UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _______________

Commission File No.: 0-28312

                 First Federal Bancshares of Arkansas, Inc.             

(Exact name of registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(b) of the Act:

Common Stock (par value $.01 per share)	The Nasdaq Stock Market LLC
(Title of Class)	(Exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( § 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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  oAccelerated Filer  oNon-accelerated Filer  oSmaller reporting company  x

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

As of June 30, 2011, the aggregate value of the 3,380,171 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 15,922,432 shares held by affiliates of the Registrant as a group, was approximately $21.9 million.  This figure is based on the last sales price of $6.48 per share of the Registrant’s Common Stock on June 30, 2011.

Number of shares of Common Stock outstanding as of March 26, 2012:  19,302,603

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the 2012 Annual Meeting of Stockholders (Part III, Items 10 through 14)

First Federal Bancshares of Arkansas, Inc.

Form 10-K

For the Year Ended December 31, 2011

PART I.
Item 1.	Business	2
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	23
Item 4.	Mine Safety Disclosures	24
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	54
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	93
Item 9A.	Controls and Procedures	93
Item 9B.	Other Information	95
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	95
Item 11.	Executive Compensation	95
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	95
Item 13.	Certain Relationships and Related Transactions, and Director Independence	96
Item 14.	Principal Accounting Fees and Services	96
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	96

1

PART I.

Item 1.  Business

GENERAL

First Federal Bancshares of Arkansas, Inc.  First Federal Bancshares of Arkansas, Inc. (the "Company") is an Arkansas corporation originally organized in Texas in January 1996 by First Federal Bank ("First Federal" or the "Bank") for the purpose of becoming a unitary holding company of the Bank.  The Company reincorporated from the State of Texas to the State of Arkansas on July 20, 2011. The significant asset of the Company is the capital stock of the Bank.  The business and management of the Company consists of the business and management of the Bank.  The Company does not presently own or lease any property, but instead uses the premises, equipment and furniture of the Bank.  At the present time, the Company does not employ any persons other than officers of the Bank, and the Company utilizes the support staff of the Bank from time to time.  Additional employees will be hired as appropriate to the extent the Company expands or changes its business in the future.  At December 31, 2011, the Company had $579.1 million in total assets, $510.2 million in total liabilities and $68.9 million in stockholders' equity.

The Company’s primary regulator is the Federal Reserve Bank (“FRB”), as successor to the Office of Thrift Supervision (the “OTS”). See “Regulation – Transfer of OTS Powers” below.

The Company's principal executive office is located at the home office of the Bank at 1401 Highway 62-65 North, Harrison, Arkansas 72601, and its telephone number is (870) 741-7641. The Bank also has executive offices at its home office and in Little Rock, Arkansas.

First Federal Bank.  The Bank is a federally chartered stock savings and loan association formed in 1934.  As of December 31, 2011, First Federal conducted business from its main office and seventeen full service branch offices located in a six county area in Arkansas comprised of Benton and Washington counties in Northwest Arkansas; Carroll, Boone, Marion and Baxter counties in Northcentral Arkansas; and a loan production office opened in June 2011 in Little Rock, Arkansas. In February 2012, three full service branches in Northwest Arkansas were closed. First Federal's deposits are insured by the Deposit Insurance Fund ("DIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"), to the maximum extent permitted by law.

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; Bounce ProtectionTM overdraft service; debit cards; and safe deposit boxes.

The Bank is regulated by the Office of the Comptroller of the Currency ("OCC"), which is the Bank's chartering authority and primary regulator, as successor to the OTS. See “Regulation – Transfer of OTS Powers” section below.  The Bank is also regulated by the FDIC, the administrator of the DIF.  The Bank is also subject to certain reserve requirements established by the Board of Governors of the FRB and is a member of the Federal Home Loan Bank ("FHLB") of Dallas.

Cautionary Statement About Forward-Looking Statements

This Form 10-K contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management.  In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "expect," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements.  Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.  The Company cautions readers not to place undue reliance on any forward-looking statements.  The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.  These risks could cause actual results for 2012 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Company’s operating and stock performance.

Employees

The Bank had 186 full-time employees and 35 part-time employees at December 31, 2011, compared to 218 full-time employees and 23 part-time employees at December 31, 2010.   None of these employees is represented by a collective bargaining agent, and the Bank believes that it enjoys good relations with its personnel.

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Available Information

The Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports filed pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable on or through its website located at www.ffbh.com after filing with the United States Securities and Exchange Commission (“SEC”). Information on, or accessible through, the Company’s website is not a part of and is not incorporated into this Annual Report on Form 10-K and the inclusion of the Company’s website address in this report is an inactive textual reference.

Competition

The Bank faces strong competition both in attracting deposits and making loans.  Its most direct competition for deposits has historically come from other savings associations, community banks, credit unions and commercial banks.  In addition, the Bank has faced additional significant competition for investors' funds from short-term money market securities, mutual funds and other corporate and government securities.  The ability of the Bank to attract and retain savings and certificates of deposit depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.  The Bank’s ability to increase checking deposits depends on offering competitive checking accounts and promoting these products through effective channels.  Additionally, the Bank offers convenient hours, locations and online services to maintain and attract customers.

The Bank experiences strong competition for loans principally from savings associations, community banks, commercial banks and mortgage companies.  The Bank competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers.

In the combined market area of Benton, Washington, Carroll, Boone, Marion, and Baxter counties, we had 5.03% of the deposit market share at June 30, 2011 compared to 6.25% at June 30, 2010. Of the thirteen banks in this market area, the Bank is the third largest in the combined market area.

Corporate Overview and Strategic Initiatives

Recapitalization.  On January 27, 2011, the Company and the Bank entered into an Investment Agreement (the “Investment Agreement”) with Bear State Financial Holdings, LLC (“Bear State”) which set forth the terms and conditions of the Recapitalization, which was completed in the second quarter of 2011.  The Recapitalization consisted of the following:

· The Company amended its Articles of Incorporation to effect a 1-for-5 reverse split (the “Reverse Split”) of the Company’s issued and outstanding shares of common stock. The Reverse Split was effective May 3, 2011. All periods presented in this Form 10-K have been retroactively restated to reflect the Reverse Split.

· Bear State purchased from the United States Department of the Treasury (“Treasury”) for $6 million aggregate consideration, the Company’s 16,500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), including accrued but unpaid dividends thereon, and related warrant dated March 6, 2009 to purchase 321,847 pre-Reverse Split shares of the Company’s common stock at an exercise price of $7.69 per share (pre-Reverse Split) (the “TARP Warrant”), both of which were previously issued to the Treasury through the Troubled Asset Relief Program — Capital Purchase Program. Bear State surrendered the Series A Preferred Stock and the TARP Warrant to the Company. As a result, the Company recorded a $10.5 million discount related to the difference between the fair value of the consideration paid for the Series A Preferred Stock and its book value.

· The Company sold to Bear State (i) 15,425,262 post-Reverse Split shares (the “First Closing Shares”) of the Company’s common stock at $3.00 per share (or $0.60 per share pre-Reverse Split) in a private placement, and (ii) a warrant (the “Investor Warrant”) to purchase 2 million post-Reverse Split shares of common stock at an exercise price of $3.00 per share (or $0.60 per share pre-Reverse Split) (the date on which such sale occurred, the “First Closing”).  The First Closing occurred on May 3, 2011. The Investor Warrant has not been exercised as of December 31, 2011, and is scheduled to expire June 27, 2014.

· Bear State paid the Company aggregate consideration of approximately $46.3 million for the First Closing Shares and Investor Warrant, consisting of (i) $40.3 million in cash, and (ii) Bear State’s surrendering to the Company the Series A Preferred Stock and TARP Warrant for a $6 million credit against the purchase price of the First Closing Shares.

· The Company completed a stockholder rights offering (the “Rights Offering”) pursuant to which stockholders who held shares of common stock on the record date for the Rights Offering received the right to purchase three (3) post-Reverse Split shares of the Company’s common stock for each one (1) post-Reverse Split share held by such stockholder at $3.00 per share (or $0.60 per share pre-Reverse Split). Bear State agreed to backstop the Rights Offering in the event it was not fully subscribed.  The Rights Offering was completed June 21, 2011, resulting in the issuance of 2,908,071 post-Reverse Split shares.  Because the Rights Offering was fully subscribed, Bear State was not required to backstop the Rights Offering by purchasing any unsubscribed shares from the Company in a second  private placement.

· In connection with the First Closing, Bear State designated, and the Company appointed, four individuals to serve on the Boards of Directors of the Company and the Bank.

3

As a result of its participation in the Recapitalization, Bear State owns approximately 82% of the Company’s common stock, assuming exercise of the Investor Warrant.

Regulatory Enforcement Actions. The OCC as successor to the OTS is the primary federal regulator of the Bank.  On April 12, 2010, the Company and the Bank each consented to the terms of Cease and Desist Orders issued by the OTS (the “Bank Order” and the “Company Order” and, together, the “Orders”).  The Orders impose certain operations restrictions on the Company and, to a greater extent, the Bank, including lending and dividend restrictions. In particular, the Bank must seek the prior non-objection of the OCC before making certain kinds of loans.

The Orders also require the Company and the Bank to take certain actions, including the submission to the OTS of capital plans and business plans to, among other things, preserve and enhance the capital of the Company and the Bank and strengthen and improve the consolidated Company’s asset quality and profitability.  The Bank Order specifically required the Bank to achieve and maintain, by December 31, 2010, a Tier 1 (core) capital ratio of at least 8% and a total risk-based capital ratio of at least 12%.  The Bank did not achieve these required levels by December 31, 2010. However, the Bank achieved compliance with the capital requirements of the Orders during the second quarter of 2011 as a result of the Recapitalization.

While the Company and the Bank intend to take such actions as may be necessary to comply with the requirements of the Orders, there can be no assurance that the Company or the Bank will be judged by the regulators to be in full compliance with the Orders, or that efforts to comply with the Orders will not have adverse effects on the operations and financial condition of the Company or the Bank. See “Risk Factors.” In addition, the Bank from time to time may require waivers, amendments, or modifications in order to remain in compliance with the Orders, and there can be no assurance the regulators will grant such relief. Any material failure by the Company and the Bank to comply with the provisions of the Orders could result in further enforcement actions by the FRB and/or the OCC.

Strategic Initiatives.  As a result of the Recapitalization, the Company has taken a number of actions to rehabilitate the Bank, including:

· Hiring a new president/chief executive officer, chief operating officer, chief lending officer, chief credit officer, and other key members of management:

o W. Dabbs Cavin, Chief Executive Officer and President of the Company and the Bank and Vice Chairman of the Boards of Directors of the Company and the Bank, has been active in commercial banking in a variety of executive positions for over 20 years;

o Christopher M. Wewers, Executive Vice President and the Chief Operating Officer of the Company and the Bank, has almost 20 years of banking experience in various management and executive roles, while having served the last ten years as executive vice president and chief financial officer of a community-oriented financial institution that serves central and south Arkansas;

o J. Russell Guerra, Executive Vice President and the Chief Lending Officer, brings over 20 years of commercial lending, commercial/industrial business development, risk management, regulatory compliance, treasury, interest rate derivative, private banking, financial analysis and risk assessment experience to the Company and the Bank;

o R. Thomas Fritsche, Jr., Executive Vice President and Chief Credit Officer, has over 25 years of commercial banking experience with several multi-billion dollar financial institutions;

o A new Regional President for the North Arkansas Region encompassing Harrison, Mountain Home, Yellville, and Berryville; a new Market Manager for the Northwest Arkansas Region; a Little Rock Market President; five experienced commercial lenders; and a General Counsel.

