Bear State Financial 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-Q

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

For the quarterly period ended March 31, 2014

OR

☐	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 ☒ No☐

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 ☒ No ☐

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 ☐ Accelerated Filer☐ Non-accelerated Filer☐ Smaller reporting company☒

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of April 24, 2014, there were issued and outstanding 20,046,031 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 ofMarch 31, 2014 and December 31, 2013 (unaudited)	1
	Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2014 and 2013 (unaudited)	2
	Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2014 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the three months endedMarch 31, 2014 and 2013 (unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Conditionand Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
Part II.	Other Information
Item 1.	Legal Proceedings	33
Item 6.	Exhibits	33
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, 2014			December 31, 2013
ASSETS
Cash and cash equivalents	$	29,503		$	23,970
Interest-bearing time deposits in banks		23,869			24,118
Investment securities available for sale		71,951			70,828
Federal Home Loan Bank stock—at cost		457			457
Loans receivable, net of allowance of $12,478 and $12,711, respectively		384,055			371,149
Loans held for sale		6,931			4,205
Accrued interest receivable		1,626			1,473
Real estate owned - net		7,031			8,627
Office properties and equipment - net		18,439			18,769
Cash surrender value of life insurance		24,011			23,811
Prepaid expenses and other assets		1,440			1,465
TOTAL	$	569,313		$	548,872
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	488,717		$	469,725
Other borrowings		5,912			5,941
Advance payments by borrowers for taxes and insurance		791			605
Other liabilities		2,319			1,414
Total liabilities		497,739			477,685
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value—5,000,000 shares authorized; none issued at March 31, 2014 and December 31, 2013		--			--
Common stock, $.01 par value—30,000,000 shares authorized; 20,046,031 and 20,041,497 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		200			200
Additional paid-in capital		92,815			92,740
Accumulated other comprehensive income (loss)		122			(467	)
Accumulated deficit		(21,563	)		(21,286	)
Total stockholders’ equity		71,574			71,187
TOTAL	$	569,313		$	548,872

See notes to unaudited condensed consolidated financial statements.

1

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except earnings per share)

(Unaudited)

	Three Months Ended
	March 31, 2014			March 31, 2013
INTEREST INCOME:
Loans receivable	$	4,135		$	4,081
Investment securities:
Taxable		225			53
Nontaxable		286			314
Other		105			133
Total interest income		4,751			4,581
INTEREST EXPENSE:
Deposits		869			846
Other borrowings		22			13
Total interest expense		891			859
NET INTEREST INCOME		3,860			3,722
PROVISION FOR LOAN LOSSES		--			--
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,860			3,722
NONINTEREST INCOME:
Deposit fee income		625			770
Earnings on life insurance policies		200			198
Gain on sale of loans		304			197
Other		73			89
Total noninterest income		1,202			1,254
NONINTEREST EXPENSES:
Salaries and employee benefits		3,110			2,678
Net occupancy expense		585			618
Real estate owned, net		217			(96	)
FDIC insurance		120			171
Supervisory assessments		37			53
Data processing		418			336
Professional fees		195			259
Advertising and public relations		103			70
Postage and supplies		91			109
Other		463			475
Total noninterest expenses		5,339			4,673
INCOME (LOSS) BEFORE INCOME TAXES		(277	)		303
INCOME TAX		--			--
NET INCOME (LOSS)	$	(277	)	$	303
Basic earnings (loss) per common share	$	(0.01	)	$	0.02
Diluted earnings (loss) per common share	$	(0.01	)	$	0.01
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gains (losses) arising during the period	$	589		$	(75	)
COMPREHENSIVE INCOME	$	312		$	228

See notes to unaudited condensed consolidated financial statements.

2

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2014

(In thousands, except share data)

(Unaudited)

	Issued Common Stock				AdditionalPaid-		Accumulated Other Comprehensive			Accumulated			Total  Stockholders’
	Shares		Amount		In Capital		Income (Loss)			Deficit			Equity
BALANCE – January 1, 2014		20,041,497	$	200	$	92,740	$	(467	)	$	(21,286	)	$	71,187
Net loss		--		--		--		--			(277	)		(277	)
Other comprehensive income		--		--		--		589			--			589
Shares issued - restricted stockunit vesting		4,534		--		--		--			--			--
Stock compensation		--		--		75		--			--			75
BALANCE – March 31, 2014		20,046,031	$	200	$	92,815	$	122		$	(21,563	)	$	71,574

See notes to unaudited condensed consolidated financial statements.

3

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2014			2013
OPERATING ACTIVITIES:
Net income (loss)	$	(277	)	$	303
Adjustments to reconcile net income (loss) to net cashused in operating activities:
Provision for loan losses		--			--
Provision for real estate losses		242			186
Deferred tax provision (benefit)		(243	)		654
Deferred tax valuation allowance		243			(654	)
Net accretion of investment securities		(1	)		(3	)
Loss (gain) on sale of fixed assets, net		6			(36	)
Gain on sale of real estate owned, net		(81	)		(344	)
Originations of loans held for sale		(15,750	)		(10,719	)
Proceeds from sales of loans held for sale		13,328			10,536
Gain on sale of loans originated to sell		(304	)		(197	)
Depreciation		342			359
Amortization of deferred loan costs, net		39			16
Stock compensation		75			43
Earnings on life insurance policies		(200	)		(198	)
Changes in operating assets and liabilities:
Accrued interest receivable		(153	)		(43	)
Prepaid expenses and other assets		25			339
Other liabilities		(229	)		(327	)
Net cash used in operating activities		(2,938	)		(85	)
INVESTING ACTIVITIES:
Redemptions of interest-bearing time deposits in banks		249			498
Purchases of investment securities available for sale (“AFS”)		(100	)		--
Proceeds from maturities/calls/paydowns of investment securities AFS		701			1,925
Loan originations, net of repayments		(9,169	)		3,146
Loan participations purchased		(4,229	)		--
Proceeds from sales of real estate owned		1,888			2,803
Other cash activity - real estate owned		--			(12	)
Proceeds from sales of office properties and equipment		144			140
Purchases of office properties and equipment		(162	)		(724	)
Net cash (used in) provided by investing activities		(10,678	)		7,776

(Continued)

4

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2014			2013
FINANCING ACTIVITIES:
Net increase in deposits	$	18,992		$	15,308
Repayment of advances from Federal Home Loan Bank		(29	)		(56	)
Net increase in advance payments by borrowersfor taxes and insurance		186			86
Proceeds from exercise of warrants		--			1,785
Net cash provided by financing activities		19,149			17,123
NET INCREASE IN CASH ANDCASH EQUIVALENTS		5,533			24,814
CASH AND CASH EQUIVALENTS:
Beginning of period		23,970			42,607
End of period	$	29,503		$	67,421
SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION—
Cash paid for:
Interest	$	867		$	854
SUPPLEMENTAL SCHEDULE OF NONCASHINVESTING AND FINANCING ACTIVITIES:
Real estate and other assets acquired in settlement of loans	$	453		$	954
Sales of real estate owned financed by the Bank	$	--		$	534
Investment securities purchased—not settled	$	1,234		$	--
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 is substantially in the business of community banking and therefore is considered a banking operation with no separately reportable segments. The Bank is a federally chartered stock savings and loan association formed in 1934. As of March 31, 2014, the Bank conducted business from its home office in Harrison, Arkansas, a full-service branch office in Pulaski County, Arkansas, ten full-service branch offices and one limited service office located in a five county area in Arkansas (comprised of Benton and Washington counties in Northwest Arkansas and Boone, Marion and Baxter counties in Northcentral Arkansas), and a mortgage production office in Bentonville, Arkansas. The Bank provides a broad line of financial products to individuals and business customers. The consolidated financial statements also include the accounts of the Bank’s wholly owned subsidiary, First Harrison Service Corporation (“FHSC”), which is inactive. Intercompany transactions have been eliminated in consolidation.

