Bear State Financial 10-Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2013

OR

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

For the transition period from __________ to _______________

Commission File No.:0-28312

                 First Federal Bancshares of Arkansas, Inc.             

(Exact name of registrant as specified in its charter)

Arkansas	71-0785261
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)
1401 Highway 62-65 North
Harrison, Arkansas	72601
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:  (870) 741-7641

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

Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer  o Accelerated Filer  o Non-accelerated Filer  o Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o   No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  As of May 1, 2013, there were issued and outstanding 19,897,603 shares of the Registrant's Common Stock, par value $.01 per share.

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

TABLE OF CONTENTS

Part I.	Financial Information	Page
Item 1.	Financial Statements
	Condensed Consolidated Statements of Financial Condition as of March 31, 2013 and December 31, 2012 (unaudited)	1
	Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2013 and 2012 (unaudited)	2
	Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2013 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
Part II.	Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 6.	Exhibits	30
Signatures
Exhibit Index

Part I.  Financial Information

Item 1.  Financial Statements

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

(Unaudited)

	March 31, 2013			December 31, 2012
ASSETS
Cash and cash equivalents	$	67,421		$	42,607
Interest-bearing time deposits in banks		29,094			29,592
Investment securities available for sale		51,328			53,325
Federal Home Loan Bank stock—at cost		375			375
Loans receivable, net of allowance of $15,597 and $15,676, respectively		333,746			337,328
Loans held for sale		4,815			4,435
Accrued interest receivable		1,544			1,501
Real estate owned - net		14,445			16,658
Office properties and equipment - net		20,895			20,634
Cash surrender value of life insurance		23,201			23,003
Prepaid expenses and other assets		598			937
TOTAL	$	547,462		$	530,395
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	448,601		$	455,051
Deposits held for sale		21,758			--
Other borrowings		3,053			3,109
Advance payments by borrowers for taxes and insurance		762			676
Other liabilities		1,572			1,899
Total liabilities		475,746			460,735
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value—5,000,000 shares authorized; none issued at March 31, 2013 and December 31, 2012		--			--
Common stock, $.01 par value—30,000,000 shares authorized; 19,897,603 and 19,302,603 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		199			193
Additional paid-in capital		92,541			90,719
Accumulated other comprehensive income		688			763
Accumulated deficit		(21,712	)		(22,015	)
Total stockholders’ equity		71,716			69,660
TOTAL	$	547,462		$	530,395

See notes to unaudited condensed consolidated financial statements.

1

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except earnings per share)

(Unaudited)

	Three Months Ended
	March 31, 2013			March 31, 2012
INTEREST INCOME:
Loans receivable	$	4,081		$	4,641
Investment securities:
Taxable		53			178
Nontaxable		314			268
Other		133			124
Total interest income		4,581			5,211
INTEREST EXPENSE:
Deposits		846			1,221
Other borrowings		13			33
Total interest expense		859			1,254
NET INTEREST INCOME		3,722			3,957
PROVISION FOR LOAN LOSSES		--			16
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,722			3,941
NONINTEREST INCOME:
Deposit fee income		770			1,094
Earnings on life insurance policies		198			193
Gain on sale of loans		197			198
Other		89			201
Total noninterest income		1,254			1,686
NONINTEREST EXPENSES:
Salaries and employee benefits		2,678			2,875
Net occupancy expense		618			690
Real estate owned, net		(96	)		(35	)
FDIC insurance		171			298
Supervisory assessments		53			75
Data processing		336			476
Professional fees		259			398
Advertising and public relations		70			69
Postage and supplies		109			131
Other		475			458
Total noninterest expenses		4,673			5,435
INCOME BEFORE INCOME TAXES		303			192
INCOME TAX		--			--
NET INCOME	$	303			192
Basic earnings per common share	$	0.02		$	0.01
Diluted earnings per common share	$	0.01		$	0.01
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding (losses) gains arising during the period	$	(75	)	$	61
Reclassification adjustments for (gain) loss included in net income		--			--
COMPREHENSIVE INCOME	$	228		$	253

See notes to unaudited condensed consolidated financial statements.

2

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013

(In thousands, except share data)

(Unaudited)

	Issued Common Stock				Additional Paid-In		Accumulated Other  Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Capital		Income			Deficit			Equity
BALANCE – January 1, 2013		19,302,603	$	193	$	90,719	$	763		$	(22,015	)	$	69,660
Net income		--		--		--		--			303			303
Other comprehensive loss		--		--		--		(75	)		--			(75	)
Exercise of warrants		595,000		6		1,779		--			--			1,785
Stock compensation expense		--		--		43		--			--			43
BALANCE – March 31, 2013		19,897,603	$	199	$	92,541	$	688		$	(21,712	)	$	71,716

See notes to unaudited condensed consolidated financial statements.

3

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	303		$	192
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		--			16
Provision for real estate losses		186			28
Deferred tax provision		654			(103	)
Deferred tax valuation allowance		(654	)		103
Net (accretion) amortization of investment securities		(3	)		3
Federal Home Loan Bank stock dividends		--			(1	)
Gain on sale of fixed assets, net		(36	)		(126	)
Gain on sale of real estate owned, net		(344	)		(65	)
Originations of loans held for sale		(10,719	)		(9,873	)
Proceeds from sales of loans held for sale		10,536			9,731
Gain on sale of loans originated to sell		(197	)		(198	)
Depreciation		359			390
Amortization of deferred loan costs, net		16			8
Stock compensation		43			41
Earnings on life insurance policies		(198	)		(193	)
Changes in operating assets and liabilities:
Accrued interest receivable		(43	)		(257	)
Prepaid expenses and other assets		339			316
Other liabilities		(327	)		(467	)
Net cash used in operating activities		(85	)		(455	)
INVESTING ACTIVITIES:
Purchases of interest-bearing time deposits in banks		--			(496	)
Redemptions of interest-bearing time deposits in banks		498			--
Purchases of investment securities available for sale		--			(6,475	)
Proceeds from maturities and calls of investment securities available for sale		1,925			7,926
Loan repayments, net of originations		3,146			444
Proceeds from sales of real estate owned		2,803			1,684
Improvements to real estate owned		(12	)		(64	)
Proceeds from sales of office properties and equipment		140			239
Purchases of office properties and equipment		(724	)		(26	)
Net cash provided by investing activities		7,776			3,232

(Continued)

4

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2013			2012
FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	15,308		$	(8,205	)
Repayment of advances from Federal Home Loan Bank		(56	)		(177	)
Net increase in advance payments by borrowers for taxes and insurance		86			112
Proceeds from exercise of warrants		1,785			--
Net cash provided by (used in) financing activities		17,123			(8,270	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		24,814			(5,493	)
CASH AND CASH EQUIVALENTS:
Beginning of period		42,607			79,799
End of period	$	67,421		$	74,306
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—
Cash paid for:
Interest	$	854		$	1,273
Income taxes	$	--		$	--
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate and other assets acquired in settlement of loans	$	954		$	2,816
Sales of real estate owned financed by the Bank	$	534		$	715
Investment securities purchased—not settled	$	--		$	2,804

Transfers from deposits to deposits held for sale in probable branch sale	$	21,758	$	--
See notes to unaudited condensed consolidated financial statements.			(Concluded)

5

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation—First Federal Bancshares of Arkansas, Inc. (the “Company”) is a unitary holding company that owns all of the stock of First Federal Bank (the “Bank”). The Company, through its ownership of the Bank, is principally in the business of community banking and therefore is considered a banking operation with no separately reportable segments. 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, which is inactive.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and the Bank.  Intercompany transactions have been eliminated in consolidation.  Certain reclassifications of prior period amounts have been made to conform with the current period presentation. These reclassifications had no impact on previously reported net income.

The results of operations for the three months ended March 31, 2013, are not necessarily indicative of the results to be expected for the year ending December 31, 2013.  The unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2012, contained in the Company’s 2012 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).

2.         RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. In December 2011, FASB issued ASU 2011-12, which defers certain provisions of ASU 2011-05. One of ASU 2011-05’s provisions requires the Company to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. ASU 2011-12 deferred this requirement indefinitely. All other requirements in ASU 2011-05 were not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The ASU did not amend the components that must be reported in other comprehensive income. Both ASUs were effective for the Company’s reporting periods beginning after December 15, 2011. The Company adopted this ASU beginning in the quarter ended March 31, 2012. As this ASU amended only the disclosure requirements for fair value measurements, the adoption of this ASU did not have a material impact on the Company’s financial statements. In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires disclosure, either in a single footnote or parenthetically on the face of the financial statements, of the effect of significant items reclassified from accumulated other comprehensive income to their respective line items in the statement of net income. The effective date of ASU 2013-02 is for reporting periods beginning after December 15, 2012. The Company adopted this ASU effective January 1, 2013.  The adoption of this ASU did not have a material impact on the Company’s financial statements.