· Focusing significant resources on improving asset quality by reducing problem assets and improving the Bank’s credit culture and restructuring the credit approval process;

· Improving the Bank’s operational efficiency with a high-performance culture and reduced overall staffing levels; and

· Opening a loan production office in Little Rock, Arkansas to increase new loan production and diversify the Bank’s asset base.

Reducing problem assets will remain the top priority for Bank management, as well as examining all areas of the Bank for further improvements. 

4

Lending Activities

General.  At December 31, 2011, the Bank's portfolio of net loans receivable amounted to $331.5 million or 57.2% of the Company's total assets.  The Bank has traditionally concentrated its lending activities on loans collateralized by real estate, with $337.9 million or 95.6% of the Bank's total portfolio of loans receivable ("total loan portfolio") consisting of loans collateralized by real estate at December 31, 2011.

Origination, Purchase and Sale of Loans.  The lending activities of the Bank are subject to the written, non-discriminatory underwriting standards and policies established by the Bank’s board of directors and management.  Loan originations are obtained from a variety of sources, including realtor referrals, walk-in customers to the Bank’s branch locations, solicitation by loan officers, radio, television and newspaper advertising and the Bank’s Internet website.

To minimize interest rate risk, fixed rate loans with terms of fifteen years or greater are typically sold to specific investors in the secondary mortgage market.  The rights to service such loans are typically sold with the loans. This allows the Bank to provide its customers competitive long-term fixed rate mortgage products, which have been the predominant mortgage financial product for residential home buyers recently due to the low rate environment, while not exposing the Bank to undue interest rate risk.  These loans are originated subject to Fannie Mae, Freddie Mac and the specific investor’s underwriting guidelines.  The Secondary Market Department of the Bank typically locks and confirms the purchase price of the loan on the day of the loan application, which protects the Bank from market price movements and ensures that the Bank will receive a fair and reasonable price on the sale of the respective loan.  In 2011 and 2010, the Bank’s secondary market loan sales amounted to $33.8 million and $38.5 million, respectively.  The Bank is not involved in loan hedging or other speculative mortgage loan origination activities.

In addition to sales of loans on the secondary market, the Bank periodically sells larger commercial loans or participations in such loans in order to comply with the Bank’s loans to one borrower limit or for credit concentration purposes.  In such situations, the loans are typically sold with servicing retained.  During 2011, such loans sold amounted to approximately $7.0 million. In 2010, loans sold amounted to $1.1 million.  At December 31, 2011 and 2010, the balances of loans sold with servicing retained were approximately $13.4 million and $10.6 million, respectively.   Loan servicing fee income for the years ended December 31, 2011 and 2010 was approximately $24,000 and $27,000, respectively.

The following table shows the Bank's originations, sales, purchases, and repayments of loans held for investment during the periods indicated.

	Year Ended December 31,
	2011			2010
	(In Thousands)
Loans receivable at beginning of period	$	414,611		$	518,754
Loan originations:
Mortgage loans:
One- to four-family residential		12,537			18,336
Home equity and second mortgage loans		2,740			4,032
Multifamily residential		3,466			666
Commercial real estate		22,140			7,711
Land loans		969			5,551
Construction		4,385			7,531
Commercial loans		3,800			2,913
Consumer:
Automobile		1,621			1,520
Other		2,630			4,092
Total loan originations(1)		54,288			52,352
Loan purchases		4,000			--
Repayments		(83,135	)		(115,044	)
Loan sales		(7,000	)		(1,105	)
Charge-offs and transfers to REO		(29,256	)		(40,346	)
Net loan activity		(61,103	)		(104,143	)
Loans receivable at end of period(2)	$	353,508		$	414,611

(1) Includes loans which the borrower refinanced with the Bank of $3.1 million and $17.6 million for each of the years ended December 31, 2011 and 2010, respectively. Specifically, for the year ended December 31, 2010, refinanced loans represented $6.3 million of commercial real estate originations and $4.7 million of land loan originations.

(2) Gross of undisbursed loan funds, unearned discounts and net loan fees and the allowance for loan losses.

Loans to One Borrower.  A savings institution generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities.  At December 31, 2011, the Bank's limit on loans to one borrower was approximately $13.0 million compared to $9.2 million at December 31, 2010.  At December 31, 2011, the Bank's largest loan or group of loans to one borrower, including persons or entities related to the borrower, amounted to $9.0 million, including undisbursed loan funds.  The Bank's ten largest loans or groups of loans to one borrower, including persons or entities related to the borrower, including unfunded commitments, totaled $63.8 million at December 31, 2011.  Of the $63.8 million, 7 loans totaling $7.7 million related to two borrowers were on nonaccrual status at December 31, 2011.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

5

One- to Four-Family Residential Real Estate Loans.  At December 31, 2011, $183.2 million or 51.8% of the Bank's total loan portfolio consisted of one- to four-family residential real estate loans.   Of the $183.2 million of such loans at December 31, 2011, $124.7 million or 68.1% had adjustable rates of interest (including $14.7 million of seven-year adjustable rate loans) and $58.5 million or 31.9% had fixed rates of interest. At December 31, 2011, the Bank had $11.7 million of nonaccrual one- to four-family residential real estate loans and $6.4 million of one- to four-family residential real estate loans 30-89 days delinquent not on nonaccrual status.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank currently originates both fixed rate and adjustable rate one- to four-family residential mortgage loans to be sold into the secondary market.  The Bank's fixed rate loans to be held in portfolio are typically originated as simple interest loans with a balloon maturity of up to five years and an amortization period not to exceed fifteen years.  The Bank's one- to four-family loans are typically originated under terms, conditions and documentation that permit them to be sold to U.S. Government-sponsored agencies such as Fannie Mae or Freddie Mac.  The Bank's residential loans typically include "due on sale" clauses.

As of December 31, 2011, the Bank's portfolio included adjustable rate mortgage loans that provide for an interest rate which adjusts every one, three, five or seven years in accordance with a designated index plus a margin.  Such loans are typically based on a 15-, 20-, 25- or 30-year amortization schedule.  The amount of any increase or decrease in the interest rate per one- or three-year period is generally limited to 2%, with a limit of 6% over the life of the loan.  The Bank’s five-year adjustable rate loans provide that any increase or decrease in the interest rate per period is limited to 3%, with a limit of 6% over the life of the loan.  The Bank's seven-year adjustable rate loans provide that any increase or decrease in the interest rate per period is limited to 5%, with a limit of 5% over the life of the loan.  The Bank's adjustable rate loans are assumable (generally without release of the initial borrower), do not contain prepayment penalties, do not provide for negative amortization and typically contain "due on sale" clauses. The Bank generally underwrote its one- and three-year adjustable rate loans on the basis of the borrowers’ ability to pay at the rate after the first interest rate adjustment.  Adjustable rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates.

The Bank’s residential mortgage loans generally do not exceed 80% of the lesser of purchase price or appraised value of the collateral. However, pursuant to the underwriting guidelines adopted by the board of directors, the Bank may lend up to 100% of the value of the property securing a one- to four-family residential loan with private mortgage insurance or other similar protection to support the portion of the loan that exceeds 80% of the value.  The Bank may, on occasion, extend a loan up to 90% of the value of the secured property without private mortgage insurance coverage.  However, these exceptions are minimal and are only approved on loans with exceptional credit scores, sizeable asset reserves, or other compensating factors.

Home Equity and Second Mortgage Loans.   At December 31, 2011, $12.5 million or 3.5% of the Bank’s total loan portfolio consisted of home equity and second mortgage loans.  At December 31, 2011, the unused portion of home equity lines of credit was $3.5 million.  At December 31, 2011, the Bank had nonaccrual home equity and second mortgage loans totaling $764,000.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank’s home equity and second mortgage loans are fixed rate loans with fully amortized terms of up to fifteen years, variable rate interest-only loans with terms up to three years, or home equity lines of credit.  The variable rate loans are typically tied to the Wall Street Journal Prime Rate (“Prime Rate”), plus a margin commensurate with the risk as determined by the borrower’s credit score.  Although the Bank no longer offers balloon maturities longer than five years, at December 31, 2011, the Bank’s portfolio included loans with balloon maturities of five, seven, and ten years.  The home equity lines of credit are typically either fixed rate for a term of no longer than one year or variable rate with terms up to five years.  The Bank generally limits the total loan-to-value on these mortgages to 90% of the value of the secured property if the Bank holds the first mortgage and 80% if the first mortgage is held by another party.

Multifamily Residential Real Estate Loans.  At December 31, 2011, $20.5 million or 5.8% of the Bank's total loan portfolio consisted of loans collateralized by existing multifamily residential real estate properties.  At December 31, 2011, the Bank had nonaccrual multifamily real estate loans of $4.6 million.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

6

The Bank has originated both fixed rate and adjustable rate multifamily loans.  Fixed rate loans are generally originated with amortization periods not to exceed 30 years, and typically have balloon periods of three, five or seven years.  Adjustable rate loans are typically amortized over terms up to 30 years, with interest rate adjustments every three to seven years.  Loan-to-value ratios on the Bank's multifamily real estate loans are currently limited to 80%.  It is also the Bank's general policy to obtain corporate or personal guarantees, as applicable, on its multifamily residential real estate loans from the principals of the borrower.

Multifamily real estate lending typically entails additional risks as compared with one- to four-family residential property lending.  The payment experience on such loans is typically dependent on the successful operation of the real estate project.  The success of such projects is sensitive to changes in supply and demand conditions in the market for multifamily real estate as well as regional and economic conditions generally.

Commercial Real Estate Loans.  At December 31, 2011, $95.9 million or 27.1% of the Bank's total loan portfolio consisted of loans collateralized by existing commercial real estate properties.  At December 31, 2011, the Bank had nonaccrual commercial real estate loans of $13.2 million. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Many of the Bank’s commercial real estate loans are collateralized by properties such as office buildings, strip and small shopping centers, churches, convenience stores, mini-storage facilities and hotels/motels. The Bank underwrites commercial real estate loans specifically in relation to the type of property being collateralized.  Sustainable cash flows and occupancy rates are primary considerations when underwriting these loans. Loans to borrowers that are corporations, limited liability companies, trusts, or other such legal entities are also typically personally guaranteed by the principals of the respective entity.  The financial strength of the individuals who are personally guaranteeing the loan is also a primary underwriting factor.

Regulatory guidelines and the Bank’s policy require that properties securing commercial real estate loans are appraised by licensed real estate appraisers pursuant to state licensing requirements and federal regulations.  The Bank considers the quality and location of the real estate, the creditworthiness of the borrower, the cash flow of the project, and the quality of management involved with the property.  As part of the underwriting of these loans, the Bank prepares a cash flow analysis that includes a vacancy rate projection, expenses for taxes, insurance, maintenance and repair reserves as well as debt coverage ratios.  The Bank’s commercial real estate loans are generally originated with amortization periods not to exceed 25 years.  Generally, the Bank has structured these on three to ten year balloon terms. Recently and to the extent possible, the Bank has made or renewed these credits at variable rates priced with a margin tied to the Prime Rate commensurate with the risk of the credit.  The Bank attempts to keep maturities of these credits short as possible in order to enable the Bank to better manage its interest rate sensitivity during this low rate environment.

Commercial real estate lending entails additional risks as compared to the Bank’s one- to four-family residential property loans. The repayment on such loans is typically dependent on the successful operation of the real estate project, which is sensitive to changes in supply and demand conditions in the market for commercial real estate, and on regional and economic conditions.

