidt, Heuer and
Smith. The Compensation Committee, which reviews and recommends compensation and
benefits for the Company's employees, met once in 1997.

The Board of Directors of the Bank met 13 times during 1997. The entire
Board of Directors of the Bank acts in the capacity of an audit committee and
has established a Compensation Committee.

Executive Officers Who Are Not Directors

Set forth below is information with respect to the principal
occupations during at least the last five years for the executive officers of
the Company and the Bank who do not serve as a director.

Carolyn M. Thomason. Mrs. Thomason is the Executive Vice President and
Secretary. She became Executive Vice President for the Bank in 1989 and its
Secretary in 1969. Mrs. Thomason initially was employed by the Bank in 1963.

Tommy W. Richardson. Mr. Richardson is a Senior Vice President and the
Chief Financial Officer. He became Senior Vice President and Chief Financial
Officer for the Bank in 1993. Mr. Richardson initially was employed by the Bank
in 1984.

Sherri R. Billings. Mrs. Billings is a Senior Vice President and the
Treasurer. She became Senior Vice President for the Bank in 1993 and its
Treasurer in 1986. Mrs. Billings initially was employed by the Bank in 1979.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's officers and directors, and persons who own
more than 10% of the Company's Common Stock, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC") and the
National Association of Securities Dealers, Inc. Officers, directors and greater
than 10% stockholders are required by regulation to furnish the Company with
copies of all Section 16(a) forms they file. The Company knows of no person who
owns 10% or more of the Company's Common Stock.

Based solely on review of the copies of such forms furnished to the
Company, or written representations from its officers and directors, the Company
believes that during, and with respect to, the year ended December 31, 1997, the
Company's officers and directors satisfied the reporting requirements
promulgated under Section 16(a) of the 1934 Act.

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<PAGE>

BENEFICIAL OWNERSHIP OF COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of the Voting Record Date, certain
information as to the Common Stock beneficially owned by (i) each person or
entity, including any "group" as that term is used in Section 13(d)(3) of the
1934 Act, who or which was known to the Company to be the beneficial owner of
more than 5% of the issued and outstanding Common Stock, (ii) the directors of
the Company, (iii) those executive officers of the Company whose salary and
bonus exceeded $100,000 in 1997, and (iv) all directors and executive officers
of the Company and the Bank as a group.

<TABLE>
<CAPTION>
Common Stock
Beneficially Owned as of
Name of Beneficial Owner March 4, 1998(1)
- ------------------------------------------------ -------------------------
No. %
-------------------------- ------------
<S> <C> <C>
First Federal Bancshares of Arkansas, Inc. 411,648(2) 8.4%
Employee Stock Ownership Trust
200 West Stephenson
Harrison, Arkansas 72601

First Manhattan Co. 334,100(3) 6.8
437 Madison Avenue
New York, New York 10002

Directors:

Frank L. Coffman, Jr 127,721(4) 2.6
Larry J. Brandt 80,620(5) 1.6
John P. Hammerschmidt 21,128(6) *
James D. Heuer 32,742(7) *
William F. Smith 33,628(8) *

Certain other executive officers:
Carolyn M. Thomason 60,390(9) 1.2

All directors and executive officers of the Company and the 418,999(2)(10) 8.5%
Bank as a group (8 persons)

</TABLE>

- ---------------

* Represents less than 1% of the outstanding Common Stock.

(1) Based upon information provided by the respective beneficial owners and
filings with the SEC made pursuant to the 1934 Act. For purposes of
this table, pursuant to rules promulgated under the 1934 Act, an
individual is considered to beneficially own shares of Common Stock if
he or she directly or indirectly has or shares (1) voting power, which
includes the power to vote or to direct the voting of the shares, or
(2) investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, an individual
has sole voting power and sole investment power with respect to the
indicated shares. (Footnotes continued on following page)

- 6 -

<PAGE>

- ---------------

(2) The First Federal Bancshares of Arkansas, Inc. Employee Stock Ownership
Trust ("Trust") was established pursuant to the First Federal
Bancshares of Arkansas, Inc. Employee Stock Ownership Plan ("ESOP") by
an agreement between the Bank and Messrs. Coffman and Brandt and Mrs.
Thomason, directors and/or officers of the Company and the Bank, who
act as trustees of the plan ("Trustees"). As of the Voting Record Date,
68,417 shares held in the Trust had been allocated to the accounts of
participating employees. The Trustees must vote the allocated shares
held in the ESOP in accordance with the instructions of the
participating employees. Under the terms of the ESOP, unallocated
shares held in the ESOP will be voted by the ESOP Trustees in the same
proportion for and against proposals to stockholders of the Company as
participating employees actually vote shares of Common Stock which have
been allocated to their accounts. The amount of Common Stock
beneficially owned by directors who serve as trustees of the ESOP and
by all directors and executive officers as a group does not include the
unallocated shares held by the Trust.

(3) Based on filings made with the Securities and Exchange Commission.

(4) Includes 1,500 shares held in trust as to which Mr Coffman is a
trustee, 3,419 shares held in Mr. Coffman's account in the ESOP, 25,648
shares held in the Company's Recognition and Retention Plan (the
"Recognition and Retention Plan") granted to Mr. Coffman and not yet
vested which may be voted by Mr. Coffman, and 10,307 shares which may
be acquired pursuant to the exercise of stock options exercisable
within 60 days of the Voting Record Date.

(5) Includes 29,999 shares held jointly with Mr. Brandt's spouse, 3,419
shares held in Mr. Brandt's account in the ESOP, 25,648 shares held in
the Recognition and Retention Plan granted to Mr. Brandt and not yet
vested which may be voted by Mr. Brandt, and 10,307 shares which may be
acquired pursuant to the exercise of stock options exercisable within
60 days of the Voting Record Date.

(6) Includes 7,062 shares held jointly with Mr. Hammerschmidt's spouse,
2,500 shares held by a company owned by Mr. Hammerschmidt, 6,412 shares
held in the Recognition and Retention Plan granted to Mr. Hammerschmidt
and not yet vested which may be voted by Mr. Hammerschmit, and 5,154
shares which may be acquired pursuant to the exercise of stock options
exercisable within 60 days of the Voting Record Date.

(7) Includes 15,000 shares held jointly with Mr. Heuer's children, 6,412
shares held in the Recognition and Retention Plan granted to Mr. Heuer
and not yet vested which may be voted by Mr. Heuer, and 5,154 shares
which may be acquired pursuant to the exercise of stock options
exercisable within 60 days of the Voting Record Date.

(8) Includes 6,412 shares held in the Recognition and Retention Plan
granted to Mr. Smith and not yet vested which may be voted by Mr.
Smith, and 5,154 shares which may be acquired pursuant to the exercise
of stock options exercisable within 60 days of the Voting Record Date.

(9) Includes 15,745 shares held jointly with Mrs. Thomason's spouse, 3,419
shares held in Mrs. Thomason's account in the ESOP, 570 shares held
individually by Mrs. Thomason's spouse, 25,648 shares held in the
Recognition and Retention Plan granted to Mrs. Thomason and not yet
vested which may be voted by Mrs. Thomason and 10,307 shares which may
be acquired pursuant to the exercise of stock options exercisable
within 60 days of the Voting Record Date.

(10) Includes 15,344 shares allocated to the accounts of executive officers
as a group in the ESOP, 66,997 shares which may be acquired by all
directors and executive officers as a group upon the exercise of stock
options exercisable within 60 days of the Voting Record Date, and
121,830 shares held in the Recognition and Retention Plan on behalf of
all Directors and executive officers as a group.

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<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth a summary of certain information
concerning the compensation paid by the Bank for services rendered in all
capacities during the years ended December 31, 1997, 1996 and 1995 to the Chief
Executive Officer of the Bank and the other executive officers of the Bank whose
total compensation during the year exceeded $100,000.

- -----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
-------------------------------------------------------------------------
Awards Payouts
----------------------------------
Name and Other Annual Stock Number of LTIP All Other
Principal Position Year Salary(1) Bonus Compensation(2) Grants(3) Options Payouts ompensation(4)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank L. Coffman, Jr. 1997 $325,420 $13,150 $ -- $793,678 51,538 -- $47,968
Chief Executive Officer 1996 $310,200 $12,177 -- -- -- -- $22,209
1995 $276,000 $30,000 -- -- -- --

- -----------------------------------------------------------------------------------------------------------------------------------
Larry J. Brandt 1997 $227,140 $14,470 $ -- $793,678 51,538 -- $47,968
President and Chief 1996 $216,600 $13,394 -- -- -- -- $22,209
Operating Officer 1995 $192,000 $33,000 -- -- -- --

- -----------------------------------------------------------------------------------------------------------------------------------
Carolyn M. Thomason 1997 $191,040 $10,960 $ -- $793,678 51,538 -- $47,968
Executive Vice 1996 $182,400 $10,147 -- -- -- -- $22,209
President 1995 $162,000 $25,000 -- -- -- --

- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes director's fees from the Company and the Bank with respect to
Messrs. Coffman and Brandt. Also includes fees for Mrs. Thomason for
acting as Secretary.

(2) Does not include amounts attributable to miscellaneous benefits
received by the named executive officers. In the opinion of management
of the Bank, the costs to the Bank of providing such benefits to the
named executive officer during the indicated periods did not exceed the
lesser of $50,000 or 10% of the total of annual salary and bonus
reported for the individual.

(3) Represents the grant of shares of restricted Common Stock pursuant to
the Recognition and Retention Plan, which had the indicated value at
the date of grant and had a fair market value of $979,213 for each of
Messrs. Coffman and Brandt and Mrs. Thomason, at December 31, 1997.
Twenty percent of the shares awarded vested immediately upon grant and
20% vest each year over four years commencing one year from May 20,
1997.

(4) Consists of amounts allocated during 1997 pursuant to the ESOP based on
the market price per share on the allocation date of December 31, 1997.

Directors' Fees

Members of the Board of Directors of the Bank receive $1,000 per month.
Directors receive the normal monthly payment regardless of attendance. Members
of the Board serving on committees do not receive any

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<PAGE>

additional compensation for serving on such committees. Members of the Board of
Directors of the Company receive $200 per month.

Employment Agreements

In connection with the Bank's May 1996 conversion, the Company and the
Bank (the "Employers") entered into employment agreements with each of Messrs.
Coffman and Brandt and Mrs. Thomason (the "Executives"). The Employers have
agreed to employ the Executives for a term of three years, in each case in their
current respective positions. The employment agreements will be reviewed
annually by the Boards of Directors of the Employers, and the term of the
Executives' employment agreements shall be extended each year for a successive
additional one-year period upon approval of the Employers' Board of Directors,
unless either party elects, not less than 30 days prior to the annual
anniversary date, not to extend the employment term.

Each of the employment agreements are terminable with or without cause
by the Employers. The officer has no right to compensation or other benefits
pursuant to the employment agreement for any period after voluntary termination
or termination by the Employers for cause, disability or retirement. The
agreements provide for certain benefits in the event of the Executives' death.
In the event that (i) the officer terminates his employment because of failure
of the Employers to comply with any material provision of the employment
agreement or the Employers change the officers' title or duties or (ii) the
employment agreement is terminated by the Employers other than for cause,
disability, retirement or death or by the officer as a result of certain adverse
actions which are taken with respect to the officer's employment following a
change in control of the Company, as defined below, the employee will be
entitled to a cash severance amount equal to 3.0 times the employee's average
annual compensation, as defined in the Agreement, over the most recent five
taxable years.

A change in control is generally defined in the employment agreements
to include any change in control of the Company required to be reported under
the federal securities laws, as well as (i) the acquisition by any person of 25%
or more of the Company's outstanding voting securities and (ii) a change in a
majority of the directors of the Company during any two-year period without the
approval of at least two-thirds of the persons who were directors of the Company
at the beginning of such period.

Each employment agreement provides that in the event that any of the
payments to be made thereunder or otherwise upon termination of employment are
deemed to constitute "excess parachute payments" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), then such
payments and benefits received thereunder shall be reduced, in the manner
determined by the Executive, by the amount, if any, which is the minimum
necessary to result in no portion of the payments and benefits being
non-deductible by the Employers for federal income tax purposes. Excess
parachute payments generally are payments in excess of three times the
recipient's average annual compensation from the employer includable in the
recipient's gross income during the most recent five taxable years ending before
the date on which a change in control of the employer occurred. Recipients of
excess parachute payments are subject to a 20% excise tax on the amount by which
such payments exceed the base amount, in addition to regular income taxes, and
payments in excess of the base amount are not deductible by the employer as
compensation expense for federal income tax purposes.

Although the above-described employment agreements could increase the
cost of any acquisition of control of the Company, management of the Company
does not believe that the terms thereof would have a significant anti-takeover
effect.

Benefits

Retirement Plan. The Bank has a defined benefit pension plan
("Retirement Plan") for all full time employees who have attained the age of 21
years and have completed one year of service with the Bank. In general, the
Retirement Plan provides for annual benefits payable monthly upon retirement at
age 65 in an amount equal to 2% of an employee's average annual salary for the
five consecutive years of highest salary

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<PAGE>

during benefit service ("Five Year Average Compensation") multiplied by his
number of years of service. Under the Retirement Plan, an employee's benefits
are fully vested after five years of service. A year of service is any year in
which an employee works a minimum of 1,000 hours. Members who have reached age
65 are automatically 100% vested, regardless of completed years of employment.
The Retirement Plan also provides for an early retirement option with reduced
benefits. The Retirement Plan also provides for death benefits depending on the
age of the participant and the years of service. Death benefits are paid in a
lump sum distribution. For the year ended December 31, 1997, there was a net
pension cost of approximately $56,000.

The following table illustrates annual pension benefits for retirement
at age 65 under various levels of compensation and years of service. The figures
in the table assume that the Retirement Plan continues in its present form and
that the participants elect a straight life annuity form of benefit.

