S-4/A 1 ffbh20140104_s4a.htm FORM S-4/A appendix a.htm

As filed with the Securities and Exchange Commission on January 10, 2014

Registration No. 333-190845



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 3

TO

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

first federal bancshares of arkansas, inc.

(Exact name of registrant as specified in its charter)

 

Arkansas

6035

71-0785261

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer Identification Number)

 

1401 Highway 62-65 North
Harrison, Arkansas 72601

(870) 741-7641

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

 

Christopher M. Wewers

President and Chief Executive Officer

1401 Highway 62-65 North

Harrison, Arkansas 72601

(870) 741-7641

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

 

Copies to:

 

Daniel L. Heard

Kutak Rock LLP

124 West Capitol Avenue

Suite 2000

Little Rock, Arkansas 72201

(501) 975-3000

C. Douglas Buford, Jr.

Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C.

425 West Capitol Avenue

Suite 1800

Little Rock, Arkansas 72201

(501) 688-8866

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective and all other conditions to the proposed merger described herein have been satisfied or waived.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

 
 

 

 

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.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐

 


 

CALCULATION OF REGISTRATION FEE 

 

Title of each class of

securities to be registered

Amount

to be

registered(1)

Proposed

maximum

offering

price

per unit

Proposed

maximum

aggregate

offering price(2)

Amount of

registration fee(3)(4)

Common Stock, $.01 par value

6,252,400

Not Applicable

$75,352,000

$10,278

 

(1)

Represents the maximum number of shares of common stock of First Federal Bancshares of Arkansas, Inc. issuable upon the completion of the merger described in the joint proxy statement/prospectus.

(2)

Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act and calculated pursuant to Rule 457(f)(2) and (f)(3) under the Securities Act. The proposed maximum aggregate offering price is the difference between (a) the aggregate book value of the shares of First National Security Company common stock computed as of June 30, 2013, or $149,352,000 and (b) the aggregate amount of cash to be paid by First Federal Bancshares of Arkansas, Inc. for the outstanding shares of First National Security Company common stock, pursuant to the merger described in the joint proxy statement/prospectus, or $74,000,000.

(3)

Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $136.40 per $1,000,000 of the proposed maximum aggregate offering price.

(4) Previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



 
 

 

 

Information in this joint proxy statement/prospectus is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This joint proxy statement/prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

 

PRELIMINARY — SUBJECT TO COMPLETION — DATED JANUARY 10, 2014

 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

FIRST NATIONAL SECURITY COMPANY

                              

 

Joint Proxy Statement/Prospectus

Merger Proposal – Your Vote is Very Important

 


 

6,252,400 Shares of Common Stock, par value $.01 per share of
First Federal Bancshares of Arkansas, Inc.

 


 

The boards of directors of First Federal Bancshares of Arkansas, Inc. (“First Federal”) and First National Security Company (“FNSC”) have approved the Agreement and Plan of Merger, dated July 1, 2013 that provides for the combination of the two companies. First Federal and FNSC each believe the combined company will be able to create substantially more shareholder value than could be achieved by the companies individually.

 

If the merger is completed, and assuming that there are 107,800 shares of FNSC common stock outstanding at the closing, which is the number of shares of FNSC common stock outstanding as of July 1, 2013, each share of FNSC common stock will be converted into the right to receive $686.46 in cash and 58 shares of First Federal common stock. Cash will be paid in lieu of any fractional shares. In connection with the merger, First Federal anticipates that it will issue, in the aggregate, 6,252,400 shares of its common stock and pay $74,000,000 as aggregate cash consideration. The market value of the merger consideration will fluctuate with the market price of First Federal common stock and will not be known at the time FNSC shareholders vote on the merger. First Federal common stock is currently quoted on the NASDAQ Global Market under the symbol "FFBH." On           , the last practicable trading day before the date of this joint proxy statement/prospectus, the closing share price of First Federal common stock was $   per share. We urge you to obtain current market quotations for First Federal.

 

Following the merger, and assuming approval of a name change by the First Federal shareholders, the combined company will continue under the name Bear State Financial, Inc. with its headquarters in Harrison, Arkansas. The shares of the combined company will continue to be quoted on the NASDAQ Global Market, but with a new ticker symbol – “BSF.” Each share of common stock of First Federal outstanding prior to the merger will continue to exist as a share of the combined company following the merger.

 

Each of First Federal and FNSC is asking its respective shareholders to approve the merger and the other matters described in the accompanying joint proxy statement/prospectus. The merger cannot be completed unless each of First Federal and FNSC receives the requisite approval from its respective shareholders. The merger must be approved by the affirmative vote of holders of a majority of the outstanding shares of common stock of both First Federal and FNSC.

 

The Boards of Directors of First Federal and FNSC recommend that you vote “FOR” approval of the merger agreement and the merger.

 

Shareholders of both First Federal and FNSC are entitled to exercise dissenters’ rights in connection with the merger and, in the case of First Federal, receive the cash fair value of their shares of First Federal common stock in exchange for the surrender of such shares, and in the case of FNSC, receive the cash fair value of their shares of FNSC common stock in lieu of the merger consideration. In order to properly exercise your dissenters’ rights and receive the cash fair value for your shares, you must precisely follow the procedures specified in the Arkansas Business Corporation Act at Ark. Code Ann. §§ 4-27-1301, et seq., which are summarized herein and the relevant portions of which have been excerpted and included as Appendix C to this joint proxy statement/prospectus.