Land Loans.  Land loans include loans for the acquisition or refinancing of land for consumer or commercial purposes.  This segment of the portfolio totaled $14.4 million, or 4.1% of the Bank’s total loan portfolio, as of December 31, 2011.  Generally, these loans are collateralized by properties in the Bank’s market areas. At December 31, 2011, the Bank had nonaccrual land loans totaling $2.8 million.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Construction Loans.  At December 31, 2011, construction loans, including land development loans, amounted to $11.4 million or 3.2% of the Bank’s total loan portfolio. The portfolio consists of six owner occupied single family residential construction loans totaling $928,000, eleven speculative single family residential construction loans totaling $1.5 million, two multifamily construction loans totaling $8.4 million and one land development loan of $622,000 that is on nonaccrual at December 31, 2011. The land development loan paid off in January 2012.

The Bank’s construction loans generally have fixed interest rates or variable rates that float with the Prime Rate and have typically been issued for terms of six to eighteen months. However, the Bank has originated construction loans with terms up to two years.  This practice has generally been limited to larger projects that could not be completed in the typical six- to eighteen-month period.  Construction loans were typically made with a maximum loan-to-value ratio of 80% on an as-completed basis.

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The Bank originated construction loans to individual homeowners and local builders and developers for the purpose of constructing one- to four-family residences.  The Bank typically required that permanent financing with the Bank or some other lender be in place prior to closing any non-speculative construction loan.  Interest on construction/permanent loans is due upon completion of the construction phase of the loan.  At such time, the loan will convert to a permanent loan at the interest rate established at the initial closing of the construction/permanent loan.

The Bank has made construction loans to local builders for the purpose of construction of speculative (or unsold) residential properties, and for the construction of pre-sold one- to four-family homes.  These loans were subject to credit review, analysis of personal and, if applicable, corporate financial statements, and an appraisal of the property. Loan proceeds are disbursed during the construction term after a satisfactory inspection of the project has been made based upon percentage of completion.  Interest on these construction loans is due monthly.  The Bank may extend the term of a construction loan if the property has not been sold by the maturity date.

Construction lending is generally considered to involve a higher level of risk as compared to one- to four-family residential loans.  This is due, in part, to the concentration of principal in a limited number of loans and borrowers, and the effects of general economic conditions on developers and builders.  In addition, construction loans to a builder for construction of homes that are not pre-sold possess a greater potential risk to the Bank than construction loans to individuals on their personal residences or on houses that are pre-sold prior to the inception of the loan.  The Bank analyzed each borrower involved in speculative building and limited the principal amount and number of unsold speculative homes at any one time with such borrower.  At December 31, 2011, the Bank had no nonaccrual speculative one- to four-family construction loans.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Commercial Loans.  The Bank also offers secured and unsecured commercial loans.  Secured commercial loans are primarily secured by equipment, inventory and accounts receivable.  At December 31, 2011, such loans amounted to $7.6 million or 2.2% of the total loan portfolio.  At December 31, 2011, the Bank had nonaccrual commercial loans of $72,000.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank's commercial loans are originated with fixed and variable interest rates and maturities between one and five years.  These loans are typically based on a maximum fifteen year amortization schedule.

Consumer Loans.  The consumer loans offered by the Bank primarily include automobile loans, deposit account secured loans, and unsecured loans.  Consumer loans amounted to $8.0 million or 2.3% of the total loan portfolio at December 31, 2011, of which $2.5 million and $5.5 million consisted of automobile loans and other consumer loans, respectively.  The Bank intends to continue its emphasis on consumer loans in furtherance of its role as a community-oriented financial institution.  At December 31, 2011, the Bank had nonaccrual consumer loans of $98,000.  See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank's automobile loans are typically originated for the purchase of new and used cars and trucks.  Such loans are generally originated with a maximum term of five years.  The Bank does offer extended terms on automobile loans to some customers based upon their creditworthiness and the age of the vehicle.

Other consumer loans consist primarily of deposit account loans and unsecured loans.  Loans secured by deposit accounts are generally originated for up to 95% of the deposit account balance, with a hold placed on the account restricting the withdrawal of the deposit account balance.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

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Sources of Funds

General.  Deposits are the primary source of the Bank's funds for lending and other investment purposes.  In addition to deposits, the Bank derives funds from loan principal repayments and prepayments and interest payments, maturities and calls of investment securities, and advances from the FHLB of Dallas.  Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions.  Borrowings are used when funds from loan and deposit sources are insufficient to meet funding needs.  FHLB advances are the primary source of borrowings.

Deposits.  The Bank's deposit products include a broad selection of deposit instruments, including checking accounts, money market accounts, savings accounts and term certificate accounts.  Deposit account terms vary, with the principal differences being the minimum balance required, the time period the funds must remain on deposit, early withdrawal penalties and the interest rate.

The Bank considers its primary market area to be Northcentral and Northwest Arkansas.  The Bank utilizes traditional marketing methods to attract new customers and savings deposits.  The Bank does not advertise for retail deposits outside of its primary market area and management believes that non-residents of Arkansas held an insignificant number of deposit accounts at December 31, 2011.  Services of deposit brokers have been used on a limited basis with less than 1% of deposits at December 31, 2011, obtained through a broker. In addition, the Bank uses non-brokered institutional internet certificates of deposit as an additional source of funds to augment the retail CD market.  At December 31, 2011, internet certificates of deposit were 5.2% of deposits.

The Bank has been competitive in the types of accounts and in interest rates it has offered on its deposit products but does not necessarily seek to match the highest rates paid by competing institutions.  Although market demand generally dictates which deposit maturities and rates will be accepted by the public, the Bank intends to continue to offer longer-term deposits to the extent possible and consistent with its asset and liability management goals. Due to the Bank Order, the Bank is considered to be “adequately capitalized” and as such is subject to restrictions on deposit rates under the FDIC’s brokered deposit rule which covers, in some circumstances, deposits solicited directly by the institution.

Borrowed funds.  The Bank utilizes FHLB advances in its normal operating and investing activities.  The Bank currently pledges as collateral for FHLB advances certain qualifying one- to four-family mortgage loans.  Pledged collateral is held in the custody of the FHLB.  Currently, based on the Bank’s restricted status with FHLB, the Bank may borrow only short-term FHLB advances with maturities up to thirty days.

At December 31, 2011, the Bank’s additional borrowing capacity with the FHLB was $57.8 million, comprised of qualifying loans collateralized by first-lien one- to four-family residences with a collateral value of $64.5 million less outstanding advances at December 31, 2011 of $6.7 million.

The Bank is currently operating under restricted status at the FHLB whereby the FHLB has custody and endorsement of the loans that collateralize outstanding borrowings with the FHLB.  Qualifying loans (i) must not be 90 days or more past due; (ii) must not have been in default within the most recent twelve-month period, unless such default has been cured in a manner acceptable to the FHLB; (iii) must relate to real property that is covered by fire and hazard insurance in an amount at least sufficient to discharge the mortgage loan in case of loss and as to which all real estate taxes are current; (iv) must not have been classified as substandard, doubtful, or loss by the Bank’s regulating authority or the Bank; and (v) must not secure the indebtedness to any director, officer, employee, attorney, or agent of the Bank or of any FHLB.  The FHLB currently allows an aggregate collateral value on the qualifying loans of approximately 75% of the outstanding balance of the loans pledged to the FHLB.

Subsidiaries

The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary service corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. In addition to investments in service corporations, the Bank is permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities in which the Bank may engage directly.  The Bank's only subsidiary, First Harrison Service Corporation (the "Service Corporation"), was formed in 1971.  At December 31, 2011, the Service Corporation was inactive.

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REGULATION

Set forth below is a brief description of those laws and regulations which, together with the descriptions of laws and regulations contained elsewhere herein, are deemed material to an investor's understanding of the extent to which the Company and the Bank are regulated.  The description of the laws and regulations hereunder, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

Transfer of OTS Powers. Effective July 21, 2011, one year after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), signed into law on July 21, 2010, the OTS was eliminated and its powers transferred to the FDIC, the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Bank (“FRB”). The OCC assumed supervisory oversight of federal savings associations and became the primary regulator of the Bank.  The FRB assumed oversight of all savings and loan holding companies and will become the primary regulator of the Company.

The Company

General.  The Company, as a savings and loan holding company within the meaning of the Home Owners’ Loan Act ("HOLA"), has registered with the FRB and is subject to FRB regulations, examinations, supervision and reporting requirements.  As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Company and affiliates thereof.

Holding Company Acquisitions.  Federal law generally prohibits a savings and loan holding company, without prior FRB approval, from acquiring the ownership or control of any other savings institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares thereof which is not a subsidiary.  These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OCC.

Holding Company Activities.  There are generally no restrictions on the activities of a savings and loan holding company, such as the Company, which controlled only one subsidiary savings association on or before May 4, 1999 (a “grandfathered holding company”).  However, if the OCC determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings association, the OCC may impose such restrictions as it deems necessary to address such risk, including limiting (i) payment of dividends; (ii) transactions between or among its affiliates; and (iii) any activities that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association.  Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the qualified thrift lender (“QTL”) test, then such unitary holding company also shall become subject to the activities restrictions applicable to multiple savings and loan holding companies and, unless the savings association requalifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions applicable to, a bank holding company.

The activities financial holding companies may engage in include:

§ lending, exchanging, transferring or investing for others, or safeguarding money or securities;

§ insuring, guaranteeing or indemnifying others, issuing annuities, and acting as principal, agent or broker for purposes of the foregoing;

§ providing financial, investment or economic advisory services, including advising an investment company;

§ issuing or selling interests in pooled assets that a bank could hold directly;

§ underwriting, dealing in or making a market in securities; and

§ merchant banking activities.

Every savings institution subsidiary of a savings and loan holding company is required to give the OCC at least 30 days’ advance notice of any proposed dividends to be made on its guaranteed, permanent or other nonwithdrawable stock, or else such dividend will be invalid.

Restrictions on Transactions with Affiliates.   Transactions between a savings institution and its "affiliates" are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act and OCC regulations.  Affiliates of a savings institution generally include, among other entities, the savings institution’s holding company and companies that are controlled by or under common control with the savings institution.  Generally, Section 23A (i) limits the extent to which the savings association or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such association’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus.  Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least favorable, to the association or subsidiary as those provided to a non-affiliate.  The term “covered transaction” includes the making of loans to, purchase of assets from, issuance of a guarantee to an affiliate and similar transactions.  Section 23B transactions also apply to the provision of services and the sale of assets by a savings association to an affiliate.  In addition to the restrictions imposed by Sections 23A and 23B, Section 11 of the HOLA prohibits a savings association from (i) making a loan or other extension of credit to an affiliate, except for any affiliate which engages only in certain activities which are permissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings association.

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In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders.  Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution (“a principal stockholder”), and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus).  Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings institution.  Section 22(h) also requires prior board approval for certain loans.  In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution’s unimpaired capital and surplus.  Furthermore, Section 22(g) places additional restrictions on loans to executive officers.  At December 31, 2011, the Bank was in compliance with the above restrictions.  The Company Order prohibits the Company from engaging in transactions with the Bank except exempt transactions under 12 CFR 223 and intercompany cost-sharing transactions and tax sharing transactions without the prior written non-objection of the OCC and the FRB.

The Bank

General.  The OCC has extensive authority over the operations of federally chartered savings institutions.  As part of this authority, savings institutions are required to file periodic reports with the OCC and are subject to periodic examinations by the OCC and the FDIC.  The last regulatory examination of the Bank by the OCC was a joint exam with the FDIC conducted in the fourth quarter of 2011.  Federal laws and regulations prescribe the investment and lending authority of savings institutions, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations.

The OCC's enforcement authority over all savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions.  In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.  Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC.