<TABLE>
<CAPTION>
Five Year
Average 15 Years of 20 Years of 25 Years of 30 Years of 35 Years of
Compensation Service Service Service Service Service
--------------- --------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>

$ 80,000 $24,000 $32,000 $ 40,000 $ 48,000 $ 56,000

90,000 27,000 36,000 45,000 54,000 63,000

100,000 30,000 40,000 50,000 60,000 70,000

110,000 33,000 44,000 55,000 66,000 77,000

120,000 36,000 48,000 60,000 72,000 84,000

140,000 42,000 56,000 70,000 84,000 98,000

160,000 48,000 64,000 80,000 96,000 112,000

180,000 54,000 72,000 90,000 108,000 126,000

200,000 60,000 80,000 100,000 120,000 140,000

220,000 66,000 88,000 110,000 132,000 154,000
</TABLE>

The maximum annual compensation which may be taken into account under
the Code (as adjusted from time to time by the Internal Revenue Service) for
calculating contributions under qualified defined benefit plans currently is
$160,000 and the maximum annual benefit permitted under such plans currently is
$118,000.

At December 31, 1997, Messrs. Coffman and Brandt and Mrs. Thomason had
nine, 24 and 34 years, respectively, of credited service under the Retirement
Plan.

Employee Stock Ownership Plan. The Company has established the ESOP for
employees of the Company and the Bank. Employees of the Company and the Bank who
have been credited with at least 1,000 hours of service during a twelve month
period and have attained the age of 21 are eligible to participate in the ESOP.

In connection with the mutual to stock conversion of the Bank, the ESOP
borrowed approximately $4.1 million from the Company to purchase Common Stock
issued in the Conversion. The loan to the ESOP is being repaid principally from
the Bank's contributions to the ESOP over a period of 10 years, and the
collateral for the loan is the Common Stock purchased by the ESOP. The interest
rate on the loan is 8.25%. The Bank may, in any plan year, make additional
discretionary contributions for the benefit of plan participants in either cash
or shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders, upon the
original issuance of additional shares by the Company or upon the sale

- 10 -

<PAGE>

of treasury shares by the Company. Such purchases, if made, would be funded
through additional borrowing by the ESOP or additional contributions from the
Bank. The timing, amount and manner of future contributions to the ESOP will be
affected by various factors, including prevailing regulatory policies, the
requirements of applicable laws and regulations and market conditions.

Shares purchased by the ESOP with the proceeds of the loan are held in
a suspense account and released on a pro rata basis as debt service payments are
made. Discretionary contributions to the ESOP and shares released from the
suspense account are allocated among participants on the basis of compensation.

Forfeitures will be reallocated among remaining participating employees
and may reduce any amount the Bank might otherwise have contributed to the ESOP.
Participants become vested in their right to receive their account balances
within the ESOP upon completion of their fifth year of service. In the case of a
"change in control," as defined, however, participants will become immediately
fully vested in their account balances, subject to certain tax considerations.
Benefits may be payable upon retirement, early retirement, death, disability or
separation from service. The Bank's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.

Stock Options

The following table sets forth certain information concerning exercises
of stock options by the named executive officers during the year ended December
31, 1997 and stock options held at December 31, 1997.

Aggregated Option Exercise in Last Fiscal Year
and Year End Option Values

- ------------------------------------------------------------------------------------------------------------------------------------
Number of Value of
Shares Unexercised Unexercised
Acquired on Value Options at Year End Options at
Name Exercise Realized Year End(1)
-----------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Frank L. Coffman, Jr -- -- 10,307 41,231 $46,382 $185,540
- ------------------------------------------------------------------------------------------------------------------------------------
Larry J. Brandt -- -- 10,307 41,231 46,382 185,540
- ------------------------------------------------------------------------------------------------------------------------------------
Carolyn M. Thomason -- -- 10,307 41,231 46,382 185,540
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Based on a per share market price of $23.75 at December 31, 1997.

- 11 -

<PAGE>

The following table sets forth certain information concerning grants of
stock options to the named executive officers during the year ended December 31,
1997.

Option Grants in Last Fiscal Year

- ------------------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Individual Grants Annual Rates
of Stock Price
Appreciation
for Option Term(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Options % of Total Options Exercise Expiration
Name Granted Granted to Employees(1) Price(2) Date(3) 5% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Frank L. Coffman, Jr. 51,538 10% $19.25 May 20, 2007 $624,125 $1,581,186
- ------------------------------------------------------------------------------------------------------------------------------------
Larry J. Brandt 51,538 10 19.25 May 20, 2007 624,125 1,581,186
- ------------------------------------------------------------------------------------------------------------------------------------
Carolyn M. Thomason 51,538 10 19.25 May 20, 2007 624,125 1,581,186
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

(1) Percentage of options granted to all employees and directors during
fiscal 1997.

(2) The exercise price was equal to the fair market value of a share of
Common Stock on the date of grant.

(3) The stock options were granted on May 20, 1997. One-fifth of the
options vested and became exercisable on the date of grant and
one-fifth vest and become exercisable each year over four years
commencing one year from the date of grant.

(4) Assumes compounded rates of return for the remaining life of the
options and future stock prices of $31.36 and $49.93 at compounded
rates of return of 5% and 10%, respectively.

Transactions With Certain Related Persons

The Bank's policy provides that all loans made by the Bank to its
directors and officers are made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. The
Bank's policy provides that such loans may not involve more than the normal risk
of collectibility or present other unfavorable features. As of December 31,
1997, mortgage and consumer loans to directors and officers aggregated $2.9
million or 3.5% of the Company's stockholders' equity as of such date. All such
loans were made by the Bank in accordance with the aforementioned policy.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors of the Bank
determines the salaries and bonuses of the Bank's three most senior executive
officers. The Committee also reviews and approves the salaries and bonuses for
the Bank's other officers and employees as prepared and submitted to the
Committee by the Bank's senior executive officers. During 1997, the members of
the committee were Messrs. Hammerschmidt (Chairman), Heuer and Smith. No member
of the Committee was a former or current full-time officer or employee of the
Bank or the Company. The Compensation Committee met once during 1997. The report
of the Compensation Committee with respect to compensation for the Chief
Executive Officer and all other Bank officers and employees for the year ended
December 31, 1997 is set forth below:

- 12 -

<PAGE>

Report of the Compensation Committee

The purpose of the Committee is to assist the Bank in attracting and
retaining qualified management, motivating executives to achieve performance
goals as outlined in the Bank's business plan and to ensure that executive
compensation is related to and supports the Bank's overall objective of
enhancing stockholder value.

In order to establish base salary levels and to determine an annual
cash bonus for the Bank's Chief Executive Officer and other senior executive
officers, the Compensation Committee considered the financial performance of the
Bank, including net income of the Bank and various financial ratios. The
Committee also considered the successful completion of the Conversion, as well
as the additional responsibilities related to being a public company. Further,
with respect to the Bank's other officers and employees, the Committee reviewed
and approved the salary increases and bonuses as submitted by the Bank's senior
executive officers.

Based upon the above factors, the Committee increased Mr. Coffman's
base salary by approximately $14,000 or 4.5% to $325,000 for 1998 and Mr.
Coffman was given a cash bonus of $13,150 for his service during 1997. The
Committee provided for a 4.5% salary increase for the other senior executive
officers and awarded a cash bonus as well.

Following review and approval by the Committee, all issues pertaining
to executive compensation are submitted to the full Board of Directors for their
approval. Messrs. Coffman and Brandt and Mrs. Thomason do not participate in the
review of their compensation.

John P. Hammerschmidt, Chairman
James D. Heuer, Director
William F. Smith, Director

- 13 -

<PAGE>

Performance Graph

The following graph demonstrates comparison of the cumulative total
returns for the Common Stock of the Company, the SNL Securities $500 million to
$1 Billion Thrift Asset Size Index and the Nasdaq Stock Market Index since the
close of trading of the Company's Common Stock on May 3, 1996.

[GRAPHIC]

<TABLE>
<CAPTION>
Period Ending
--------------------------------------------
Index 5/3/96 6/30/96 12/31/96 6/30/97 12/31/97
- ------------------------------------------ ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
First Federal Bancshares of Arkansas, Inc. 100.00 106.73 122.12 155.60 184.67
NASDAQ - Total US 100.00 100.36 109.04 122.03 133.80
SNL $500M-$1B Thrift Index 100.00 104.06 123.60 156.31 208.78
</TABLE>

The above graph represents $100 invested in the Company's Common Stock
at $13.25 per share, the closing price per share as of May 3, 1996. The Common
Stock commenced trading on the Nasdaq Stock Market on May 3, 1996. The
cumulative total returns do not include the payment of dividends by the Company.

- 14 -

<PAGE>

RATIFICATION OF APPOINTMENT OF AUDITORS

The Board of Directors of the Company has appointed Deloitte & Touche
LLP, independent certified public accountants, to perform the audit of the
Company's financial statements for the year ending December 31, 1998, and
further directed that the selection of auditors be submitted for ratification by
the stockholders at the Annual Meeting.

The Company has been advised by Deloitte & Touche LLP that neither that
firm nor any of its associates has any relationship with the Company or its
subsidiaries other than the usual relationship that exists between independent
certified public accountants and clients. Deloitte & Touche LLP will have one or
more representatives at the Annual Meeting who will have an opportunity to make
a statement, if they so desire, and who will be available to respond to
appropriate questions.

The Board of Directors recommends that you vote FOR the ratification of
the appointment of Deloitte & Touche LLP as independent auditors for the year
ending December 31, 1998.

STOCKHOLDER PROPOSALS

Any proposal which a stockholder wishes to have included in the proxy
materials of the Company relating to the next annual meeting of stockholders of
the Company, which is scheduled to be held in April 1999, must be received at
the principal executive offices of the Company, P.O. Box 550, Harrison, Arkansas
72602 Attention: Carolyn M. Thomason, Secretary, no later than November 25,
1998. If such proposal is in compliance with all of the requirements of Rule
14a-8 under the 1934 Act, it will be included in the proxy statement and set
forth on the form of proxy issued for such annual meeting of stockholders. It is
urged that any such proposals be sent by certified mail, return receipt
requested.

- 15 -

<PAGE>

ANNUAL REPORTS

A copy of the Company's Annual Report to Stockholders for the year
ended December 31, 1997 accompanies this Proxy Statement. Such annual report is
not part of the proxy solicitation materials.

Upon receipt of a written request, the Company will furnish to any
stockholder without charge a copy of the Company's Annual Report on Form 10-K
for 1997 required to be filed under the 1934 Act. Such written requests should
be directed to Tommy W. Richardson, Chief Financial Officer, First Federal
Bancshares of Arkansas, Inc., P.O. Box 550, Harrison, Arkansas 72602. The Form
10-K is not part of the proxy solicitation materials.

OTHER MATTERS

Each proxy solicited hereby also confers discretionary authority on the
Board of Directors of the Company to vote the proxy with respect to the election
of any person as a director if the nominee is unable to serve or for good cause
will not serve, matters incident to the conduct of the meeting, and upon such
other matters as may properly come before the Annual Meeting. Management is not
aware of any business that may properly come before the Annual Meeting other
than the matters described above in this Proxy Statement. However, if any other
matters should properly come before the meeting, it is intended that the proxies
solicited hereby will be voted with respect to those other matters in accordance
with the judgment of the persons voting the proxies.

The cost of the solicitation of proxies will be borne by the Company.
The Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending the proxy
materials to the beneficial owners of the Company's Common Stock. In addition to
solicitations by mail, directors, officers and employees of the Company may
solicit proxies personally or by telephone without additional compensation.

YOUR VOTE IS IMPORTANT! WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY
CARD AND RETURN IT TODAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

- 16 -

<PAGE>

/x/ PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FIRST
FEDERAL BANCSHARES OF ARKANSAS, INC. ("COMPANY") FOR USE AT THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 23, 1998 AND AT ANY ADJOURNMENT
THEREOF.

The undersigned, begin a stockholder of the Company as of March 4, 1998,
hereby authorized the Board of Directors of the Company or any successors
thereto as proxies with full powers of substitution, to represent the
undersigned at the Annual Meeting of Stockholders of the Company to be held
at the Comfort Inn located at 1210 Highway 62-65 North, Harrison, Arkansas
72601, on Thursday, April 23, 1998 at 10:00 a.m., Central Time, and at any
adjournment of said meeting, and thereat to act with respect to all votes
that the undersigned would be entitled to cast, if then personally present, as
follows:

Please be sure to sign and date Date ____________________________
this Proxy in the box below.

---------------------------------- -----------------------------------
Stockholder sign above Co-holder (if any) sign above

1. ELECTION OF DIRECTOR For Withhold For All Except

/ / / / / /

Nominee for a three-year term: Larry J. Brandt

INSTRUCTION: to withhold authority to vote for any individual nominee, mark
"For All Except" and write that nominee's name in the space provided below.

- ---------------------------------------------------------------------------

2. PROPOSAL to ratify the appointment For Against Abstain
by the Board of Directors of Deloitte
& Touche LLP as the Company's / / / / / /
independent auditors for the year
ending December 31, 1998.

In their discretion, the proxies are authorized to vote with respect to
approval of the minutes of the last meeting of stockholders, the election of
any person as a director if the nominee is unable to serve or for good cause
will not serve, matters incident to the conduct of the meeting, and upon such
other matters as may properly come before the meeting.

Detach above card, sign, date and mail in postage paid envelope provided

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

The Board of Directors recommends that you vote FOR the Board of Director's
nominee listed above and FOR Proposal 2. Shares of common stock of the
Company will be voted as specified. If no specification is made, shares will
be voted for the election of the Board of Directors' nominee to the Board of
Directors and for Proposal 2 and otherwise at the discretion of the proxies.
This proxy may not be voted for any person who is not a nominee of the Board
of Directors of the Company. This proxy may be revoked at any time before it
is exercised.

The above signed hereby acknowledges receipt of the Notice of the Annual
Meeting of Stockholders of First Federal Bancshares of Arkansas, Inc. called
for April 23, 1998, a Proxy Statement for the Annual Meeting and the 1997
Annual Report to Stockholders.

Please sign exactly as your name(s) appear(s) on this proxy card. Only one
signature is required in the case of a joint account. When signing in a
representative capacity, please give title.

PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY

<PAGE>

FIRST FEDERAL BANCSHARES
OF ARKANSAS, INC.