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. Those adjusting entries consist only of normal recurring adjustments.

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, 2014, are not necessarily indicative of the results to be expected for the year ending December 31, 2014. 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, 2013, contained in the Company’s 2013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet of the Company has been derived from the audited consolidated balance sheet of the Company as of that date.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued ASU 2013-11,Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740):Income Taxes, which states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The amendments in this Update do not require new recurring disclosures. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this ASU did not have a material impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04,Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (Topic 310-40):Receivables – Troubled Debt Restructurings by Creditors, which clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The Company is in the process of evaluating the impact of this Update on its financial statements.

6

In April 2014, the FASB issued ASU 2014-08,Reporting Discontinued Operations and Disclosures of Components of an Entity,which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The Company will be required to adopt this ASU beginning with the quarter ending March 31, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

3. PENDING ACQUISITION

On July 1, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First National Security Company (“FNSC”) of Hot Springs, Arkansas, pursuant to which FNSC will merge with and into the Company (the “Merger”). Pursuant to the Merger Agreement, shareholders of FNSC will receive, in the aggregate, 6,252,400 shares of Company common stock and $74 million in cash in exchange for their shares of FNSC common stock. The total transaction value will depend on the closing price of the Company’s stock on the closing date of the Merger.On March 21, 2014, shareholders of both the Company and FNSC voted to approve the Merger. Consummation of the Merger is subject to certain conditions, including, among others, receipt of all required governmental regulatory approvals. Applications have been filed with the appropriate regulatory authorities and receipt of all required approvals is anticipated by June 30, 2014. The Merger Agreement was originally terminable at will by either party if the Merger had not closed by March 31, 2014 due to a failure to receive regulatory approval. In accordance with the terms of the Merger Agreement, the Company extended the termination date for an additional 90 days.

In connection with the Merger, the Company will sell up to 2,531,645 shares of Company common stock at a price per share equal to $7.90 in a private placement (the “Private Placement”) to its principal shareholder Bear State Financial Holdings, LLC (“Bear State”) and certain of its members (the “Investors”)(including Richard N. Massey, the Company’s Chairman, and Scott T. Ford, a director of the Company). Additionally, the Company issued warrants to purchase 177,215 shares of common stock on the same terms as in the Private Placement to the Investors in exchange for their respective commitments to backstop the Private Placement. The Company anticipates the closing of the Private Placement will occur immediately prior to the closing of the Merger.

7

4. INVESTMENT SECURITIES AVAILABLE FOR SALE

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

	March 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Municipal securities	$	43,199	$	248	$	(244	)	$	43,203
Mortgage-backed securities		28,630		129		(11	)		28,748
Total	$	71,829	$	377	$	(255	)	$	71,951

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Municipal securities	$	42,203	$	199	$	(478	)	$	41,924
Mortgage-backed securities		29,092		11		(199	)		28,904
Total	$	71,295	$	210	$	(677	)	$	70,828

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”), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	March 31, 2014
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Municipal securities	$	13,959	$	244	$	--	$	--	$	13,959	$	244
Mortgage-backed securities		5,341		11		--		--		5,341		11
Total	$	19,300	$	255	$	--	$	--	$	19,300	$	255

	December 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	$	17,851	$	424	$	945	$	54	$	18,796	$	478
Mortgage-backed securities		27,004		199		--		--		27,004		199
Total	$	44,855	$	623	$	945	$	54	$	45,800	$	677

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 from 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 and 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.

8

The Company has pledged investment securities with carrying values of approximately $398,000 at March 31, 2014 and December 31, 2013, as collateral for certain deposits in excess of $250,000.

The following table sets forth the amount (dollars in thousands) of investment securities available for sale that contractually mature during each of the periods indicated and the weighted average yields for each range of maturities at March 31, 2014. Weighted average yields for municipal obligations have not been adjusted to a tax-equivalent basis. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligation without prepayment penalties.

	March 31, 2014
	Amortized Cost		Fair Value		Weighted Average Rate
Within one year	$	1,418	$	1,422		2.83	%
Due from one year to five years		13,934		13,989		2.18	%
Due from five years to ten years		18,692		18,651		2.81	%
Due after ten years		9,155		9,141		3.45	%
		43,199		43,203		2.75	%
Mortgage-backed securities		28,630		28,748		3.01	%
Total	$	71,829	$	71,951		2.85	%

As of March 31, 2014 and December 31, 2013, investments with amortized cost totaling approximately $35.5 million and $34.4 million, respectively, have call options held by the issuer, of which approximately $14.0 million and $13.0 million, respectively, are or were callable within one year.

5. LOANS RECEIVABLE

Loans receivable consisted of the following at March 31, 2014 and December 31, 2013 (in thousands):

	March 31, 2014			December 31, 2013
Real estate:
One- to four-family residential	$	126,640		$	129,308
Multifamily residential		25,521			25,773
Nonfarm nonresidential		177,444			168,902
Construction and land development		28,795			26,554
Commercial		34,240			29,033
Consumer		3,950			4,368
Total loans receivable		396,590			383,938
Unearned discounts and net deferred loan costs		(57	)		(78	)
Allowance for loan and lease losses		(12,478	)		(12,711	)
Loans receivable—net	$	384,055		$	371,149

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, 2014 and December 31, 2013 were $10.7 million and $12.9 million, respectively. Servicing loans for others generally consists of collecting payments and disbursing payments to investors. Servicing income for the three months ended March 31, 2014 and 2013 was not significant.

As of March 31, 2014 and December 31, 2013, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $48.3 million and $50.6 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 Bank also pledged loans totaling $149.4 million at March 31, 2014 under a blanket lien with the FHLB. On October 17, 2013 the Bank was notified by the FHLB that the Bank has been removed from custody status and upgraded to blanket lien status due to continued improvement in the financial ratios that the FHLB uses to measure a Bank’s status.

9

As of March 31, 2014 and December 31, 2013, qualifying loans collateralized by commercial real estate with balances of $7.6 million and $8.2 million, respectively, were pledged at the FRB. No FRB borrowings were outstanding at March 31, 2014.

Age analyses of loans as of the dates indicated, including both accruing and nonaccrual loans, are presented below (in thousands):

March 31, 2014	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	2,677	$	1,527	$	122,436	$	126,640
Multifamily residential		--		--		25,521		25,521
Nonfarm nonresidential		176		2,118		175,150		177,444
Construction and land development		82		2,244		26,469		28,795
Commercial		2		18		34,220		34,240
Consumer		15		2		3,933		3,950
Total	$	2,952	$	5,909	$	387,729	$	396,590

December 31, 2013	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	3,511	$	1,664	$	124,133	$	129,308
Multifamily residential		--		--		25,773		25,773
Nonfarm nonresidential		176		2,340		166,386		168,902
Construction and land development		30		2,799		23,725		26,554
Commercial		--		348		28,685		29,033
Consumer		--		19		4,349		4,368
Total	$	3,717	$	7,170	$	373,051	$	383,938

There were no loans over 90 days past due and still accruing at March 31, 2014 or December 31, 2013. Restructured loans totaled $2.5 million and $2.6 million as of March 31, 2014 and December 31, 2013, respectively, with $2.0 million and $2.1 million of such restructured loans on nonaccrual status at March 31, 2014 and December 31, 2013, respectively.