3.         INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities available for sale consisted of the following as of the dates indicated (in thousands):

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Municipal securities	$	42,640	$	734	$	(29	)	$	43,345
Corporate debt securities		8,000		5		(22	)		7,983
Total	$	50,640	$	739	$	(51	)	$	51,328

6

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Municipal securities	$	44,562	$	849	$	(18	)	$	45,393
Corporate debt securities		8,000		--		(68	)		7,932
Total	$	52,562	$	849	$	(86	)	$	53,325

The following tables summarize the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired (“OTTI”) (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	March 31, 2013
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Municipal securities	$	2,512	$	27	$	124	$	2	$	2,636	$	29
Corporate debt securities		998		2		1,980		20		2,978		22
Total	$	3,510	$	29	$	2,104	$	22	$	5,614	$	51

	December 31, 2012
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Municipal securities	$	4,033	$	18	$	--	$	--	$	4,033	$	18
Corporate debt securities		3,980		20		3,952		48		7,932		68
Total	$	8,013	$	38	$	3,952	$	48	$	11,965	$	86

On a quarterly basis, management conducts a formal review of securities for the presence of OTTI.  Management assesses whether an OTTI is present when the fair value of a security is less than its amortized cost basis at the balance sheet date.  For such securities, OTTI is considered to have occurred if the Company intends to sell the security, if it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis or if the present values of expected cash flows is not sufficient to recover the entire amortized cost.

The unrealized losses are primarily a result of increases in market yields since the time of purchase.  In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired.  Additionally, the unrealized losses are also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount.

The Company has pledged investment securities available for sale with carrying values of approximately $1.6 million as of March 31, 2013 and December 31, 2012, as collateral for certain deposits in excess of $250,000.  In addition, at March 31, 2013 and December 31, 2012 the Company has pledged investment securities available for sale with carrying values of approximately $8.0 million and $7.9 million, respectively, as collateral for the primary discount window.

7

The scheduled contractual maturities of debt securities at March 31, 2013 are shown below (in thousands). Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2013
	Amortized Cost		Fair Value		Weighted Average Rate
Within one year	$	276	$	276		3.37%
Due from one year to five years		19,539		19,636		2.17%
Due from five years to ten years		19,504		19,838		2.73%
Due after ten years		11,321		11,578		3.78%
Total	$	50,640	$	51,328		2.75%

As of March 31, 2013 and December 31, 2012, investments with amortized cost of approximately $34.8 million and $36.8 million, respectively, have call options held by the issuer, of which approximately $7.8 million and $9.2 million, respectively, are or were callable within one year.

4.         LOANS RECEIVABLE

Loans receivable consisted of the following at March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013			December 31, 2012
Real estate:
One- to four-family residential	$	151,553		$	157,936
Multifamily residential		21,138			20,790
Nonfarm nonresidential		142,624			138,014
Construction and land development		13,158			14,551
Commercial and industrial		15,833			16,083
Consumer		5,214			5,818
Total loans receivable		349,520			353,192
Unearned discounts and net deferred loan costs		(177	)		(188	)
Allowance for loan and lease losses		(15,597	)		(15,676	)
Loans receivable—net	$	333,746		$	337,328

Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition.  The unpaid principal balances of such loans at March 31, 2013 and December 31, 2012 were $4.2 million and $8.7 million, respectively.  Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing.   Servicing income for the three months ended March 31, 2013 and 2012 was $1,000 and $2,000, respectively.

As of March 31, 2013 and December 31, 2012, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $62.9 million and $67.3 million, respectively, were held in custody by the Federal Home Loan Bank of Dallas (“FHLB”) and were pledged for outstanding advances or available for future advances.

The FHLB has custody and endorsement of the loans that collateralize the Bank’s outstanding borrowings with the FHLB.  Qualifying loans (i) must not be 90 days or more past due; (ii) must not have been in default within the most recent twelve-month period, unless such default has been cured in a manner acceptable to the FHLB; (iii) must relate to real property that is covered by fire and hazard insurance in an amount at least sufficient to discharge the mortgage loan in case of loss and as to which all real estate taxes are current; (iv) must not have been classified as substandard, doubtful, or loss by the Bank or its regulatory authority; and (v) must not secure the indebtedness to any director, officer, employee, attorney, or agent of the Bank or of any FHLB.  The FHLB currently allows an aggregate lendable value on the qualifying loans of approximately 90% of the collateral value of loans pledged to the FHLB.

As of March 31, 2013 and December 31, 2012, qualifying loans collateralized by commercial real estate with balances of $8.9 million and $9.4 million, respectively, were pledged at the Federal Reserve Bank (“FRB”).  The Bank uses qualifying investment securities and qualifying commercial real estate loans as collateral for the discount window.

8

The following tables present age analyses of loans, including both accruing and nonaccrual loans, as of the dates indicated (in thousands):

March 31, 2013	30-89 Days Past Due		90 Days or More Past Due		Current		Total (1)
One- to four-family residential	$	5,293	$	4,123	$	142,137	$	151,553
Multifamily residential		--		--		21,138		21,138
Nonfarm nonresidential		18		3,666		138,940		142,624
Construction and land development		375		3,212		9,571		13,158
Commercial		--		402		15,431		15,833
Consumer		9		25		5,180		5,214
Total (1)	$	5,695	$	11,428	$	332,397	$	349,520

December 31, 2012	30-89 Days Past Due		90 Days or More Past Due		Current		Total (1)
One- to four-family residential	$	7,411	$	3,982	$	146,543	$	157,936
Multifamily residential		3,459		--		17,331		20,790
Nonfarm nonresidential		--		4,523		133,491		138,014
Construction and land development		241		3,145		11,165		14,551
Commercial		341		402		15,340		16,083
Consumer		15		25		5,778		5,818
Total	$	11,467	$	12,077	$	329,648	$	353,192

(1) Gross of unearned discounts and net deferred loan costs and the allowance for loan and lease losses.

There were no loans over 90 days past due and still accruing at March 31, 2013 or December 31, 2012.  Restructured loans totaled $7.4 million and $9.2 million as of March 31, 2013 and December 31, 2012, respectively, with $3.4 million of such restructured loans on nonaccrual status at both March 31, 2013 and December 31, 2012, respectively.

The following table presents age analyses of nonaccrual loans as of the dates indicated (in thousands):

March 31, 2013	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	1,036	$	4,123	$	2,063	$	7,222
Multifamily residential		--		--		--		--
Nonfarm nonresidential		--		3,666		2,863		6,529
Construction and land development		325		3,212		271		3,808
Commercial		--		402		--		402
Consumer		--		25		5		30
Total	$	1,361	$	11,428	$	5,202	$	17,991

December 31, 2012	30-89 Days Past Due		90 Days or  More Past Due		Current		Total
One- to four-family residential	$	1,070	$	3,982	$	1,975	$	7,027
Multifamily residential		--		--		--		--
Nonfarm nonresidential		--		4,523		2,713		7,236
Construction and land development		241		3,145		747		4,133
Commercial		--		402		--		402
Consumer		1		25		--		26
Total	$	1,312	$	12,077	$	5,435	$	18,824

9

The following tables summarize information pertaining to impaired loans as of March 31, 2013 and December 31, 2012 and for quarters ended March 31, 2013 and 2012 (in thousands):

	March 31, 2013						Three Months Ended March 31, 2013
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	2,992	$	2,479	$	513	$	1,814	$	6
Multifamily residential		3,428		2,958		470		1,479		40
Nonfarm nonresidential		3,312		2,114		1,198		2,466		--
Construction and land development		1,808		1,306		502		957		--
Commercial		381		--		381		--		--
Consumer		6		--		6		2		--
		11,927		8,857		3,070		6,718		46
Impaired loans without a valuation allowance:
One- to four-family residential		4,737		4,737		--		6,538		--
Multifamily residential		--		--		--		2,785		--
Nonfarm nonresidential		3,217		3,217		--		5,423		--
Construction and land development		2,001		2,001		--		2,918		--
Commercial		21		21		--		150		--
Consumer		25		25		--		26		--
		10,001		10,001		--		17,840		--
Total impaired loans	$	21,928	$	18,858	$	3,070	$	24,558	$	46
Interest based on original terms									$	344
Interest income recognized on a cash basis on impaired loans									$	--

	December 31, 2012						Three Months Ended March 31, 2012
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	1,424	$	1,149	$	275	$	3,437	$	9
Multifamily residential		--		--		--		1,128		--
Nonfarm nonresidential		3,596		2,817		778		2,287		4
Construction and land development		737		607		130		1,393		9
Commercial		380		--		380		--		--
Consumer		5		4		2		13		--
		6,142		4,577		1,565		8,258		22
Impaired loans without a valuation allowance:
One- to four-family residential		6,718		6,718		--		8,663		29
Multifamily residential		3,459		3,459		--		4,474		46
Nonfarm nonresidential		4,876		4,876		--		8,099		50
Construction and land development		3,396		3,396		--		2,240		5
Commercial		22		22		--		278		--
Consumer		27		27		--		52		1
		18,498		18,498		--		23,806		131
Total impaired loans	$	24,640	$	23,075	$	1,565	$	32,064	$	153
Interest based on original terms									$	477
Interest income recognized on a cash basis on impaired loans									$	69

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Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the loan portfolio, the Bank assigns loans into risk categories based on the ability of borrowers to service their debt as determined by available and relevant information such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank assigns a credit risk rating to certain non-homogeneous loans over $250,000 on at least an annual basis.  Homogeneous loans and non-homogeneous loans under $250,000 are generally not risk rated.  The Bank uses the following definitions for risk ratings:

Pass (Grades 1 to 5). Loans rated as pass generally meet or exceed normal credit standards and are rated on a scale from 1 to 5, with 1 being the highest quality loan and 5 being a pass/watch loan.  Factors influencing the level of pass grade include repayment source and strength, collateral value, borrower cash flows, existence of and strength of guarantors, industry/business sector, financial trends, performance history, etc.