1997

ANNUAL REPORT

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
President's Letter to Stockholders................................. 1
Corporate Profile.................................................. 2
Selected Consolidated Financial and Other Data..................... 3
Selected Quarterly Operating Results............................... 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 6
Independent Auditors' Report....................................... 16
Consolidated Financial Statements.................................. 17
Directors and Executive Officers................................... 39
Banking Locations.................................................. 39
Stockholder Information............................................ 40
</TABLE>

<PAGE>

FIRST FEDERAL
BANCSHARES
of Arkansas, Inc.

Dear Stockholder:

First Federal Bancshares had another great year in 1997! Our stock
appreciated over 49% and we increased our quarterly dividend to six cents a
share. We also achieved record profits with net income of $5.5 million.

In 1997 we achieved our third consecutive "outstanding" rating on our
Community Reinvestment Act (CRA) examination. Our outstanding CRA rating is
indicative of our strong banking commitment to our communities we serve.

We continue to excel in both mortgage and installment lending with over
$145 million in new loans originated in 1997 in northwest Arkansas. Our new
Secondary Mortgage Division got off to an excellent start in 1997 and we
anticipate they will surpass their goals for this year.

We also opened two more offices in booming Washington County in Northwest
Arkansas. The first office was opened on Crossover Road in Fayetteville and
we had our grand opening in April. The building was acquired from the Bank of
Arkansas and, with some renovation, has become a flagship office for the
Fayetteville area. The second office was opened in Farmington and we held the
grand opening in November. The Farmington office is a new concept for us in
branch banking. It is located in a leased office adjoining a convenience
store complex. This high visibility location has made this office a valuable
addition to our branch network.

Our new Visa Check Card received an excellent response from our customers
and our VOICELINE 24 telephone banking continues to increase in volume each
month. In addition, we will introduce Internet Banking during 1998. Our
commitment to automation and leading edge technology has been a key to our
outstanding efficiency ratio of 53.8%.

Finally, our vision is to be "the premier family bank in Arkansas". The
board, management and all "First Team" members are committed to this vision
and our mission of "being the best provider of family banking services in our
market areas and maximizing our stockholders' value". We appreciate your
confidence expressed by investing in First Federal Bancshares of Arkansas.

Sincerely,

/s/ Larry J. Brandt President
--------------------------------
Larry J. Brandt
President

<PAGE>
CORPORATE PROFILE

First Federal Bancshares of Arkansas, Inc. (the "Company") was
incorporated in January 1996 under Texas law for the purpose of acquiring all
of the capital stock issued by First Federal Bank of Arkansas, FA ("First
Federal" or the "Bank") in connection with its conversion from a federally
chartered mutual savings and loan association to a federally chartered stock
savings and loan association (the "Conversion"). The Conversion was
consummated on May 3, 1996 and, as a result, the Company became a unitary
savings and loan holding company of the Bank. The Company has no significant
assets other than the shares of the Bank's common stock acquired in the
Conversion, the Company's loan to the Employee Stock Ownership Plan ("ESOP")
and the portion of the net Conversion proceeds retained and invested by the
Company. The Company has no significant liabilities.

The Bank is a federally chartered stock savings and loan association
which was formed in 1934. First Federal conducts business from its main
office and eleven full service branch offices, all of which are located in a
six county area in Northcentral and Northwest Arkansas comprised of Benton,
Marion, Washington, Carroll, Baxter and Boone counties. First Federal's
deposits are insured by the Savings Association Insurance Fund ("SAIF"),
which is administered by the Federal Deposit Insurance Corporation ("FDIC"),
to the maximum extent permitted by law. The Bank is a community oriented
savings institution which has traditionally offered a wide variety of savings
products to its retail customers while concentrating its lending activities
on the origination of loans secured by one- to four-family residential
dwellings. To a significantly lesser extent, the Bank's activities have also
included origination of multi-family residential loans, commercial real
estate loans, construction loans, commercial loans and consumer loans. In
addition, the Bank maintains a significant portfolio of investment securities.

At December 31, 1997, the Company had total assets of $549.6 million,
total deposits of $450.9 million and stockholders' equity of $82.9 million.
The Company's and the Bank's principal executive offices are located at 200
West Stephenson, Harrison, Arkansas 72601, and their telephone number is
(870)741-7641.

<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated financial and other data of the Company set
forth below and on the following page does not purport to be complete and
should be read in conjunction with, and is qualified in its entirety by, the
more detailed information, including the Consolidated Financial Statements
and related Notes, appearing elsewhere herein.

<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets...................... $ 549,607 $ 505,739 $ 454,479 $ 428,312 $ 402,649
Cash and cash equivalents......... 6,627 6,819 8,845 8,280 22,491
Investment securities............. 95,533 91,322 96,312 130,527 134,861
Loans receivable, net............. 433,942 396,508 339,505 279,783 236,659
Deposits.......................... 450,874 422,858 417,229 395,483 374,908
Federal Home Loan Bank advances... 11,997 -- -- -- --
Stockholders' equity.............. 82,884 80,758 35,308 31,242 26,451

Selected Operating Data:
Interest income................... $ 40,445 $ 37,192 $ 32,964 $ 29,790 $ 29,944
Interest expense.................. 23,748 22,449 21,538 17,700 17,047
--------- --------- --------- --------- ---------
Net interest income............... 16,697 14,743 11,426 12,090 12,897
Provision for loan losses......... -- 60 133 54 511
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses.................. 16,697 14,683 11,293 12,036 12,386
Gain on sale of mortgage-backed
and investment securities........ 394 -- 311 446 1,036
Noninterest income................ 1,526 1,222 1,107 1,137 1,165
Noninterest expense(1)............ 10,016 10,749 6,836 6,667 6,132
--------- --------- --------- --------- ---------
Income before income taxes........ 8,601 5,156 5,875 6,952 8,482
Provision for income taxes........ 3,099 1,756 1,871 2,250 3,109
--------- --------- --------- --------- ---------
Net income(1)................... $ 5,502 $ 3,400 $ 4,004 $ 4,702 $ 5,373
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

</TABLE>

- ------------------------

(1) The year ended December 31, 1996 includes a nonrecurring SAIF special
assessment of approximately $2.6 million or approximately $1.7 million net of
the income tax benefit.

<PAGE>

<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios(1):
Return on average assets(2)............... 1.03% .69% .91% 1.12% 1.35%
Return on average equity(2)............... 6.76 5.22 12.03 16.22 22.56
Average equity to average assets.......... 15.26 13.23 7.55 6.91 5.99
Interest rate spread(3)................... 2.47 2.48 2.37 2.74 3.14
Net interest margin(3).................... 3.22 3.08 2.66 2.96 3.33
Net interest income after provision for
loan losses to noninterest expense...... 166.70 136.60 165.20 180.53 201.99
Noninterest expense to average assets..... 1.88 2.18 1.55 1.59 1.54
Average interest-earning assets to
average interest-bearing liabilities.... 116.21 112.96 105.92 105.23 104.37
Operating efficiency(4)................... 53.80 67.33 53.22 48.76 40.54

Asset Quality Ratios(5):
Nonperforming loans to total loans(6)..... 1.11 0.18 0.10 0.09 0.60
Nonperforming assets to total assets(6)... 0.94 0.17 0.13 0.12 0.48
Allowance for loan losses to
non-performing loans(6)................. 24.12 173.51 350.86 420.00 99.25
Allowance for loan losses to total loans.. 0.27 0.30 0.35 0.40 0.59

Capital Ratios(5):
Tangible capital to adjusted total assets. 11.98 12.30 7.74 7.29 6.57
Core capital to adjusted total assets..... 11.98 12.30 7.74 7.29 6.57
Risk-based capital to risk-weighted
assets.................................. 22.52 23.24 15.57 16.62 16.52

Other Data:
Full service offices at end of period..... 12 10 8 8 8
</TABLE>

- ------------------------

(1) Ratios for 1997 are based on average daily balances. Ratios prior to 1997
are based on average month end balances.

(2) The year ended December 31, 1996 includes a nonrecurring SAIF special
assessment of approximately $2.6 million or approximately $1.7 million net
of the income tax benefit. For the year ended December 31, 1996, return on
average assets, without the SAIF special assessment, would have been 1.04%
and return on average equity for the same period would have been 7.83%.

(3) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.

(4) Noninterest expense to net interest income plus noninterest income.

(5) Asset quality ratios and capital ratios are end of period ratios.

(6) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans while REO consists
of real estate acquired in settlement of loans.

4
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
YEAR ENDED DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................................. $ 10,456 $ 10,226 $ 10,048 $ 9,715
Interest expense................................................ 6,191 6,153 5,831 5,573
----------- ----------- ----------- -----------
Net interest income............................................. 4,265 4,073 4,217 4,142
Provision for loan losses....................................... -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision for loan losses............. 4,265 4,073 4,217 4,142
Noninterest income.............................................. 370 360 872 318
Noninterest expense............................................. 2,501 2,374 3,029 2,112
----------- ----------- ----------- -----------
Income before income taxes...................................... 2,134 2,059 2,060 2,348
Provision for income taxes...................................... 774 748 739 838
----------- ----------- ----------- -----------
Net income...................................................... $ 1,360 $ 1,311 $ 1,321 $ 1,510
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share(2):
Basic......................................................... $ 0.30 $ 0.29 $ 0.29 $ 0.33
Diluted....................................................... $ 0.30 $ 0.29 $ 0.29 $ 0.33

Selected Ratios (Annualized):
Net interest margin............................................. 3.19% 3.07% 3.29% 3.33%
Return on average assets........................................ 0.99 0.96 1.00 1.18
Return on average equity........................................ 6.62 6.50 6.50 7.41
</TABLE>

<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
YEAR ENDED DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................................. $ 9,655 $ 9,600 $ 9,232 $ 8,705
Interest expense................................................ 5,598 5,556 5,592 5,703
----------- ----------- ----- -----
Net interest income............................................. 4,057 4,044 3,640 3,002
Provision for loan losses....................................... 60 -- -- --
----------- ----------- ----- -----
Net interest income after provision for loan losses............. 3,997 4,044 3,640 3,002
Noninterest income.............................................. 314 307 311 290
Noninterest expense(1).......................................... 2,190 4,738 1,951 1,870
----------- ----------- ----- -----
Income (loss) before income taxes............................... 2,121 (387) 2,000 1,422
Provision (benefit) for income taxes............................ 711 (127) 692 480
----------- ----------- ----- -----
Net income (loss) (1)........................................... $ 1,410 $ (260) $ 1,308 $ 942
----------- ----------- ----- -----
----------- ----------- ----- -----
Earnings (loss) per share(2):
Basic......................................................... $ 0.30 $ (.05) $ 0.28 NA
Diluted....................................................... $ 0.30 $ (.05) $ 0.28 NA

Selected Ratios (Annualized):
Net interest margin............................................. 3.29% 3.29% 3.03% 2.69%
Return on average assets........................................ 1.11 (0.21) 1.06 0.82
Return on average equity........................................ 6.79 (1.24) 8.75 10.54
</TABLE>

- ------------------------

(1) The third quarter of 1996 includes the nonrecurring SAIF special assessment
of approximately $2.6 million or approximately $1.7 million net of the
income tax benefit.

(2) Basic and Diluted Shares Outstanding

YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------
Basic and diluted weighted--average shares.................... 4,689,085 4,748,228 4,741,524 NA
</TABLE>

During the year ended December 31, 1996, there were no potential dilutive
securities. The second quarter of 1996 assumes the Company was a public company
at the beginning of that quarter.

5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial Statements and
the other sections contained in this Annual Report.

The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations also are affected by the provision for loan losses, the
level of its noninterest income and expenses, and income tax expense.

ASSET AND LIABILITY MANAGEMENT

The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap", provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of December 31, 1997, the Bank estimates that the ratio of
its one-year gap to total assets was a negative 14.8% and its ratio of
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 68.0%.

In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Company's management has implemented and continues to monitor asset and
liability management policies to better match the maturities and repricing terms
of the Bank's interest-earning assets and interest-bearing liabilities. Such
policies have consisted primarily of: (i) emphasizing the origination of
adjustable-rate mortgage loans ("ARMs"); and (ii) lengthening the maturity on
deposits by offering longer term certificates of deposit. Presently, deposits
into such certificates of deposit are minimal due to the prevailing low interest
rate environment.

The Bank focuses its lending activities on the origination of one-, three-
and seven-year adjustable-rate residential mortgage loans. Although
adjustable-rate loans involve certain risks, including increased payments and
the potential for default in an increasing interest rate environment, such loans
decrease the risks associated with changes in interest rates. As a result of the
Bank's efforts, as of December 31, 1997, $236.0 million or 63.6% of the Bank's
portfolio of one- to four-family residential mortgage loans consisted of ARMs,
including $198.3 million in seven-year ARMs.

The Company's investment securities portfolio amounted to $95.5 million or
17.4% of the Company's total assets at December 31, 1997. Of such amount, $12.0
million or 12.6% is contractually due within one year and $25.3 million or 26.5%
is contractually due after one year to five years. However, actual maturities
are normally shorter than contractual maturities due to the ability of borrowers
to call or prepay such obligations without call or prepayment

6
<PAGE>
penalties. As of December 31, 1997, there was approximately $71 million of
investment securities with call options held by the issuer, of which
approximately $60 million are callable within one year.

Deposits are the Bank's primary funding source and the Bank prices its
deposit accounts based upon competitive factors and the availability of prudent
lending and investment opportunities. The Bank seeks to lengthen the maturities
of its deposits by soliciting longer term certificates of deposit when market
conditions have created opportunities to attract such deposits. However, the
Bank does not solicit high-rate jumbo certificates of deposit and does not
pursue an aggressive growth strategy which would force the Bank to focus
exclusively on competitors' rates rather than deposit affordability.

NET PORTFOLIO VALUE

Management also presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Bank's portfolio equity and
the level of net interest income on a quarterly basis. The Office of Thrift
Supervision ("OTS") adopted a final rule in August 1993 incorporating an
interest rate risk component into the risk-based capital rules. Under the rule,
an institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate component from total capital for
purposes of calculating the risk-based capital requirement. An institution with
a greater than "normal" interest rate risk is defined as an institution that
would incur a loss of net portfolio value ("NPV") exceeding 2% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
A resulting change in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its capital 50%
of that excess change. The rule provides that the OTS will calculate the
interest rate risk component quarterly for each institution. The OTS has
recently indicated that no institution will be required to deduct capital for
interest rate risk until further notice. However, utilizing this measurement
concept, at December 31, 1997, there would be a decrease in the Bank's NPV of
approximately 3.31% of the present value of its assets, assuming a 200 basis
point increase in interest rates.