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

March 31, 2014	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	806	$	1,527	$	1,603	$	3,936
Multifamily residential		--		--		--		--
Nonfarm nonresidential		176		2,118		1,683		3,977
Construction and land development		--		2,244		154		2,398
Commercial		--		18		576		594
Consumer		5		2		19		26
Total	$	987	$	5,909	$	4,035	$	10,931

December 31, 2013	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	637	$	1,664	$	1,957	$	4,258
Multifamily residential		--		--		--		--
Nonfarm nonresidential		--		2,340		1,717		4,057
Construction and land development		--		2,799		450		3,249
Commercial		--		348		2		350
Consumer		--		19		5		24
Total	$	637	$	7,170	$	4,131	$	11,938

10

The following tables summarize information pertaining to impaired loans as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 (in thousands):

	March 31, 2014						December 31, 2013
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Unpaid Principal Balance		Recorded Investment		Valuation Allowance
Impaired loans with avaluation allowance:
One- to four-family residential	$	1,300	$	1,164	$	268	$	1,213	$	1,085	$	279
Multifamily residential		--		--		--		--		--		--
Nonfarm nonresidential		2,902		2,700		1,062		3,287		3,105		1,119
Construction and land development		1,770		1,285		437		2,488		2,000		764
Commercial		251		251		250		--		--		--
Consumer		11		11		11		--		--		--
		6,234		5,411		2,028		6,988		6,190		2,162
Impaired loans without avaluation allowance:
One- to four-family residential		4,020		3,264		--		4,430		3,668		--
Multifamily residential		--		--		--		--		--		--
Nonfarm nonresidential		1,382		1,276		--		1,077		952		--
Construction and land development		1,497		1,113		--		1,743		1,249		--
Commercial		391		343		--		388		350		--
Consumer		19		15		--		27		24		--
		7,309		6,011		--		7,665		6,243		--
Total impaired loans	$	13,543	$	11,422	$	2,028	$	14,653	$	12,433	$	2,162

	Three Months Ended March 31,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	1,125	$	2	$	1,814	$	6
Multifamily residential		--		--		1,479		40
Nonfarm nonresidential		2,903		--		2,466		--
Construction and land development		1,643		--		957		--
Commercial		125		--		--		--
Consumer		6		--		2		--
		5,802		2		6,718		46
Impaired loans without a valuation allowance:
One- to four-family residential		3,465		1		6,538		--
Multifamily residential		--		--		2,785		--
Nonfarm nonresidential		1,114		--		5,423		--
Construction and land development		1,181		--		2,918		--
Commercial		347		--		150		--
Consumer		20		--		26		--
		6,127		1		17,840		--
Total impaired loans	$	11,929	$	3	$	24,558	$	46
Interest based on original terms			$	192			$	344
Interest income recognized on a cashbasis on impaired loans			$	--			$	--

11

Credit Quality Indicators.As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, the Bank categorizes loans into risk categories based on available and relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by assigning a credit risk rating to loans on at least an annual basis for non-homogeneous loans over $250,000. 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, 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).Loansrated 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).Loansrated 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).Loansrated 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 or reserving all or a portion of the asset, even though partial recovery may be effected in the future.

Based on analyses performed at March 31, 2014 and December 31, 2013, the risk categories of loans are as follows (in thousands):

	March 31, 2014
	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
One- to four-family residential	$	35,250	$	327	$	6,391	$	--	$	84,672	$	126,640
Multifamily residential		25,521		--		--		--		--		25,521
Nonfarm nonresidential		168,339		4,465		3,976		--		664		177,444
Construction and land development		22,668		251		3,063		--		2,813		28,795
Commercial		33,506		--		524		70		140		34,240
Consumer		149		--		45		--		3,756		3,950
Total	$	285,433	$	5,043	$	13,999	$	70	$	92,045	$	396,590

	December 31, 2013
	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
One- to four-family residential	$	34,333	$	329	$	6,371	$	--	$	88,275	$	129,308
Multifamily residential		25,773		--		--		--		--		25,773
Nonfarm nonresidential		159,629		4,490		4,057		--		726		168,902
Construction and land development		19,732		295		3,942		--		2,585		26,554
Commercial		28,555		--		350		--		128		29,033
Consumer		151		--		45		--		4,172		4,368
Total	$	268,173	$	5,114	$	14,765	$	--	$	95,886	$	383,938

As of March 31, 2014 and December 31, 2013, the Bank did not have any loans classified as loss.

Troubled Debt Restructurings.Troubled debt restructurings (“TDRs”) are loans where the contractual terms on the loan 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.

12

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, 2014 and December 31, 2013: (dollars in thousands)

March 31, 2014	Number of Accruing TDR Loans		Balance		Number of Nonaccrual TDR Loans		Balance		Total Number of TDR Loans		Total Balance
One- to four-family residential		4	$	491		9	$	750		13	$	1,241
Nonfarm nonresidential		--		--		3		545		3		545
Construction and land development		--		--		4		693		4		693
Consumer		--		--		2		16		2		16
Total		4	$	491		18	$	2,004		22	$	2,495

December 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		4	$	495		8	$	658		12	$	1,153
Nonfarm nonresidential		--		--		3		556		3		556
Construction and land development		--		--		5		856		5		856
Consumer		--		--		1		5		1		5
Total		4	$	495		17	$	2,075		21	$	2,570

Loans receivable that were restructured as TDRs during the three months ended March 31, 2014 and 2013 were as follows: (dollars in thousands)

	Three Months Ended March 31, 2014
			Balance		Balance at		Nature of Modification
	Number of Loans		Prior to TDR		March 31, 2014		Payment Term (1)		Other
One- to four-family residential		1	$	103	$	100	$	103	$	--
Consumer		1		11	$	11	$	11	$	--
Total		2	$	114	$	111	$	114	$	--

	Three Months Ended March 31, 2013
			Balance		Balance at		Nature of Modification
	Number of Loans		Prior to TDR		March 31, 2014		Payment Term (1)		Other
One- to four-family residential		1	$	6	$	6	$	6	$	--
Total		1	$	6	$	6	$	6	$	--

(1) Concessions represent skipped payments/maturity date extensions or amortization term extensions.

There were no loans receivable for which a payment default occurred during the three months ended March 31, 2014 or 2013 that had been modified as a TDR within 12 months or less of the payment default.