 

You should read this document and all the appendices carefully. Before making a decision on how to vote, you should consider the “Risk Factors” discussion beginning on page [__] of this document.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the merger or determined if this document is accurate or complete. Any representation to the contrary is a criminal offense.

 

 
 

 

 

The securities to be issued in connection with the merger are not savings accounts, deposits or other obligations of any bank or savings association and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

 

This joint proxy statement/prospectus is dated              , 2014, and is first being mailed to First Federal shareholders and FNSC shareholders on or about             , 2014.

 

 
 

 

 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

1401 Highway 62-65 North

Harrison, Arkansas 72601

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON MARCH 5, 2014

 

NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of First Federal Bancshares of Arkansas, Inc. (“First Federal”) will be held at Three Financial Centre, 900 S. Shackleford Rd., Suite 605, Little Rock, Arkansas 72211, at 10:00 a.m., central time, on March 5, 2014, for the following purposes:

 

1.     To consider and vote on a proposal to approve the Agreement and Plan of Merger dated July 1, 2013, by and between First Federal and First National Security Company (“FNSC”), as such agreement may be amended from time to time, pursuant to which, among other things, FNSC will be merged with and into First Federal. As a result of the merger, each outstanding share of FNSC will be converted into the right to receive cash and shares of First Federal common stock, as more particularly described elsewhere in this joint proxy statement/prospectus.

 

2.     To consider and vote on a proposal to amend the articles of incorporation of First Federal to increase the number of authorized shares of First Federal common stock from 30,000,000 to 100,000,000.

 

3.     To consider and vote on a proposal to amend the articles of incorporation of First Federal to change the name of First Federal to Bear State Financial, Inc.

 

4.     To consider and vote on a proposal to approve a private placement of 2,531,645 shares of First Federal common stock at a per share price of $7.90 to Bear State Financial Holdings, LLC (“Bear State”), First Federal’s largest shareholder, and to certain members of Bear State individually (the “Private Placement”).

 

5.     To approve a proposal to grant discretionary authority to the persons named as proxies to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the matters to be voted on at the meeting.

 

6.     To transact any other business that properly comes before the special meeting of shareholders, or any adjournments or postponements of the special meeting.

 

The proposed merger, amendments to the articles of incorporation and Private Placement are described in more detail in this joint proxy statement/prospectus, which you should read carefully in its entirety before voting. Only First Federal shareholders of record as of the close of business on December 31, 2013 are entitled to notice of and to vote at the special meeting of shareholders or any adjournments or postponements of the special meeting.

 

A holder of First Federal common stock who complies with the provisions of the Arkansas Business Corporation Act (“ABCA”) relating to dissenters’ rights applicable to the merger (Ark. Code Ann. §§ 4-27-1301 et. seq.) is entitled to determination and payment in cash of the “fair value” of their stock pursuant to the relevant provisions of the ABCA, copies of which are included as Appendix C to this joint proxy statement/prospectus.

 

Whether you attend the special meeting or not, you may revoke a previously granted proxy at any time before it is voted by submitting to the corporate secretary of First Federal a duly executed revocation of proxy bearing a later date or by appearing and voting in person at the special meeting. You may revoke a proxy by any of these methods, regardless of the method used to deliver your previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy.

 

Your vote is very important. To ensure your representation at the special meeting of shareholders, please complete, execute and promptly mail your proxy card in the return envelope enclosed. This will not prevent you from voting in person, but it will help to secure a quorum. You may revoke your proxy at any time before it is voted. 

 

 

BY ORDER OF THE FIRST FEDERAL BOARD OF DIRECTORS

 

/s/ Christopher M. Wewers

Christopher M. Wewers

President and Chief Executive Officer

 

Harrison, Arkansas

              , 2014

 

 

 
 

 

 

THE BOARD OF DIRECTORS OF FIRST FEDERAL BANCSHARES OF ARKANSAS, INC. UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” ALL PROPOSALS PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.

 

PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING OF SHAREHOLDERS.

 

 
 

 

 

FIRST NATIONAL SECURITY COMPANY

135 Section Line Road

Hot Springs, Arkansas 71913

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON               , 2014

 

NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of First National Security Company (“FNSC”) will be held at 1010 N. 6th Street, DeQueen, Arkansas 71832, at 10:00 a.m., central time, on               , 2014 for the following purposes:

 

1.     To consider and vote on a proposal to approve the Agreement and Plan of Merger dated July 1, 2013, by and between First Federal Bancshares of Arkansas, Inc. (“First Federal”) and FNSC, as such agreement may be amended from time to time, pursuant to which, among other things, FNSC will be merged with and into First Federal. As a result of the merger, each outstanding share of FNSC will be converted into the right to receive cash and shares of First Federal common stock, as more particularly described elsewhere in this joint proxy statement/prospectus.

 

2.     To approve a proposal to grant discretionary authority to the persons named as proxies to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the matters to be voted on at the meeting.

 

3.     To transact any other business that properly comes before the special meeting of shareholders, or any adjournments or postponements of the special meeting.

 

The proposed merger is described in more detail in this joint proxy statement/prospectus, which you should read carefully in its entirety before voting. Only FNSC shareholders of record as of the close of business on               , 2013 are entitled to notice of and to vote at the special meeting of shareholders or any adjournments or postponements of the special meeting.