Special Mention (Grade 6). Loans rated as special mention, while still adequately protected by the borrower’s repayment capability, exhibit distinct weakening trends. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming adversely classified credits.

Substandard (Grade 7). Loans rated as substandard are inadequately protected by the current sound net worth and paying capacity of the borrower or the collateral pledged, if any. These assets must have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful (Grade 8). Loans rated as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss (Grade 9). Loans rated as a loss are considered uncollectible and of such little value that continuance as an asset is not warranted. A loss classification does not mean that an asset has no recovery or salvage value, but that it is not practical or desirable to defer writing off all or a portion of the asset, even though partial recovery may be effected in the future.

Based on analyses performed at March 31, 2013 and December 31, 2012, the risk categories of loans are as follows:

	March 31, 2013
	Pass		Special Mention		Substandard		Not Rated		Total (1)
One- to four-family residential	$	31,888	$	3,121	$	12,898	$	103,646	$	151,553
Multifamily residential		17,349		--		3,775		14		21,138
Nonfarm nonresidential		123,545		7,104		11,090		885		142,624
Construction and land development		4,789		397		4,600		3,372		13,158
Commercial		14,933		--		747		153		15,833
Consumer		157		--		47		5,010		5,214
Total (1)	$	192,661	$	10,622	$	33,157	$	113,080	$	349,520

	December 31, 2012
	Pass		Special Mention		Substandard		Not Rated		Total (1)
One- to four-family residential	$	30,216	$	3,698	$	12,993	$	111,029	$	157,936
Multifamily residential		16,695		--		4,078		17		20,790
Nonfarm nonresidential		117,604		7,445		12,045		920		138,014
Construction and land development		5,298		867		4,934		3,452		14,551
Commercial		15,127		340		425		191		16,083
Consumer		159		--		45		5,614		5,818
Total (1)	$	185,099	$	12,350	$	34,520	$	121,223	$	353,192

(1) Gross unearned discounts and net deferred loan costs and the allowance for loan and lease losses.

As of March 31, 2013 and December 31, 2012, the Bank did not have any loans categorized as subprime or classified as doubtful or loss.

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Troubled Debt Restructurings. Troubled debt restructurings (“TDRs”) are loans where the contractual terms have been modified and both of the following conditions exist: (i) the borrower is experiencing financial difficulty and (ii) the restructuring constitutes a concession that the Bank would not otherwise make. The Bank assesses all loan modifications to determine if the modifications constitute a TDR.  Restructurings resulting in an insignificant delay in payment are not considered to be TDRs.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All TDRs are considered impaired loans. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The following table summarizes TDRs as of March 31, 2013 and December 31, 2012: (dollars in thousands)

March 31, 2013	Number of  Accruing TDR Loans		Balance		Number of Nonaccrual TDR Loans		Balance		Total Number of TDR Loans		Total Balance
One- to four-family residential		5	$	508		12	$	1,555		17	$	2,063
Multifamily residential		1		3,428		--		--		1		3,428
Nonfarm nonresidential		--		--		3		595		3		595
Construction and land development		--		--		6		1,283		6		1,283
Consumer		--		--		1		5		1		5
Total		6	$	3,936		22	$	3,438		28	$	7,374

December 31, 2012	Number of Accruing TDR Loans		Balance		Number of Nonaccrual TDR Loans		Balance		Total Number of TDR Loans		Total Balance
One- to four-family residential		12	$	1,115		9	$	1,461		21	$	2,576
Multifamily residential		1		3,459		--		--		1		3,459
Nonfarm nonresidential		1		1,235		3		606		4		1,841
Construction and land development		--		--		6		1,315		6		1,315
Consumer		3		7		--		--		3		7
Total		17	$	5,816		18	$	3,382		35	$	9,198

The Bank restructured one loan as a TDR during the three months ended March 31, 2013 in the amount of $6,000. The Bank did not restructure any loans receivable that were TDRs during the three months ended March 31, 2012.

The Bank had no loans receivable for which a payment default occurred during the three months ended March 31, 2013 or 2012 and that had been modified as a TDR within 12 months or less of the payment default.

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5.        ALLOWANCES FOR LOAN AND LEASE LOSSES AND REAL ESTATE LOSSES

The tables below provide a rollforward of the allowance for loan and lease losses (“ALLL”) by portfolio segment for the three months ended March 31, 2013 and 2012 (in thousands):

	Three Months Ended March 31, 2013
	One- to Four- Family Residential			Multifamily Residential			Nonfarm Nonresidential			Construction and Land Development			Commercial		Consumer			Total
Balance, beginning of year	$	5,099		$	1,319		$	6,949		$	1,130		$	956	$	223		$	15,676
Provision charged to expense		1,724			(245	)		(1,475	)		(24	)		25		(5	)		--
Losses charged off		(87	)		--			(134	)		--			--		(29	)		(250	)
Recoveries		42			--			1			84			19		25			171
Balance, end of year	$	6,778		$	1,074		$	5,341		$	1,190		$	1,000	$	214		$	15,597

	Three Months Ended March 31, 2012
	One- to Four- Family Residential			Multifamily Residential			Nonfarm Nonresidential			Construction and Land Development			Commercial			Consumer			Total
Balance, beginning of year	$	6,999		$	3,332		$	7,316		$	1,973		$	972		$	226		$	20,818
Provision charged to expense		(134	)		427			646			(440	)		(487	)		4			16
Losses charged off		(436	)		(997	)		(1,736	)		--			--			(96	)		(3,265	)
Recoveries		18			17			4			702			6			24			771
Balance, end of year	$	6,447		$	2,779		$	6,230		$	2,235		$	491		$	158		$	18,340

The tables below present the allocation of the ALLL and the related loans receivable balances disaggregated on the basis of impairment method by portfolio segment as of March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013
	One- to Four- Family Residential		Multifamily Residential		Nonfarm Nonresidential		Construction and Land Development		Commercial		Consumer		Total
ALLL Balances:
Individually evaluated for impairment	$	513	$	470	$	1,198	$	502	$	381	$	6	$	3,070
Collectively evaluated for impairment		6,265		604		4,143		688		619		208		12,527
Ending balance	$	6,778	$	1,074	$	5,341	$	1,190	$	1,000	$	214	$	15,597
Loan balances (1):
Individually evaluated for impairment	$	7,729	$	3,428	$	6,529	$	3,809	$	402	$	31	$	21,928
Collectively evaluated for impairment		143,824		17,710		136,095		9,349		15,431		5,183		327,592
Ending balance	$	151,553	$	21,138	$	142,624	$	13,158	$	15,833	$	5,214	$	349,520

	December 31, 2012
	One- to Four-Family Residential		Multifamily Residential		Nonfarm Nonresidential		Construction and Land Development		Commercial		Consumer		Total
ALLL Balances:
Individually evaluated for impairment	$	275	$	--	$	778	$	130	$	380	$	2	$	1,565
Collectively evaluated for impairment		4,824		1,319		6,171		1,000		576		221		14,111
Ending balance	$	5,099	$	1,319	$	6,949	$	1,130	$	956	$	223	$	15,676
Loan balances (1):
Individually evaluated for impairment	$	8,142	$	3,459	$	8,472	$	4,133	$	402	$	32	$	24,640
Collectively evaluated for impairment		149,794		17,331		129,542		10,418		15,681		5,786		328,552
Ending balance	$	157,936	$	20,790	$	138,014	$	14,551	$	16,083	$	5,818	$	353,192

(1) Gross of unearned discounts and net deferred loan costs and the allowance for loan and lease losses.