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6. 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, 2014 and 2013 (in thousands):

	Three Months Ended March 31, 2014
	One- to Four-Family Residential			Multifamily Residential			Nonfarm Nonresidential			Construction and Land Development			Commercial		Consumer			Total
Balance, beginning of period	$	4,549		$	1,001		$	4,271		$	1,541		$	1,268	$	81		$	12,711
Provision charged to expense		(144	)		(154	)		(26	)		(219	)		530		13			--
Losses charged off		(8	)		--			(113	)		(152	)		--		(28	)		(301	)
Recoveries		10			--			2			41			1		14			68
Balance, end of period	$	4,407		$	847		$	4,134		$	1,211		$	1,799	$	80		$	12,478

	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 period	$	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 period	$	6,778		$	1,074		$	5,341		$	1,190		$	1,000	$	214		$	15,597

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, 2014 and December 31, 2013 (in thousands):

	March 31, 2014
	One- to Four-Family Residential		Multifamily Residential		Nonfarm Nonresidential		Construction and Land Development		Commercial		Consumer		Total
ALLL Balances:
Individually evaluated for impairment	$	268	$	--	$	1,062	$	437	$	250	$	11	$	2,028
Collectively evaluated for impairment		4,139		847		3,072		774		1,549		69		10,450
Ending balance	$	4,407	$	847	$	4,134	$	1,211	$	1,799	$	80	$	12,478
Loan balances (1):
Individually evaluated for impairment	$	4,428	$	--	$	3,976	$	2,398	$	594	$	26	$	11,422
Collectively evaluated for impairment		122,212		25,521		173,468		26,397		33,646		3,924		385,168
Ending balance	$	126,640	$	25,521	$	177,444	$	28,795	$	34,240	$	3,950	$	396,590

	December 31, 2013
	One- to Four-Family Residential		Multifamily Residential		Nonfarm Nonresidential		Construction and Land Development		Commercial		Consumer		Total
ALLL Balances:
Individually evaluated for impairment	$	279	$	--	$	1,119	$	764	$	--	$	--	$	2,162
Collectively evaluated for impairment		4,270		1,001		3,152		777		1,268		81		10,549
Ending balance	$	4,549	$	1,001	$	4,271	$	1,541	$	1,268	$	81	$	12,711
Loan balances (1):
Individually evaluated for impairment	$	4,753	$	--	$	4,057	$	3,249	$	350	$	24	$	12,433
Collectively evaluated for impairment		124,555		25,773		164,845		23,305		28,683		4,344		371,505
Ending balance	$	129,308	$	25,773	$	168,902	$	26,554	$	29,033	$	4,368	$	383,938

14 

A summary of the activity in the allowance for losses on real estate owned is as follows for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended
	March 31, 2014			March 31, 2013
Balance—beginning of period	$	8,794		$	14,877
Provisions for estimated losses		242			186
Recoveries		--			--
Losses charged off		(893	)		(5,667	)
Balance—end of period	$	8,143		$	9,396

7. 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. Shares issued in connection with stock compensation awards are issued from available authorized shares.

Stock Options. 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. 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, 2014, is presented below:

	Shares Underlying Awards			Weighted Average Exercise Price
Outstanding—January 1, 2014		217,500		$	6.66
Granted		--		$	--
Forfeited		(1,500	)	$	6.57
Outstanding—March 31, 2014		216,000		$	6.66

The weighted average remaining contractual life of the outstanding options was 4.7 years and the aggregate intrinsic value of the options was approximately $543,000 at March 31, 2014. None of the outstanding options are vested.

As ofMarch 31, 2014, there was $412,000 of total unrecognized compensation costs related to nonvested stock options under the 2011 Plan. The cost is expected to be recognized over a weighted-average period of 2.8 years. Compensation expense attributable to option awards totaled approximately $35,000 and $37,000 for the three months ended March 31, 2014 and 2013, respectively.   

15 

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 vesting periods range from three to seven years.

	Restricted Stock Units			Weighted Average Grant Date Fair Value
Outstanding—January 1, 2014		65,500		$	8.97
Granted		29,000		$	8.18
Vested		(5,817	)	$	9.75
Forfeited		(567	)	$	8.92
Outstanding—March 31, 2014		88,116		$	8.66

As ofMarch 31, 2014, there was $672,000 of total unrecognized compensation costs related to nonvested RSUs under the 2011 Plan. The cost is expected to be recognized over a weighted-average period of 3.7 years. Compensation expense attributable to awards of RSUs totaled approximately $51,000 and $6,000 for the three months ended March 31, 2014 and 2013, respectively.

8. 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 MonthsEnded March 31,
	2014		2013
Basic weighted average shares outstanding		20,041,547		19,421,603
Effect of dilutive securities		--		1,322,978
Diluted weighted average shares outstanding		20,041,547		20,744,581

The calculation of diluted earnings per share for the three months ended March 31, 2014 excluded the following antidilutive securities: warrants representing 1,373,882 shares, stock options representing 216,000 shares, and restricted stock units representing 88,116 shares. The calculation of diluted earnings per share for the three months ended March 31, 2013 excluded antidilutive stock options representing 42,500 shares.

9. 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.
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, 2014 and December 31, 2013, as well as the general classification of such assets pursuant to the valuation hierarchy.

16 

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, LIBOR yield curve, credit spreads and prices from market makers and live trading systems. Recurring Level 2 securities include mortgage-backed 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, 2014 or December 31, 2013.

The following table presents major categories of assets measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 (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, 2014
Available for sale investment securities:
Municipal securities	$	43,203	$	--	$	43,203	$	--
Mortgage-backed securities		28,748		--		28,748		--
Total	$	71,951	$	--	$	71,951	$	--
December 31, 2013
Available for sale investment securities:
Municipal securities	$	41,924	$	--	$	41,924	$	--
Mortgage-backed securities		28,904		--		28,904		--
Total	$	70,828	$	--	$	70,828	$	--

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, 2014 and December 31, 2013 are secured by real estate.  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 through current 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.   During the reported periods, collateral discounts ranged from 15% to 45% and selling costs were estimated at 8%. Fair value adjustments are made by partial charge-offs and adjustments to the allowance for loan and lease losses.

Real Estate Owned, net

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, 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.  During the reported periods, collateral discounts ranged from 0% to 25% and selling costs were estimated at 8%. 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, 2014 and 2013 were $242,000 and $186,000, respectively.

The following table presents major categories of assets measured at fair value on a nonrecurring basis for the three months ended March 31, 2014 and 2013 (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, 2014
Impaired loans	$	5,203	$	--	$	--	$	5,203
REO, net		1,645		--		--		1,645
March 31, 2013
Impaired loans	$	12,546	$	--	$	--	$	12,546
REO, net		2,846		--		--		2,846

17

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of financial instruments has 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, 2014				December 31, 2013
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
FINANCIAL ASSETS:
Level 1 inputs:
Cash and cash equivalents	$	29,503	$	29,503	$	23,970	$	23,970
Level 2 inputs:
Interest-bearing time deposits in banks		23,869		24,262		24,118		24,573
Federal Home Loan Bank stock		457		457		457		457
Loans held for sale		6,931		6,931		4,205		4,205
Cash surrender value of life insurance		24,011		24,011		23,811		23,811
Accrued interest receivable		1,626		1,626		1,473		1,473
Level 3 inputs:
Loans receivable—net		384,055		390,277		371,149		377,851
FINANCIAL LIABILITIES:
Level 2 inputs:
Checking, money market and savings accounts		214,479		214,479		203,067		203,067
Other borrowings		5,912		5,969		5,941		6,017
Accrued interest payable		35		35		33		33
Advance payments by borrowers for taxes and insurance		791		791		605		605
Level 3 inputs:
Certificates of deposit		274,238		274,414		266,658		266,495

For cash and cash equivalents, the carrying amount approximates fair value (level 1). For FHLB 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 FHLB stock, the ability to sell the stock back to the FHLB 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 9. 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).