 

A holder of FNSC common stock who complies with the provisions of the Arkansas Business Corporation Act (“ABCA”) relating to dissenters’ rights applicable to the merger (Ark. Code Ann. §§ 4-27-1301 et. seq.) is entitled to determination and payment in cash of the “fair value” of their stock pursuant to the relevant provisions of the ABCA, copies of which are included as Appendix C to this joint proxy statement/prospectus.

 

Whether you attend the special meeting or not, you may revoke a previously granted proxy at any time before it is voted by submitting to the corporate secretary of FNSC a duly executed revocation of proxy bearing a later date or by appearing and voting in person at the special meeting. You may revoke a proxy by any of these methods, regardless of the method used to deliver your previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy.

 

Your vote is very important. To ensure your representation at the special meeting of shareholders, please complete, execute and promptly mail your proxy card in the return envelope enclosed. This will not prevent you from voting in person, but it will help to secure a quorum and avoid added solicitation costs. You may revoke your proxy at any time before it is voted.

 

 

BY ORDER OF THE FNSC BOARD OF DIRECTORS

 

/s/ Daniel C. Horton

Daniel C. Horton

President and Chief Executive Officer

 

Hot Springs, Arkansas

              , 2014

 

THE BOARD OF DIRECTORS OF FIRST NATIONAL SECURITY COMPANY RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE MERGER AGREEMENT AND “FOR” GRANTING THE PROXIES THE DISCRETION TO ADJOURN THE SPECIAL MEETING TO A LATER DATE IN ORDER TO SOLICIT FURTHER PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF APPROVAL OF THE MATTERS TO BE VOTED ON AT THE TIME OF THE SPECIAL MEETING.

 

PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING OF SHAREHOLDERS.

 

 
 

 

 

ADDITIONAL INFORMATION

 

This joint proxy statement/prospectus incorporates important business and financial information about First Federal from documents that are filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) but that are not included in or delivered with this joint proxy statement/prospectus. You can obtain copies of First Federal’s documents incorporated by reference in this joint proxy statement/prospectus without charge by requesting them in writing or by telephone from First Federal at the following address:

 

First Federal Bancshares of Arkansas, Inc.

1401 Highway 62-65 North

P.O. Box 550

Harrison, Arkansas 72601

Attention: John T. Adams, Corporate Secretary

Telephone: (870) 741-7641 

 

Shareholders of First Federal or FNSC requesting copies of First Federal’s documents from First Federal should do so by February 19, 2014 in order to receive them before the First Federal or FNSC special meeting.  

 

You may also obtain these documents at the SEC’s website (www.sec.gov) and you may obtain certain of these documents at First Federal’s website (www.ffbh.com) by selecting the tab entitled “Investor Relations” then the tab entitled “SEC Filings.” Other information contained on First Federal’s website is expressly not incorporated by reference into this document.

 

If you have any questions, or need assistance in completing and returning your proxy, you may contact First Federal or FNSC at the following addresses and telephone numbers, respectively:

 

First Federal Bancshares of Arkansas, Inc.

1401 Highway 62-65 North

P.O. Box 550

Harrison, Arkansas 72602

Attention: John T. Adams, Corporate Secretary

Telephone: (870) 741-7641

First National Security Company

135 Section Line Road

Hot Springs, Arkansas 71913

Attention: Jason Lenderman
Executive Vice President and Secretary

Telephone: (501) 525-7999

 

 

See “Where You Can Find More Information” on page __.

 

 

 

 

TABLE OF CONTENTS

Page

 

ADDITIONAL INFORMATION

i

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETINGS

1

SUMMARY

7

Parties to the Merger

7

Historic Market Value of Securities 7

What FNSC Shareholders will receive in the Merger

7

Material United States Federal Income Tax Consequences of the Merger

7

FNSC’s Board of Directors Recommends Shareholder Approval of the Merger Agreement

8

First Federal’s Board of Directors Unanimously Recommends Shareholder Approval of the Merger Agreement

8

Authorized Share Amendment

8

Name Change Amendment

8

Private Placement

8

Special Meeting of Shareholders of FNSC

9

Special Meeting of Shareholders of First Federal

9

FNSC Shareholder Vote Required

9

First Federal Shareholder Vote Required

9

FNSC Dissenters’ Rights of Appraisal

10

First Federal Dissenters’ Rights of Appraisal

10

Interests of FNSC Officers and Directors in the Merger

11

Regulatory Approvals Required for the Merger

11

Conditions to the Merger

11

No Solicitation

11

Termination of the Merger Agreement

11

Termination Fee

11

Comparison of Shareholders’ Rights

12

RISK FACTORS

13

Risks Associated with the Merger and the Combined Company

13

Risks Associated with First Federal’s Business

16

Risks Associated with First Federal’s Common Stock

22

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION

25

Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet

26

Unaudited Pro Forma Condensed Combined Consolidated Income Statements

27

Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Statements

29

COMPARATIVE PER SHARE DATA (UNAUDITED)

32

MARKET PRICE AND DIVIDEND INFORMATION

33

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC. SPECIAL MEETING OF SHAREHOLDERS