A summary of the activity in the allowance for real estate losses is as follows for the three months ended March 31, 2013 and 2012 (in thousands):

	Three Months Ended
	March 31, 2013			March 31, 2012
Balance—beginning of period	$	14,877		$	20,934
Provisions for estimated losses		186			28
Recoveries		--			--
Losses charged off		(5,667	)		(461	)
Balance—end of period	$	9,396		$	20,501

6.        STOCK BASED COMPENSATION

2011 Omnibus Incentive Plan—The 2011 Omnibus Incentive Plan (the “2011 Plan”), became effective May 3, 2011, after approval by the Company’s stockholders on April 29, 2011. The objectives of the 2011 Plan are to optimize the profitability and growth of the Company through incentives that are consistent with the Company's goals and that link the personal interests of participants to those of the Company's stockholders. The 2011 Plan provides for a committee of the Company’s Board of Directors to award nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other awards representing up to 1,930,269 shares of Company stock. Awards may be granted under the 2011 Plan up to ten years following the effective date of the plan.  Each award under the 2011 Plan is governed by the terms of the individual award agreement, which shall specify pricing, term, vesting, and other pertinent provisions. Option awards are generally granted with an exercise price equal to the fair market value of the Company’s stock at the date of grant, generally vest based on five years of continuous service and have seven year contractual terms.  Restricted stock units generally vest based on three years of continuous service.  Compensation expense attributable to awards made under the 2011 Plan totaled approximately $43,000 and $41,000 for the three months ended March 31, 2013 and 2012, respectively.

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Stock Options. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model.  Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise, employee termination, and expected term of the options within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of the stock option activity in the Company’s 2011 Plan for the three months ended March 31, 2013, is presented below:

	Shares Underlying Awards			Weighted Average Exercise Price
Outstanding—January 1, 2013		223,500		$	6.65
Granted		--		$	--
Forfeited		(4,500	)	$	6.57
Outstanding—March 31, 2013		219,000		$	6.66

The weighted average remaining contractual life of the outstanding options was 5.7 years and the aggregate intrinsic value of the options was approximately $732,000 at March 31, 2013. None of the outstanding options are vested.

As of March 31, 2013, there was $539,000 of total unrecognized compensation costs related to nonvested share-based compensation arrangements under the 2011 Plan.  The cost is expected to be recognized over a weighted-average period of 3.7 years.

Restricted Stock Units.  The fair value of each restricted stock unit (“RSU”) award is determined based on the closing market price of the Company’s stock on the grant date and amortized to compensation expense on a straight-line basis over the vesting period.  The Company granted 17,500 RSUs with a weighted-average grant date fair value of $9.75 during the quarter ended March 31, 2013, with each award vesting over a three-year period.

7.        EARNINGS PER SHARE

Basic earnings per share is computed by dividing reported earnings available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing reported earnings available to common stockholders by the weighted average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options and warrants using the treasury stock method.

	Three Months Ended March 31,
	2013		2012
Basic weighted average shares outstanding		19,421,603		19,302,603
Effect of dilutive securities		1,322,978		997,401
Diluted weighted average shares outstanding		20,744,581		20,300,004

The calculation of diluted earnings per share for the three months ended March 31, 2013 and 2012 excluded antidilutive stock options totaling 42,500 and 151,500, respectively

8.        FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurement, provides a framework for measuring fair value and defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

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Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Financial instruments are broken down by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, due to an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at March 31, 2013 and December 31, 2012, as well as the general classification of such assets pursuant to the valuation hierarchy.

Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. The fair values used by the Company are obtained from an independent pricing service, which represent either quoted market prices for the identical asset or fair values determined by pricing models, or other model-based valuation techniques, that consider observable market data, such as interest rate volatilities, London Interbank Offered Rate (“LIBOR”) yield curve, credit spreads and prices from market makers and live trading systems. Recurring Level 2 securities include corporate debt securities and municipal bonds. Inputs used for valuing Level 2 securities include observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels and market consensus prepayment speeds, among other things. Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models. No securities were included in the Recurring Level 3 category at or for the periods ended March 31, 2013 or December 31, 2012.

The following table presents major categories of assets measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 (in thousands):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2013
Available for sale investment securities:
Municipal securities	$	43,345	$	--	$	43,345	$	--
Corporate debt securities		7,983		--		7,983		--
Total	$	51,328	$	--	$	51,328	$	--
December 31, 2012
Available for sale investment securities:
Municipal securities	$	45,393	$	--	$	45,393	$	--
Corporate debt securities		7,932		--		7,932		--
Total	$	53,325	$	--	$	53,325	$	--

The following is a description of valuation methodologies used for significant assets measured at fair value on a nonrecurring basis.

Impaired Loans Receivable

Loans which meet certain criteria are evaluated individually for impairment. A loan is considered impaired when, based upon current information and events, it is probable the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.  Substantially all of the Bank’s impaired loans at March 31, 2013 and December 31, 2012 are secured by real estate.  These impaired loans are individually measured for impairment by comparing the carrying value of the loan to the discounted cash flows or the fair value of the collateral, less estimated selling costs, as appropriate. Fair value is estimated primarily through appraisals, real estate brokers’ opinions or listing prices.  Fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.   Fair value adjustments are made by charge-offs to the ALLL.

Real Estate Owned, net

Real estate owned (“REO”) represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs.  Fair value is estimated through current appraisals, internal valuations, real estate brokers’ opinions or listing prices. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.  Fair value adjustments are recorded in earnings during the period such adjustments are made.   REO loss provisions recorded during the three months ended March 31, 2013 and 2012 were $186,000 and $28,000, respectively.

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The following table presents major categories of assets measured at fair value on a nonrecurring basis for the three months ended March 31, 2013 and 2012 (in thousands).  The assets disclosed in the following table represent REO properties or impaired loans that were remeasured at fair value during the period with a resulting valuation adjustment or fair value write-down.

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2013
Impaired loans	$	12,546	$	--	$	--	$	12,546
REO, net		2,846		--		--		2,846
March 31, 2012
Impaired loans	$	11,725	$	--	$	--	$	11,725
REO, net		1,967		--		--		1,967

9.        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 that are reported at amortized cost in the Company’s statement of financial condition, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value, are as follows (in thousands):

	March 31, 2013				December 31, 2012
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
FINANCIAL ASSETS:
Level 1 inputs:
Cash and cash equivalents	$	67,421	$	67,421	$	42,607	$	42,607
Level 2 inputs:
Interest-bearing time deposits in banks		29,094		29,844		29,592		30,413
Federal Home Loan Bank stock		375		375		375		375
Loans held for sale		4,815		4,815		4,435		4,435
Cash surrender value of life insurance		23,201		23,201		23,003		23,003
Accrued interest receivable		1,544		1,544		1,501		1,501
Level 3 inputs:
Loans receivable—net		333,746		344,408		337,328		351,642
FINANCIAL LIABILITIES:
Level 1 inputs:
Deposits held for sale		21,758		21,758		-		-
Level 2 inputs:							��
Checking, money market and savings accounts		207,416		207,416		203,308		203,308
Other borrowings		3,053		3,172		3,109		3,239
Accrued interest payable		28		28		23		23
Advance payments by borrowers for taxes and insurance		762		762		676		676
Level 3 inputs:
Certificates of deposit		241,185		245,906		251,743		255,573

For cash and cash equivalents, the carrying amount approximates fair value (level 1).  For Federal Home Loan Bank stock, loans held for sale, cash surrender value of life insurance and accrued interest receivable, the carrying value is a reasonable estimate of fair value, primarily because of the short-term nature of the instruments or, as to Federal Home Loan Bank stock, the ability to sell the stock back to the Federal Home Loan Bank at cost (level 2).  Interest-bearing time deposits in banks were valued using discounted cash flows based on current rates for similar types of deposits (level 2). Fair values of impaired loans are estimated as described in Note 8.  Non-impaired loans were valued using discounted cash flows. The discount rates used to determine the present value of these loans were based on interest rates currently being charged by the Bank on comparable loans (level 3).

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The fair value of deposits held for sale is considered to be level 1 since its value is based on a sales agreement. The fair value of checking accounts, savings accounts and money market deposits is the amount payable on demand at the reporting date (level 2). The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered by the Bank for deposits of similar terms (level 3).  The fair value of Federal Home Loan Bank advances is estimated using the rates for advances of similar remaining maturities at the reporting date (level 2). For advance payments by borrowers for taxes and insurance and for accrued interest payable the carrying value is a reasonable estimate of fair value, primarily because of the short-term nature of the instruments (level 2).

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2013 and December 31, 2012. 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.

10.      REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (“OCC”), as successor to the Office of Thrift Supervision (“OTS”). Failure to meet minimum capital requirements can result in certain mandatory—and possible additional discretionary—actions by regulators that, if undertaken, could have a direct and 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 following table) of tangible capital (as defined) 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).   Tier 1 (core) capital includes common stockholders’ equity less certain other deductions.  Total capital includes Tier 1 capital plus the ALLL, subject to limitations.