The following table presents the Bank's NPV as of December 31, 1997, as
calculated by the OTS, based on information provided to the OTS by the Bank.

<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
- ------------------------------------------------------------------------------------
ESTIMATED NPV AS
CHANGE IN INTEREST A PERCENTAGE OF
RATES (BASIS PRESENT VALUE AMOUNT PERCENT
POINTS) ESTIMATED NPV OF ASSETS OF CHANGE OF CHANGE
- ------------------- --------------- ------------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
+400 $ 40,569 7.93% $ (40,095) (50)%
+300 51,155 9.72 (29,509) (37)
+200 61,826 11.43 (18,839) (23)
+100 72,124 12.98 (8,540) (11)
-- 80,664 14.19 -- --
-100 84,910 14.70 4,246 5
-200 85,397 14.64 4,733 6
-300 87,900 14.86 7,236 9
-400 91,861 15.29 11,197 14
</TABLE>

7
<PAGE>
CHANGES IN FINANCIAL CONDITION

GENERAL. At December 31, 1997, the Company's total assets amounted to
$549.6 million as compared to $505.7 million at December 31, 1996. The $43.9
million or 8.7% increase was primarily due to an increase of $37.4 million or
9.4% in loans receivable, net, a $4.6 million or 5.0% increase in investment
securities held to maturity, and a $1.7 million or 46.4% increase in office
properties and equipment, net.

The loans receivable increase resulted from the continued origination of
loans during the year ended December 31, 1997. Originations for the twelve
month period ended December 31, 1997 consisted of $92.7 million in one- to
four- family residential loans, $8.9 million in commercial loans, $20.6
million in construction loans and $22.9 million in consumer installment
loans, of which $8.8 million consisted of home equity loans. At December 31,
1997, the Bank had outstanding loan commitments of $3.6 million, unused lines
of credit of $3.6 million, and the undisbursed portion of construction loans
of $7.3 million. The increase in office properties and equipment primarily
consisted of a land acquisition for future construction of a North Harrison,
Arkansas full service branch facility and the purchase of an existing full
service branch on Crossover Road in Fayetteville, Arkansas. Liabilities
increased $41.7 million or 9.8% to $466.7 million at December 31, 1997
compared to $425.0 million at December 31, 1996. The increase in liabilities
was primarily due to an increase of $28.0 million or 6.6% in deposits, a
$12.0 million increase in advances from the Federal Home Loan Bank ("FHLB")
of Dallas and a $1.6 million outstanding commitment by the Company to
purchase the remaining stock to fund the Management Recognition and Retention
Plan ("MRR Plan"). The increases in deposits and advances from the FHLB of
Dallas were used to fund the net loan increase and to purchase additional
investment securities. Stockholders' equity amounted to $82.9 million or
15.08% of total assets at December 31, 1997 compared to $80.8 million or
15.97% of total assets at December 31, 1996.

Nonperforming assets, consisting of nonperforming loans and repossessed
assets, amounted to $5.2 million or .94% of total assets at December 31, 1997,
compared to $875,000, or .17% of total assets at December 31, 1996. Such
increase in nonperforming assets was primarily due to the Bank classifying a
commercial real estate loan as non-accrual. The Bank currently anticipates
accepting a deed in lieu of foreclosure in the first quarter of 1998. The
property will be promptly listed and aggressively marketed, and will be operated
by a management company until disposition. A preliminary appraisal amount has
been determined as of December 31, 1997 and an adequate loan loss allowance has
been established.

LOANS RECEIVABLE. Net loans receivable increased by $37.4 million, or 9.4%,
to $433.9 million at December 31, 1997 from $396.5 million at December 31, 1996.
Loan originations for 1997 totaled $145.1 million. The net loans receivable
increase was composed of increases in single-family residential loans of $32.6
million or 9.6%, construction loans, net of undisbursed funds, of $2.1 million
or 18.1%, commercial loans of $800,000 or 3.2%, and consumer loans of $1.4
million or 4.9%. Loans were originated using the Bank's normal underwriting
standards, rates, and terms.

Unearned loan fee income at December 31, 1997 amounted to $3.5 million, down
from $4.4 million at December 31, 1996. Such decrease was primarily due to the
Bank writing off the unearned discount in connection with the classification of
a commercial real estate loan as non-accrual in anticipation of accepting a deed
in lieu of foreclosure in the first quarter of 1998. These unearned fees are
recognized as an adjustment to yield over the contractual lives of the related
loans. Undisbursed amounts of loans in process related to construction loans at
December 31, 1997 were $7.3 million, compared to $8.7 million at December 31,
1996.

INVESTMENT SECURITIES. Investment securities available for sale and held to
maturity amounted to $95.5 million as of December 31, 1997 compared to $91.3
million as of December 31, 1996. In 1997, approximately $51.7 million of
government agency obligations were purchased. Securities which matured or were
called during 1997 amounted to $46.6 million in 1997, which resulted in a
increase of $4.2 million or 4.6% in investment securities at December 31, 1997
compared to December 31, 1996.

8
<PAGE>

DEPOSITS. Deposits at December 31, 1997 amounted to $450.9 million, an
increase of $28.0 million or 6.2% from the December 31, 1996 balance of $422.9
million. The Bank does not advertise for deposits outside of its primary market
area, Northcentral and Northwest Arkansas, or utilize the services of deposit
brokers. In 1997, the Bank began offering special promotion certificate of
deposits.

BORROWED FUNDS. The Bank borrowed $12.0 million in Federal Home Loan Bank
of Dallas advances during the year ended December 31, 1997. The weighted average
rate on such borrowings was 6.31% at December 31, 1997. These borrowings were
used to fund loan growth and to purchase additional investment securities.

STOCKHOLDERS' EQUITY. Stockholders' equity increased $2.1 million to $82.9
million at December 31, 1997 from $80.8 million at December 31, 1996. The
increase was primarily due to net income in the amount of $5.5 million. The
increase in stockholders' equity was offset by the cost of $4.0 million for the
MRR Plan shares which was partially reduced by the shares of stock vested and
accrued for in the current year of $1.2 million, and by the recognition of costs
of $800,000 associated with the release of unallocated shares from the ESOP. In
addition, during the year ended December 31, 1997 cash dividends aggregating
$1.1 million were paid.

9
<PAGE>

AVERAGE BALANCE SHEETS

The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the yields earned and rates paid at
December 31, 1997. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented and outstanding balances at December 31, 1997. For the year
ended December 31, 1997, average balances are based on daily balances during the
period. For the year ended December 31, 1996 and 1995, average balances are
based on month end balances during the periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------------------------------------
1997 1997 1996
------------- --------------------------------- -----------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST BALANCE INTEREST COST
------------- --------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning
assets:
Loans
receivable(1)..... 8.08% $ 415,075 $ 33,804 8.14% $ 369,185 $ 30,498 8.26%
Investment
securities(2)..... 6.75 96,170 6,207 6.45 102,398 6,258 6.11
Mortgage-backed
securities........ 8.82 202 17 8.46 264 22 8.33
Other interest-
earning assets.... 5.42 7,615 417 5.48 6,335 414 6.54
--------- ---------- ---------- ----------
Total interest-
earning assets.. 7.84 519,062 40,445 7.79 478,182 37,192 7.78
---------- ----------
Noninterest-earning
assets.............. 14,550 13,821
--------- ----------
Total assets...... $ 533,612 $ 492,003
--------- ----------
--------- ----------
Interest-bearing
liabilities:
Deposits............ 5.30 440,147 23,331 5.30 $ 420,062 22,409 5.33
Other borrowings.... 6.31 6,493 417 6.42 3,264 40 1.23
--------- ---------- ---------- ----------
Total interest-
bearing
liabilities..... 5.33 446,640 23,748 5.32 423,326 22,449 5.30
Noninterest-bearing
liabilities......... 5,561 3,564
--------- ----------
Total
liabilities..... 452,201 426,890
Stockholders'
equity.............. 81,411 65,113
--------- ----------
Total liabilities
and stockholders'
equity.......... $ 533,612 $ 492,003
--------- ----------
--------- ----------
--------- ----------
Net interest
income.............. $ 16,697 $ 14,743
--------- ----------
--------- ----------
Net earning
assets.............. $ 72,422 $ 54,856
--------- ----------
--------- ----------

Interest rate
spread.............. 2.51% 2.47% 2.48%
--------- ---------- ----------
--------- ---------- ----------
Net interest
margin.............. 3.22% 3.08%
--------- ----------
--------- ----------
Ratio of interest-
earning assets to
interest-bearing
liabilities......... 116.21% 112.96%
--------- ----------
--------- ----------
<CAPTION>

YEAR ENDED DECEMBER 31,
-------------------------------------
1995
-------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- ----------- ----------
<S> <C> <C> <C>

Interest-earning
assets:
Loans
receivable(1)..... $ 306,175 $ 25,544 8.34%
Investment
securities(2)..... 109,267 6,343 5.81
Mortgage-backed
securities........ 9,378 778 8.30
Other interest-
earning assets.... 4,069 299 7.35
--------- -----------
Total interest-
earning assets.. 428,889 32,964
-----------
Noninterest-earning
assets.............. 12,326
----------
Total assets...... $ 441,215
----------
----------
Interest-bearing
liabilities:
Deposits............ $ 404,930 21,538 5.32
Other borrowings.... -- -- --
--------- -----------
Total interest-
bearing
liabilities..... 404,930 21,538 5.32
Noninterest-bearing
liabilities......... 2,988
----------
Total
liabilities..... 407,918
Stockholders'
equity.............. 33,297
----------
Total liabilities
and stockholders'
equity.......... $ 441,215
----------
----------
----------
Net interest
income.............. $ 11,426
----------
----------
Net earning
assets.............. $ 23,959
----------
----------

Interest rate
spread.............. 2.37%
------
------
Net interest
margin.............. 2.66%
------
------
Ratio of interest-
earning assets to
interest-bearing
liabilities......... 105.92%
------
------
</TABLE>

- -----------------------

(1) Includes non-accrual loans.
(2) Includes FHLB of Dallas stock and for the years 1996 and 1995 Federal Home
Loan Mortgage Corporation ("FHLMC") preferred stock at cost.

<PAGE>

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.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
------------------------------------------------ ----------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------------------- ----------------------
TOTAL
RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE
----------- --------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............................... $ 3,791 $ (431) $ (54) $ 3,306 $ 5,257 $ (252)
Investment securities.......................... (381) 351 (21) (51) (399) 335
Mortgage-backed securities..................... (5) -- -- (5) (756) 9
Other interest-earning assets.................. 84 (67) (14) 3 166 (33)
----------- --------- ----- ----------- ----------- ---------
Total interest-earning asset................. 3,489 (147) (89) 3,253 4,268 59
----------- --------- ----- ----------- ----------- ---------
Interest expense:
Deposits....................................... 1,072 (143) (7) 922 805 63
Other borrowings............................... 39 170 168 377 -- --
----------- --------- ----- ----------- ----------- ---------
Total interest-bearing liabilities............. 1,111 27 161 1,299 805 63
----------- --------- ----- ----------- ----------- ---------
Net change in interest income.................... $ 2,378 $ (174) $ (250) $ 1,954 $ 3,463 $ (4)
----------- --------- ----- ----------- ----------- ---------
----------- --------- ----- ----------- ----------- ---------

<CAPTION>
TOTAL
RATE/ INCREASE
VOLUME (DECREASE)
----------- -----------
<S> <C> <C>
Interest income:
Loans receivable............................... $ (51) $ 4,954
Investment securities.......................... (21) (85)
Mortgage-backed securities..................... (9) (756)
Other interest-earning assets.................. (18) 115
----- -----------
Total interest-earning assets................ (99) 4,228
----- -----------
Interest expense:
Deposits....................................... 3 871
Other borrowings............................... 40 40
----- -----------
Total interest-bearing liabilities........... 43 911
----- -----------
Net change in interest income.................... $ (142) $ 3,317
----- -----------
----- -----------
</TABLE>

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996.

GENERAL. Net income amounted to $5.5 million for 1997 compared to $3.4
million for 1996. The increase in net income of $2.1 million was due primarily
to an increase in net interest income and noninterest income offset by an
increase in noninterest expenses, excluding the one-time SAIF special
assessment.

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 amounted to $16.7 million in
1997, an increase of $2.0 million or 13.3% compared to $14.7 million for 1996.
The Company's interest rate spread remained virtually unchanged at 2.47% for
1997 compared to 2.48% for 1996. The Company's net interest margin increased to
3.22% for 1997 compared to 3.08% for 1996. Such increase in the Bank's net
interest margin was due to the increased investment in loans receivable, and an
increase in the ratio of interest-earning assets to interest-bearing liabilities
to 116.21% for 1997 compared to 112.96% for 1996, which was partially offset by
an increase in interest expense due to deposit growth and borrowings of FHLB
advances.

INTEREST INCOME. Interest income increased $3.3 million or 8.7% to $40.4
million for 1997 compared to $37.2 million for 1996. The interest income
increase resulted from an increase of $3.3 million in interest income on loans
receivable which was partially offset by a decrease of $51,000 in interest
income from investment securities. The increase in interest income on loans
receivable was due to an increase of $45.9 million or 12.4% in the average
balance of loans receivable as a result of continued loan originations. The
positive impact of the increase on the average balance of loans receivable was
partially offset by a decrease in the average yield earned on such assets to
8.14% for 1997 from 8.26% in 1996. Such decrease in the average yield was due to
originations of loans at lower

<PAGE>

interest rates and refinancing of higher rate loans. Interest income on
investment securities declined primarily as a result of a decrease in the
average balance of such assets due to maturities and calls of such
investments. The decline was substantially offset by an increase in the
average yield earned on investment securities from 6.11% in 1996 to 6.45% in
1997 due to purchasing investment securities with higher yields and longer
maturity terms. Such bonds typically contain call features.

INTEREST EXPENSE. Interest expense increased $1.3 million or 5.8% to $23.7
million in 1997 compared to $22.4 million in 1996. The increase was due
primarily to an increase of $20.1 million or 4.8% in the average balance of
deposits resulting from the Bank offering special promotion certificates of
deposit and from interest credited on existing accounts.