34

Matters to be Considered

34

Proxy Card; Revocation of Proxy

34

Solicitation of Proxies

34

Record Date

35

Voting Rights; Quorum Requirements

35

PROPOSAL NO. 1 - APPROVAL AND ADOPTION OF THE MERGER AGREEMENT

35

PROPOSAL NO. 2 - APPROVAL OF THE AUTHORIZED SHARE AMENDMENT

35

PROPOSAL NO. 3 - APPROVAL OF THE NAME CHANGE AMENDMENT

36

PROPOSAL NO. 4 - APPROVAL OF THE PRIVATE PLACEMENT

37

PROPOSAL NO. 5 - ADJOURNMENT OF THE SPECIAL MEETING

38

FIRST NATIONAL SECURITY COMPANY SPECIAL MEETING OF SHAREHOLDERS

39

Matters to be Considered

39

Proxy Card; Revocation of Proxy

39

Solicitation of Proxies

39

Record Date

39

Voting Rights; Quorum Requirements

39

PROPOSAL NO. 1 - APPROVAL AND ADOPTION OF THE MERGER AGREEMENT

40

PROPOSAL NO. 2 - ADJOURNMENT OF THE SPECIAL MEETING

40

THE MERGER

41

Terms of the Merger

41

Background of the Merger

41

FNSC’s Reasons for the Merger; Recommendation of FNSC’s Board of Directors

44

First Federal’s Reasons for the Merger; Recommendation of First Federal’s Board of Directors

44

Interests of Certain Executive Officers and Directors in the Merger

45

Dissenters’ Appraisal Rights

46

 

 
ii 

 

 

 

Table of Contents

(continued)

Page

 

Resale of First Federal Common Stock

46

Regulatory Approvals Required for the Merger

46

Procedure for Exchanging Certificates

47

The Private Placement

47

The Private Placement – Opinion of First Federal’s Financial Advisor

48

THE MERGER AGREEMENT

51

General

51

Purchase Price; Merger Consideration

51

Conduct of Business Pending the Merger

52

Representations and Warranties

52

Conditions to the Merger

52

Agreement to Not Solicit Other Offers

53

Employee Matters

53

Termination; Amendment

54

Effect of Termination; Termination Fee

54

Fees and Expenses

54

ACCOUNTING TREATMENT

55

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

55

CERTAIN INFORMATION ABOUT FIRST FEDERAL

58

GENERAL

58

BUSINESS

60

REGULATION

64

TAXATION

68

PROPERTIES

70

LEGAL PROCEEDINGS

71

SECURITY OWNERSHIP

71

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FIRST FEDERAL

73

EXECUTIVE COMPENSATION

102

CERTAIN INFORMATION ABOUT FNSC

106

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FNSC

108

BOARD OF DIRECTORS, MANAGEMENT AND OWNERSHIP OF THE COMBINED COMPANY FOLLOWING THE MERGER

141

Board of Directors and Executive Officers

141

Pro Forma Security Ownership

147

TRANSACTIONS WITH CERTAIN RELATED PERSONS

147

DESCRIPTION OF FIRST FEDERAL CAPITAL STOCK

149

General

149

Transfer Agent and Registrar

149

Common Stock

149

Preferred Stock

149

Anti-Takeover Provisions

149

COMPARISON OF SHAREHOLDERS’ RIGHTS

150

ADJOURNMENT OF THE SPECIAL MEETINGS

154

OTHER MATTERS

154

LEGAL MATTERS

154

EXPERTS

154

SHAREHOLDER PROPOSALS FOR 2014 ANNUAL MEETING OF SHAREHOLDERS OF FIRST FEDERAL

154

WHERE YOU CAN FIND ADDITIONAL INFORMATION

155

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

155

INDEX TO FINANCIAL STATEMENTS

F-1

Appendix A - Agreement and Plan of Merger

 

Appendix B - Fairness Opinion of Southard Financial

 

Appendix C - Ark. Code. Ann. § 4-27-1301, et. seq., regarding Dissenter’s Rights of Appraisal

 

 

 
iii 

 

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETINGS

 

The following are answers to certain questions you may have regarding the special meetings. We urge you to read carefully the remainder of this joint proxy statement/prospectus, including the appendices, because the information in this section may not provide all the information that might be important to you in determining how to vote.

 

Q:

What are First Federal Bancshares of Arkansas, Inc. (“First Federal”) and First National Security Company (“FNSC”) shareholders being asked to vote upon?

 

A:

First Federal. The shareholders of First Federal are being asked to consider and vote on the following proposals:

 

 

Proposal 1 - To consider and vote on a proposal to approve the Agreement and Plan of Merger dated July 1, 2013, by and between First Federal and FNSC, as such agreement may be amended from time to time, pursuant to which, among other things, FNSC will be merged with and into First Federal;

 

 

Proposal 2 - To consider and vote on a proposal to amend the articles of incorporation of First Federal to increase the number of authorized shares of First Federal common stock from 30,000,000 to 100,000,000 (the “Authorized Share Amendment”);

 

 

Proposal 3 - To consider and vote on a proposal to amend the articles of incorporation of First Federal to change the name of First Federal to Bear State Financial, Inc. (the “Name Change Amendment”);

 

 

Proposal 4 - To vote on a proposal to approve a private placement of 2,531,645 shares of First Federal common stock at a per share price of $7.90 to Bear State Financial Holdings, LLC (“Bear State”), First Federal’s largest shareholder, and to certain members of Bear State individually; and

 

 

Proposal 5 - To approve a proposal to grant discretionary authority to the persons named as proxies to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the matters to be voted on at the meeting.