Insurance of Accounts. FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit. FDIC insurance does not cover other financial products and services that banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or securities.  The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. From December 31, 2010 through December 31, 2012, at all FDIC-insured institutions, deposits held in noninterest-bearing transaction accounts will be fully insured regardless of the amount in the account. On November 9, 2010, the FDIC adopted a final rule of the Dodd-Frank Act which provides unlimited FDIC insurance for only noninterest-bearing transaction accounts in all banks effective December 31, 2010 and continuing through December 31, 2012.  On December 22, 2010, Congress passed a bill authorizing the FDIC to expand the unlimited FDIC insurance to lawyers trust accounts for 2011-2012.  The Dodd-Frank Act also permanently increases deposit insurance coverage to $250,000 per depositor.

Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (“CAMELS rating”).

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.  It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC.  The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OCC an opportunity to take such action. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC.  It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital.  If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC.  Management is aware of no existing circumstances that would result in termination of the Bank's deposit insurance.

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On February 7, 2011, the FDIC finalized the rule to redefine the deposit insurance assessment base as required by the Dodd-Frank Act.  The base is defined as average consolidated total assets for the assessment period less average tangible equity capital with potential adjustments for unsecured debt, brokered deposits and depository institution debts.  The FDIC also adopted a new rate schedule and suspended dividends indefinitely.  In lieu of dividends, the FDIC adopted progressively lower assessment rate schedules that will take effect when the reserve ratio exceeds 1.15 percent, 2 percent and 2.5 percent.  All changes and revised rates went into effect April 1, 2011. 

FDIC insurance expense totaled $1.4 million and $1.9 million in 2011 and 2010, respectively. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds.

Temporary Liquidity Guarantee Program.  On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG Program was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by the Secretary of the Department of Treasury (after consultation with the President), as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the latest extension of the TLG Program the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before October 31, 2009 and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying 0.25% interest or less per annum and Interest on Lawyers Trust  Accounts held at participating FDIC- insured institutions through December 31, 2010 (the Transaction Account Guarantee Program, or “TAG” Program). On December 5, 2008, the Company elected to participate in both the debt guarantee and TAG programs. Coverage under the TLG Program was available for the first 30 days without charge. The fee assessment for the TAG program is 25 basis points annualized collected quarterly on average daily account balances in covered accounts exceeding $250,000. The TAG program expired on December 31, 2010.

On November 9, 2010, the FDIC adopted a final rule of the Dodd-Frank Act which provides unlimited FDIC insurance for only noninterest-bearing transaction accounts in all banks effective December 31, 2010 and continuing through December 31, 2012.  On December 22, 2010, Congress passed a bill authorizing the FDIC to expand the unlimited FDIC insurance to lawyers trust accounts for 2011-2012.  The Dodd-Frank Act also permanently increases deposit insurance coverage to $250,000 per depositor.

Regulatory Capital Requirements.  Federally insured savings institutions are required to maintain minimum levels of regulatory capital.  The OCC has established capital standards applicable to all savings institutions.  These standards generally must be as stringent as the comparable capital requirements imposed on national banks.  The OCC also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

Current OCC capital standards require savings institutions to satisfy three different capital requirements.  Under these standards, savings institutions must maintain "tangible" capital equal to at least 1.5% of adjusted total assets, "core" capital equal to at least 4.0% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to at least 8.0% of "risk-weighted" assets.  Capital regulations define core capital and tangible capital as equity in accordance with GAAP, adjusted for unrealized gains and losses on certain available for sale securities, less investments in nonincludable subsidiaries, less goodwill and other intangible assets, less certain nonqualifying equity instruments, plus noncontrolling interests in includable consolidated subsidiaries, plus nonwithdrawable deposits of mutual associations  Both core and tangible capital are further reduced by an amount equal to a savings institution's debt and equity investments in subsidiaries engaged in activities not permissible to national banks (other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies).  These adjustments do not materially affect the Bank's regulatory capital.

In determining compliance with the risk-based capital requirement, a savings institution is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the savings institution's core capital.  Supplementary capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included as core capital; subordinated debt and intermediate-term preferred stock; and the allowance for loan losses up to a maximum of 1.25% of risk-weighted assets.  In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets.  The risk weights assigned by the OCC for principal categories of assets are (i) 0% for cash and securities issued by the U.S. Government or unconditionally backed by the full faith and credit of the U.S. Government; (ii) 20% for securities (other than equity securities) issued by U.S. Government-sponsored agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (iii) 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 90% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential bridge loans made directly for the construction of one- to four-family residences and qualifying multifamily residential loans; and (iv) 100% for all other loans and investments, including consumer loans, commercial loans, and one- to four-family residential real estate loans more than 90 days delinquent, and for repossessed assets.

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Prompt Corrective Action.  The OCC is required to take certain supervisory actions against undercapitalized savings associations, the severity of which depends upon the institution’s degree of undercapitalization.  The following table shows the amount of capital associated with the different capital categories set forth in the prompt corrective action regulations.

	Total Risk-Based Capital	Tier 1 Risk-Based Capital	Tier 1 Leverage Capital
Well capitalized	10% or more	6% or more	5% or more
Adequately capitalized	8% or more	4% or more	4% or more
Undercapitalized	Less than 8%	Less than 4%	Less than 4%
Significantly undercapitalized	Less than 6%	Less than 3%	Less than 3%

At December 31, 2011, the Bank had total risk-based, tier 1 risk-based, and tier 1 leverage ratios of 19.62%, 18.32% and 11.22% which would have satisfied the “well capitalized” criteria set forth in the table above.  The OCC may reclassify an institution to a lower capital category based on various supervisory criteria, including a formal agreement for increased capital levels.  An “adequately capitalized” institution is subject to restrictions on deposit rates under the FDIC’s brokered deposit rule which covers, in some circumstances, deposits solicited directly by the institution.  As a result of the Bank Order, the Bank was required to raise its tier 1 core capital and Total Risk-Based Capital Ratios to 8% and 12%, respectively, by December 31, 2010.  The Bank did not achieve these required levels by December 31, 2010. However, the Bank achieved compliance with the capital requirements of the Orders during the second quarter of 2011 as a result of the Recapitalization.

Qualified Thrift Lender Test.  All savings institutions are required to meet a QTL test to avoid certain restrictions on their operations.  A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; and (iii) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank.  Upon the expiration of three years from the date the savings institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank.

Currently, the QTL test requires either (i) that a savings association qualifies as a domestic building and loan association as defined in Section 7701 (a)(19) of the Internal Revenue Code of 1986, as amended, (the “Code”) or (ii) that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months.  Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; educational loans; small business loans; loans made through credit cards or credit card accounts; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); stock issued by the FHLB of Dallas; and direct or indirect obligations of the FDIC.  In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; investments in a service corporation that derives at least 80% of its gross revenues from activities related to domestic or manufactured residential housing; 200% of the amount of loans and investments in “starter homes”; 200% of the amount of certain loans in “credit-needy” areas; loans for the purchase, construction, development, or improvements of “community service facilities” not in credit-needy areas; loans for personal, family, or household purchases (other than those in the includable without limit category); and stock issued by the FHLMC or the FNMA.  Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets.  At December 31, 2011, the qualified thrift investments of the Bank were approximately 77.31% of its portfolio assets.

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Federal Home Loan Bank System.  The Bank is a member of the FHLB of Dallas, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions.  Each FHLB serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB.  At December 31, 2011, the Bank had $6.7 million of outstanding FHLB advances.

As a member, the Bank is required to purchase and maintain stock in the FHLB of Dallas in an amount equal to the sum of 0.05% of total assets as of the previous December 31 and 4.10% of outstanding advances.  At December 31, 2011, the Bank had $576,000 in FHLB stock, which was in compliance with this requirement.  No ready market exists for such stock and it has no quoted market value.

 The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.  These contributions have adversely affected the level of FHLB dividends paid in the past and could continue to do so in the future.  These contributions also could have an adverse effect on the value of FHLB stock in the future.

Federal Reserve System.  The FRB requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits.  As of December 31, 2011, no reserves were required to be maintained on the first $10.7 million of transaction accounts, reserves of 3% were required to be maintained against the next $48.1 million of net transaction accounts (with such dollar amounts subject to adjustment by the FRB), and a reserve of 10% against all remaining net transaction accounts.  Because required reserves must be maintained in the form of vault cash or a noninterest bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution's earning assets.

TAXATION

Federal Taxation

General.  The Company and the Bank are subject to the generally applicable corporate tax provisions of the Code, and the Bank is subject to certain additional provisions of the Code that apply to thrift and other types of financial institutions. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters material to the taxation of the Company and the Bank and is not a comprehensive discussion of the tax rules applicable to the Company and the Bank.

Year.  The Bank files a federal income tax return on the basis of a fiscal year ending on December 31.  The Company filed a consolidated federal income tax return with both the Bank and the Service Corporation.

Bad Debt Reserves.  Prior to the enactment of the Small Business Jobs Protection Act (the "Act"), which was signed into law on August 21, 1996, certain thrift institutions, such as the Bank, were allowed deductions for bad debts under methods more favorable than those granted to other taxpayers.  Qualified thrift institutions could compute deductions for bad debts using either the specific charge-off method of Section 166 of the Code or the reserve method of Section 593 of the Code.As a result of the 1996 Act, the Bank was required to use the specific charge-off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve).

The balance of the pre-1988 reserves is subject to the provisions of Section 593(e), as modified by the Act, which requires recapture in the case of certain excessive distributions to shareholders.  The pre-1988 reserves may not be utilized for payment of cash dividends or other distributions to a shareholder (including distributions in dissolution or liquidation) or for any other purpose (except to absorb bad debt losses).  Distribution of a cash dividend by a thrift institution to a shareholder is treated as made:  first, out of the institution's post-1951 accumulated earnings and profits; second, out of the pre-1988 reserves; and third, out of such other accounts as may be proper.  To the extent a distribution by the Bank to the Company is deemed paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and the Bank's gross income for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the pre-1988 reserves.  As of December 31, 2011, the Bank's pre-1988 reserves for tax purposes totaled approximately $4.2 million.

Minimum Tax.  The Code imposes an alternative minimum tax at a rate of 20%.  The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI") and is payable to the extent such AMTI is in excess of an exemption amount.  Items of tax preference that constitute AMTI include (a) tax-exempt interest on newly issued (generally, issued on or after August 8, 1986) private activity bonds other than certain qualified bonds and (b) 75% of the excess (if any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating losses).  Generally, only 90% of AMTI can be offset by net operating loss carrybacks and carryforwards.

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Net Operating Loss Carryovers.  A financial institution may, for federal income tax purposes, carry back net operating losses ("NOLs") to the preceding two taxable years and forward to the succeeding 20 taxable years.  At December 31, 2011, the Bank had a $9.3 million NOL for federal income tax purposes that will be carried forward. The federal NOL was limited based on Bear State’s investment in the Company as it constituted an “ownership change” as defined in the Code. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOL carryforwards and certain recognized built-in losses.  The annual limit under Section 382 is approximately $405,000.

Capital Gains and Corporate Dividends-Received Deduction.  Corporate net capital gains are taxed at a maximum rate of 35%.  The corporate dividends-received deduction is 80% in the case of dividends received from a “20-percent-owned corporation”, i.e., a corporation having at least twenty percent (but generally less than 80 percent) of its stock owned by the recipient corporation and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.  However, a corporation may deduct 100% of dividends from a member of the same affiliated group of corporations.

Deferred Taxes.  A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and expense, and unrealized gains and losses, for financial and tax reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company conducted an analysis to assess the need for a valuation allowance at December 31, 2011 and December 31, 2010. As part of this assessment, all available evidence, including both positive and negative, was considered to determine whether based on the weight of such evidence, a valuation allowance on the Company’s deferred tax assets was needed. In accordance with ASC Topic 740-10, Income Taxes (ASC 740), a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized. The future realization of the deferred tax asset depends on the existence of sufficient taxable income within the carryback and carryforward periods.