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 discount rates currently offered by the Bank for deposits of similar terms (level 3). The fair value of FHLB 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, 2014 and December 31, 2013. 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.

11. 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. 

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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 and qualifying preferred stock less certain other deductions. Total capital includes Tier 1 capital plus the allowance for loan and lease losses, subject to limitations.

As of the most recent notification from regulatory authorities, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, tier 1 risk-based, and tier 1 (core) ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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					Required Per Agreement With the OCC (1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2014:
Tangible Capital to Tangible Assets	$	70,813		12.45	%	$	8,535		1.50	%		N/A		N/A			N/A		N/A
Core Capital to Adjusted Tangible Assets		70,813		12.45	%		22,760		4.00	%	$	28,450		5.00	%		N/A		N/A
Total Capital to Risk-Weighted Assets		76,201		17.97	%		33,916		8.00	%		42,395		10.00	%		N/A		N/A
Tier I Capital to Risk-Weighted Assets		70,813		16.70	%		N/A		N/A			25,437		6.00	%		N/A		N/A
As of December31, 2013:
Tangible Capital to Tangible Assets	$	70,853		12.90	%	$	8,240		1.50	%		N/A		N/A			N/A		N/A
Core Capital to Adjusted Tangible Assets		70,853		12.90	%		21,972		4.00	%	$	27,465		5.00	%		43,944		8.00	%
Total Capital to Risk-Weighted Assets		76,036		18.68	%		32,570		8.00	%		40,713		10.00	%		48,855		12.00	%
Tier I Capital to Risk-Weighted Assets		70,853		17.40	%		N/A		N/A			24,428		6.00	%		N/A		N/A

(1) 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 and through February 21, 2014, 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.

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. On June 21, 2013, the Federal Reserve Bank (the “FRB”), which, as successor to the OTS, is the primary federal regulator of the Company, issued a letter terminating the Cease and Desist Order issued by the OTS on April 12, 2010 (the “Company Order”), effective immediately. The action also terminates the related Stipulation and Consent to Issuance of Order to Cease and Desist between the Company and the OTS.

Authorized Shares. On March 21, 2014, the stockholders of the Company approved a proposal to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000. As of March 31, 2014, the Company had not filed the amended Articles of Incorporation.

Dividend Restrictions. The Bank 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 on 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 revenues is dividends from the Bank. Our ability to pay dividends to our stockholders depends to a large extent upon the dividends we receive from the Bank.

Repurchase Program. On February 19, 2014, the Board of Directors of the Company approved a share repurchase program permitting the Company to repurchase up to $1,000,000 of its common stock over the next 12 months.

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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 (“MD&A”) 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. References to the Company and the Bank throughout MD&A are made using the first person notations of “we”, “us” or “our”.

The Bank is a federally chartered stock savings and loan association that was formed in 1934. As of March 31, 2014, the Bank conducted business from its home office in Harrison, Arkansas, a full-service branch office in Pulaski County, Arkansas, ten full-service branch offices and one limited service office located in a five county area in Arkansas (comprised of Benton and Washington counties in Northwest Arkansas and Boone, Marion and Baxter counties in Northcentral Arkansas), and a mortgage production office in Bentonville, Arkansas.

The Bank is a community-oriented financial institution offering a wide range of retail and business deposit accounts, including noninterest bearing and interest bearing checking accounts, 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, bill payment, and e-statements; mobile banking, including remote deposit capture and funds transfer; Bounce Protection^TM overdraft service; debit cards; and safe deposit boxes.

2014 FIRST QUARTER OVERVIEW

The Company’s net loss was $277,000 for the three months ended March 31, 2014, compared to net income of $303,000 for the same period in 2013. The decrease in net income for the comparative period was due to increases in operating expenses, primarily related to salaries and employee benefits and real estate owned.

The Bank continued to reduce its level of nonperforming assets during the first three months of 2014. Total nonperforming assets at March 31, 2014, including nonaccrual loans and real estate owned, totaled $18.0 million, or 3.15% of total assets, a reduction of $2.6 million compared to December 31, 2013, and a reduction of $14.5 million compared to March 31, 2013. The Bank also reduced its level of classified loans to $14.0 million at March 31, 2014 compared to $14.8 million at December 31, 2013 and $33.2 million at March 31, 2013.The primary drivers in improving the Bank’s nonperforming assets and classified loans were the Bank’s concerted efforts to work out or settle nonperforming loans and to aggressively market REO properties for sale.

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.

MERGER WITH FIRST NATIONAL SECURITY COMPANY

On July 1, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First National Security Company (“FNSC”) of Hot Springs, Arkansas, pursuant to which FNSC will merge with and into the Company (the “Merger”). Pursuant to the Merger Agreement, shareholders of FNSC will receive, in the aggregate, 6,252,400 shares of Company common stock and $74 million in cash in exchange for their shares of FNSC common stock. The total transaction value will depend on the closing price of the Company’s stock on the closing date of the Merger. On March 21, 2014, shareholders of both the Company and FNSC voted to approve the Merger. Consummation of the Merger is subject to certain conditions, including, among others, receipt of all required governmental regulatory approvals. Applications have been filed with the appropriate regulatory authorities and receipt of all required approvals is anticipated by June 30, 2014. The Merger Agreement was originally terminable at will by either party if the Merger had not closed by March 31, 2014 due to a failure to receive regulatory approval. In accordance with the terms of the Merger Agreement, the Company extended the termination date for an additional 90 days.

In connection with the Merger, the Company will sell up to 2,531,645 shares of Company common stock at a price per share equal to $7.90 in a private placement (the “Private Placement”) to its principal shareholder Bear State Financial Holdings, LLC (“Bear State”) and certain of its members (the “Investors”)(including Richard N. Massey, the Company’s Chairman, and Scott T. Ford, a director of the Company). Additionally, the Company issued warrants to purchase 177,215 shares of common stock on the same terms as in the Private Placement to the Investors in exchange for their respective commitments to backstop the Private Placement. The Company anticipates the closing of the Private Placement will occur immediately prior to the closing of the Merger.

20

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

● 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included herein. In particular, Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” generally describes our accounting policies. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our 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 our 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. In the event the economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan 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 Bank 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, 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 notavailable, 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.

We recognize 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. We evaluate our 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. We are required to establish a valuation allowance for deferred tax assets if we determine, 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, we estimate 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 our projected operating performance, our actual results and other factors.

21

RESULTS OF OPERATIONS

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net Income. The bank recorded a net loss of $277,000 for the three months ended March 31, 2014 compared to net income of $303,000 for the three months ended March 31, 2013. The decrease in net income for the comparative period was due to increases in operating expenses, primarily related to salaries and employee benefits and real estate owned.

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 2014 was $3.9 million, compared to $3.7 million for the same period in 2013. The increase in net interest income for the three month comparison period resulted from changes in interest income and interest expense discussed below.