 

First Federal shareholders will also transact such other business that may properly come before the First Federal special meeting. As of the date of this joint proxy statement/prospectus, First Federal is not aware of any matters, other than those stated above, that may be brought before the First Federal special meeting.

 

FNSC. The shareholders of FNSC are being asked to consider and vote on the following proposals:

 

 

Proposal 1 - To consider and vote on a proposal to approve the Agreement and Plan of Merger dated July 1, 2013, by and between First Federal and FNSC, as such agreement may be amended from time to time, pursuant to which, among other things, FNSC will be merged with and into First Federal; and

 

 

Proposal 2 - To approve a proposal to grant discretionary authority to the persons named as proxies to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the matters to be voted on at the meeting.

 

FNSC’s shareholders will also transact such other business that may properly come before the FNSC special meeting. As of the date of this joint proxy statement/prospectus, FNSC is not aware of any matters, other than those stated above, that may be brought before the FNSC special meeting.

 

Q:

What will happen in the merger?

 

A:

In the merger, FNSC will be merged with and into First Federal, with First Federal surviving the merger.

 

Q:

What form of consideration will FNSC shareholders receive as a result of the merger?

 

A:

If the merger agreement is approved by both the shareholders of First Federal and the shareholders of FNSC and the merger is subsequently completed, the aggregate merger consideration to be paid by First Federal to FNSC shareholders will consist of $74,000,000 in cash and 6,252,400 shares of First Federal common stock. Assuming that there are 107,800 shares of FNSC common stock outstanding at the closing, which is the number of shares of FNSC common stock outstanding as of July 1, 2013, each share of FNSC common stock will be converted into the right to receive $686.46 in cash and 58 shares of First Federal common stock.

 

 

 
1

 

 

Q:       

Will the value of the merger consideration change between the date of this joint proxy statement/prospectus and the time the merger is completed?

 

A:       

The value of the merger consideration may fluctuate between the date of this joint proxy statement/prospectus and the completion of the merger based upon the market value for First Federal common stock. In the merger, assuming 107,800 shares of FNSC are outstanding, FNSC shareholders will receive 58 shares of First Federal common stock for each share of FNSC common stock they hold. Any fluctuation in the market price of First Federal common stock after the date of this joint proxy statement/prospectus will change the value of the shares of First Federal common stock that FNSC shareholders will receive.

 

Q:       

What are the U.S. federal income tax consequences of the merger to FNSC shareholders?

 

A:      

The merger is intended to qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, and no gain or loss will be recognized as a result of the merger; however, gain (but not loss) will be recognized by holders of FNSC common stock in an amount equal to the lesser of (1) the amount by which the sum of the fair market value of the First Federal common stock and cash received by a U.S. holder of FNSC common stock exceeds such holder’s basis in its FNSC common stock and (2) the amount of cash received by such holder of FNSC common stock.

 

For further information, see "Material U.S. Federal Income Tax Consequences of the Merger."

 

The U.S. federal income tax consequences described above may not apply to all holders of FNSC common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your independent tax advisor for a full understanding of the particular tax consequences of the merger to you.

 

Q:

Will the shareholders of First Federal receive any consideration in the merger?

 

A:

No. The shareholders of First Federal will continue to hold their shares of First Federal common stock after the merger. First Federal will be a substantially larger company after the merger, and existing First Federal shareholders will own a proportionately smaller amount of the combined company. Prior to the merger and the Private Placement, First Federal shareholders, excluding officers, directors and other affiliates, own approximately 21% of the outstanding shares of First Federal common stock. After giving effect to the merger and the Private Placement, existing First Federal shareholders, excluding officers, directors and other affiliates, are expected to own approximately 14% of the combined company’s outstanding common stock, based on the assumptions described in “Board of Directors, Management and Ownership of the Combined Company Following the Merger – Pro Forma Security Ownership” on page [__].

 

Q:

When do you expect the merger to be completed?

 

A:

First Federal and FNSC are working to complete the merger during the first quarter of 2014, although delays could occur. It is possible that as a result of factors outside of either company's control, the merger may be completed at a later time, or may not be completed at all. Either party may terminate the merger agreement if the merger has not occurred by March 31, 2014, provided that either party may extend the termination date for up to 90 days if the closing has not occurred at that time due to a failure to obtain a required regulatory approval. Neither First Federal nor FNSC can assure you when or if the merger will occur. For the merger to be consummated, both First Federal shareholders and FNSC shareholders must first approve the merger agreement at their respective special meetings, First Federal and FNSC must obtain the necessary regulatory approvals, and other conditions specified in the merger agreement must be satisfied.   

 

Q:

When and where will the First Federal and FNSC special meetings be held?

 

A:

First Federal. The First Federal special meeting is scheduled to take place on Wednesday, March 5, 2014 at 10:00 a.m., central time, at Three Financial Centre, 900 S. Shackleford Rd., Suite 605, Little Rock, Arkansas 72211.

 

FNSC. The FNSC special meeting is scheduled to take place on                 ,                   , 2014 at 10:00 a.m., central time, at 1010 N. 6th Street, DeQueen, Arkansas 71832.

 

Q:

Who is entitled to vote at the special meetings?