PROVISION FOR LOAN LOSSES. Provisions for loan losses amounted to $60,000
for 1996. No provisions for loan losses were provided for in 1997. Provisions
for loan losses include charges to reduce the recorded balance of mortgage
loans to their estimated fair value. Such provision and the adequacy of the
allowance for loan losses is evaluated for adequacy periodically 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. The decrease in the provision for loan
losses in 1997 compared to 1996 was due to management's evaluation of the
adequacy of the allowance for loan losses.

NONINTEREST INCOME. Noninterest income increased $698,000 or 57.1% to $1.9
million compared to $1.2 million for 1997 and 1996, respectively. The increase
was due primarily to a gain of $394,000 on the sale of Federal Home Loan
Mortgage Corporation stock, which was previously classified as an available for
sale investment security, and to the current recognition of $145,000 on
previously deferred profit on the sale of real estate owned.

NONINTEREST EXPENSE. Noninterest expenses, excluding the SAIF special
assessment of $2.6 million in 1996, increased $1.9 million or 23.1% to $10.0
million in 1997 compared to $8.1 million in 1996. The increase was primarily due
to an increase in salaries and employee benefits, including costs associated
with the implementation of the Company's ESOP and the Company's MRR Plan,
additional costs attributable to being a public company, advertising costs
related to targeting special promotions and branch openings and occupancy costs
due to branch expansions. Such increases were partially offset by a decline in
the quarterly FDIC premiums from $902,000 in 1996 compared to $272,000 in 1997.

The salaries and employee benefits increased $2.1 million or 47.6% to $6.4
million compared to $4.3 million for 1997 and 1996, respectively. Such increase
included the $754,000 fair market value of 39,170 vested shares of stock granted
to key officers as well as to non-employee directors during the second quarter
ended June 30, 1997 pursuant to the MRR Plan adopted by the Company's
shareholders on May 7, 1997. An additional cost of $440,000 was accrued during
the year for shares awarded under the plan that will vest in May 1998. The costs
related to the Company's ESOP amounted to $745,000 for 1997 compared to $402,000
for 1996. This $343,000 or 85.3% increase resulted, in part, from the
recognition of compensation expense for ESOP shares committed to be released at
the fair market value which increased during 1997. In addition, the ESOP expense
for 1996 represented a partial year commencing upon conversion on May 3, 1996.
Other increases in salaries and employee benefits are attrituable to an increase
in the number of employees due to expansion and growth.

Net occupancy expense amounted to $804,000 in 1997 compared to $672,000 in
1996, an increase of $132,000 or 19.7%. Such increase was primarily due to
branch expansion as previously discussed. Advertising costs increased $81,000 or
41.6% to $275,000 for 1997 compared to $194,000 for 1996. The increase was
related to targeting special promotions for product offerings and advertising
branch openings. Noninterest expenses also increased as a result of additional
costs attributable to being a public company. Noninterest expense increases were
partially offset by a reduction in the FDIC premiums which amounted to $272,000
in 1997 compared to $902,000 in 1996. Such reduction in the premium was mandated
by the legislation requiring the payment, in the third quarter of 1996, of the
one-time special assessment used to recaptialize the SAIF.

12
<PAGE>

INCOME TAXES. Income taxes amounted to $3.1 million and $1.8 million for
1997 and 1996, respectively, resulting in effective tax rates of 36.0% and
34.1%, respectively. Such increase was primarily due to an increase in pre-tax
income and additional state income tax in 1997 attributable to tax exempt
investment security interest income not sufficient to reduce state taxable
income to the 1996 level of zero.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995.

GENERAL. Net income amounted to $3.4 million for 1996 compared to $4.0
million for 1995. The decrease in net income was due primarily to an increase in
noninterest expenses as a result of the SAIF special assessment, which was
partially offset by an increase in net interest income.

NET INTEREST INCOME. The Company's net interest income amounted to $14.7
million in 1996, an increase of $3.3 million or 28.9% compared to $11.4 million
for 1995. The Company's interest rate spread and net interest margin increased
to 2.48% and 3.08%, respectively, for 1996 compared to 2.37% and 2.66%,
respectively, for 1995. Such increases in the Bank's interest rate spread and
net interest margin were due to the increased investment in higher yielding
loans receivable, relative to investment securities, and an increase in the
ratio of interest-earning assets to interest-bearing liabilities to 112.96% for
1996 compared to 105.92% for 1995, which was partially offset by an increase in
interest expense due to deposit growth.

INTEREST INCOME. Interest income increased $4.2 million or 12.7% to $37.2
million for 1996 compared to $33.0 million for 1995. The interest income
increase resulted from an increase of $5.0 million in interest income on loans
receivable which was partially offset by decreases of $756,000 and $85,000 in
interest income on mortgage-backed securities and investment securities,
respectively. The increase in interest income on loans receivable was due to an
increase of $63.0 million or 20.6% in the average balance of loans receivable as
a result of increased loan originations. The positive impact of the increase on
the average balance of loans receivable was partially offset by a decrease in
the average yield earned on such assets to 8.26% for 1996 from 8.34% in 1995.
Such decrease in the average yield was due to originations of loans at lower
interest rates and refinancing of higher rate loans. Interest income on
investment securities declined primarily as a result of a decrease in the
average balance of such assets due to maturities and calls of such investments
that were invested in higher-yielding loans. The decline was partially offset by
an increase in the average yield earned on investment securities from 5.81% in
1995 to 6.11% in 1996. Such increase was primarily due to the investment of a
portion of the net proceeds from the Conversion in longer term higher-rate
investment securities, a substantial portion of which were subsequently called
in the latter part of 1996 and scheduled maturities of lower-yielding investment
securities. The decrease in interest income on mortgage-backed securities was
substantially due to a decrease of $9.1 million in the average balance of such
assets resulting from sales of mortgage-backed securities and payments and
prepayments of the mortgages underlying such securities. The sales of such
securities occurred in November 1995, with no sales of such securities in 1996.

INTEREST EXPENSE. Interest expense increased $911,000 or 4.2% to $22.4
million in 1996 compared to $21.5 million in 1995. The increase was due almost
solely to an increase of $15.1 million or 3.7% in the average balance of
deposits resulting from interest credited which was partially offset by a
deposit outflow primarily related to accountholders purchasing the Company's
common stock in the Conversion.

PROVISION FOR LOAN LOSSES. Provisions for loan losses amounted to $60,000
and $133,000 for 1996 and 1995, respectively. Provisions for losses include
charges to reduce the recorded balance of mortgage loans to their estimated fair
value. Such provision and the adequacy of the allowance for loan losses is
evaluated periodically 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. The decrease in the
provision for loan losses in 1996 compared to 1995 was due to management's
evaluation of the adequacy of the allowance for loan losses.

<PAGE>

NONINTEREST INCOME. Noninterest income decreased $196,000 or 13.8% to $1.2
million in 1996 compared to $1.4 million in 1995 due primarily to a $311,000
decrease in gain on sales of mortgage-backed and investment securities. Such
decrease was the result of no sales activity in 1996. Deposit fee income
amounted to $764,000 and $716,000 for 1996 and 1995, respectively or a 6.7%
increase.

NONINTEREST EXPENSE. Noninterest expenses increased $3.9 million or 57.2%
to $10.7 million in 1996 compared to $6.8 million in 1995. The increase was
primarily due to a nonrecurring SAIF special assessment of $2.6 million, an
increase of $870,000 in salaries and employee benefits, an increase of $117,000
in data processing and additional costs associated with being a public company.
The increase in salaries and employee benefits was due to normal merit increases
as well as increases in personnel and additional post retirement costs including
the ESOP adopted in connection with the Conversion. Generally accepted
accounting principles require recognition of compensation expense for shares
released from the ESOP at the fair market value of the shares at the time they
are committed to be released. Such costs amounted to $402,000 in 1996. The
increase in data processing costs was the result of charges tied to the number
of accounts reflecting the growth of the Bank.

INCOME TAXES. Income taxes amounted to $1.8 million and $1.9 million for
1996 and 1995, respectively, resulting in effective tax rates of 34.1% and
31.8%, respectively.

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, amortization,
prepayments and maturities of outstanding loans, maturities and sales 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 December 31, 1997, the Bank had outstanding advances from the FHLB of Dallas
of $12.0 million. Such advances were used in the Bank's normal operating and
investing activities.

All savings institutions are required to maintain an average daily balance
of liquid assets equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
institutions. At the present time, the required minimum liquid asset ratio is
4%. At December 31, 1997, the Bank's liquidity ratio was 18.3%.

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. 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 and to fund loan commitments. At December
31, 1997, the total approved mortgage loan origination commitments outstanding,
excluding the undisbursed portion of construction loans, amounted to $3.6
million. At the same date, the undisbursed portion of construction loans
approximated $7.3 million. The Bank's unused lines of credit at December 31,
1997 were approximately $3.6 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1997 totaled $228.8 million.
Management believes that a significant portion of maturing deposits will remain
with the Bank. Investment securities scheduled to mature in one year or less at
December 31, 1997 totaled $12.0 million. However, actual maturities are
normally shorter than contractual maturities due to the ability of borrowers to
call or prepay such obligations without

<PAGE>

call or prepayment penalties. As of December 31, 1997, there was
approximately $60 million of investment securities with call options held by
the issuer exercisable within one year.

As of December 31, 1997, the Bank's regulatory capital was well in excess of
all applicable regulatory requirements. At December 31, 1997, the Bank's
tangible, core and risk-based capital ratios amounted to 11.98%, 11.98% and
22.52%, respectively.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles, 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.

THE YEAR 2000 ISSUE

The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The Year 2000 Issue is
the result of computer programs being written using two digits rather than four
digits to define the applicable year. Computer programs that have time-sensitive
coding may recognize a date using "00" as the year 1900 rather than the year
2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.

The Bank has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The majority of the Bank's data
processing is provided by a third party service bureau. The service bureau is
actively involved in resolving Year 2000 issues and has provided the Bank with
frequent updates regarding their progress. The service bureau has advised the
Bank that it expects to have the majority of the Year 2000 issues resolved
before the end of 1998 to allow the Bank to test their system for Year 2000
compliance. The Bank presently believes that, based on the progress of the
Bank's service bureau, the Year 2000 problem will not pose significant
operational problems for the Bank's computer system.

<PAGE>

[LETTERHEAD]

INDEPENDENT AUDITORS' REPORT

The Board of Directors of
First Federal Bancshares of Arkansas, Inc.:

We have audited the consolidated statements of financial condition of First
Federal Bancshares of Arkansas, Inc. and its subsidiary (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of First Federal Bancshares of
Arkansas, Inc. and its subsidiary at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

/s/ Deloitte & Touche LLP
- -------------------------

February 27, 1998

<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $ 6,627 $ 6,819
Investment securities:
Available for sale, at fair value (amortized cost of $12 at
December 31, 1996).................................................................... -- 340
Held to maturity, at amortized cost (fair value at December 31, 1997
and 1996, of $95,614 and $90,497, respectively)....................................... 95,533 90,982
Federal Home Loan Bank stock.............................................................. 3,603 3,026
Loans receivable, net of allowance at December 31, 1997 and 1996,
of $1,196 and $1,251, respectively...................................................... 433,942 396,508
Accrued interest receivable............................................................... 4,134 3,620
Real estate acquired in settlement of loans, net.......................................... 195 154
Office properties and equipment, net...................................................... 5,218 3,565
Prepaid expenses and other assets......................................................... 355 725
---------- ----------
TOTAL..................................................................................... $ 549,607 $ 505,739
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits................................................................................ $ 450,874 $ 422,858
Federal Home Loan Bank advances......................................................... 11,997 --
Advance payments by borrowers for taxes and insurance................................... 900 806
Other liabilities....................................................................... 2,952 1,317
---------- ----------
Total liabilities......................................................................... 466,723 424,981
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, none issued
Common stock, $.01 par value, 20,000,000 shares authorized, 5,153,751
shares issued, 4,896,063 shares outstanding........................................... 52 52
Additional paid-in capital.............................................................. 50,237 49,975
Employee stock benefit plans............................................................ (6,207) (3,848)
Unrealized gain on investment securities available for sale,
net of tax of $126 in 1996............................................................ -- 202
Retained earnings--substantially restricted............................................. 42,982 38,557
---------- ----------
87,064 84,938
Treasury stock, at cost, 257,688 shares................................................... (4,180) (4,180)
---------- ----------
Total stockholders' equity............................................................ 82,884 80,758
---------- ----------
TOTAL..................................................................................... $ 549,607 $ 505,739
---------- ----------
---------- ----------
</TABLE>

See notes to consolidated financial statements.

<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable............................................................... $ 33,804 $ 30,498 $ 25,544
Investment securities.......................................................... 6,207 6,258 6,343
Mortgage-backed securities..................................................... 17 22 778
Other.......................................................................... 417 414 299
--------- --------- ---------
Total interest income........................................................ 40,445 37,192 32,964

INTEREST EXPENSE:
Deposits....................................................................... 23,331 22,409 21,538
Other borrowings............................................................... 417 40 --
--------- --------- ---------
Total interest expense....................................................... 23,748 22,449 21,538
--------- --------- ---------
NET INTEREST INCOME.............................................................. 16,697 14,743 11,426

PROVISION FOR LOAN LOSSES........................................................ -- 60 133
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES................................................................ 16,697 14,683 11,293

NONINTEREST INCOME:
Gain on sales of investment securities......................................... 394 -- 311
Deposit fee income............................................................. 814 764 716
Other.......................................................................... 712 458 391
--------- --------- ---------
Total noninterest income..................................................... 1,920 1,222 1,418
--------- --------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits................................................. 6,384 4,325 3,455
Net occupancy expense.......................................................... 804 672 612
Federal insurance premiums..................................................... 272 902 910
SAIF special assessment........................................................ -- 2,611 --
Provision for real estate losses............................................... 37 38 25
Data processing................................................................ 810 745 628
Postage and supplies........................................................... 369 309 261
Other.......................................................................... 1,340 1,147 945
--------- --------- ---------
Total noninterest expenses................................................... 10,016 10,749 6,836
--------- --------- ---------
INCOME BEFORE INCOME TAXES....................................................... 8,601 5,156 5,875

INCOME TAX PROVISION............................................................. 3,099 1,756 1,871
--------- --------- ---------
NET INCOME....................................................................... $ 5,502 $ 3,400 $ 4,004
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE:
Basic.......................................................................... $ 1.22 $ 0.72 N/A
--------- ---------
--------- ---------
Diluted........................................................................ $ 1.21 $ 0.72 N/A
--------- ---------
--------- ---------
</TABLE>

See notes to consolidated financial statements.