Interest Income. Interest income for the first quarter of 2014 was $4.8 million compared to $4.6 million for the same period in 2013. The increase in interest income for the three months ended March 31, 2014 compared to the comparable period in 2013 was primarily related to increases in the average balances of loans receivable and investment securities offset by a decrease in yields earned on loans receivable. The decrease in yields earned on loans receivable is primarily due to origination during the period 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.

Interest Expense.   Interest expense for the first quarter of 2014 was $891,000 compared to $859,000 for the same period in 2013. The increase in interest expense for the three months ended March 31, 2014 compared to the comparable period in 2013 was primarily due to an increase in the average balance of deposit accounts.

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 (changes 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,
	2014 vs. 2013
	Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	394		$	(310	)	$	(30	)	$	54
Investment securities		134			7			3			144
Other interest-earning assets		(49	)		33			(12	)		(28	)
Total interest-earning assets		479			(270	)		(39	)		170
Interest expense:
Deposits		38			(14	)		(1	)		23
Other borrowings		12			(2	)		(1	)		9
Total interest-bearing liabilities		50			(16	)		(2	)		32
Net change in net interest income	$	429		$	(254	)	$	(37	)	$	138

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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. Interest rate spread represents the difference between the weighted average yield on average interest earning assets and the weighted average cost of average interest bearing liabilities. Net interest margin represents net interest income as a percentage of average interest earning assets.

	Three Months Ended March 31,
	2014								2013
	Average Balance		Interest			Average Yield/ Cost			Average Balance		Interest		Average Yield/ Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)	$	391,024	$	4,135			4.29	%	$	356,580	$	4,081		4.64	%
Investment securities(2)		71,521		511			2.90			52,410		367		2.84
Other interest-earning assets		46,471		105			0.91			73,435		133		0.72
Total interest-earning assets		509,016		4,751			3.78			482,425		4,581		3.85
Noninterest-earning assets		47,410								52,343
Total assets	$	556,426							$	534,768
Interest-bearing liabilities:
Deposits	$	456,275		869			0.77		$	436,640		846		0.79
Other borrowings		5,923		22			1.51			3,072		13		1.76
Total interest-bearing liabilities		462,198		891			0.78			439,712		859		0.79
Noninterest-bearing deposits		20,313								22,009
Noninterest-bearing liabilities		2,102								2,792
Total liabilities		484,613								464,513
Stockholders' equity		71,813								70,255
Total liabilities andstockholders' equity	$	556,426							$	534,768
Net interest income			$	3,860	��						$	3,722
Net earning assets	$	46,818							$	42,713
Interest rate spread							3.00	%						3.06	%
Net interest margin							3.08	%						3.13	%
Ratio of interest-earning assets toInterest-bearing liabilities							110.13	%						109.71	%

(1) Includes nonaccrual loans. 

(2) Includes FHLB of Dallas stock.

The Bank’s net interest margin decreased primarily as a result of decreasing yields on loans receivable. Yields on loans receivable decreased as a result of originations during the period of higher quality loans with lower rates relative to the weighted average rate of the Bank’s loan portfolio in the same period in the previous year.

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Provision for Loan Losses.The provision for loan losses represents the amount added to the allowance for loan and lease losses (“ALLL”) for the purpose of maintaining the ALLL at a level considered adequate to cover probable credit losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of the balance sheet date. 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.

Management determined that no provision for loan losses was required for the three months ended March 31, 2014 or 2013, primarily due to decreases in nonperforming and classified loans and continued improvement in the Bank’s loan portfolio and ALLL coverage of nonaccrual loans. The ALLL as a percentage of loans receivable was 3.2% at March 31, 2014, compared to 3.3% at December 31, 2013. The ALLL as a percentage of nonaccrual loans was 114.2% at March 31, 2014, compared to 106.5% at December 31, 2013. The ALLL as a percentage of classified loans was 88.7% at March 31, 2014, compared to 86.1% at December 31, 2013. 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 $1.2 million for the three months ended March 31, 2014 decreased from $1.3 million for the same period in 2013. The decrease in the three month comparison period 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 increased $666,000 or 14.3% during the first quarter of 2014 compared to the first quarter of 2013. The variances in certain noninterest expense items are further explained in the following paragraphs, with the aggregate expense increase for the three month comparison period being primarily related to the increase in employee compensation expense and a decrease in gains on sales of other real estate owned for the three month comparison period.

Salaries and Employee Benefits. Salaries and employee benefits increased $432,000 for the three months ended March 31, 2014 compared to the same period in 2013. The increase in the three month comparison period was primarily due to an increase in full time employees at the Bank. Additionally, effective January 1, 2014, the Bank began matching the first 2% of employee contributions to the Company’s 401(k) plan. Beginning in 2009, the Bank suspended its matching contributions and no expenses related to matching contributions were incurred in 2013. The changes in the composition of this line item are presented below (in thousands):

	Three Months Ended March 31,
	2014		2013		Change
Salaries	$	2,365	$	2,108	$	257
Payroll taxes		286		242		44
Insurance		131		128		3
401(k) plan expenses		38		4		34
Defined benefit plan		153		109		44
Stock compensation		87		43		44
Other		50		44		6
Total	$	3,110	$	2,678	$	432

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

	Three Months Ended March 31,
	2014			2013			Change
Loss provisions	$	242		$	142		$	100
Net gain on sales		(81	)		(331	)		250
Rental income		(53	)		(38	)		(15	)
Taxes and insurance		37			67			(30	)
Other		72			64			8
Total	$	217		$	(96	)	$	313

The increase in loss provisions was primarily due to updated valuations on nonfarm nonresidential REO properties during the first quarter of 2014. The decrease in gains on sales of REO is due to a decrease in sales of REO in the first quarter of 2014 compared to the same period in 2013 due to an overall continued decrease in REO balances during the periods. Real estate owned expenses such as taxes, insurance and maintenance as well as rental income are expected to decline as the size of the REO portfolio decreases. Future levels of loss provisions and net gains or losses on sales of real estate owned will depend on market conditions.

24

Income Taxes.The Company had no taxable income for the three months ended March 31, 2014 or 2013 and recorded a valuation allowance for the full amount of its net deferred tax asset as of March 31, 2014 and December 31, 2013, respectively.

LENDING ACTIVITIES

Loans Receivable.Changes in loan composition between March 31, 2014 and December 31, 2013, are presented in the following table (dollars in thousands).

	March 31,			December 31,			Increase
	2014			2013			(Decrease)			% Change
One- to four-family residential	$	126,640		$	129,308		$	(2,668	)		(2.1	)%
Multifamily residential		25,521			25,773			(252	)		(1.0	)
Nonfarm nonresidential		177,444			168,902			8,542			5.1
Construction and land development		28,795			26,554			2,241			8.4
Total real estate loans		358,400			350,537			7,863			2.2
Commercial		34,240			29,033			5,207			17.9
Consumer		3,950			4,368			(418	)		(9.6	)
Total loans receivable		396,590			383,938			12,652			3.3
Unearned discounts and net deferredloan costs		(57	)		(78	)		21			26.9
Allowance for loan and lease losses		(12,478	)		(12,711	)		233			1.8
Loans receivable, net	$	384,055		$	371,149		$	12,906			3.5	%

Total loans receivable increased $12.7 million to $396.6 million at March 31, 2014, compared to $383.9 million at December 31, 2013. The increase in total loans receivable was due to loan originations partially offset by repayments.