 

A:

First Federal. Holders of First Federal common stock at the close of business on December 31, 2013, the record date for the First Federal special meeting, are entitled to receive notice of the First Federal special meeting and to vote their shares at the First Federal special meeting and any related adjournment or postponement thereof.

 

FNSC. Holders of FNSC common stock at the close of business on               , 2013, the record date for the FNSC special meeting, are entitled to receive notice of the FNSC special meeting and to vote their FNSC shares at the FNSC special meeting and any related adjournment or postponement thereof.

 

 

 
2

 

 

Q:

What votes are required for approval of the merger agreement?

 

A:

First Federal. Approval of the merger agreement by First Federal shareholders requires the affirmative vote of the holders of a majority of the shares of First Federal common stock outstanding on the record date at a meeting at which a quorum is present. Bear State, First Federal’s largest shareholder, owns 15,600,962 shares of First Federal common stock, excluding exercisable warrants. These shares represent approximately 78% of the First Federal common stock entitled to vote at the First Federal special meeting. Bear State entered into a voting agreement with FNSC pursuant to which Bear State agreed to vote its shares in favor of the merger agreement. Accordingly, no additional votes in favor of this voting item will be required from other First Federal shareholders at the special meeting to approve the merger agreement.

 

FNSC. Approval of the merger agreement by FNSC shareholders requires the affirmative vote of the holders of a majority of the shares of FNSC common stock outstanding on the record date at a meeting at which a quorum is present. John H. Hendrix, FNSC’s largest shareholder, owns or controls 60,084 shares of FNSC common stock. These shares represent approximately 56% of the FNSC common stock entitled to vote at the FNSC special meeting. Mr. Hendrix entered into a voting agreement with First Federal pursuant to which he agreed to vote his shares in favor of the merger agreement. Accordingly, no additional votes in favor of this voting item will be required from other FNSC shareholders at the special meeting to approve the merger agreement.

 

Q:

What regulatory approvals are required in order to consummate the merger?

 

A:

The consummation of the merger requires the approval of the Board of Governors of the Federal Reserve System (“FRB”) under the Bank Holding Company Act of 1956. The payment of dividends by First National Bank, Heritage Bank, and First Federal Bank, which will be used to partially fund the cash portion of the merger consideration, will require the approval of the Office of the Comptroller of the Currency (the “OCC”).

 

Q:

What vote is required for First Federal shareholders to approve the Authorized Share Amendment and the Name Change Amendment?

 

A:

In accordance with the ABCA, the affirmative vote of the holders of a majority of the shares of First Federal common stock outstanding on the record date entitled to be cast at a meeting at which a quorum is present is required to approve the Authorized Share Amendment and the Name Change Amendment. Bear State, First Federal’s largest shareholder, has indicated that it will vote its shares of First Federal common stock in favor of the Authorized Share Amendment and the Name Change Amendment, although it is not contractually obligated to do so.

 

Q:

What vote is required for First Federal shareholders to approve the Private Placement?

 

A:

In accordance with NASDAQ Listing Rules and interpretations thereof, the affirmative vote of a majority of the total votes cast on the proposal, in person or by proxy, is required to approve the Private Placement. Additionally, approval of the Private Placement is conditioned upon shareholders of First Federal approving the merger agreement. Bear State, First Federal’s largest shareholder, has indicated that it will vote its shares of First Federal common stock in favor of the Private Placement, although it is not contractually obligated to do so.

 

Q:

What are the quorum requirements for the special meetings?

 

A:

First Federal. The presence in person or by proxy of First Federal shareholders having a majority of the total votes entitled to be cast by shareholders of First Federal common stock at the First Federal special meeting will constitute a quorum. Shares of First Federal common stock will be counted as present at the First Federal special meeting for purposes of determining whether there is a quorum if such shares are present and voted in person at the First Federal special meeting or if a proxy with respect to such shares has been properly submitted for the First Federal special meeting, without regard to whether the proxy is marked as casting a vote or abstaining from voting. Abstentions will count towards the quorum. Broker non-votes will not be counted toward establishing a quorum, because all proposals to be voted on at the First Federal special meeting are considered “non-routine” matters, meaning that brokers and other nominees will not have authority to vote uninstructed shares and will thus not be deemed present and entitled to vote.

 

FNSC. The presence in person or by proxy of FNSC shareholders having a majority of the total votes entitled to be cast by shareholders of FNSC common stock at the FNSC special meeting will constitute a quorum. Shares of FNSC common stock will be counted as present at the FNSC special meeting for purposes of determining whether there is a quorum if such shares are present and voted in person at the FNSC special meeting or if a proxy with respect to such shares has been properly submitted for the FNSC special meeting, without regard to whether the proxy is marked as casting a vote or abstaining from voting. Abstentions will count toward the quorum. Broker non-votes will not be counted toward establishing a quorum, however, because all proposals to be voted on at the FNSC special meeting are considered “non-routine” matters.

 

 

 
3

 

 

Q:

How does the board of directors recommend that I vote?

 

A:

First Federal. The board of directors of First Federal unanimously recommends that the First Federal shareholders vote their shares as follows:

 

 

Item 1 – FOR the approval of the merger agreement;

 

 

Item 2 – FOR the Authorized Share Amendment;

 

 

Item 3 – FOR the Name Change Amendment; and

 

 

Item 5 – FOR the authority to adjourn or postpone the First Federal special meeting.

 

An independent special committee of the board of directors of First Federal unanimously recommends that the First Federal shareholders vote their shares as follows:

 

 

Item 4 – FOR the Private Placement.