On January 15, 2013, the OCC issued an order terminating, effective immediately, the Cease and Desist Order issued by the OTS on April 12, 2010 (the "Bank Order"). The action also terminates the related Stipulation and Consent to Issuance of Order to Cease and Desist between the Bank and the OTS.

As of December 31, 2012, the regulators categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action, due to the Bank Order.  The termination of the Bank Order subsequent to December 31, 2012, allowed the Bank to be eligible to be categorized as well-capitalized. On January 15, 2013, the Bank agreed with the OCC to maintain a minimum Tier 1 (core) capital ratio of at least 8% of adjusted total assets and a total risk-based capital ratio of at least 12% of risk-weighted assets.

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The Bank’s actual and required capital amounts (in thousands) and ratios are presented in the following table:

	Actual					For Capital Adequacy Purposes					To be Categorized as Well Capitalized Under Prompt Corrective Action Provisions (1)					Other Requirements (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2013:
Tangible Capital to Tangible Assets	$	69,714		12.75	%	$	8,201		1.50	%		N/A		N/A			N/A		N/A
Core Capital to Adjusted Tangible Assets		69,714		12.75	%		21,870		4.00	%	$	21,870		4.00	%		43,740		8.00	%
Total Capital to Risk-Weighted Assets		74,370		20.57	%		28,926		8.00	%		28,926		8.00	%		43,388		12.00	%
Tier I Capital to Risk-Weighted Assets		69,714		19.28	%		N/A		N/A			14,463		4.00	%		N/A		N/A
As of December 31, 2012:
Tangible Capital to Tangible Assets	$	67,434		12.73	%	$	7,944		1.50	%		N/A		N/A			N/A		N/A
Core Capital to Adjusted Tangible Assets		67,434		12.73	%		21,185		4.00	%	$	21,185		4.00	%		42,371		8.00	%
Total Capital to Risk-Weighted Assets		72,131		19.77	%		29,182		8.00	%		29,182		8.00	%		43,773		12.00	%
Tier I Capital to Risk-Weighted Assets		67,434		18.49	%		N/A		N/A			14,591		4.00	%		N/A		N/A

(1) Effective with the termination of the Bank Order effective January 15, 2013, the Bank can be categorized as well-capitalized by achieving the required ratios below.

(2) The Bank Order, effective through January 15, 2013, required the Bank to maintain a Tier 1 (core) capital ratio of at least 8% and a total risk-based capital ratio of at least 12%.  After such date, the Bank agreed with the OCC to maintain a minimum Tier 1 (core) capital ratio of at least 8% of adjusted total assets and a total risk-based capital ratio of at least 12% of risk-weighted assets. The required amounts presented reflect these ratios.

Dividend Restrictions.  The Company may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause the Bank’s stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements for insured institutions or below the special liquidation account established by the Bank in connection with the consummation of the conversion from the mutual holding company structure May 3, 1996. In addition, federal regulations, as currently applied to the Bank, impose limitations upon payment of capital distributions to the Company.

The principal source of the Company’s revenue is dividends from the Bank.  The Company’s ability to pay dividends to stockholders depends to a large extent upon the dividends received from the Bank.  Pursuant to the Cease and Desist Order issued by the OTS (the “Company Order”) on April 12, 2010, the Company may not declare or pay any dividends or capital distributions on its common stock or repurchase such shares without the prior written non-objection of the FRB.

11.      SUBSEQUENT EVENTS

On April 1, 2013, the Bank entered into a definitive purchase and assumption agreement with The First National Bank in Green Forest (“FNBGF”) of Green Forest, Arkansas to sell all deposits and selected assets associated with the Bank’s branch office located in Berryville, Arkansas. In addition, as part of the agreement, FNBGF will also purchase certain loans with a carrying value of $3.2 million, interest bearing deposits of $20.9 million and noninterest bearing deposits of approximately $900,000 at March 31, 2013. The transaction is pending regulatory approval and, if approval is received, is expected to close in June 2013. The transaction is not expected to result in any material gain or loss.

On April 19, 2013, the Board of Directors approved the sale of certain classified loans with a total net book value of $11.3 million for aggregate proceeds of $9.3 million.  The sale closed in April 2013, resulting in charge-offs to the allowance for loan and lease losses of $2.0 million in the second quarter of 2013. No additional provision for loan losses was required since all loans were adequately reserved at quarter end. The Bank’s classified assets ratio (“CAR”), defined as the ratio of classified assets to Tier 1 capital plus the ALLL, at March 31, 2013 was 55.8%.  The CAR at March 31, 2013, considering the effect of this sale, would have been 42.9%.

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

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 Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements and the other sections contained herein.

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The Bank is a federally chartered stock savings and loan association that was formed in 1934.  As of March 31, 2013, the Bank conducted business from its home office, one limited service office, thirteen full service branch offices located in a six county area in Arkansas (comprised of Benton and Washington counties in Northwest Arkansas; Carroll, Boone, Marion and Baxter counties in North-central Arkansas) and a loan production office located in Little Rock, Arkansas.  The Company also has executive offices in Little Rock, Arkansas. In April 2013, the Bank announced the sale of its Berryville, Arkansas, branch with such sale expected to close in the second quarter of 2013.

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 automated teller machines; 24-hour telephone banking; online banking, including account access, e-statements, and bill payment; mobile banking; Bounce ProtectionTM overdraft service; debit cards; and safe deposit boxes.

2013 FIRST QUARTER OVERVIEW

The Company’s net income was $303,000 for the three months ended March 31, 2013, compared to net income of $192,000 for the same period in 2012.  The primary reason for the increase in net income was a decrease in operating expenses, partially offset by decreases in net interest income and noninterest income.

The Bank continued to reduce its level of nonperforming assets during the first quarter of 2013. Total nonperforming assets at March 31, 2013, including nonaccrual loans, real estate owned, and restructured loans, totaled $36.4 million, or 6.64% of total assets, a reduction of $4.9 million compared to December 31, 2012, and a reduction of $22.9 million compared to March 31, 2012.  The Bank also reduced its level of classified loans to $33.2 million at March 31, 2013 compared to $34.5 million at December 31, 2012.

While the Bank is continuing its focus on reducing nonperforming assets, it is equally focused on improving its operational performance through improving its net interest margin, increasing noninterest income, and controlling noninterest expense.

CRITICAL ACCOUNTING POLICIES

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, the following estimates, due to the judgments, estimates and assumptions inherent in those policies, are critical to preparation of our financial statements:

· Determination of our allowance for loan and lease losses (“ALLL”)

· Valuation of real estate owned

· Valuation of investment securities

· Valuation of our deferred tax assets

These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Condensed Consolidated Financial Statements included herein.  We believe that the judgments, estimates and assumptions used in the preparation of our condensed consolidated financial statements are appropriate given the factual circumstances at the time.  However, given the sensitivity of our condensed consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

In estimating the amount of credit losses inherent in the loan portfolio, various judgments and assumptions are made.  For example, when assessing the overall economic environment, assumptions are made regarding 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 the portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan and lease 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.

The Company has classified all of its investment securities as available for sale. Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income taxes, and are reported as a separate component of stockholders’ equity with any related changes included in accumulated other comprehensive income (loss).  The Company utilizes independent third parties as its principal sources for determining fair value of its investment securities that are measured on a recurring basis. For investment securities traded in an active market, the fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.  The fair values of the Company’s investment securities traded in both active and inactive markets can be volatile and may be influenced by a number of factors including market interest rates, prepayment speeds, discount rates, credit quality of the issuer, general market conditions including market liquidity conditions and other factors. Factors and conditions are constantly changing and fair values could be subject to material variations that may significantly impact the Company’s financial condition, results of operations and liquidity.

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The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company evaluates its deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including our historical profitability and projections of future taxable income.  The Company is required to establish a valuation allowance for deferred tax assets if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company estimates future taxable income based on management-approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between projected operating performance, our actual results and other factors.

RESULTS OF OPERATIONS

Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012

Net Income.  Net income increased to $303,000 for the three months ended March 31, 2013 compared to $192,000 for the three months ended March 31, 2012.  The primary reason for the increase in net income was a decrease in operating expenses, partially offset by decreases in net interest income and noninterest income.

Net Interest Income.  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 for the first quarter of 2013 was $3.7 million compared to $4.0 million for the same period in 2012. The decrease in net interest income resulted from changes in interest income and interest expense discussed below.

Interest Income.  Interest income for the first quarter of 2013 was $4.6 million compared to $5.2 million for the same period in 2012. The decrease in interest income in 2013 compared to 2012 was primarily related to a decrease in yields earned on loans receivable and, to a lesser degree, a decrease in the average balance of investment securities.  The decrease in yields earned on loans receivable is due to origination of high quality loans with average market rates lower than the weighted average rate of the Bank’s portfolio in the same period last year. The average balance of investment securities decreased due to calls and maturities of investment securities.