25

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, 2014					December 31, 2013
	Net (2)		% Total Assets			Net (2)		% Total Assets			Increase (Decrease)
Nonaccrual Loans:
One- to four-family residential	$	3,936		0.70	%	$	4,258		0.77	%	$	(322	)
Multifamily residential		--		--			--		--			--
Nonfarm nonresidential		3,977		0.70	%		4,057		0.75	%		(80	)
Construction and land development		2,398		0.42	%		3,249		0.59	%		(851	)
Commercial		594		0.10	%		350		0.06	%		244
Consumer		26		--			24		0.01	%		2
Total nonaccrual loans		10,931		1.92	%		11,938		2.18	%		(1,007	)
Accruing loans 90 days or more past due		--		--			--		--			--
Real estate owned		7,031		1.23	%		8,627		1.57	%		(1,596	)
Total nonperforming assets		17,962		3.15	%		20,565		3.75	%		(2,603	)
Performing restructured loans		491		0.09	%		494		0.09	%		(3	)
Total nonperforming assets and performing restructured loans (1)	$	18,453		3.24	%	$	21,059		3.84	%	$	(2,606	)

(1) The table does not include substandard loans which were judged not to be impaired totaling $3.1 million at March 31, 2014 and $2.9 million at December 31, 2013.

(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.

The decrease in nonperforming assets during the three months ended March 31, 2014, was primarily due to sales of real estate owned of $1.8 million and net cash payments on nonaccrual loans of $0.7 million.

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

	March 31, 2014					December 31, 2013					Increase (Decrease)
	Balance		Percentage of Total			Balance		Percentage of Total			Balance			Percentage of Total
Bankruptcy or foreclosure	$	715		6.5	%	$	1,043		8.7	%	$	(328	)		(2.2	)%
Over 90 days past due		5,211		47.7			6,308		52.8			(1,097	)		(5.1	)
30-89 days past due		981		9.0			637		5.3			344			3.7
Not past due		4,024		36.8			3,950		33.2			74			3.6
	$	10,931		100.0	%	$	11,938		100.0	%	$	(1,007	)		--

The following table presents nonaccrual loan activity for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
Balance of nonaccrual loans—beginning of period	$	11,938		$	18,824
Loans added to nonaccrual status		811			1,050
Net cash payments		(690	)		(711	)
Loans returned to accrual status		(393	)		--
Charge-offs to the ALLL		(121	)		(220	)
Transfers to REO		(614	)		(952	)
Balance of nonaccrual loans—end of period	$	10,931		$	17,991

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Real Estate Owned. Changes in the composition of real estate owned between December 31, 2013 and March 31, 2014 are presented in the following table (dollars in thousands).

	December 31, 2013		Additions		Fair Value Adjustments			Other Adjustments			Net Sales Proceeds			Net Gain (Loss)		March 31, 2014
One- to four-family residential	$	1,517	$	--	$	(3	)	$	(9	)	$	(165	)	$	19	$	1,359
Land		4,688		382		--			--			(1,723	)		62		3,409
Nonfarm nonresidential		2,422		80		(239	)		--			--			--		2,263
Total	$	8,627	$	462	$	(242	)	$	(9	)	$	(1,888	)	$	81	$	7,031

Classified Assets.Federal regulations require that each insured savings association risk rate its classified assets 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, 2014 and December 31, 2013, the Bank did not have any assets classified as loss.  The table below summarizes the Bank’s classified assets as of the dates indicated (dollars in thousands):

	March 31, 2014			December 31, 2013			March 31, 2013
Nonaccrual loans	$	10,931		$	11,938		$	17,991
Accruing classified loans		3,138			2,827			15,166
Classified loans		14,069			14,765			33,157
Real estate owned		7,031			8,627			14,445
Total classified assets	$	21,100		$	23,392		$	47,602
Texas Ratio (1)		21.6	%		24.8	%		38.0	%
Classified Assets Ratio (2)		25.3	%		28.0	%		55.8	%

(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 total classified assets to Tier 1 capital plus the allowance for loan and lease losses.

The decrease in classified assets during the three months ended March 31, 2014, was primarily due to sales of real estate owned and net cash payments on nonaccrual loans.

Allowance for Loan and Lease Losses.The Bank maintains an allowance for loan and lease losses for known and inherent losses determined by 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, and general economic conditions, including unemployment, bankruptcy trends, vacancy rates and the level and trend of home sales and prices. 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 short fall in relation to the principal and interest owed. Each quarter, classified loans where the borrower’s total loan relationship exceeds $250,000 are evaluated 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 Bank considers its ALLL of approximately $12.5 million to be appropriate based on management’s evaluation of the loan portfolio and the losses inherent in the loan portfolio as of March 31, 2014. Actual losses may substantially differ from currently estimated losses. Adequacy of the ALLL is periodically evaluated, and the ALLL could be significantly decreased or increased, which could materially affect the Company’s financial condition and results of operations.

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The following table summarizes changes in the allowance for loan and lease losses and other selected statistics for the periods indicated.

	Three Months Ended March 31,
	2014			2013
	(Dollars in Thousands)
Total loans outstanding at end of period	$	396,590		$	349,520
Average loans outstanding	$	391,024		$	356,580
Allowance at beginning of period	$	12,711		$	15,676
Charge-offs:
One- to four-family residential		(8	)		(87	)
Multifamily residential		--			--
Nonfarm nonresidential		(113	)		(134	)
Construction and land development		(152	)		--
Commercial		--			--
Consumer (1)		(28	)		(29	)
Total charge-offs		(301	)		(250	)
Recoveries:
One- to four-family residential		10			42
Multifamily residential		--			--
Nonfarm nonresidential		2			1
Construction and land development		41			84
Commercial		1			19
Consumer (1)		14			25
Total recoveries		68			171
Net charge-offs		(233	)		(79	)
Total provisions for losses		--			--
Allowance at end of period	$	12,478		$	15,597
Allowance for loan and lease losses as apercentage of total loansoutstanding at end of period		3.2	%		4.5	%
Net loans charged-off as a percentageof average loans outstanding		0.2	%		0.1	%
Allowance for loan and leaselosses to nonaccrual loans		114.2	%		86.7	%

(1)      Consumer loan charge-offs include overdraft charge-offs of $21,000 and $30,000 for the three months ended March 31, 2014 and 2013, respectively. Consumer loan recoveries include recoveries of overdraft charge-offs of $14,000 and $21,000 for the three months ended March 31, 2014 and 2013, respectively.

The following table presents the allocation of the Bank's allowance for loan and lease losses by the type of loan at each of the dates indicated as well as the percentage of loans in each category to total loans receivable. These allowance amounts have been computed using the Bank’s internal model. The amounts shown are not necessarily indicative of the actual future losses that may occur within a particular category.

	March 31,
	2014					2013
	Amount		Percentage of Loans			Amount		Percentage of Loans
	(Dollars in Thousands)
One-to-four family residential	$	4,407		31.93	%	$	6,778		43.36	%
Multifamily residential		847		6.44			1,074		6.05
Nonfarm nonresidential		4,134		44.74			5,341		40.81
Construction and land development		1,211		7.26			1,190		3.76
Commercial		1,799		8.63			1,000		4.53
Consumer		80		1.00			214		1.49
Total	$	12,478		100.00	%	$	15,597		100.00	%

The decrease in the allowance for loan and lease losses from $15.6 million as of March 31, 2013 to $12.5 million as of March 31, 2014 was primarily related to a decrease in general allowances primarily due to an improvement in the credit quality of the loan portfolio as well as a decrease in the overall historical net charge-off rate. The allowance for loan and lease losses remains at an elevated level due to the level of nonperforming loans and estimated inherent losses remaining in the portfolio as the Bank continues its efforts to reduce nonperforming assets.

