EXECUTIVE SUMMARY

Management's discussion and analysis of financial condition and results of operations is intended to assist a reader in understanding the consolidated financial condition and results of operations of the Company for the periods presented. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes to such financial statements found in this report under "Part I, Item 1, Consolidated Financial Statements".

The Bank is a federally chartered stock savings and loan association that was formed in 1934. First Federal conducts business from its main office and nineteen 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. The Bank will continue to focus its growth and expansion efforts in this six county area, especially in Benton and Washington counties, one of the fastest growing areas of the state. The Bank is a community-oriented financial institution offering a wide range of retail and commercial deposit accounts, including noninterest bearing and interest bearing checking, savings and money market accounts, certificates of deposit, and individual retirement accounts. Loan products offered by the Bank include residential real estate, consumer, construction, lines of credit, commercial real estate and commercial business loans. Other financial services include investment products offered through First Federal Investment Services, Inc.; automated teller machines; 24-hour telephone banking; internet banking, including account access, e-statements, bill payment and online loan applications; Bounce ProtectionTM overdraft service; debit cards; and safe deposit boxes.

The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest earning assets, such as loans and investments, and interest expense on interest bearing liabilities, such as deposits and borrowings. Net interest income is affected by the level of nonperforming assets as they provide no interest earnings to the Bank. The Company's results of operations are also affected by the provision for loan losses, the level of its noninterest income and expenses, and income tax expense.

The Company recorded a net loss of $937,000 for the second quarter of 2009 compared to net income of $1.0 million during the second quarter of 2008. For the six months ended June 30, 2009, net loss totaled $2.4 million compared to net income of $2.1 million for the first six months of 2008. The decreases in net income for both the three month and six month comparative periods were primarily due to an increase in the provision for loan losses and increases in real estate owned expenses and FDIC insurance premiums. The Company's net loss available to common shareholders was $0.24 per common share for the quarter ended June 30, 2009 compared to net income of $0.21 per common share for the quarter ended June 30, 2008. The Company's net loss available to common shareholders was $0.56 per common share for the six months ended June 30, 2009 compared to net income of $0.43 per common share for the six months ended June 30, 2008.

The Company's business activities and credit exposures are concentrated in Northwest Arkansas and the surrounding region which is subject to a weak housing market and an oversupply of residential real estate, including developed and undeveloped land and residential development projects. The continued recessionary forces in the Company's market area have had a negative impact on the Company's financial condition and results of operations. Nonaccrual loans have increased from $25.4 million at December 31, 2008 to $54.8 million at June 30, 2009 and, over the same period, total nonperforming assets have increased from $56.8 million or 7.1% of total assets to $79.8 million or 10.1% of the total assets. The level of nonperforming assets has and will continue to have an adverse effect on interest income, the provision for loan losses, noninterest expenses and net income as well as the Company's interest rate spread and net interest margin. The Company has devoted substantial resources toward the resolution of delinquent and nonperforming assets and, with respect to its REO properties, has committed an experienced special assets officer who is working full-time to liquidate the Bank's properties in the Northwest Arkansas market. The Company will continue to be proactive in taking steps to contain and reduce its nonperforming assets and minimize the negative impact on its financial condition and results of operations in future periods.

CRITICAL ACCOUNTING POLICIES

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

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

CHANGES IN FINANCIAL CONDITION


Changes in financial condition between June 30, 2009 and December 31, 2008 are
presented in the following table (dollars in thousands).  Material changes
between the periods are discussed in the sections which follow the table.



                                           June 30,      December 31,       Increase      Percentage
                                             2009            2008          (Decrease)       Change
ASSETS
Cash and cash equivalents                 $   10,541    $        9,367    $      1,174          12.5 %
Investment securities held to maturity       141,688           136,412           5,276           3.9
Federal Home Loan Bank stock                   3,656             4,825          (1,169 )       (24.2 )
Loans receivable, net                        548,329           566,537         (18,208 )        (3.2 )
Loans held for sale                            3,517             1,586           1,931         121.8
Accrued interest receivable                    5,324             6,701          (1,377 )       (20.6 )
Real estate owned, net                        23,473            22,385           1,088           4.9
Office properties and equipment, net          24,151            24,694            (543 )        (2.2 )
Prepaid expenses and other assets             26,018            22,665           3,353          14.8

TOTAL                                     $  786,697    $      795,172    $     (8,475 )        (1.1 )