Interest Expense.   Interest expense for the first quarter of 2013 was $859,000 compared to $1.3 million for the same period in 2012. The decrease in interest expense in 2013 compared to 2012 was primarily due to a decrease in the average rates paid on deposit accounts and, to a lesser degree, decreases in the average balances of deposits and borrowings. The decrease in the average rates paid on deposit accounts reflects decreases in market interest rates and Bank management’s pricing of its deposits at such levels to maintain deposit balances commensurate with its overall balance sheet management and liquidity position.

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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 regarding 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.

	Three Months Ended March 31,
	2013 vs. 2012
	Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume				Total Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	(30	)	$	(533	)		$	3		$	(560	)
Investment securities		(61	)		(20	)			2			(79	)
Other interest-earning assets		(24	)		41				(8	)		9
Total interest-earning assets		(115	)		(512	)			(3	)		(630	)
Interest expense:
Deposits		(79	)		(316	)			20			(375	)
Other borrowings		(18	)		(4	)			2			(20	)
Total interest-bearing liabilities		(97	)		(320	)			22			(395	)
Net change in net interest income	$	(18	)	$	(192	)		$	(25	)	$	(235	)

Average Balance Sheets.  The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the periods indicated.  Such yields and costs are derived by dividing interest income or interest expense by the average balance of assets or liabilities, respectively, for the periods presented.  Average balances are based on daily balances during the periods.

	Three Months Ended March 31,
	2013							2012
	Average Balance		Interest		Average Yield/ Cost			Average Balance		Interest		Average Yield/ Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)	$	356,580	$	4,081		4.64	%	$	358,896	$	4,641		5.19	%
Investment securities(2)		52,410		367		2.84			60,643		446		2.95
Other interest-earning assets		73,435		133		0.72			91,246		124		0.54
Total interest-earning assets		482,425		4,581		3.85			510,785		5,211		4.09
Noninterest-earning assets		52,343							59,590
Total assets	$	534,768						$	570,375
Interest-bearing liabilities:
Deposits	$	458,650		846		0.75		$	490,392		1,221		1.00
Other borrowings		3,072		13		1.76			6,563		33		2.00
Total interest-bearing liabilities		461,722		859		0.75			496,955		1,254		1.01
Noninterest-bearing liabilities		2,791							4,206
Total liabilities		464,513							501,161
Stockholders' equity		70,255							69,214
Total liabilities and stockholders' equity	$	534,768						$	570,375
Net interest income			$	3,722						$	3,957
Net earning assets	$	20,703						$	13,830
Interest rate spread						3.10	%						3.08	%
Net interest margin						3.13	%						3.11	%
Ratio of interest-earning assets to Interest-bearing liabilities						104.48	%						102.78	%

(1)  Includes nonaccrual loans.

(2)  Includes FHLB of Dallas stock.

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

No provision for loan losses was required for the three months ended March 31, 2013, primarily due to decreases in nonperforming and classified loans.  The ALLL as a percentage of loans receivable was 4.5% at March 31, 2013, compared to 4.4% at December 31, 2012.  The ALLL as a percentage of classified loans was 47.0% at March 31, 2013, compared to 45.4% at December 31, 2012. See “Allowance for Loan and Lease Losses” in the “Asset Quality” section.

Noninterest Income. Noninterest income is generated primarily through deposit account fee income, profit on sale of loans, and earnings on life insurance policies. Total noninterest income of $1.3 million for the first quarter of 2013 decreased from $1.7 million for the first quarter of 2012.  This decrease was primarily due to a decrease in deposit fee income, primarily due to a decrease in insufficient funds fee revenue.

Noninterest Expense.  Noninterest expense consists primarily of employee compensation and benefits, office occupancy expense, data processing expense, real estate owned expense, and other operating expense.  Total noninterest expense decreased $762,000 or 14% during the first quarter of 2013 compared to the first quarter of 2012. The variances in certain noninterest expense items are further explained in the following paragraphs, with the aggregate expense decrease being primarily related to the decrease in nonperforming assets and improvements in the Bank’s operational efficiency and overall staffing levels.

Real estate owned, net.The changes in the composition of this line item are presented below (in thousands):

	Three Months Ended March 31,
	2013			2012			Change
Loss provisions	$	142		$	28		$	114
Net gain on sales		(331	)		(65	)		(266	)
Rental income		(38	)		(258	)		220
Taxes and insurance		67			163			(96	)
Other		64			97			(33	)
Total	$	(96	)	$	(35	)	$	(61	)

The increase in the net gain on sales of REO properties for the three months ended March 31, 2013 compared to the same period in 2012 was primarily related to sales of developed residential subdivision lots and land in a single subdivision with total gains of $264,000 during the first quarter of 2013, partially offset by increased loss provisions and decreased rental income.

Real estate owned expenses such as taxes, insurance and maintenance as well as rental income are expected to continue to decline as the size of the REO portfolio continues to decline.  Future levels of loss provisions and net gains or losses on sales of real estate owned will depend on market conditions.

Salaries and Employee Benefits.Salaries and employee benefits of $2.7 million for the three months ended March 31, 2013 decreased $197,000 from the same period in 2012. The decrease was primarily attributable to a decrease in average full-time equivalents in the first quarter of 2013 compared to the first quarter of 2012.

FDIC Insurance Premium.  The Bank’s FDIC insurance premium decreased $127,000 for the three months ended March 31, 2013 compared to the same period in 2012 due to decreases in the assessment rate and the assessment base.  The base is defined as average consolidated total assets for the assessment period less average tangible equity capital with potential adjustments for unsecured debt, brokered deposits and depository institution debts.  

Data Processing.The decrease in data processing expense of $140,000 in the first quarter of 2013 compared to the same period in 2012 was primarily related to lower overall processing costs for the three months ended March 31, 2013 as a result of the Bank’s conversion of its operational software during the second quarter of 2012, as well as one-time costs of approximately $75,000 incurred during the three months ended March 31, 2012.

Professional Fees.Professional fees decreased $139,000 or 35% for the quarter ended March 31, 2013 compared to the same period in 2012, primarily due to a decrease in audit fees and a decrease in loan-related legal fees.

Income Taxes.  The Company had no taxable income for the three months ended March 31, 2013 or 2012 and recorded a valuation allowance for the full amount of its net deferred tax asset as of March 31, 2013 and December 31, 2012, respectively.

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LENDING ACTIVITIES

Loans Receivable.  Changes in loan composition between March 31, 2013 and December 31, 2012, are presented in the following table (dollars in thousands).

	March 31, 2013			December 31, 2012			Increase (Decrease)			% Change
One- to four-family residential	$	151,553		$	157,936		$	(6,383	)		(4.0	)%
Multifamily residential		21,138			20,790			348			1.7
Nonfarm nonresidential		142,624			138,014			4,610			3.3
Construction and land development		13,158			14,551			(1,393	)		(9.6	)
Total real estate loans		328,473			331,291			(2,818	)		(0.9	)
Commercial		15,833			16,083			(250	)		(1.6	)
Consumer		5,214			5,818			(604	)		(10.4	)
Total loans receivable		349,520			353,192			(3,672	)		(1.0	)
Unearned discounts and net deferred loan costs		(177	)		(188	)		11			(5.9	)
Allowance for loan and lease losses		(15,597	)		(15,676	)		79			(0.5	)
Loans receivable, net	$	333,746		$	337,328		$	(3,582	)		(1.1	)%

Total loans receivable decreased $3.7 million to $349.5 million at March 31, 2013, compared to $353.2 million at December 31, 2012. The balance of total loans receivable has recently stabilized, reversing a trend of several consecutive years of decline. Relying mainly on high quality commercial and commercial real estate loans, management has been able to partially offset the reduction in one- to-four family residential mortgage loans resulting from the Bank’s gradual but concerted shift away from that loan type in order to better balance the overall loan portfolio.

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ASSET QUALITY

Nonperforming Assets.  The following table sets forth the amounts and categories of the Bank's nonperforming assets at the dates indicated (dollars in thousands).

	March 31, 2013					December 31, 2012
	Net (2)		% Total Assets			Net (2)		% Total Assets			Increase (Decrease)
Nonaccrual Loans:
One- to four-family residential	$	7,222		1.32	%	$	7,027		1.32	%	$	195
Multifamily residential		--		--			--		--			--
Nonfarm nonresidential		6,529		1.20	%		7,236		1.37	%		(707	)
Construction and land development		3,808		0.69	%		4,133		0.77	%		(325	)
Commercial		402		0.07	%		402		0.08	%		--
Consumer		30		0.01	%		26		0.01	%		4
Total nonaccrual loans		17,991		3.29	%		18,824		3.55	%		(833	)
Accruing loans 90 days or more past due		--		--			--		--			--
Real estate owned		14,445		2.64	%		16,658		3.14	%		(2,213	)
Total nonperforming assets		32,436		5.93	%		35,482		6.69	%		(3,046	)
Performing restructured loans		3,936		0.71	%		5,816		1.10	%		(1,880	)
Total nonperforming assets and performing restructured loans (1)	$	36,372		6.64	%	$	41,298		7.79	%	$	(4,926	)

(1) The table does not include substandard loans which were judged not to be impaired totaling $11.4 million and $12.1 million at March 31, 2013 and December 31, 2012, respectively.