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INVESTMENT SECURITIES

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

	March 31, 2014		December 31, 2013		Increase (Decrease)
Municipal securities	$	43,203	$	41,924	$	1,279
Mortgage-backed securities		28,748		28,904		(156	)
Total	$	71,951	$	70,828	$	1,123

Municipal securities increased due to purchases in the first quarter of 2014. The overall yield of the investment portfolio was 2.85% as of March 31, 2014 compared to 2.86% at December 31, 2013.

DEPOSITS

Changes in the composition of deposits between March 31, 2014 and December 31, 2013, are presented in the following table (dollars in thousands).

	March 31,		December 31,		Increase
	2014		2013		(Decrease)		% Change
Checking accounts	$	134,091	$	127,764	$	6,327		4.95	%
Money market accounts		47,707		45,153		2,554		5.66
Savings accounts		32,681		30,150		2,531		8.39
Certificates of deposit		274,238		266,658		7,580		2.84
Total deposits	$	488,717	$	469,725	$	18,992		4.04	%

Total deposits increased in the comparison period primarily due to an increase in certificates of deposit (“CDs”) which included of an increase of $6.0 million in non-brokered CDs obtained through a listing service. The increase in checking accounts was due primarily to an increase in the average balance per account. The cost of certificate of deposit funds increased from 1.18% at December 31, 2013 to 1.21% at March 31, 2014. The overall cost of deposit funds increased from 0.74% at December 31, 2013 to 0.75% at March 31, 2014. The Bank manages the pricing of its deposits to maintain deposit balances commensurate with its overall balance sheet management and liquidity position.

OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS

In the normal course of business and to meet the 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 could involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s 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 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.

The funding period for construction loans is generally six to eighteen months and commitments to originate mortgage loans are generally outstanding for no more than 60 days.

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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; and

■ the fulfillment of commitments under letters of credit, extensions of credit on lines of credit, construction loans, and under predetermined overdraft protection limits.

At March 31, 2014, the Bank’s off-balance sheet arrangements principally included lending commitments, which are described below. At March 31, 2014, the Company had no interests in non-consolidated special purpose entities.

At March 31, 2014, commitments included:

■ total approved loan origination commitments outstanding amounting to $22.9 million, including approximately $793,000 of loans committed to sell;

■ rate lock agreements with customers of $9.1 million, all of which have been locked with an investor;

■ funded mortgage loans committed to sell of $6.9 million;

■ unadvanced portion of construction loans of $14.9 million;

■ unused lines of credit of $14.3 million;

■ outstanding standby letters of credit of $878,000; and

■ total predetermined overdraft protection limits of $7.9 million.

Total unfunded commitments to originate loans for sale and the related commitments to sell of $9.1 million meet the definition of a derivative financial instrument. The related asset and liability are considered immaterial at March 31, 2014.

Historically, a very small percentage of predetermined overdraft limits have been used. At March 31, 2014, overdrafts of accounts with Bounce Protection™ represented usage of 2.00% 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 retail 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. On October 17, 2013 the Bank was notified by the FHLB of Dallas that the Bank has been removed from custody status and upgraded to blanket lien status due to continued improvement in the financial ratios that the FHLB uses to measure a Bank’s status. Although the Bank’s status was upgraded by the FHLB, the Bank has continued to maintain loans in custody at the FHLB as the FHLB allows an aggregate lendable value on qualifying loans (as defined) held in custody of approximately 90% of the outstanding balance of the loans pledged to the FHLB. The lendable value as a percentage of the outstanding loan balance on qualifying loans under blanket lien status varies based on the type of collateral, but the percentages are less than the percentage available for loans held in custody. At March 31, 2014, the Bank’s additional borrowing capacity with FHLB was $115.4 million, comprised of qualifying loans collateralized by first-lien one- to four-family mortgages with a lendable value of $ 43.0 million held in custody at the FHLB and $78.3 million of loans under blanket lien less outstanding advances at March 31, 2014 of $5.9 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 commercial real estate loans as collateral for the discount window. At March 31, 2014, the Bank pledged qualifying commercial real estate loans with a collateral value of approximately $6.7 million, or 88% of the fair market value of the loans as determined by the FRB taking into consideration the rate and duration of the loans pledged. No FRB borrowings were outstanding at March 31, 2014.

At March 31, 2014, the Bank’s liquidity ratio was 23.9% which represents liquid assets as a percent of deposits and borrowings. As of the same date, the Bank’s adjusted liquidity ratio was 55.4%, which represents liquid assets plus borrowing capacity at the FHLB, FRB and correspondent banks 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 other deposit withdrawals, to repay maturing borrowings, to fund loan commitments, and to purchase investment securities.

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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 an issue 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 or the Bank. 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 United States Department of 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.

Since the Company is a unitary holding company and does not conduct independent operations, its primary source of liquidity are dividends from the Bank. The Company has no borrowings from outside sources. The Company funds its expenses from cash deposits maintained in the Bank, which amounted to $370,000 at March 31, 2014.

At March 31, 2014, the Bank's tangible, core and risk-based capital ratios amounted to 12.45%, 12.45% and 17.97%, respectively, compared to regulatory capital adequacy standards of 1.5%, 4% and 8%.

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. As used in this document, the words "anticipate," "believe," "estimate," "expect," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements.

The statements presented herein with respect to, among other things, the Company’s plans, objectives, expectations and intentions, including our pending merger with FNSC and the anticipated timing of and impact on the Company of such acquisition, anticipated changes in non-interest expenses in future periods (including changes as a result of the pending merger with FNSC), changes in earnings, impact of outstanding off-balance sheet commitments, sources of liquidity and that we have sufficient liquidity, the sufficiency of the allowance for loan losses, expected loan, asset, and earnings growth, growth in new and existing customer relationships, our intentions with respect to our investment securities, and financial and other goals and plans are forward looking.

Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions, including those risk factors described in Part I, Item 1A. of the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2014 and in Part II, Item 1A. hereof. 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 the remainder of fiscal 2014 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.

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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 Bank’s economic 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 28, 2014.  There has been no material change in the Company’s asset and liability position or the Bank’s economic value of equity since December 31, 2013.

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, 2014 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 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.

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SIGNATURES

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

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

Date:	April 29, 2014	By:	/s/ Christopher M. Wewers
			Christopher M. Wewers
			Chief Executive Officer

Date:	April 29, 2014	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
2.1	Agreement and Plan of Merger by and between First Federal Bancshares of Arkansas, Inc. and First National Security Company, dated July 1, 2013 (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2013). (1)
2.2	List of Schedules to the Agreement and Plan of Merger (incorporated herein by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2013).
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
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase

(1) Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules to this Agreement have not been filed with this exhibit. The schedules contain various items related to the business of and the representations and warranties made by the Company and FNSC. The Registrant agrees to furnish supplementally any omitted schedule to the SEC upon request.

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