<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
UNREALIZED
ISSUED GAIN ON
COMMON STOCK ADDITIONAL EMPLOYEE SECURITIES TREASURY STOCK TOTAL
----------------- PAID-IN STOCK AVAILABLE FOR RETAINED ---------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL BENEFIT PLANS SALE, NET EARNINGS SHARES AMOUNT EQUITY
--------- ------ ---------- ------------- ------------- -------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

BALANCE, JANUARY 1,
1995................ $ 89 $31,153 $31,242

Net income.......... 4,004 4,004

Net change in
unrealized gain on
securities
available for
sale.............. 62 62
----- -------- -----------

BALANCE, DECEMBER 31,
1995................ 151 35,157 35,308

Net income.......... 3,400 3,400

Issuance of common
stock............. 5,153,751 $52 $49,848 49,900

Loan to Employee
Stock Ownership
Plan (ESOP)....... $(4,123) (4,123)

Repayment of ESOP
loan.............. 127 275 402

Net change in
unrealized gain on
securities
available for
sale.............. 51 51

Purchase of treasury
stock, at cost.... 257,688 $(4,180) (4,180)
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------

BALANCE, DECEMBER 31,
1996................ 5,153,751 52 49,975 (3,848) 202 38,557 257,688 (4,180) 80,758

Net income.......... 5,502 5,502

Repayment of ESOP
loan.............. 414 416 830

Common stock
acquired or
committed to be
acquired for
employee stock
benefit plan...... (152) (3,968) (4,120)

Stock compensation
expense........... 1,193 1,193

Net change in
unrealized gain on
securities
available for
sale.............. (202) (202)

Dividends paid...... (1,077) (1,077)
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------

BALANCE, DECEMBER 31,
1997................ 5,153,751 $52 $50,237 $(6,207) $ -- $42,982 257,688 $(4,180) $82,884
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------
</TABLE>

See notes to consolidated financial statements.

<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands)

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................. $ 5,502 $ 3,400 $ 4,004
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses.................................................. -- 60 133
Provision for real estate losses........................................... 37 38 25
Deferred tax provision..................................................... 27 111 153
Gain on sale of investment securities--available for sale.................. (394) -- (311)
Gain on sale of real estate owned.......................................... (158) (10) (11)
Gain on sale of mortgage loans originated to sell.......................... (30) -- --
Depreciation............................................................... 465 403 391
Accretion of deferred loan fees............................................ (621) (640) (470)
Repayment of ESOP loan..................................................... 830 402 --
Stock compensation expense................................................. 1,193 -- --
Changes in operating assets and liabilities:
Accrued interest receivable.............................................. (514) (143) 17
Prepaid expenses and other assets........................................ 370 (433) 29
Other liabilities........................................................ 299 (21) 157
--------- --------- ---------
Net cash provided by operating activities.............................. 7,006 3,167 4,117
--
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities--held to maturity........................ (51,678) (41,172) (24,395)
Purchases of loans.......................................................... -- -- (3,235)
Proceeds from sales of investment securities--available for sale............ 406 -- 10,253
Proceeds from maturities of investment securities -held to maturity......... 46,550 46,040 48,594
Loan originations, net of repayments........................................ (39,305) (56,518) (56,265)
Proceeds from sales of mortgage loans originated to sell.................... 2,251 -- --
Proceeds from sales of real estate owned.................................... 205 146 117
Purchases of office properties and equipment................................ (2,118) (975) (373)
--------- --------- ---------
Net cash used by investing activities.................................. (43,689) (52,479) (25,304)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits.................................................... 28,016 5,629 21,746
Advances from Federal Home Loan Bank........................................ 11,997 -- --
Net increase in advance payments by borrowers for taxes and insurance....... 94 60 6
Issuance of common stock, net of related expenses........................... -- 45,777 --
Purchase of treasury stock.................................................. -- (4,180) --
Common stock acquired for employee stock benefit plan....................... (2,539) -- --
Dividends paid.............................................................. (1,077) -- --
--------- --------- ---------
Net cash provided by financing activities.............................. 36,491 47,286 21,752
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (192) (2,026) 565
CASH AND CASH EQUIVALENTS:
Beginning of year.......................................................... 6,819 8,845 8,280
--------- --------- ---------
End of year................................................................ $ 6,627 $ 6,819 $ 8,845
--------- --------- ---------
--------- --------- ---------
(Continued)
</TABLE>

<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................................. $ 23,656 $ 22,451 $ 21,417
--------- --------- ---------
--------- --------- ---------
Income taxes............................................................. $ 2,908 $ 1,899 $ 1,916
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans................................ $ 272 $ 95 $ 128
--------- --------- ---------
--------- --------- ---------
Loans to facilitate sales of real estate owned............................. $ -- $ 110 $ 108
--------- --------- ---------
--------- --------- ---------
Transfers of investment securities to available for sale portfolio......... $ 9,946
---------
---------
Increase (decrease) in unrealized gains, net............................... $ (202) $ 51 $ 62
--------- --------- ---------
--------- --------- ---------
(Concluded)
</TABLE>

See notes to consolidated financial statements.

<PAGE>

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION--First Federal
Bancshares of Arkansas, Inc. (the "Company") was incorporated in January 1996
by First Federal Bank of Arkansas, FA (the "Bank") in connection with the
conversion of the Bank from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association, the
issuance of the Bank's common stock to the Company, and the offer and sale of
the Company's common stock by the Company (the "Conversion"). Upon
consummation of the Conversion on May 3, 1996, the Company became a unitary
holding company for the Bank. Approximately 50% of the net proceeds from the
Conversion were used to acquire 100% of the common stock of the Bank. The
remaining net proceeds from the Conversion were retained by the Company. The
Conversion was accounted for at historical cost in a manner similar to that
in pooling of interests accounting.

The Bank provides a broad line of financial products to individuals and
small to medium sized businesses. The consolidated financial statements also
include the accounts of the Bank's wholly-owned subsidiary, First Harrison
Service Corporation whose activities are limited to owning an interest in and
servicing a commercial loan, which is in the process of foreclosure at
December 31, 1997. All material intercompany transactions have been
eliminated in consolidation. The financial statements as of December 31,
1995, and for the year then ended are those of the Bank prior to the
Conversion. Results of operations and cash flows of the Bank for the period
from January 1, 1996 to May 3, 1996, are included in the consolidated
financial statements of the Company for the year ended December 31, 1996.

USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and such differences could be significant.

LIQUIDITY REQUIREMENT--Regulations require the Bank to maintain an amount
equal to 4% of deposits (net of loans on deposits) plus short-term borrowings
in cash and U.S. Government and other approved securities.

CASH AND CASH EQUIVALENTS--For purposes of reporting cash flows, cash
includes cash on hand and amounts due from depository institutions, which
includes interest-bearing amounts available upon demand.

INVESTMENT SECURITIES--The Company classifies investment securities into
one of two categories: held to maturity or available for sale. Debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at cost, adjusted
for the amortization of premiums and the accretion of discounts.

<PAGE>

Investment securities that the Company intends to hold for indefinite
periods of time are classified as available for sale and are recorded at fair
value. Unrealized holding gains and losses are excluded from earnings and
reported net of tax as a separate component of equity until realized.
Investment securities in the available for sale portfolio may be used as part
of the Company's asset and liability management practices and may be sold in
response to changes in interest rate risk, prepayment risk or other economic
factors.

Premiums are amortized into interest income using the interest method to
the earlier of maturity or call date. Discounts are accreted into interest
income using the interest method over the period to maturity. The specific
identification method of accounting is used to compute gains or losses on the
sales of investment securities.

The overall return or yield earned on mortgage-backed securities depends
on the amount of interest collected over the life of the security and the
amortization of any premium or accretion of any discount. Premiums and
discounts are recognized in income using a method that approximates the
level-yield method over the assets' remaining lives adjusted for anticipated
prepayments. Although the Company receives the full amount of principal if
prepaid, the interest income that would have been collected during the
remaining period to maturity, net of any discount accretion or premium
amortization is lost. Accordingly, the actual yields and maturities of
mortgage-backed securities depend on when the underlying mortgage principal
and interest are prepaid. Prepayments generally result when market interest
rates fall below a mortgage's contractual interest rate and it is to the
borrower's advantage to prepay the existing loan and obtain new, lower rate
financing. In addition to changes in interest rates, mortgage prepayments
depend on other factors such as loan types and geographic location of the
related properties.

If the fair value of an investment security declines for reasons other
than temporary market conditions, the carrying value of such a security is
written down to fair value by a charge to operations.

LOANS RECEIVABLE--Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in the aggregate. Loans receivable that management has the intent and ability
to hold until maturity or pay-off are stated at unpaid principal balances
adjusted for any charge-offs, the allowance for loan losses and deferred loan
fees or costs and discounts. Deferred loan fees or costs and discounts on
first mortgage loans are amortized or accreted to income using the
level-yield method over the remaining period to contractual maturity.

The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when the loan becomes 90 days past due, whichever occurs first.
When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments in excess of principal due are received, until such time that in
management's opinion, the borrower will be able to meet payments as they
become due.

Any excess of the Bank's recorded investment in the loans (unpaid
principal balance, adjusted for unamortized premium or discount and net of
deferred loan origination fees or costs) over the measured value of the loans
are provided for in the allowance for loan losses. The Bank reviews its loans
for impairment on a quarterly basis.

<PAGE>

ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is a valuation
allowance available for losses incurred on loans. All losses are charged to
the allowance when the loss actually occurs or when a determination is made
that a loss is likely to occur. Recoveries are credited to the allowance at
the time of recovery.

Throughout the year management estimates the likely level of losses to
determine whether the allowance for loan losses is adequate to absorb losses
in the existing portfolio. Based on these estimates, an amount is charged to
the provision for loan losses and credited to the allowance for loan losses
in order to adjust the allowance to a level determined to be adequate to
absorb anticipated losses. The allowance for loan losses is increased by
charges to income (provisions) and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the allowance
is based on the Company'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.

Estimates of loan losses involve an exercise of judgment. While it is
reasonably possible that in the near term the Company may sustain losses
which are substantial in relation to the allowance for loan losses, it is the
judgment of management that the allowance for loan losses reflected in the
consolidated statements of financial condition is adequate to absorb
estimated losses that may exist in the current portfolio.

FORECLOSED REAL ESTATE--Real estate acquired in settlement of loans is
initially recorded at estimated fair value less estimated costs to sell and
is subsequently carried at the lower of carrying amount or fair value less
estimated disposal costs. Valuations are periodically performed by
management, and an allowance for losses is established by a charge to
operations or the balance is written off if the carrying value of a property
exceeds its estimated fair value. Costs relating to the development and
improvement of the property are capitalized, whereas those relating to
holding the property are expensed.

OFFICE PROPERTIES AND EQUIPMENT--Office properties and equipment are
stated at cost less accumulated depreciation and amortization. The Company
computes depreciation of office properties and equipment using the
straight-line method over the estimated useful lives of the individual assets
which range from 3 to 30 years.

LOAN ORIGINATION FEES--Loan origination fees and certain direct loan
origination costs are deferred and the net fee or cost is recognized as an
adjustment to interest income using the level-yield method over the
contractual life of the loans. When a loan is fully repaid or sold, the
amount of unamortized fee or cost is recorded in income.

INCOME TAXES--The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.

INTEREST RATE RISK--The Bank's asset base is exposed to risk including
the risk resulting from changes in interest rates and changes in the timing
of cash flows. The Bank monitors the effect of such risks by considering the
mismatch of the maturities of its assets and liabilities in the current
interest rate environment and the sensitivity of assets and liabilities to
changes in interest rates. The Bank's management has considered the effect of
significant increases and decreases in interest rates and believes such
changes, if they occurred, would be manageable and would not affect the
ability of the Bank to hold its assets as planned. However, the Bank is
exposed to significant market risk in the event of significant and prolonged
interest rate changes.

<PAGE>

RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components. The
Company will be required to classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial
condition. Also in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, establishing standards for
the way public enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS Nos. 130
and 131 are effective for fiscal years beginning after December 15, 1997,
with reclassification of earlier periods. The adoption of SFAS Nos. 130 and
131 is not expected to have a material effect on the Company's consolidated
financial statements.

EARNINGS PER SHARE--Earnings per share of common stock has been computed
on the basis of the weighted-average number of shares of common stock
outstanding, assuming the Company was a public company since January 1, 1996.

In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS"). The previous presentation of primary EPS is replaced with a
presentation of basic EPS. Dual presentation of basic and diluted EPS is
required on the face of the income statement as well as a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No.
15. The Company adopted SFAS No. 128 for the year ended December 31, 1997,
and prior periods were restated.

RECLASSIFICATIONS--Certain amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the classifications
adopted for reporting in 1997.

2. INVESTMENT SECURITIES

Investment securities consisted of the following at December 31 (in
thousands):

<TABLE>
<CAPTION>
1997
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
-------- ----- ----- -----
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations......... $ 95,376 $ 428 $ 351 $ 95,453
Mortgage-backed securities--FHLMC.............. 157 4 -- 161
-------- ----- ----- --------
Total...................................... $ 95,533 $ 432 $ 351 $ 95,614
-------- ----- ----- --------
-------- ----- ----- --------
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
1996
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
FHLMC preferred stock................................................. $ 12 $ 328 $ -- $ 340
------------- ------------- ------------- ---------
Total............................................................. $ 12 $ 328 $ -- $ 340
------------- ------------- ------------- ---------
------------- ------------- ------------- ---------
</TABLE>

<TABLE>
<CAPTION>
1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations............................. $ 90,755 $ 227 $ 719 $ 90,263
Mortgage-backed securities--FHLMC.................................. 227 7 -- 234
----------- ------------- ------------- ---------
Total.......................................................... $ 90,982 $ 234 $ 719 $ 90,497
----------- ------------- ------------- ---------
----------- ------------- ------------- ---------

</TABLE>

The Company has pledged investment securities held to maturity with
carrying values of approximately $15 million and $13 million at December 31,
1997 and 1996, respectively, as collateral for certain deposits in excess of
$100,000.