(2) Loan balances are presented net of undisbursed loan funds, partial charge-offs and interest payments recorded as reductions in principal balances for financial reporting purposes.

Nonaccrual Loans. The composition of nonaccrual loans by status was as follows as of the dates indicated (dollars in thousands):

	March 31, 2013					December 31, 2012					Increase (Decrease)
	Balance		Percentage of Total			Balance		Percentage  of Total			Balance			Percentage of Total
Bankruptcy or foreclosure	$	1,762		9.8	%	$	2,347		12.5	%	$	(585	)		(2.7	)%
Over 90 days past due		9,920		55.2			9,913		52.7			7			2.5
30-89 days past due		564		3.1			1,311		7.0			(747	)		(3.8	)
Not past due		5,745		31.9			5,253		27.8			492			4.0
	$	17,991		100.0	%	$	18,824		100.0	%	$	(833	)		--

The following table presents nonaccrual loan activity for the three months ended March 31, 2013 and 2012 (in thousands):

	Three Months Ended March 31, 2013			Three Months Ended March 31, 2012
Balance of nonaccrual loans—beginning of period	$	18,824		$	33,954
Loans added to nonaccrual status		1,050			4,547
Net cash payments		(711	)		(4,458	)
Loans returned to accrual status		--			(1,998	)
Charge-offs to the ALLL		(220	)		(3,188	)
Transfers to REO		(952	)		(2,816	)
Balance of nonaccrual loans—end of period	$	17,991		$	26,041

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Real Estate Owned.  Changes in the composition of real estate owned between March 31, 2013 and December 31, 2012, are presented in the following table (dollars in thousands).

	December 31, 2012		Additions		Fair Value Adjustments			Net Sales Proceeds(1)			Net Gain (Loss)		March 31, 2013
One- to four-family residential	$	2,586	$	588	$	(51	)	$	(1,219	)	$	61	$	1,965
Land		6,583		85		(120	)		(1,760	)		279		5,067
Nonfarm nonresidential		7,489		291		(15	)		(356	)		4		7,413
Total	$	16,658	$	964	$	(186	)	$	(3,335	)	$	344	$	14,445

(1) Net sales proceeds include $534,000 of loans made by the Bank to finance certain sales of real estate owned.

Classified Assets.  Federal regulations require that each insured savings association risk rate its assets on a regular basis into three classification categories - substandard, doubtful and loss.  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified loss is generally considered uncollectible and of such little value that continuance as an asset is not warranted.  As of March 31, 2013 and December 31, 2012, the Bank did not have any assets classified as doubtful or loss.  The table below summarizes the Bank’s classified assets as of the dates indicated (dollars in thousands):

	March 31, 2013			December 31, 2012			March 31, 2012
Nonaccrual loans	$	17,991		$	18,824		$	26,041
Accruing classified loans		15,166			15,696			26,972
Classified loans		33,157			34,520			53,013
Real estate owned		14,445			16,658			28,631
Total classified assets	$	47,602		$	51,178		$	81,644
Texas Ratio (1)		38.0	%		42.7	%		65.5	%
Classified Assets Ratio (2)		55.8	%		61.6	%		97.8	%

(1) Defined as the ratio of nonaccrual loans and real estate owned to Tier 1 capital plus the allowance for loan and lease losses.

(2) Defined as the ratio of classified assets to Tier 1 capital plus the allowance for loan and lease losses.

On April 19, 2013, the Board of Directors approved the sale of certain classified loans with a total net book value of $11.3 million for aggregate proceeds of $9.3 million.  The sale closed in April 2013, resulting in charge-offs to the allowance for loan and lease losses of $2.0 million in the second quarter of 2013.  The CAR at March 31, 2013, considering the effect of this sale, would have been 42.9%.

Allowance for Loan and Lease Losses.   The Bank maintains an allowance for loan and lease losses for known and inherent losses in the loan portfolio based on ongoing quarterly assessments of the loan portfolio.  The estimated appropriate level of the ALLL is maintained through a provision for loan losses charged to earnings. Charge-offs are recorded against the ALLL when management believes the estimated loss has been confirmed. Subsequent recoveries, if any, are credited to the ALLL.

The ALLL consists of general and allocated (also referred to as specific) loan loss components.  For loans that are determined to be impaired that are troubled debt restructurings (“TDRs”) and impaired loans where the relationship totals $250,000 or more, a specific loan loss allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than its carrying value. The general loan loss allowance covers loans that are not impaired and those impaired relationships under $250,000 and is based on historical loss experience adjusted for qualitative factors.

The ALLL represents management’s estimate of incurred credit losses inherent in the Bank’s loan portfolio as of the balance sheet date.  The estimation of the ALLL is based on a variety of factors, including past loan loss experience, the current credit profile of the Bank’s borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, general economic conditions, and other qualitative factors.  Losses are recognized when available information indicates that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or conditions change.

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A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the note. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Classified loans where the borrower’s total loan relationship exceeds $250,000 are evaluated quarterly for impairment on a loan-by-loan basis. Nonaccrual loans and TDRs are considered to be impaired loans. TDRs are restructurings in which the Bank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that the Bank would not otherwise consider. Impairment is measured quarterly on a loan-by-loan basis for all TDRs and impaired loans where the aggregate relationship balance exceeds $250,000 by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.  Impaired loans under this threshold are aggregated and included in loan pools with their ALLL calculated as described in the following paragraph.

Groups of smaller balance homogeneous loans are collectively evaluated for impairment. Homogeneous loans are those that are considered to have common characteristics that provide for evaluation on an aggregate or pool basis. The Bank considers the characteristics of (1) one- to four-family residential mortgage loans; (2) unsecured consumer loans; and (3) collateralized consumer loans to permit consideration of the appropriateness of the ALLL of each group of loans on a pool basis. The primary methodology used to determine the appropriateness of the ALLL includes segregating impaired loans from the pools of loans, valuing these loans, and then applying a loss factor to the remaining pool balance based on several factors including past loss experience, inherent risks, and economic conditions in the primary market areas.

In estimating the amount of credit losses inherent in the loan portfolio, various judgments and assumptions are made.  For example, when assessing the condition of the overall economic environment, assumptions are made regarding market conditions and their impact on the loan portfolio.  For impaired loans that are collateral dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold in the event that the Bank has to foreclose or repossess the collateral.

The Company considers its ALLL of approximately $15.6 million to be adequate to cover losses inherent in its loan portfolio as of March 31, 2013.  Actual losses may substantially differ from currently estimated losses.  Adequacy of the ALLL is periodically evaluated, and the allowance could be significantly decreased or increased, which could materially affect the Company’s financial condition and results of operations.

INVESTMENT SECURITIES

The following table sets forth the carrying values of the Company's investment securities available for sale (dollars in thousands).

	March 31, 2013		December 31, 2012		Increase (Decrease)
Municipal securities	$	43,345	$	45,393	$	(2,048	)
Corporate debt securities		7,983		7,932		51
Total	$	51,328	$	53,325	$	(1,997	)

Municipal securities decreased due to calls and maturities. The overall yield of the investment portfolio was 2.75% as of March 31, 2013 compared to 2.85% at December 31, 2012.

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DEPOSITS

Changes in the composition of deposits between March 31, 2013 and December 31, 2012, are presented in the following table (dollars in thousands).

	March 31, 2013		December 31, 2012		Increase (Decrease)		% Change
Checking accounts	$	141,981	$	131,826	$	10,155		7.7%
Money market accounts		41,196		40,818		378		0.9
Savings accounts		33,143		30,664		2,479		8.1
Certificates of deposit		254,039		251,743		2,296		0.9
Total deposits	$	470,359	$	455,051	$	15,308		3.4%

Deposits include $21.8 million of deposits held for sale in connection with the probable sale of our Berryville branch location, including $6.6 million of checking accounts, $1.1 million of money market accounts, $1.2 million of savings accounts, and $12.9 million of certificates of deposit. Overall deposits increased in the comparison period primarily due to an increase in checking accounts.  The Bank reduced the cost of its certificate of deposit accounts with the weighted average cost of funds decreasing from 1.32% at December 31, 2012 to 1.15% at March 31, 2013.  The Bank manages the pricing of its deposits to maintain deposit balances commensurate with its overall balance sheet management and liquidity position. The overall cost of deposit funds decreased from 0.83% at December 31, 2012 to 0.71% at March 31, 2013.

OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS

In the normal course of business to meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. 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 counterparty 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 for off-balance sheet arrangements as it does for on-balance sheet instruments.

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. 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.