 

FNSC. The board of directors of FNSC recommends that the FNSC shareholders vote their shares as follows:

 

 

Item 1 – FOR the approval of the merger agreement; and

 

 

Item 2 – FOR the authority to adjourn or postpone the FNSC special meeting.

 

Q:

What happens if FNSC shares are transferred after the record date for the FNSC special meeting?

 

A:

The record date for the FNSC special meeting is earlier than the special meeting and the expected date of completion of the merger. Therefore, if a FNSC shareholder transfers his or her shares of FNSC common stock after the applicable record date, but prior to the merger, that shareholder will retain the right to vote at the FNSC special meeting, but the right to receive the merger consideration will transfer with the shares of FNSC common stock. Therefore, it is very important that any shareholder who sells or transfers his or her shares after the record date vote such shares at the FNSC special meeting as the holder of record for purposes of the FNSC special meeting. The failure to vote these shares will have the same effect as votes against the merger agreement.

 

Q:

How do I vote?

 

A:

If your shares are registered in your name, meaning you are the record holder of your shares, you may vote in person at the First Federal or FNSC special meeting, as the case may be, or by proxy without attending the applicable meeting.  Record holders may mark, sign, date, and mail the First Federal or FNSC proxy card, as the case may be, included with this joint proxy statement/prospectus in the enclosed pre-addressed postage-paid envelope.  If you vote by submitting a proxy card, your shares will be voted at the First Federal or FNSC special meeting, as the case may be, in accordance with your instructions.  If you sign and return the proxy card but do not give any instructions on some or all of the proposals, your shares will be voted by the persons named in the proxy card on all uninstructed proposals in accordance with the respective recommendations of the boards of directors of First Federal and FNSC given below.

 

If your shares are held by a bank, broker, custodian or other nominee, such bank, broker, custodian or other nominee is deemed the record holder of your shares. If you wish to vote in person at the meeting, you must obtain from your bank, broker, custodian or other nominee, and bring with you to the meeting, a proxy from such record holder issued in your name.  If you do not plan to vote in person at the First Federal or FNSC special meeting, as the case may be, please mark, date, sign, and return the voting instruction form you received from your broker or other nominee with this joint proxy statement/prospectus.  As indicated on the form or other documentation provided by your bank, broker, custodian or other nominee, you may have the choice of voting your shares over the Internet or by telephone as instructed by your broker, bank or other nominee.  To do so, follow the instructions on the form you received from your broker, bank or other nominee.

 

Q:

What happens if I do not return a proxy card for the special meeting?

 

A:

First Federal. If a First Federal shareholder fails to return a proxy card, it will have the same effect as a vote against the merger agreement, the Authorized Share Amendment and the Name Change Amendment, unless that First Federal shareholder attends the First Federal special meeting in person and votes for approval of these proposals, because approval of those proposals requires the affirmative approval of the holders of a majority of the outstanding shares of First Federal common stock.

 

 

 
4

 

 

Failure of a First Federal shareholder to return a proxy card for the First Federal special meeting will have no effect on the Private Placement proposal or the vote to approve the authority to adjourn or postpone the First Federal special meeting because the votes required for those proposals is the affirmative vote of a majority of the votes cast. However, approval of the Private Placement is conditioned upon shareholders of First Federal approving the merger agreement.

 

FNSC. If a FNSC shareholder fails to return a proxy card, it will have the same effect as a vote against the merger agreement, unless that shareholder attends the FNSC special meeting in person and votes for approval of this proposal, because approval of this proposal requires the affirmative approval of the holders of a majority of the outstanding shares of FNSC common stock.

 

Failure of a FNSC shareholder to return a proxy card for the FNSC special meeting will have no effect on the vote to approve the authority to adjourn or postpone the FNSC special meeting because the vote required for that proposal is the affirmative vote of a majority of the votes cast.

 

Q:

May I change my vote after I have submitted my proxy card?

 

A:

Yes, you may change your vote at any time before your proxy is voted at the First Federal or FNSC special meeting, as the case may be, by submitting a new proxy card, by attending the First Federal or FNSC special meeting, as the case may be, and voting your shares in person, or by delivering a written notice to the Secretary of First Federal or FNSC, as the case may be, stating that you revoke your proxy.

 

Q:

What is the difference between holding shares as a shareholder of record and as a beneficial owner?

 

A:

If your shares are registered directly in your name with First Federal’s or FNSC’s transfer agent, you are considered the shareholder of record with respect to those shares. As the shareholder of record, you have the right to vote by proxy or to vote in person at the First Federal or FNSC special meeting, as the case may be.

 

If your shares are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in “street name,” and your bank, broker or other nominee is considered the shareholder of record with respect to those shares. Your bank, broker or other nominee has enclosed information about how you, as the beneficial owner, can provide the bank, broker or other nominee with instructions for voting your shares. You should follow the instructions provided by them to vote your shares. You are invited to attend the First Federal or FNSC special meeting, as the case may be; however, you may not vote these shares in person at the applicable special meeting unless you obtain a “legal proxy” from your bank, broker, or other nominee that holds your shares, giving you the right to vote the shares at the First Federal or FNSC special meeting, as the case may be.

 

Q:

If my shares are held in street name by my broker, can my broker vote my shares without instructions from me?