As part of its analysis, the Company considered the following positive evidence:

· The Company has a long history of earnings profitability prior to 2009.

· Future reversals of certain deferred tax liabilities.

As part of its analysis, the Company considered the following negative evidence:

· The Company recorded a net loss in 2009, 2010 and 2011.

· The Company may not meet its projections concerning future taxable income.

· Limitations on the Company’s ability to utilize its pre-change NOLs and certain recognized built-in losses to offset future taxable income pursuant to Section 382 of the Internal Revenue Code.

At December 31, 2011, and December 31, 2010, based on the negative evidence presented, the Company determined that a valuation allowance relating to both the federal and state portion of our deferred tax asset was necessary.  In addition, the determination for the state deferred tax asset included negative evidence represented by the level of state tax exempt interest income which reduces state taxable income to a level that makes it unlikely the Company will realize its state deferred tax asset. Therefore, valuation allowances of $20.1 million and $4.8 million at December 31, 2011 were recorded for the federal deferred tax asset and the state deferred tax asset, respectively.

Other Matters.  The Bank's federal income tax returns for the tax years ended December 31, 2008 forward are open under the statute of limitations and are subject to review by the IRS.

State Taxation

The Bank is subject to the Arkansas corporation income tax, which is a progressive rate up to a maximum of 6.5% of all taxable earnings.

The Company is incorporated under Arkansas law and, accordingly, is subject to the Arkansas Franchise Tax.  The Arkansas Franchise Tax is based on the par value of the issued and outstanding capital stock of the Company.

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Item 1A.                       Risk Factors

You should carefully read and consider the risk factors described below as well as other information included in this Annual Report on Form 10-K and the information contained in other filings with the SEC.  Any of these risks, if they actually occur, could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations and prospects.  Additional risks and uncertainties not presently known by us or that we currently deem to be immaterial may materially and adversely affect us.

The failure of the Company and/or the Bank to comply with applicable regulatory requirements and regulatory enforcement actions could result in further restrictions and enforcement actions.

The Bank is subject to supervision and regulation by the OCC and FDIC and the Company is subject to supervision and regulation by the FRB.  As a federally chartered stock savings and loan association, the Bank’s good standing with its regulators is of fundamental importance to the continuation of its business and the business of the Company.  On April 12, 2010, the Company and the Bank both consented to the Orders issued by the OTS.  The Orders required the Company and the Bank to, among other things, file with the OTS an updated business plan and capital plan and submit to the OTS (OCC and FRB effective July 21, 2011), on a quarterly basis with respect to the business plan and monthly with respect to the capital plan, variance reports related to the plans.  The Orders impose certain operations restrictions on the Company and, to a greater extent, the Bank, including lending and dividend restrictions. In particular, the Bank must seek the prior non-objection of the OCC before making certain kinds of loans.   We have incurred and expect to continue to incur significant additional regulatory compliance expense in connection with the Orders, and we will incur ongoing expenses attributable to compliance with the terms of the Orders.  In addition, the OCC and FRB must approve any deviation from our business plan, which could limit our ability to make any changes to our business, which could negatively impact the scope and flexibility of our business activities.

While the Company and the Bank intend to take such actions as may be necessary to comply with the requirements of the Orders, the Company and the Bank may be unable to comply fully with the Orders, and efforts to comply with the Orders may have adverse effects on the operations and financial condition of the Company or the Bank. In addition, the Bank from time to time may require waivers, amendments, or modifications in order to remain in compliance with the Orders, and the regulators may not grant such relief. Any material failure by the Company and the Bank to comply with the provisions of the Orders could result in further enforcement actions by the FRB and/or the OCC which could impact our ability to operate in the normal course of business and, thereby, adversely affect our results of operations.

Future bank failures across the country could significantly increase FDIC premiums.

Recent difficult economic conditions have resulted in higher bank failures and expectations of future bank failures. In the event of a bank failure, the FDIC takes control of a failed bank and ensures payment of deposits up to insured limits (which have recently been increased) using the resources of the DIF. The FDIC is required by law to maintain adequate funding of the DIF, and the FDIC may increase premium assessments to maintain such funding. Recent bank failures have substantially depleted the insurance fund of the FDIC and reduced the fund's ratio of reserves to insured deposits.  If the FDIC elects to increase deposit insurance premiums and assessments, non-interest expense could increase significantly.

Future bank failures in local markets could cause large sales of bank-owned properties, reducing the value of our REO, resulting in additional losses, costs and expenses that may negatively affect the Company’s operations.

Further bank failures in the Bank’s geographic regions could adversely impact the value of real estate owned. Declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of real estate loans and resulted in significant write-downs of assets by many financial institutions in our markets.  Future bank failures in the areas in which we operate would exacerbate these conditions. Such effects may be particularly pronounced in a market like Northwest Arkansas with reduced real estate values and excess inventory, which may make the disposition of REO properties more difficult, increase maintenance costs and expenses, and reduce the Company’s ultimate realization from any REO sales. At December 31, 2011 and 2010, the Company had $28.1 million and $44.7 million of REO, respectively. As the amount of REO in our market areas increases, the Company’s losses and the costs and expenses of maintaining the real estate will likewise increase. Any additional increase in losses, and maintenance costs and expenses due to REO could have a material adverse impact on the Company’s business, results of operations and financial condition.

The current economic environment poses significant challenges for us and could continue to adversely affect the Company’s financial condition and results of operations.

The Company is operating in a challenging and uncertain economic environment, including generally uncertain national and local conditions.  Financial institutions continue to be affected by sharp declines in the real estate market and constrained financial markets.  Dramatic declines in the housing market over the past several years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by the Bank and other financial institutions.  Continued declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the uncertain economic environment could continue to have an adverse effect on the Bank’s borrowers or their customers, which could adversely affect the Company’s financial condition and results of operations.  A worsening of these conditions would likely exacerbate the adverse effects on the Company and others in the financial services industry.  For example, further deterioration in local economic conditions in the Company’s markets could drive losses beyond that which is provided for in its allowance for loan losses or could require further write-downs of the Bank’s real estate owned.  The Company may also face the following risks in connection with these events:

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§ Economic conditions in the markets in which we operate that negatively affect housing prices and the job market have resulted, and may continue to result, in deterioration in credit quality of the Bank’s loan portfolio, and such deterioration in credit quality has had, and could continue to have, a negative impact on the Company’s business and financial condition.

§ Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities.

§ The processes the Company uses to estimate the allowance for loan losses may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation.

§ The Bank’s ability to assess the creditworthiness of its customers may be impaired if the processes and approaches it uses to select, manage, and underwrite its customers become less predictive of future charge-offs.

§ The Company has faced and expects to continue to face increased regulation of its industry, and compliance with such regulation has increased and may continue to increase its costs, limit its ability to pursue business opportunities, and increase compliance challenges.

As these conditions or similar ones continue to exist or worsen, the Company could experience continuing or increased adverse effects on its financial condition and results of operations.

We have a high percentage of nonperforming loans and classified assets relative to total assets.  If the allowance for loan losses is not sufficient to cover actual loan losses, results of operations will be adversely affected.

At December 31, 2011, nonperforming loans totaled $34.0 million, representing 9.7% of total loans and 5.9% of total assets. At December 31, 2011, real estate owned totaled $28.1 million or 4.9% of total assets. As a result, the Company’s total nonperforming assets amounted to $62.5 million or 10.8% of total assets at December 31, 2011. Further, assets classified by management as substandard, including nonperforming loans and real estate owned, totaled $103.1 million, representing 17.8% of total assets.  At December 31, 2011, the allowance for loan losses was $20.8 million, representing 60.6% of nonperforming loans.  In the event loan customers do not repay their loans according to their terms and the collateral securing the payment of these loans is insufficient to pay any remaining loan balance, significant loan losses could result, which could have a material adverse effect on the Company’s financial condition and results of operations.

Management maintains an allowance for loan losses based upon, among other things:

• historical experience;

• repayment capacity of borrowers;

• an evaluation of local, regional and national economic conditions;

• regular reviews of delinquencies and loan portfolio quality;

• collateral evaluations;

• current trends regarding the volume and severity of problem loans;

• the existence and effect of concentrations of credit; and

• results of regulatory examinations.

Based on these factors, management makes various assumptions and judgments about the ultimate collectability of the respective loan portfolios.  The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and management must make significant estimates of current credit risks and future trends, all of which may undergo material changes. In addition, the Board of Directors and the OCC periodically review the allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs. The OCC’s judgments may differ from management.  While we believe that the allowance for loan losses is adequate to cover current losses, we may determine that we need to increase the allowance for loan losses or regulators may require an increase in the allowance. Either of these occurrences could materially and adversely affect the Company’s financial condition and results of operations. Any further increases to the allowance for loan losses and operating losses could negatively impact capital levels and make it more difficult to maintain the capital levels set forth in the Bank Order.

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A portion of the loan portfolio is related to commercial real estate, construction, commercial business and consumer lending activities and certain loans are secured by vacant or unimproved land. Uncertainties related to these lending activities may negatively impact these loans and could adversely impact results of operations.

As of December 31, 2011, approximately 30% of loans were related to commercial real estate and construction projects. Commercial real estate and construction lending generally is considered to involve a higher degree of risk than single family residential lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion or operation of the project for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity.  The loan portfolio also includes commercial business loans to small- to medium-sized businesses, which generally are secured by various equipment, machinery and other corporate assets, and a variety of consumer loans, including automobile loans, deposit account secured loans and unsecured loans.  Although commercial business loans and consumer loans generally have shorter terms and higher interest rates than mortgage loans, they generally involve more risk than mortgage loans because of the nature of, or in certain cases the absence of, the collateral which secures such loans.  In addition, a portion of the loan portfolio is secured by vacant or unimproved land.  Loans secured by vacant or unimproved land are generally more risky than loans secured by improved one- to four-family residential property.  Since vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business.  These loans are susceptible to adverse conditions in the real estate market and local economy.  Uncertainties related to these lending activities could result in higher delinquencies and greater charge-offs in future periods, which could adversely affect our financial condition or results of operations.

We have had losses in recent periods and may be unable to return to profitability in the near future which would adversely affect our stock price.

We incurred net losses available to common stockholders of $8.5 million and $4.9 million for the years ended December 31, 2011 and 2010, respectively.  A return to profitability will depend on our ability to implement our business plan and reduce credit losses and other real estate owned losses and write-downs in the future, which will depend, in part, on whether economic conditions in our markets improve.  We may be unsuccessful in executing our business plan. Further, even if we successfully implement the business plan, we may be unable to curtail losses now or in the future.  If we continue to incur significant operating losses, our stock price may decline.

We experienced an ownership change in connection with the investment by Bear State which resulted in a limitation of the use of net operating losses.

The Recapitalization constituted as an “ownership change” as defined for U.S. federal income tax purposes. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) to offset future taxable income. Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOL carryforwards and certain recognized built-in losses.

At December 31, 2011, the Bank had a $9.3 million NOL for federal income tax purposes that will be carried forward.  The Company experienced a permanent loss of approximately $5.7 million of its NOLs to offset future taxable income.

We are heavily regulated, and that regulation could limit or restrict our activities and adversely affect the Company’s financial condition.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies, including the OCC, the FRB and the FDIC.  Compliance with these regulations is costly and may restrict some of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates and locations of offices.  The regulators’ interpretation and application of relevant regulations are beyond our control and may change rapidly and unpredictably.  Banking regulations are primarily intended to protect depositors.  The regulations to which we are subject may not always be in the best interest of investors.