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

§ the origination, purchase or sale of loans;

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

The funding period for construction loans is generally six to eighteen months and commitments to originate mortgage loans are generally outstanding for 60 days or less.

At March 31, 2013, the Bank’s off-balance sheet arrangements principally included lending commitments, which are described below. At March 31, 2013, the Company had no interests in non-consolidated special purpose entities.

At March 31, 2013, commitments included:

§ total approved loan origination commitments outstanding amounting to $6.1 million, including approximately $746,000 of loans committed to sell;

§ rate lock agreements with customers of $5.7 million, all of which have been locked with an investor;

§ funded mortgage loans committed to sell of $4.8 million;

§ unadvanced portion of construction loans of $2.2 million;

§ unused lines of credit of $14.2 million;

§ outstanding standby letters of credit of $1.9 million;

§ total predetermined overdraft protection limits of $9.1 million; and

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Total unfunded commitments to originate loans for sale and the related commitments to sell of $5.7 million meet the definition of a derivative financial instrument. The related asset and liability are considered immaterial at March 31, 2013.

Historically, a small percentage of predetermined overdraft limits have been used. At March 31, 2013, overdrafts of accounts with Bounce Protectionä represented usage of 1.89% of the limit.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity management is both a daily and long-term function. 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; borrowings; payments on outstanding loans; maturities, sales and calls of investment securities and other short-term investments; and funds provided from operations.  While scheduled loan amortization and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Calls of investment securities are determined by the issuer and are generally influenced by the level of market interest rates at the bond’s call date compared to the coupon rate of the bond.  The Bank manages the pricing of its deposits to maintain deposit balances at levels commensurate with the operating, investing and financing activities of the Bank.  In addition, the Bank invests excess funds in overnight deposits and other short-term interest-earning assets that provide liquidity to meet lending requirements and pay deposit withdrawals.When funds from the retail deposit market are inadequate for the liquidity needs of the Bank or the pricing of deposits are not as favorable as other sources, the Bank has borrowed from the FHLB of Dallas and has utilized the services of bulletin board deposit listing services and brokered deposits to acquire funds.

The Bank uses qualifying loans as collateral for FHLB advances.  The FHLB retains custody and endorsement of the loans that collateralize the Bank’s outstanding borrowings with the FHLB.  The FHLB currently allows an aggregate lendable value on qualifying loans (as defined) of approximately 90% of the outstanding balance of the loans pledged to the FHLB. During the three months ended March 31, 2013, FHLB borrowings decreased by $56,000, or 1.8%, from FHLB borrowings at December 31, 2012. At March 31, 2013, the Bank’s additional borrowing capacity with FHLB was $52.4 million, comprised of qualifying loans collateralized by first-lien one- to four-family mortgages with a lendable value of $55.5 million less outstanding advances at March 31, 2013 of $3.1 million.  Outstanding borrowings with the FHLB are reported as “Other Borrowings” in the Company’s Condensed Consolidated Statements of Financial Condition.

The Bank uses qualifying investment securities and qualifying commercial real estate loans as collateral for the discount window. The FRB will permit only certain commercial real estate loans to be pledged as collateral for the discount window. At March 31, 2013, the Bank pledged qualifying commercial real estate loans with a collateral value of approximately $7.2 million, or 81% of the fair market value of the loans as determined by the FRB taking into consideration the rate and duration of the loans pledged.  In addition, at March 31, 2013, the Bank pledged qualifying investment securities with a collateral value of approximately $7.6 million and a carrying value of approximately $8.0 million for access to the discount window.

At March 31, 2013, the Bank’s liquidity ratio was 28.0% which represents liquid assets as a percentage of deposits and borrowings.  As of the same date, the Bank’s adjusted liquidity ratio was 40.3%, which includes liquid assets plus borrowing capacity at the FHLB and FRB as a percentage of deposits and borrowings.  The Bank anticipates that it will continue to rely primarily on deposits, calls and maturities of investment securities, loan repayments, and funds provided from operations to provide liquidity.  As necessary, the sources of borrowed funds described above will be used to augment the Bank’s funding sources.  The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing savings certificates and savings withdrawals, to repay maturing borrowings, to fund loan commitments, and to purchase investment securities.

The Bank’s liquidity risk management program assesses our current and projected funding needs to ensure that sufficient funds or access to funds exist to meet those needs.  The program also includes effective methods to achieve and maintain sufficient liquidity and to measure and monitor liquidity risk, including the preparation and submission of liquidity reports on a regular basis to the Board of Directors.  The program also contains a Contingency Funding Plan that forecasts funding needs and sources under different stress scenarios.  The Contingency Funding Plan approved by the Board of Directors is designed to respond to an overall decline in the economic environment, the banking industry or a problem specific to the Bank.  A number of different contingency funding conditions may arise which may result in strains or expectation of strains in the Bank’s normal funding activities including customer reaction  to negative news of the banking industry, in general, or the Bank, specifically.  As a result of negative news, some depositors may reduce the amount of deposits held at the Bank if concerns persist, which could affect the level and composition of the Bank’s deposit portfolio and thereby directly impact the Bank’s liquidity, funding costs and net interest margin. The Bank’s funding costs may also be adversely affected in the event that activities of the FRB and the Treasury to provide liquidity for the banking system and improvement in capital markets are curtailed or are unsuccessful. Such events could reduce liquidity in the markets, thereby increasing funding costs to the Bank or reducing the availability of funds to the Bank to finance its existing operations and thereby adversely affect the Company’s results of operations, financial condition, future prospects, and stock price.

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Since the Company is a holding company and does not conduct independent operations, its primary source of liquidity is dividends from the Bank. The Company has no borrowings from outside sources.  Under the Company Order, the Company must receive the prior written non-objection of the FRB to declare or pay dividends or make any other capital distributions.  The Company funds its expenses from cash deposits maintained in the Bank, which amounted to $1.3 million at March 31, 2013.

At March 31, 2013, the Bank's core and risk-based capital ratios amounted to 12.75% and 20.57%, respectively, compared to regulatory capital adequacy standards of 4% and 8%.  However, the Bank has agreed with the OCC to maintain a Tier 1 (core) capital ratio of 8% and a total risk-based capital ratio of 12%.

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management.  In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "expect," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements.  Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.  The Company cautions readers not to place undue reliance on any forward-looking statements.  The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.  These risks could cause actual results for 2013 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us and could negatively affect the Company’s operating and stock performance.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

For a discussion of the Company’s asset and liability management position as well as the potential impact of interest rate changes upon the market value of the Bank’s net portfolio value of equity, see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2013.  There has been no material change in the Company’s asset and liability position or the Bank’s net portfolio value of equity since December 31, 2012.

Item 4.  Controls and Procedures.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are operating effectively.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.  Other Information

Item 1.            Legal Proceedings

Neither the Company nor the Bank is a party to or involved in any pending legal proceedings other than non-material legal proceedings occurring in the ordinary course of business.

Item 1A.         Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2013.

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Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not repurchase any securities during the first quarter of 2013.  The Company Order prohibits the Company from repurchasing shares of its common stock without the prior written non-objection of the FRB.

In 2011, the Company and the Bank completed a recapitalization, pursuant to which, among other things, the Company sold to Bear State Financial Holdings, LLC (“Bear State”) 15,425,262 of the Company’s common stock and a warrant to purchase an additional 2,000,000 shares of the Company’s common stock at an exercise price of $3.00 per share (the “Investor Warrant”).  For a discussion of the Company’s recapitalization, see “Item 1. Business” in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2013.  On March 14, 2013, Bear State partially exercised the Investor Warrant for 595,000 shares of Common Stock at an exercise price of $3.00 per share, resulting in total aggregate proceeds to the Company of $1,785,000.   The Company sold the shares to Bear State in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.  Bear State did and continues to have access to adequate information about the Company to make an informed investment decision and represented its intention to acquire the securities for investment only and not with a view towards distribution.  We instructed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock. 

Item 6.            Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

SIGNATURES

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

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

Date:	May 3, 2013	By:	/s/ W. Dabbs Cavin
			W. Dabbs Cavin
			Chief Executive Officer

Date:	May 3, 2013	By:	/s/ Sherri R. Billings
			Sherri R. Billings
			Chief Financial Officer

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First Federal Bancshares of Arkansas, Inc.

Exhibit Index

Exhibit No.	Description
3.1	Articles of Incorporation of First Federal Bancshares of Arkansas, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on July 21, 2011).
3.2	Bylaws of First Federal Bancshares of Arkansas, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on July 21, 2011).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Section 906 Certification of the CEO
32.2	Section 906 Certification of the CFO
101.INS	XBRL Instance Document (1)
101.SCH	XBRL Taxonomy Extension Schema (1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase (1)
101.LAB	XBRL Taxonomy Extension Label Linkbase (1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase (1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase (1)

(1)  Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or section 34(b) of the Investment Company Act of 1940, as amended, and otherwise is not subject to liability under these sections.

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