Gross realized gains on sales of available for sale securities were
approximately $394,000 in 1997 and $311,000 in 1995. There were no
significant gross losses.

The scheduled maturities of debt securities at December 31, 1997, by
contractual maturity are shown below (in thousands). Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

As of December 31, 1997 and December 31, 1996, there were approximately
$71 million and $50 million, respectively, of investments with call options
held by the issuer, of which approximately $60 million and $42 million,
respectively, are callable within one year.

In November 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities (the "Guide"). The Guide provides that an enterprise
may, concurrent with initial adoption of the Guide but no later than December
31, 1995, reassess the appropriateness of the classification of all
securities held at that time and account for any resulting reclassification
at fair value in accordance with SFAS 115, paragraph 15. Reclassifications
from held to maturity resulting from this one-time reassessment do not call
into question the intent of an enterprise to hold other debt securities to
maturity in the future. The Bank adopted the implementation guidance on
November 15, 1995, and reclassified mortgage-backed securities with a
carrying value of $9.9 million and a fair value of $10.2 million at that date
from held to maturity to available for sale. On November 15, 1995, such
mortgage-backed securities were sold with a gain of $311,000. Related income
taxes due on gain were approximately $104,000.

26
<PAGE>

3. LOANS RECEIVABLE

Loans receivable consisted of the following at December 31 (in thousands):

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
First mortgage loans:
One- to four- family residences......................................................... $ 370,955 $ 338,349
Other properties........................................................................ 19,896 20,691
Construction............................................................................ 20,753 20,053
Less:
Unearned discounts.................................................................... (331) (1,253)
Undisbursed loan funds................................................................ (7,305) (8,670)
Deferred loan fees, net............................................................... (3,320) (3,232)
---------- ----------
Total first mortgage loans.......................................................... 400,648 365,938
---------- ----------

Consumer and other loans:
Commercial loans........................................................................ 5,649 4,348
Automobile.............................................................................. 8,307 7,556
Consumer loans.......................................................................... 4,065 4,077
Home equity and second mortgage......................................................... 13,023 12,549
Savings loans........................................................................... 1,339 1,526
Other................................................................................... 1,968 1,641
Deferred loan costs..................................................................... 139 124
---------- ----------
Total consumer and other loans...................................................... 34,490 31,821
---------- ----------
Allowance for loan losses................................................................. (1,196) (1,251)
---------- ----------
Loans receivable, net............................................................... $ 433,942 $ 396,508
---------- ----------
---------- ----------

</TABLE>

The Company originates and maintains loans receivable which are
substantially concentrated in its lending territory (primarily Northwest and
Northcentral Arkansas). The majority of the Company's loans are residential
mortgage loans and construction loans for residential property. The Company's
policy calls for collateral or other forms of repayment assurance to be
received from the borrower at the time of loan origination. Such collateral
or other form of repayment assurance is subject to changes in economic value
due to various factors beyond the control of the Company.

In the normal course of business, the Company has made loans to its
directors, officers, and their related business interests. In the opinion of
management, related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility. The aggregate dollar amount of loans
outstanding to directors, officers and their related business interests
totaled approximately $2.9 million and $2.3 million at December 31, 1997 and
1996, respectively.

4. LOAN SERVICING

Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans at December 31 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Mortgage loans underlying FHLMC pass-through securities........................................ $ 297 $ 440
Mortgage loan portfolios serviced for other investors.......................................... 1,037 1,335
--------- ---------
Total...................................................................................... $ 1,334 $ 1,775
--------- ---------
--------- ---------

</TABLE>

<PAGE>

Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income is recorded on the accrual
basis and includes servicing fees from investors and certain charges
collected from borrowers, such as late payment fees.

5. ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consisted of the following at December 31 (in
thousands):

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Loans.......................................................................................... $ 2,645 $ 2,348
Investment securities.......................................................................... 1,489 1,272
--------- ---------
Total...................................................................................... $ 4,134 $ 3,620
--------- ---------
--------- ---------
</TABLE>

6. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES

A summary of the activity in the allowances for loan and real estate
losses is as follows for the years ended December 31 (in thousands):

<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ---------
REAL REAL
LOANS ESTATE LOANS ESTATE LOANS
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year........................................... $ 1,251 $ -- $ 1,228 $ -- $ 1,134
Provisions for estimated losses.................................... -- 37 60 38 133
Recoveries......................................................... 12 -- 3 -- 1
Losses charged off................................................. (67) (37) (40) (38) (40)
--------- ----------- --------- ----------- ---------
Balance, end of year................................................. $ 1,196 $ -- $ 1,251 $ -- $ 1,228
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
<CAPTION>
REAL
ESTATE
-----------
<S> <C>
Balance, beginning of year........................................... $ --
Provisions for estimated losses.................................... 25
Recoveries......................................................... --
Losses charged off................................................. (25)
-----------
Balance, end of year................................................. $ --
-----------
-----------
</TABLE>

7. FEDERAL HOME LOAN BANK STOCK

The Bank is a member of the Federal Home Loan Bank System. As a member
of this system, it is required to maintain an investment in capital stock of
the Federal Home Loan Bank ("FHLB") in an amount equal to the greater of 1%
of its outstanding home loans or .3% of its total assets. No ready market
exists for such stock and it has no quoted market value.

8. OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment consisted of the following at December 31
(in thousands):

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land........................................................................................... $ 2,014 $ 902
Buildings and improvements..................................................................... 3,276 2,797
Furniture and equipment........................................................................ 3,237 2,796
Automobiles.................................................................................... 410 374
--------- ---------
Total...................................................................................... 8,937 6,869
Accumulated depreciation....................................................................... (3,719) (3,304)
--------- ---------
Office properties and equipment, net....................................................... $ 5,218 $ 3,565
--------- ---------
--------- ---------
</TABLE>

<PAGE>
9. DEPOSITS

Deposits are summarized as follows at December 31 (in thousands):

<TABLE>
<CAPTION> 1997 1996
---------- ----------
<S> <C> <C>
Demand and NOW accounts, including noninterest-bearing
deposits of $10,539 and $9,290 in 1997 and 1996, respectively........................... $ 49,963 $ 45,698
Money market.............................................................................. 15,438 17,214
Regular savings........................................................................... 25,330 26,451
Certificates of deposit................................................................... 360,143 333,495
---------- ----------
Total................................................................................... $ 450,874 $ 422,858
---------- ----------
---------- ----------
</TABLE>

The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100 thousand was approximately $27 million and $29
million at December 31, 1997 and 1996, respectively.

At December 31, 1997, scheduled maturities of certificates of deposit are as
follows (in thousands):

YEARS ENDING DECEMBER 31:
<S> <C>
1998............................................................. $228,789
1999............................................................. 50,401
2000............................................................. 19,403
2001............................................................. 12,926
2002............................................................. 17,243
Thereafter....................................................... 31,381
--------
Total....................................................... $360,143
--------
--------
</TABLE>

Interest expense on deposits consisted of the following (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NOW and Money Market............................................................. $ 1,299 $ 1,324 $ 1,359
Regular savings and certificate accounts......................................... 22,145 21,178 20,395
Early withdrawal penalties....................................................... (113) (93) (216)
--------- --------- ---------
Total....................................................................... $ 23,331 $ 22,409 $ 21,538
--------- --------- ---------
--------- --------- ---------
</TABLE>

At December 31, 1997 and 1996, the Bank had pledged investment securities of
approximately $15 million and $13 million, respectively, as collateral for
certain deposits in excess of $100 thousand.

Eligible deposits of the Bank are insured up to $100 thousand by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC").

<PAGE>

Legislation, passed by the U.S. House of Representatives and the Senate, was
signed into law by the President on September 30, 1996, to recapitalize the
SAIF. As a result of such legislation, the Bank was required to pay a one-time
special assessment of $2.6 million which had an approximate $1.7 million after-
tax effect. The legislation also mandated that the deposit insurance premiums
charged SAIF-insured institutions (such as the Bank) decline to approximately
6.5 basis points effective January 1, 1997.

10. FEDERAL HOME LOAN BANK ADVANCES

The Bank pledges as collateral for FHLB advances their FHLB stock and has
entered into blanket collateral agreements with the FHLB whereby the Bank
agrees to maintain, free of other encumbrances, qualifying single family
first mortgage loans with unpaid principal balances, when discounted at 75%
of such balances, of at least 100% of total outstanding advances. Advances at
December 31, 1997, have maturity dates as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AMOUNT
----------- ---------
<S> <C> <C>
Years ending December 31:
1999....................................................................... 6.19% $ 4,000
2000....................................................................... 6.04% 2,000
2002....................................................................... 6.59% 3,997
Thereafter................................................................. 6.26% 2,000
---------
Total................................................................. 6.31% $11,997
---------
---------
</TABLE>

11. INCOME TAXES

The provisions for income taxes are summarized as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision:
Current............................................................................ $ 3,072 $ 1,645 $ 1,718
Deferred........................................................................... 27 111 153
--------- --------- ---------
Total........................................................................... $ 3,099 $ 1,756 $ 1,871
--------- --------- ---------
--------- --------- ---------
</TABLE>

The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate................ $ 2,924 34.0% $ 1,753 34.0% $ 1,997 34.0%
Increase (decrease) resulting from:
State income tax, net................ 119 1.4% -- -- -- --
Other, net........................... 56 0.6% 3 0.1% (126) (2.2)%
--------- ---- --------- ---- --------- -----
Total............................. $ 3,099 36.0% $ 1,756 34.1% $ 1,871 31.8%
--------- ---- --------- ---- --------- -----
--------- ---- --------- ---- --------- -----
</TABLE>

<PAGE>
During the year ended December 31, 1996, new legislation was enacted which
provides for the recapture into taxable income of certain amounts previously
deducted as additions to the bad debt reserves for income tax purposes. The Bank
began changing its method of determining bad debt reserves for tax purposes
following the year ended December 31, 1995. The amounts to be recaptured for
income tax reporting purposes are considered by the Bank in the determination of
the net deferred tax liability.

The Company's deferred tax liability account was comprised of the following
at December 31 (in thousands):

<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Deferred tax assets:
Loan fees deferred................................................ $ 158 $ 211
Stock based compensation.......................................... 168 --
Other............................................................. 72 --
------ -----
Total deferred tax assets...................................... 398 211
Deferred tax liabilities:
Office properties................................................. (168) (141)
Federal Home Loan Bank stock...................................... (544) (407)
Investment securities available for sale.......................... -- (126)
Loan loss reserves................................................ (61) (11)
------ -----
Total deferred tax liabilities................................. (773) (685)
------ -----
Net deferred tax liability $(375) $(474)
------ -----
------ -----
</TABLE>

Specifically exempted from deferred tax recognition requirements are bad
debt reserves for tax purposes of U.S. savings and loans in the institution's
base year, as defined. Base year reserves totaled approximately $4.2 million.
Consequently, a deferred tax liability of approximately $1.6 million related to
such reserves was not provided for in the consolidated statements of financial
condition at December 31, 1997 and 1996. Payment of dividends to shareholders
out of retained earnings deemed to have been made out of earnings previously set
aside as bad debt reserves may create taxable income to the Bank. No provision
has been made for income tax on such a distribution as the Bank does not
anticipate making such distributions.

12. BENEFIT PLANS

In 1997, the Company's shareholders approved the Stock Option Plan ("SOP")
and Management Recognition and Retention Plan ("MRR Plan").

STOCK OPTION PLAN--The SOP provides for a committee of the Company's Board
of Directors to award incentive stock options, non-qualified or compensatory
stock options and stock appreciation rights representing up to 515,375 shares of
Company stock. One-fifth of the options granted vested immediately upon grant,
with the balance vesting in equal amounts on the four subsequent anniversary
dates of the grant. Options granted vest immediately in the event of retirement,
disability, or death. Outstanding stock options can be exercised over a ten year
period.

Under the SOP, options have been granted to directors and key employees to
purchase common stock of the Company. The exercise price in each case equals the
fair market value of the Company's stock at the date of grant. Options granted
in the current year have exercise prices ranging from $19.25 to $20.38, and a
weighted average contract life of 9.4 years.

<PAGE>
A summary of the status of the Company's stock option plan as of December
31, 1997, and changes during the year ending on that date is presented below:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS SHARES PRICE
- ------- ------- ---------
<S> <C> <C>
Outstanding at beginning of year.............................. -- --
Granted....................................................... 496,073 $19.27
Exercised..................................................... -- --
Forfeited..................................................... (1,600) 19.25
------- ------
Outstanding at December 31, 1997.............................. 494,473 $ 19
------- ------
------- ------
Options exercisable at December 31, 1997...................... 99,215 $ 19
------- ------
------- ------
</TABLE>

The Company applies the provisions of APB Opinion No. 25 in accounting for
its stock option plan, as allowed under SFAS No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for options
granted to employees. Had compensation cost for these plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the methods of SFAS No. 123, the Company's pro forma net income
and pro forma earnings per share would have been as follows:

<TABLE>
<CAPTION>
1997
------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net income (in thousands)............................ $5,502 $4,987
Earnings per share:
Basic.............................................. $ 1.22 $ 1.10
Diluted............................................ $ 1.21 $ 1.10
</TABLE>

In determining the above pro forma disclosure, the fair value of options
granted during the year was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility--22%, expected life of grant--6.5 years,
risk-free interest rate--5.7%, and expected dividend rate--1.05%. The weighted
average fair value of options granted during the fiscal year ended December 31,
1997, was $7.85 per share.