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In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. Over the past several years, the U.S. financial regulators responding to directives of the Obama Administration and Congress have intervened on an unprecedented scale. New legislative proposals continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including with respect to compensation, interest rates and the effect of bankruptcy proceedings on consumer real property mortgages. Further, federal and state regulatory agencies may adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulation to us. Compliance with current and potential regulation and scrutiny may significantly increase costs, impede the efficiency of internal business processes, require us to increase regulatory capital and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance. Additionally, evolving regulations concerning executive compensation may impose limitations that affect our ability to compete successfully for executive and management talent.

In addition, given the current economic and financial environment, our regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, certain risk management or other operational practices for financial services companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition and results of operations. Furthermore, the regulatory agencies have discretion in their interpretation of the regulations and laws and their interpretation of the quality of our loan portfolio, securities portfolio and other assets. If any regulatory agency’s assessment of our assets quality differs from ours, we may be required to take additional charges that would have the effect of materially reducing our earnings, capital ratios and stock price.

The U.S. Congress passed the Dodd-Frank Act on July 21, 2010, which includes sweeping changes in the banking regulatory environment.  The Dodd-Frank Act changed our primary regulator and may, among other things, restrict or increase the regulation of certain business activities and increase the cost of doing business. While many of the provisions in the Dodd-Frank Act are aimed at financial institutions significantly larger than us, and some will affect only institutions with different charters than us or institutions that engage in activities in which we do not engage, it will likely increase our regulatory compliance burden and may have other adverse effects on us, including increasing the costs associated with regulatory examinations and compliance measures. We are closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations. While the ultimate effect of the Dodd-Frank Act on us is still undetermined, the law is likely to result in increased compliance costs and fees paid to regulators, along with possible restrictions on our operations. 

Further, the U.S. Congress and state legislatures and federal and state regulatory authorities continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation and implementation of statutes, regulation or policies, including the Dodd-Frank Act, could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we may offer or increasing the ability of non-banks to offer competing financial services and products. While we cannot predict the regulatory changes that may be borne out of the current economic crisis, and we cannot predict whether we will become subject to increased regulatory scrutiny by any of these regulatory agencies, any regulatory changes or scrutiny could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, credit unions, savings and loan associations and other institutions. We cannot predict whether additional legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition or results of operations.

We could be materially and adversely affected if we or any of our officers or directors fail to comply with bank and other laws and regulations.

The Company and the Bank are subject to extensive regulation by U.S. federal and state regulatory agencies and face risks associated with investigations and proceedings by regulatory agencies, including those that we may believe to be immaterial. Like any corporation, we are also subject to risk arising from potential employee misconduct, including non-compliance with policies. Any interventions by authorities may result in adverse judgments, settlements, fines, penalties, injunctions, suspension or expulsion of our officers or directors from the banking industry or other relief. In addition to the monetary consequences, these measures could, for example, impact our ability to engage in, or impose limitations on, certain businesses. The number of these investigations and proceedings, as well as the amount of penalties and fines sought, has increased substantially in recent years with regard to many firms in the industry. Significant regulatory action against us or our officers or directors could materially and adversely affect our business, financial condition or results of operations or cause us significant reputational harm, which could seriously harm our business.

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Changes in interest rates could have a material adverse effect on our operations.

The operations of financial institutions such as the Bank are dependent to a large extent on net interest income, which is the difference between the interest income earned on interest earning assets such as loans and investment securities and the interest expense paid on interest bearing liabilities such as deposits and borrowings.  Approximately 46% of loans had variable rates as of December 31, 2011, which means that interest income will generally decrease in lower rate environments and rise in higher rate environments.  Changes in the general level of interest rates can affect net interest income by affecting the difference between the weighted average yield earned on interest earning assets and the weighted average rate paid on interest bearing liabilities, or interest rate spread, and the average life of interest earning assets and interest bearing liabilities.  Changes in interest rates also can affect our ability to originate loans; the value of our interest earning assets; our ability to obtain and retain deposits in competition with other available investment alternatives; and the ability of borrowers to repay adjustable or variable rate loans.  Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.  In particular, the Company had $62.1 million of investment securities at December 31, 2011, all of which were classified as available for sale.  At December 31, 2011, the investment securities portfolio had a net unrealized gain of $898,000 given the current low interest rate environment.  A significant and prolonged increase in interest rates will have a material adverse effect on the fair value of the investment securities portfolio and, accordingly, stockholders’ equity.  Results of operations may be adversely affected during any period of changes in interest rates due to a number of factors which can have a material adverse impact on the Bank’s interest rate risk position.  Such factors include among other items, call features and interest rate caps and floors on various assets and liabilities, prepayments, the current interest rates on assets and liabilities to be repriced in each period, and the relative changes in interest rates on different types of assets and liabilities.

We may incur increased employee benefit costs which could have a material adverse effect on our financial condition and results of operations.

The Bank is a participant in the multiemployer Pentegra DB Plan (the “Pentegra DB Plan”).  Since the Pentegra DB Plan is a multiemployer plan, contributions of participating employers are commingled and invested on a pooled basis without allocation to specific employers or employees. Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. In addition, if a participating employer stops contributing to the plan, the unfunded obligations of the multiemployer plan may be borne by the remaining participating employers.

On April 30, 2010, the Board of Directors of the Bank elected to freeze the Pentegra DB Plan effective July 1, 2010, eliminating all future benefit accruals for participants in the Pentegra DB Plan and closing the Pentegra DB Plan to new participants as of that date. The Pentegra DB Plan is noncontributory and prior to July 1, 2010 covered substantially all employees. Since July 1, 2010, the Bank has continued to incur costs consisting of administration and Pension Benefit Guaranty Corporation insurance expenses as well as amortization charges based on the funding level of the Pentegra DB Plan.  The level of amortization charges is determined by the Pentegra DB Plan's funding shortfall, which is determined by comparing the Pentegra DB Plan’s liabilities to the Pentegra DB Plan’s assets.  Based on the level of interest rates and Pentegra DB Plan assets, the funding shortfall increased, resulting in increased amortization charges effective both July 1, 2010 and July 1, 2011.  Future pension funding requirements, and the timing of funding payments, are also subject to changes in legislation. Based on factors that influence the levels of plan assets and liabilities, such as the level of interest rates and the performance of plan assets, it is reasonably possible that events could occur that would materially change the estimated amount of the Bank’s required contribution in the near term. Additionally, if the Bank were to terminate its participation in the Pentegra DB Plan, the Bank could incur a significant withdrawal liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

We face strong competition that may adversely affect our profitability.

We are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions, including commercial banks, savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies.  We also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers.  Many of our competitors are larger financial institutions with substantially greater resources, lending limits, and larger branch systems. These competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.  Competition from both bank and non-bank organizations will continue. Our inability to compete successfully could adversely affect profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Our ability to successfully compete may be reduced if we are unable to make technological advances.

The banking industry is experiencing rapid changes in technology.  In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs.  As a result, our future success will depend in part on our ability to address our customers’ needs by using technology.  We may be unable to effectively develop new technology-driven products and services and may be unsuccessful in marketing these products to our customers.  Many of our competitors have greater resources than we have to invest in technology. Any failure to keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

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We are subject to security and operational risks relating to our use of technology that could damage our reputation and our business.

Security breaches in our internet banking activities could expose us to possible liability and damage our reputation.  Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information.  We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data.  These precautions may not protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and our business.  Additionally, we outsource our data processing to a third party.  If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it could significantly affect our ability to adequately process and account for customer transactions, which could significantly affect our business operations.  The Bank has never incurred a material security breach nor encountered any significant down time with our outsourced partners. The occurrence of any failures, interruptions or security breaches of our systems could damage our reputation, result in loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

The trading volume of our common stock is lower than that of other financial services companies and the market price of our common stock may fluctuate significantly, which can make it difficult to sell shares of our common stock at times, volumes and prices attractive to our stockholders.

Our common stock is listed on the NASDAQ Global Market under the symbol “FFBH.” The average daily trading volume for shares of our common stock is lower than larger financial institutions.  Because the trading volume of our common stock is lower, and thus has substantially less liquidity than the average trading market for many other publicly traded companies, sales of our common stock may place significant downward pressure on the market price of our common stock.  In addition, market value of thinly traded stocks can be more volatile than stocks trading in an active public market.

The market price of our common stock has been volatile in the past and may fluctuate significantly as a result of a variety of factors, many of which are beyond our control.  These factors include, in addition to those described in elsewhere in this Annual Report on Form 10-K:

· actual or anticipated quarterly or annual fluctuations in our operating results, cash flows and financial condition;

· changes in earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;

· speculation in the press or investment community generally or relating to our reputation or the financial services industry;

· strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;

· fluctuations in the stock price and operating results of our competitors;

· future issuances or re-sales of our equity or equity-related securities, or the perception that they may occur;

· proposed or adopted regulatory changes or developments;

· anticipated or pending investigations, proceedings, or litigation or accounting matters that involve or affect us;

· domestic and international economic factors unrelated to our performance; and

· general market conditions and, in particular, developments related to market conditions for the financial services industry.

In addition, in recent years, the stock markets in general have experienced extreme price and volume fluctuations, and market prices for the stock of many companies, including those in the financial services sector, have experienced wide price fluctuations that have not necessarily been related to operating performance.  This is due, in part, to investors’ shifting perceptions of the effect of changes and potential changes in the economy on various industry sectors.  This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their performance or prospects.  These broad market fluctuations may adversely affect the market price of our common stock, notwithstanding our actual or anticipated operating results, cash flows and financial condition.  We expect that the market price of our common stock will continue to fluctuate due to many factors, including prevailing interest rates, other economic conditions, our operating performance and investor perceptions of the outlook for us specifically and the banking industry in general.

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As a result of the lower trading volume of our common stock and its susceptibility to market price volatility, stockholders may not be able to resell their shares at times, volumes or prices they find attractive.

Bear State holds a controlling interest in our common stock and may have interests that differ from the interests of our other stockholders.

Bear State owns approximately 82% of our common stock (after taking into account the assumed exercise of the Investor Warrant) and designated five of eight members for appointment to our Board of Directors. As a result, Bear State is able to control the election of directors, to determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to our stockholders for approval. Such transactions may include mergers and acquisitions, sales of all or some of the Company’s assets or purchases of assets, and other significant corporate transactions. Bear State also has sufficient voting power to amend our organizational documents.

The interests of Bear State may differ from those of our other stockholders, and it may take actions that advance its interests to the detriment of our other stockholders. Additionally, Bear State is in the business of making investments in or acquiring financial institutions and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Bear State may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

This concentration of ownership could also have the effect of delaying, deferring or preventing a change in our control or impeding a merger or consolidation, takeover or other business combination that could be favorable to the other holders of our common stock, and the market price of our common stock may be adversely affected by the absence or reduction of a takeover premium in the trading price.

As a controlled company, we are exempt from certain NASDAQ corporate governance requirements, and holders of our common stock may not have all the protections that these rules are intended to provide.

Our common stock is currently listed on the NASDAQ Global Market. NASDAQ generally requires a majority of directors to be independent and requires independent director oversight over the nominating and executive compensation functions. However, under NASDAQ’s rules, if an individual or another entity owns more than 50% of the voting power for the election of directors of a listed company, that company is considered a “controlled company” and is exempt from rules relating to independence of the board of directors and the compensation and nominating committees. We are a controlled company because Bear State owns more than 50% of our voting power for the election of directors. Accordingly, we are exempt from certain corporate governance requirements, and holders of our common stock may not have all the protections that these rules are intended to provide.

We are prohibited from paying dividends or repurchasing common stock and may not be able to resume such activities even if permitted by our regulators.

Under the Company Order, we may not pay dividends on our common stock or repurchase shares of our common stock without the prior written non-objection of the FRB.  We cannot determine at this time if or when we would be able to pay dividends or repurchase shares of our common stock even if we are allowed to do so by our regulators.  Any future payment of any dividends on both our common stock and any preferred stock and any repurchases of our common stock, will be dependent upon, among other things, our regulatory capital requirements, our financial condition, liquidity, results of operations, and cash flow, tax considerations, statutory, regulatory and contractual prohibition and other limitations, and general economic conditions.

22

Item 1B.  Unresolved Staff Comments.

None

Item 2.  Properties.

At December 31, 2011, the Bank conducted its business from its executive offices in Harrison and Little Rock, Arkansas, and seventeen full service offices, all of which are located in Northcentral and Northwest Arkansas, and loan production offices in Northwest Arkansas and Little Rock, Arkansas. In February 2012, three full service offices in Northwest Arkansas were closed.

The following table sets forth information with respect to the offices and other properties of the Bank at December 31, 2011.

Description/Address		Leased/ Owned	Description/Address		Leased/ Owned
1401 Highway 62/65 North Harrison, AR  72601	FS	Owned	2000 Promenade Boulevard Rogers, AR  72758	FS	Leased(1)
200 West Stephenson Harrison, AR 72601	FS	Owned	2501 E. Central Ave., Suite 2 Bentonville, AR  72712	FS	Leased(2)
324 Hwy. 62/65 Bypass Harrison, AR  72601	FS	Owned	3460 North College Fayetteville, AR  72703	FS	Owned
210 South Main Berryville, AR  72616	FS	Owned	201 East Henri De Tonti Blvd. Tontitown, AR  72764	FS	Owned(4)
668 Highway 62 East Mountain Home, AR  72653	FS	Owned	2025 North Crossover Road Fayetteville, AR 72703	FS	Owned
1337 Highway 62 SW Mountain Home, AR 72653	FS	Owned	191 West Main Street Farmington, AR 72730	FS	Owned
301 Highway 62 West Yellville, AR  72687	FS	Owned	2030 West Elm Rogers, AR 72756	FS	Owned
307 North Walton Blvd. Bentonville, AR  72712	FS	Owned	1023 East Millsap Road Fayetteville, AR  72703	LP	Owned(6)
3300 West Sunset Springdale, AR  72762	FS	Owned	3027 Highway 62 East Mountain Home, AR 72653	FS	Owned
900 S Shackleford Rd St 230 Little Rock, AR 76703	LP	Leased(3)	225 N. Bloomington Street, Ste. H Lowell, AR  72745	FS	Owned(5)

LP = Loan Production Office

FS = Full Service Office

(1) Such property is subject to a ten-year lease expiring March 1, 2018, with five five-year renewal options.

(2) Such property is subject to a five-year lease expiring August 1, 2013, with two five-year renewal options. The branch office occupying this location was closed effective February 29, 2012; therefore this lease will not be renewed.

(3) Such property is subject to a month to month lease.

(4) This branch location was closed effective February 29, 2012 and sold, with closing on March 1, 2012.

(5) This location ceased operation as a branch effective February 29, 2012 and will be used by the Bank for certain back office operations.

(6) This location, while still in use at December 31, 2011, was being marketed for sale.  Employees at this location are expected to relocate to the Lowell location after it ceases operation as a branch location.

Item 3.  Legal Proceedings.

Neither the Company nor the Bank is involved in any pending legal proceedings other than nonmaterial legal proceedings occurring in the ordinary course of business.

23

Item 4.  Mine Safety Disclosures.

Not applicable.

PART II.

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Shares of the Company's common stock are traded under the symbol "FFBH" on the Nasdaq Global Market.  At March 19, 2012, the Company had 19,302,603 shares of common stock outstanding and had approximately 744 holders of record.

The following table sets forth the dividends declared and the reported high and low end of day closing prices of a share of the Company's common stock as reported by Nasdaq for the periods indicated.

Quarter Ended	Year Ended December 31, 2011						Year Ended December 31, 2010
	High		Low		Dividend		High		Low		Dividend
March 31	$	18.05	$	7.10		--	$	19.45	$	11.45		--
June 30	$	15.55	$	5.64		--	$	19.50	$	13.00		--
September 30	$	6.72	$	5.50		--	$	11.50	$	8.20		--
December 31	$	5.89	$	4.32		--	$	9.75	$	4.70		--

Pursuant to the Company Order, the Company may not declare or pay any dividends or capital distributions on its common stock or repurchase such shares without the prior written non-objection of the FRB.

Issuer Purchases of Equity Securities

The Company did not repurchase any securities during 2011. The Company Order prohibits the Company from repurchasing shares of its common stock without the prior written non-objection of the FRB.

24

Item 6.  Selected Financial Data.

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

	At or For the Year Ended December 31,
	2011			2010			2009			2008			2007
	(In Thousands, Except Per Share Data)
Selected Financial Condition Data:
Total assets	$	579,046		$	600,046		$	731,070		$	795,172		$	791,978
Cash and cash equivalents		79,799			36,407			22,149			9,367			27,387
Interest bearing time deposits in banks		27,113			--			--			--			--
Investment securities–held to maturity		--			--			135,531			136,412			95,590
Investment securities–available for sale at fair value		62,077			83,106			--			--			--
Loans receivable, net		334,792			385,845			482,554			568,123			601,256
Allowance for loan losses		20,818			31,084			32,908			6,441			5,162
Real estate owned, net		28,113			44,706			35,155			22,385			8,120
Deposits		498,581			541,800			624,624			618,003			630,414
Other borrowings		6,679			18,193			59,546			92,212			82,087
Stockholders' equity		68,893			36,120			43,300			73,117			73,663
Selected Operating Data:
Interest income	$	22,834		$	29,820		$	36,043		$	43,947		$	50,426
Interest expense		6,682			9,838			15,255			22,102			28,184
Net interest income		16,152			19,982			20,788			21,845			22,242
Provision for loan losses		859			6,959			44,365			5,710			4,028
Net interest income (loss) after provision for loan losses		15,293			13,023			(23,577	)		16,135			18,214
Noninterest income		6,599			9,459			8,117			9,417			7,769
Noninterest expense		40,926			26,991			29,890			23,468			22,995
Income (loss) before income taxes		(19,034	)		(4,509	)		(45,350	)		2,084			2,988
Income tax provision (benefit)		--			(474	)		148			(423	)		345
Net income (loss)	$	(19,034	)	$	(4,035	)	$	(45,498	)	$	2,507		$	2,643
Preferred stock dividends, accretion of discount and gain on redemption of preferred stock		(10,500	)		891			728			--			--
Net income (loss) available to common stockholders	$	(8,534	)	$	(4,926	)	$	(46,226	)	$	2,507		$	2,643

Earnings (Loss) per Common Share:
Basic	$	(0.67	)	$	(5.08	)	$	(47.69	)	$	2.59	$	2.72
Diluted		(0.67	)		(5.08	)		(47.69	)		2.59		2.71
Cash Dividends Declared per Common Share	$	--		$	--		$	0.15		$	3.20	$	3.20

25

	At or For the Year Ended December 31,
	2011			2010			2009			2008			2007
Selected Operating Ratios(1):
Return on average assets		(3.18	)%		(0.60	)%		(5.84	)%		0.31	%		0.32	%
Return on average equity		(28.85	)		(9.43	)		(57.33	)		3.38			3.52
Average equity to average assets		11.03			6.34			10.19			9.24			9.21
Interest rate spread(2)		3.07			3.37			2.98			2.99			2.92
Net interest margin(2)		3.07			3.31			2.99			3.01			2.98
Net interest income after provision for loan losses to noninterest expense		37.37			48.25			(78.88	)		68.75			79.21
Noninterest expense to average assets		6.84			4.00			3.84			2.92			2.82
Average interest earning assets to average interest bearing liabilities		99.68			96.37			100.40			100.49			101.68
Operating efficiency(3)		179.89			91.68			103.41			75.07			76.62
Asset Quality Ratios(4):
Nonaccrual loans to total assets		5.86			8.22			5.86			2.83			3.84
Nonperforming assets to total assets(5)		10.79			15.68			10.67			6.77			5.17
Allowance for loan losses to classified loans(6)		27.77			22.00			28.17			12.12			7.45
Allowance for loan losses to total loans		5.89			7.50			6.34			1.11			0.81
Capital Ratios(7):
Tangible capital to adjusted total assets		11.22			6.36			5.75			8.89			9.22
Core capital to adjusted total assets		11.22			6.36			5.75			8.89			9.22
Risk-based capital to risk-weighted assets		19.62			10.72			9.97			13.35			13.20
Other Data:

Dividend payout ratio(8)	Note (9)		Note (9)		Note (9)		123.74	%	117.71	%
Full service offices at end of period		18		18		20	20		18

(1) Ratios are based on average daily balances.

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

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

(4) Asset quality ratios are end of period ratios.

(5) Nonperforming assets consist of nonperforming loans and real estate owned. Nonperforming loans consist of nonaccrual loans and accruing loans 90 days or more past due.

(6) Classified loans consist of loans graded substandard, doubtful or loss.

(7) Capital ratios are end of period ratios for First Federal Bank.

(8) Dividend payout ratio is the total common stock dividends declared divided by net income available to common stockholders.

(9) Dividend payout ratio is not meaningful for 2009 due to the Company’s net loss in that year. No dividends were paid in 2010 or 2011.

26

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

GENERAL

Management's discussion and analysis of financial condition and results of operations is intended to assist 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 Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements and the other sections contained herein.

The Bank is a federally chartered stock savings and loan association that was formed in 1934.  As of December 31, 2011, First Federal conducted business from its main office and seventeen full-service branch offices located in a six county area in Arkansas comprised of Benton and Washington counties in Northwest Arkansas; Carroll, Boone, Marion and Baxter counties in Northcentral Arkansas; and  a loan production office opened in June 2011 located in Little Rock, Arkansas. In February 2012, three full service branches in Northwest Arkansas were closed. The Bank’s primary focus will continue in this six county area as well as the Little Rock and Central Arkansas area. With the capital infusion from the Bear State investment and the Rights Offering, other markets will also be considered that present opportunities for profitable growth. The Bank is a community-oriented financial institution offering a wide range of retail and commercial deposit accounts, including noninterest bearing and interest bearing checking, savings and money market accounts, certificates of deposit, and individual retirement accounts.  Loan products offered by the Bank include residential real estate, consumer, construction, lines of credit, commercial real estate and commercial business loans. However, the Bank is currently subject to lending restrictions as a result of the provisions of the Bank Order.  Other financial services include automated teller machines; 24-hour telephone banking; online banking, including account access, e-statements, and bill payment; mobile banking; Bounce ProtectionTM overdraft service; debit cards; and safe deposit boxes.

The Company’s net loss available to common stockholders was $8.5 million for the year ended December 31, 2011 compared to $4.9 million for the year ended December 31, 2010.  The primary reason for $3.6 million increase in net loss available to common stockholders was a $13.2 million increase in REO loss provisions and a $1.6 million decrease in gain on sale of investment securities offset by the $10.5 million gain on redemption of the Company’s Series A Preferred Stock resulting from Bear State’s purchase from the United States Department of the Treasury (“Treasury”) for $6 million aggregate consideration, the Company’s 16,500 shares of Series A Preferred Stock, including accrued but unpaid dividends thereon, and the related warrant , both of which were previously issued to the Treasury through the Troubled Asset Relief Program — Capital Purchase Program. Bear State surrendered the Series A Preferred Stock and the TARP Warrant to the Company, resulting in a $10.5 million gain related to the difference between the fair value of the consideration paid for the Series A Preferred Stock and its book value. The Company’s ability to generate net income has been affected primarily by the Company’s level of nonperforming loans and real estate owned, which have decreased interest income and increased operating expenses.