MANAGEMENT RECOGNITION AND RETENTION PLAN--The MRR Plan provides for a
committee of the Company's Board of Directors to award restricted stock to key
officers as well as non-employee directors. The MRR Plan authorizes the Company
to grant up to 206,150 shares of the Company stock, of which 195,844 shares were
granted during 1997. Compensation expense will be recognized based on the fair
market value of the shares on the grant date of $19.25 over the vesting period.
One-fifth of the shares granted to date (39,170 shares) vested immediately on
the date of grant. The remainder will vest at a rate of 25% per year over the
next four anniversary dates of the grants. Shares granted will be deemed vested
in the event of disability or death. At December 31, 1997, 124,000 shares
awarded under this plan have been purchased in the open market at a cost of $2.5
million. A liability has been established, based on the grant price, for the
remainder of the shares to be purchased. Differences between the price at the
date of grant and the actual purchase price will be recorded as an adjustment to
stockholders' equity. Approximately $1.2 million in compensation expense was
recognized during the current year related to the MRR Plan.

<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN--The Company established an Employee Stock
Ownership Plan ("ESOP") on May 3, 1996. During 1996, the ESOP borrowed $4.1
million from the Company to purchase shares of Company stock. The loan is
collateralized by the shares that were purchased with the proceeds of the loan.
As the loan is repaid, ESOP shares will be allocated to participants of the ESOP
and are available for release to the participants subject to the vesting
provisions of the ESOP.

During the years ended December 31, 1997 and 1996, ESOP expense was
approximately $745,000 and $402,000, respectively.

OTHER POSTRETIREMENT BENEFITS--The Bank is a participant in a multi-employer
retirement plan and therefore separate information is not available. The plan is
noncontributory and covers substantially all employees. The plan provides a
retirement benefit and a death benefit. Retirement benefits are payable in
monthly installments for life and must begin not later than the first day of the
month coincident with or next following the seventieth birthday or the
participant may elect a lump-sum distribution. Death benefits are paid in a
lump-sum distribution, the amount of which depends on years of service. For the
years ended December 31, 1997, 1996 and 1995, there was a net pension cost of
approximately $56,000, $100,000 and $43,000, respectively.

13. EARNINGS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Basic EPS -
Income available to common stockholders................................ $ 5,501,617 4,527,043 $ 1.22
Effect of dilutive securities -
Stock options.......................................................... -- 22,365
------------ -------------
Diluted EPS -
Income available to common stockholders and assumed conversions........ $ 5,501,617 4,549,408 $ 1.21
------------ -------------
------------ -------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Basic and Diluted EPS -
Income available to common stockholders................................ $ 3,400,036 4,730,010 $ 0.72
</TABLE>

During the year ended December 31, 1996, there were no potential dilutive
securities.

14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated statements of
financial condition. The Bank does not use financial instruments with
off-balance sheet risk as part of its asset/liability management program or for
trading purposes. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
amounts of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.

33
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty. Such
collateral consists primarily of residential properties. Standby letters of
credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.

The Bank had the following outstanding commitments at December 31, 1997 (in
thousands):

<TABLE>
<S> <C>
Undisbursed construction loans..................................... $ 7,305
Commitments to originate mortgage loans............................ 3,585
Letters of credit.................................................. 54
Unused lines of credit............................................. 3,566
---------
Total............................................................ $ 14,510
---------
---------
</TABLE>

The funding period for construction loans is generally less than nine months
and commitments to originate mortgage loans are generally outstanding for 60
days or less. At December 31, 1997, interest rates on commitments ranged from
6.0% to 10.0%.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair values of financial instruments are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.................. $ 6,627 $ 6,627 $ 6,819 $ 6,819
Investment securities:
Available for sale....................... -- -- 340 340
Held to maturity......................... 95,533 95,614 90,982 90,497
Federal Home Loan Bank stock............... 3,603 3,603 3,026 3,026
Loans receivable, net...................... 433,942 438,775 396,508 399,175
Accrued interest receivable................ 4,134 4,134 3,620 3,620

LIABILITIES:
Deposits:
Demand, NOW, money market and regular
savings................................ 90,731 90,731 89,363 89,363
Certificates of deposit.................. 360,143 363,640 333,495 336,303
Federal Home Loan Bank advances............ 11,997 12,147 -- --
Accrued interest payable................... 526 526 434 434
Advance payments by borrowers for taxes and
insurance................................ 900 900 806 806
Commitments................................ -- -- -- --
</TABLE>

34
<PAGE>
For cash and cash equivalents, Federal Home Loan Bank stock and accrued
interest receivable, the carrying value is a reasonable estimate of fair value.
The fair value of investment securities is based on quoted market prices, dealer
quotes and prices obtained from independent pricing services. The fair value of
loans receivable is estimated based on present values using applicable
risk-adjusted spreads to the U.S. Treasury curve to approximate current
entry-value interest rates considering anticipated prepayment speeds, maturity
and credit risks.

The fair value of demand deposit accounts, NOW accounts, savings accounts
and money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit and Federal Home Loan
Bank advances is estimated using the rates currently offered for deposits and
advances of similar remaining maturities at the reporting date. For advance
payments by borrowers for taxes and insurance and accrued interest payable the
carrying value is a reasonable estimate of fair value. Commitments are generally
made at prevailing interest rates at the time of funding and, therefore, there
is no difference between the contract amount and fair value.

The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since the reporting date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.

16. COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements (see Note 14). In addition, the
Company is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial position of the
Company.

17. RETAINED EARNINGS--SUBSTANTIALLY RESTRICTED

Upon conversion, the Company established a special liquidation account for
the benefit of eligible account holders and the supplemental eligible account
holders in an amount equal to the net worth of the Bank as of the date of its
latest statement of financial condition contained in the final offering circular
used in connection with the conversion. The liquidation account will be
maintained for the benefit of eligible account holders and supplemental eligible
account holders who continue to maintain their accounts in the Bank after
conversion. In the event of a complete liquidation (and only in such event),
each eligible and supplemental eligible account holder will be entitled to
receive a liquidation distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.

The Company may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause the Company's stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements for insured
institutions or below the special liquidation account referred to above.

35
<PAGE>
18. REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory--and possible additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible capital (as defined in the regulations) to tangible assets
(as defined) and core capital (as defined) to adjusted tangible assets (as
defined), and of total risk-based capital (as defined) to risk-weighted assets
(as defined).

At December 31, 1997 and 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum core (Tier I leverage), Tier I risk-based, and total risk-based
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.

The Bank's actual capital amounts (in thousands) and ratios are also
presented in the table:

<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:

Tangible Capital to Tangible Assets............... $ 65,852 11.98% $ 8,244 1.50% N/A N/A

Core Capital to Adjusted Tangible Assets.......... 65,852 11.98% 16,488 3.00% $ 27,480 5.00%

Total Capital to Risk-Weighted Assets............. 66,619 22.52% 23,661 8.00% 29,576 10.00%

Tier I Capital to Risk-Weighted Assets............ 65,852 22.27% N/A N/A 17,746 6.00%

As of December 31, 1996:

Tangible Capital to Tangible Assets............... $ 60,932 12.30% $ 7,429 1.50% N/A N/A

Core Capital to Adjusted Tangible Assets.......... 60,932 12.30% 14,858 3.00% $ 24,764 5.00%

Total Capital to Risk-Weighted Assets............. 61,923 23.24% 21,315 8.00% 26,643 10.00%

Tier I Capital to Risk-Weighted Assets............ 60,932 22.87% N/A N/A 15,986 6.00%
</TABLE>

19. PARENT COMPANY ONLY FINANCIAL INFORMATION

The following condensed statements of financial condition, as of December
31, 1997 and 1996, and condensed statements of income and of cash flows for the
year ended December 31, 1997, and for the period from May 3, 1996 to December
31, 1996, for First Federal Bancshares of Arkansas, Inc. should be read in
conjunction with the consolidated financial statements and the notes herein.

36
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF FINANCIAL CONDITION (in thousands)
DECEMBER 31, 1997 AND 1996

1997 1996
--------- ---------
<S> <C> <C>
ASSETS

Cash and cash equivalents................................................................... $ 72 $ 49
Investment securities, held to maturity..................................................... -- 9,987
Loan to bank subsidiary..................................................................... 17,793 9,268
Accrued interest receivable................................................................. 82 210
Investment in Bank.......................................................................... 65,852 61,134
Other assets................................................................................ 866 178
--------- ---------
TOTAL ASSETS................................................................................ $ 84,665 $ 80,826
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses and other liabilities...................................................... $ 1,781 $ 68
Stockholders' equity........................................................................ 82,884 80,758
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $ 84,665 $ 80,826
--------- ---------
--------- ---------
</TABLE>

CONDENSED STATEMENTS OF INCOME (in thousands)
YEAR ENDED DECEMBER 31, 1997, AND FOR THE
PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
INCOME:
Interest income--investment securities....................................................... $ 418 $ 537
Interest income--loan to Bank................................................................ 714 401
--------- ---------
Total income............................................................................... 1,132 938
EXPENSES:
Management fees.............................................................................. 66 44
Other operating expenses..................................................................... 142 64
--------- ---------
Total expenses............................................................................. 208 108
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY....... 924 830
INCOME TAX EXPENSE............................................................................. 343 316
--------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDARY............................... 581 514
EQUITY OF UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY............................................ 4,921 2,886
--------- ---------
NET INCOME..................................................................................... $ 5,502 $ 3,400
--------- ---------
--------- ---------
</TABLE>

37
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE
PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................................. $ 5,502 $ 3,400
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Bank................................................ (4,921) (2,886)
Repayment of ESOP loan.................................................................... 830 402
Stock compensation expense................................................................ 1,193 --
Changes in operating assets and liabilities:
Accrued interest receivable............................................................. 128 (210)
Other assets............................................................................ (688) (178)
Accrued expenses and other liabilities.................................................. 133 68
--------- ---------
Net cash provided by operating activities............................................. 2,177 596
--------- ---------
INVESTING ACTIVITIES:
Purchase of Bank stock...................................................................... -- (22,889)
Loan to Bank, net of repayments............................................................. (8,525) (9,268)
Purchases of investment securities--held to maturity........................................ -- (14,987)
Proceeds from maturities of investment securities--held to maturity......................... 9,987 5,000
--------- ---------
Net cash provided by (used in) investing activities................................... 1,462 (42,144)
--------- ---------
FINANCING ACTIVITIES:
Increase from issuance of common stock, net of related expenses............................. -- 45,777
Purchase of treasury stock.................................................................. -- (4,180)
Common stock acquired for employee stock benefit plan....................................... (2,539) --
Dividends paid.............................................................................. (1,077) --
--------- ---------
Net cash (used in) provided by financing activities................................... (3,616) 41,597
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................................... 23 49

CASH AND CASH EQUIVALENTS:
Beginning of period......................................................................... 49 --
--------- ---------
End of period............................................................................... $ 72 $ 49
--------- ---------
--------- ---------
</TABLE>

38
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
FIRST FEDERAL BANK OF ARKANSAS, FA

<TABLE>
DIRECTORS EXECUTIVE OFFICERS
<S> <C>

Frank L. Coffman, Jr. Frank L. Coffman, Jr.
Chairman of the Board and Chairman of the Board and
Chief Executive Officer Chief Executive Officer

Larry J. Brandt Larry J. Brandt
President and Chief Operating President and Chief Operating
Officer Officer

John P. Hammerschmidt Carolyn M. Thomason
U. S. Congressman, Retired Executive Vice President and Secretary

James D. Heuer Tommy W. Richardson
Farming and Investments Senior Vice President and
Chief Financial Officer

William F. Smith Sherri R. Billings
Retired Pharmacist and Investments Senior Vice President and Treasurer
</TABLE>

BANKING LOCATIONS

MAIN OFFICE

200 West Stephenson
Harrison, Arkansas 72601

BRANCH OFFICES

<TABLE>
<S> <C> <C>
128 West Stephenson Ozark Mall--Highway 62-65 North 301 Highway 62 West
Harrison, Arkansas 72601 Harrison, Arkansas 72601 Yellville, Arkansas 72687

Corner Central & Willow 324 Highway 62-65 Bypass 307 North Walton Blvd.
Harrison, Arkansas 72601 Harrison, Arkansas 72601 Bentonville, Arkansas 72712

210 South Main 1303 West Hudson 3460 North College
Berryville, Arkansas 72616 Rogers, Arkansas 72756 Fayetteville, Arkansas 72703

668 Highway 62 East 201 East Henri De Tonti Blvd. 2025 North Crossover Road
Mountain Home, Arkansas 72653 Tontitown, Arkansas 72762 Fayetteville, AR 72703

249 West Main Street
Farmington, AR 72730
</TABLE>

<PAGE>

STOCKHOLDER INFORMATION

First Federal Bancshares of Arkansas, Inc. is a unitary savings and loan
holding company conducting business through its wholly-owned subsidiary,
First Federal Bank of Arkansas, FA. The Bank is a federally-chartered,
SAIF-insured savings institution operating through its main office and eleven
full service branch offices. The Company's and the Bank's principal executive
office is located at 200 West Stephenson, Harrison, Arkansas 72601.

TRANSFER AGENT/REGISTRAR

Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Phone: (800) 368-5948

- -------------------------------------------------------------------------------

STOCKHOLDER REQUESTS

Request for annual reports, quarterly reports and related stockholder
literature should be directed to Investor Relations, First Federal Bancshares
of Arkansas, Inc., P.O. Box 550, Harrison, Arkansas 72602.

Stockholders needing asistance wiith stock records, transfers or lost
certificates, should contact the Company's transfer agent, Registrar and
Transfer Company, at the telephone number listed above.

- -------------------------------------------------------------------------------

COMMON STOCK INFORMATION

Shares of the Company's common stock are traded under the symbol "FFBH"
on the Nasdaq National Market System. At March 4, 1998, the Company had
4,896,063 shares of common stock outstanding and had approximately 1,392
stockholders of record. Such holdings do not reflect the number of beneficial
owners of common stock.

The following table sets forth the reported high and low sale prices of a
share of the Company's common stock as reported by Nasdaq (the common stock
commenced trading on the Nasdaq National Market System on May 3, 1996).

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
QUARTER --------------------------- --------------------------
ENDED HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- ---------------------------------------- ------- ------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
March 31................................ $ 20.38 $ 15.88 $ 0.05 -- -- --
June 30................................. 20.63 17.38 0.05 $ 14.00 $ 12.88 --
September 30............................ 21.75 20.13 0.06 15.38 12.75 --
December 31............................. 24.38 20.00 0.06 16.50 14.75 --
</TABLE>