The Company amended its Articles of Incorporation to effect a 1-for-5 reverse split (the “Reverse Split”) of the Company’s issued and outstanding shares of common stock effective May 3, 2011. All periods presented in this Form 10-K have been retroactively restated to reflect the Reverse Split.

The Bank’s greatest challenges in this economic environment are asset quality and reducing the level of nonperforming assets.  We strive to maintain the asset quality of our loan portfolio at acceptable levels through sound underwriting procedures, including the use of credit scoring; a thorough loan review function; active collection procedures for delinquent loans; and, in the event of repossession, prompt and efficient liquidation of real estate and other forms of collateral.   We attempt to work with troubled borrowers to return their loans to performing status where possible. Both the board of directors and senior management place a high priority on reducing our nonperforming assets and managing asset quality.

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 losses

· Valuation of real estate owned

· Valuation of investment securities

· Valuation of our deferred tax assets

27

These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the Notes to the Consolidated Financial Statements included herein. In particular, Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” describes generally 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 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 not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.  The fair values of the Company’s investment securities traded in both active and inactive markets can be volatile and may be influenced by a number of factors including market interest rates, prepayment speeds, discount rates, credit quality of the issuer, general market conditions including market liquidity conditions and other factors. Factors and conditions are constantly changing and fair values could be subject to material variations that may significantly impact the Company’s financial condition, results of operations and liquidity.

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.

ANALYSIS OF RESULTS OF OPERATIONS

The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest earning assets, such as loans and investments, and interest expense on interest bearing liabilities, such as deposits and borrowings.  Net interest income is affected by the level of nonperforming assets as they provide no interest earnings to the Bank.  The Company's results of operations are also affected by the provision for loan losses, the level of its noninterest income and expenses, and income tax expense.  Noninterest income is generated primarily through deposit account fee income, profit on sale of loans, loan fee income, and earnings on life insurance policies. Noninterest expense consists primarily of employee compensation and benefits, office occupancy expense, data processing expense, real estate owned expense, net, and other operating expense.

Interest Income and Interest Expense

Interest Income.  The decrease in interest income in 2011 compared to 2010 was primarily related to decreases in the average balances of loans receivable and investment securities and decreases in the average yields earned on loans receivable and investment securities.  The average balance of loans receivable decreased due to repayments, maturities and charge-offs or transfers to real estate owned.  The average balance of investment securities decreased due to calls and sales of investment securities.

The decrease in interest income in 2010 compared to 2009 was primarily related to decreases in the average balances of loans receivable and investment securities and a decrease in the average yield earned on investment securities, partially offset by an increase in the yield earned on loans receivable.  The average balance of loans receivable decreased due to repayments, maturities and charge-offs or transfers to real estate owned, as well as a decrease in loan originations.  The average balance of investment securities decreased due to calls and sales of investment securities.

28

Interest Expense.   The decrease in interest expense in the 2011 vs. 2010 comparative period was primarily due to decreases in the average balances of deposits and borrowings as well as a decrease in average rates paid on deposits.  The decrease in the average rates paid on deposit accounts reflects decreases in market interest rates.

The decrease in interest expense in the 2010 vs. 2009 comparative period was primarily due to decreases in the average balances of and rates paid on deposits and borrowings.  The decreases in the average rates paid on deposit accounts and borrowings reflect decreases in market interest rates.

29

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.

	Year Ended December 31,
	2011								2010								2009
	Average Balance			Interest		Average Yield/ Cost			Average Balance			Interest		Average Yield/ Cost			Average Balance		Interest		Average Yield/ Cost
	(Dollars in Thousands)
Interest earning assets:
Loans receivable(1)	$	378,303		$	19,805		5.24	%	$	460,668		$	25,030		5.43	%	$	549,211	$	29,491		5.37	%
Investment securities(2)		70,394			2,681		3.81			103,568			4,688		4.53			136,447		6,532		4.79
Other interest earning assets		77,349			348		0.45			39,629			102		0.26			9,866		20		0.20
Total interest earning assets		526,046			22,834		4.34			603,865			29,820		4.94			695,524		36,043		5.18
Noninterest earning assets		72,077								71,286								83,337
Total assets	$	598,123							$	675,151							$	778,861
Interest bearing liabilities:
Deposits	$	512,989			6,351		1.24		$	592,740			9,177		1.55		$	624,932		13,272		2.12
Other borrowings		14,738			331		2.24			33,856			661		1.95			67,793		1,983		2.93
Total interest bearing liabilities		527,727			6,682		1.27			626,596			9,838		1.57			692,725		15,255		2.20
Noninterest bearing liabilities		4,427								5,755								6,780
Total liabilities		532,154								632,351								699,505
Stockholders' equity		65,969								42,800								79,356
Total liabilities and stockholders' equity	$	598,123							$	675,151							$	778,861
Net interest income				$	16,152							$	19,982						$	20,788
Net earning assets (interest bearing liabilities)	$	(1,681	)						$	(22,731	)						$	2,799
Interest rate spread							3.07	%							3.37	%						2.98	%
Net interest margin							3.07	%							3.31	%						2.99	%
Ratio of interest earning assets to interest bearing liabilities							99.68	%							96.37	%						100.40	%

________________

(1)  Includes nonaccrual loans.

(2)  Includes FHLB of Dallas stock.

30

Rate/Volume Analysis

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

	Year Ended December 31,
	2011 vs. 2010
	Increase (Decrease) Due to										Total
	Volume			Rate			Rate/ Volume				Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	(4,475	)	$	(913	)		$	163		$	(5,225	)
Investment securities		(1,502	)		(743	)			238			(2,007	)
Other interest earning assets		98			76				72			246
Total interest earning assets		(5,879	)		(1,580	)			473			(6,986	)
Interest expense:
Deposits		(1,235	)		(1,838	)			247			(2,826	)
Other borrowings		(373	)		99				(56	)		(330	)
Total interest bearing liabilities		(1,608	)		(1,739	)			191			(3,156	)
Net change in net interest income	$	(4,271	)	$	159			$	282		$	(3,830	)

	Year Ended December 31,
	2010 vs. 2009
	Increase (Decrease) Due to										Total
	Volume			Rate			Rate/ Volume				Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	(4,755	)	$	349			$	(55	)	$	(4,461	)
Investment securities		(1,574	)		(357	)			87			(1,844	)
Other interest earning assets		61			5				16			82
Total interest earning assets		(6,268	)		(3	)			48			(6,223	)
Interest expense:
Deposits		(683	)		(3,598	)			186			(4,095	)
Other borrowings		(993	)		(660	)			331			(1,322	)
Total interest bearing liabilities		(1,676	)		(4,258	)			517			(5,417	)
Net change in net interest income	$	(4,592	)	$	4,255			$	(469	)	$	(806	)

31

CHANGES IN RESULTS OF OPERATIONS

The table below presents a comparison of results of operations for the years ended December 31, 2011 and 2010 (dollars in thousands except share data).  Specific changes in captions are discussed following the table.

	Year Ended December 31,
	2011			2010			Dollar Change			Percentage Change
Interest income:
Loans receivable	$	19,805		$	25,030		$	(5,225	)		(20.9	)%
Investment securities		2,681			4,688			(2,007	)		(42.8	)
Other		348			102			246			241.2
Total interest income		22,834			29,820			(6,986	)		(23.4	)
Interest expense:
Deposits		6,351			9,177			(2,826	)		(30.8	)
Other borrowings		331			661			(330	)		(49.9	)
Total interest expense		6,682			9,838			(3,156	)		(32.1	)
Net interest income before provision for loan losses		16,152			19,982			(3,830	)		(19.2	)
Provision for loan losses		859			6,959			(6,100	)		(87.7	)
Net interest income after provision for loan losses		15,293			13,023			2,270			17.4
Noninterest income:
Net gain (loss) on sales and calls of investment securities		(439	)		1,163			(1,602	)		(137.7	)
Deposit fee income		4,692			5,014			(322	)		(6.4	)
Earnings on life insurance		769			1,419			(650	)		(45.8	)
Gain on sale of loans		661			742			(81	)		(10.9	)
Other		916			1,121			(205	)		(18.3	)
Total noninterest income		6,599			9,459			(2,860	)		(30.2	)
Noninterest expenses:
Salaries and employee benefits		11,351			10,914			437			4.0
Real estate owned, net		19,194			5,293			13,901			262.6
FDIC insurance premium		1,378			1,931			(553	)		(28.6	)
Supervisory assessments		341			415			(74	)		(17.8	)
Professional fees		1,087			1,138			(51	)		(4.5	)
Advertising and public relations		280			263			17			6.5
Other		7,295			7,037			258			3.7
Total noninterest expenses		40,926			26,991			13,935			51.6
Loss before provision for income taxes		(19,034	)		(4,509	)		(14,525	)		322.1
Income tax benefit		--			(474	)		474			(100.0	)
Net loss	$	(19,034	)	$	(4,035	)	$	(14,999	)		371.7
Preferred stock dividends, accretion of discount and gain on redemption of preferred stock		(10,500	)		891			(11,391	)		(1,278.5	)
Net loss available to common stockholders	$	(8,534	)	$	(4,926	)	$	(3,608	)		73.2	%
Basic loss per share	$	(0.67	)	$	(5.08	)	$	4.41			(86.8	)%
Diluted loss per share	$	(0.67	)	$	(5.08	)	$	4.41			(86.8	)%
Interest rate spread		3.07	%		3.37	%
Net interest margin		3.07	%		3.31	%
Average full-time equivalents		216			242
Full service offices		18			18

32

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

The decrease in the provision for loan losses in the 2011 vs. 2010 period was primarily due to a decrease in specific loan loss allowances on impaired loans and the decrease in the average loan balances and classified loans in 2011. The allowance as a percentage of loans receivable was 7.50% at December 31, 2010 compared to 5.89% at December 31, 2011.  The allowance as a percentage of classified loans was 22.00% at December 31, 2010 compared to 27.77% at December 31, 2011. See “Allowance for Loan Losses” in the “Asset Quality” section.

Noninterest Income.  The decrease in noninterest income in the 2011 vs. 2010 period was primarily due to a decrease in gains on sales of investment securities, a decrease in earnings on life insurance and a decrease in deposit fee income in 2011. The decrease in earnings on life insurance policies was due to a nonrecurring death benefit claim recorded during the fourth quarter of 2010 totaling $605,000. There were no such claims in 2011. Deposit fee income is down primarily due to a decrease in insufficient funds fee revenue. A Federal Reserve Board final rule effective July 1, 2010, prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine (“ATM”) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Insufficient funds fee revenue in 2011 is down 12% compared to 2010.

Gain on sale of loans changed in relation to increases or decreases in originations of loans for sale during the comparison periods.  The activity in loans held for sale is summarized below (in thousands):

	Year Ended December 31,
	2011			2010
Loans held for sale, beginning of period	$	4,502		$	1,012
Originations of loans held for sale		32,643			41,944
Sales		(33,806	)		(38,454	)
Loans held for sale, end of period	$	3,339		$	4,502
Gain on sale of loans	$	661		$	742

Noninterest Expense

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

	Year Ended December 31,				Increase
	2011		2010		(Decrease)
Salaries	$	9,238	$	8,989	$	249
Payroll taxes		740		711		29
Insurance		508		541		(33	)
Defined benefit plan contribution		630		532		98
Stock compensation		68		--		68
Other		167		141		26
Total	$	11,351