 

A:

Under New York Stock Exchange Rule 452, which governs all brokers (including those holding NASDAQ-listed securities), brokers are entitled to vote shares held by them for their customers on matters deemed “routine” under applicable rules, even though the brokers have not received voting instructions from their customers. 

 

Brokers, however, may not vote on “non-routine” matters on behalf of their clients in the absence of specific voting instructions.  A broker “non-vote” occurs when a broker’s customer does not provide the broker with voting instructions on “non-routine” matters for shares owned by the customer but held in the name of the broker.  In those instances, the broker cannot vote the uninstructed shares and reports the number of such shares as “non-votes.” 

 

All of the proposals to be voted on at the First Federal special meeting and the FNSC special meeting are considered “non-routine” matters.  Accordingly, a broker may not vote on any of these proposals without instructions from its customer and broker “non-votes” may occur with respect to these proposals.  

 

Q:

How do I vote if I own shares through the First Federal 401(k) Plan?

 

A:       

If you own shares through the First Federal 401(k) Plan, you will receive a voting instruction card that reflects all shares that you may direct the trustee to vote on your behalf under such plan. Under the terms of the First Federal 401(k) Plan, a participant is entitled to direct the trustee how to vote the shares of First Federal common stock credited to his or her account under the First Federal 401(k) Plan. If the First Federal 401(k) Plan trustee does not receive timely voting instructions for the shares of First Federal common stock held in the First Federal 401(k) Plan, the shares for which the trustee does not receive timely instructions will not be voted. The deadline for returning your voting instructions is 10:00 a.m. central time, on March 3, 2014.

 

 

 
5

 

 

Q:

Do First Federal shareholders or FNSC shareholders have any dissenters’ rights of appraisal?

 

A:

Yes. Under Arkansas law, shareholders of both First Federal and FNSC, in connection with the merger, may exercise their rights to demand the payment of the fair value of their shares of common stock. These rights are occasionally referred to as “appraisal rights” in this joint proxy statement/prospectus. The provisions of Arkansas law governing appraisal rights are complex, and you should study them carefully if you wish to exercise these rights. Multiple steps must be taken to properly exercise and perfect such rights. The specific procedures that a shareholder of either First Federal or FNSC must follow in order to properly exercise his or her appraisal rights are listed in the “Summary” section of this joint proxy statement/prospectus on page [__]. A copy of the relevant provisions of the ABCA governing appraisal rights for both First Federal shareholders and FNSC shareholders is included as Appendix C to this joint proxy statement/prospectus.

 

Q:

Should FNSC shareholders send in their stock certificates now?

 

A:

No. After the merger is completed, Registrar and Transfer Company, First Federal’s exchange agent, will send you written instructions for exchanging your stock certificates. You should not send your FNSC stock certificates with your proxy card. See “The Merger and the Merger Agreement – Procedure for Exchanging Certificates” beginning on page [___] for additional details on the exchange process.

 

Q:

Who can help answer my questions?

 

A:

First Federal. First Federal shareholders should contact John T. Adams, Corporate Secretary at First Federal Bancshares of Arkansas, Inc., 1401 Highway 62-65 North, Harrison, Arkansas 72601, telephone (870) 741-7641 with any questions about the merger or the First Federal special meeting.

 

FNSC. FNSC shareholders should contact Jason Lenderman at First National Security Company, 135 Section Line Road, Hot Springs, Arkansas 71913, telephone (501) 525-7999 with any questions about the merger or the FNSC special meeting.

 

 

 
6

 

 

 

SUMMARY

 

This summary highlights selected information included in this document and does not contain all of the information that may be important to you. You should read this entire document and its appendices and the other documents to which this document refers before you decide how to vote with respect to the merger agreement. Each item in this summary includes a page reference directing you to a more complete description of that item.

 

Unless the context otherwise requires, throughout this proxy statement/prospectus, “First Federal” refers to First Federal Bancshares of Arkansas, Inc., “FNSC” refers to First National Security Company, “we,” “us,” and “our” refer collectively to First Federal and FNSC, the “Combined Company” refers to First Federal and FNSC following completion of the merger. “First National Bank” refers to First National Bank (Hot Springs) and “Heritage Bank” refers to Heritage Bank, National Association. Also, we refer to the proposed merger of FNSC with and into First Federal as the “merger,” and the Agreement and Plan of Merger, dated July 1, 2013, by and between First Federal and FNSC as the “merger agreement.”

 

Parties to the Merger

 

First Federal Bancshares of Arkansas, Inc. (page [__])

 

First Federal, an Arkansas corporation, is the parent bank holding company for First Federal Bank, a federally chartered stock savings and loan association. First Federal is a subsidiary of Bear State, which controls First Federal through its ownership of approximately 79% of the common stock of First Federal, assuming full exercise of the warrants held by it. As of and for the nine months ended September 30, 2013, First Federal had consolidated total assets of approximately $529.7 million, total deposits of approximately $455.5 million, total common shareholders’ equity of approximately $71.5 million, net income of approximately $530,000 and basic and diluted earnings per share of $0.03.  

 

The principal executive office of First Federal is located at 1401 Highway 62-65 North, Harrison, Arkansas 72601, and its telephone number is (870) 741-7641. First Federal and First Federal Bank also have executive offices in Little Rock, Arkansas.

 

First National Security Company (page [__])

 

FNSC is the ultimate parent bank holding company for First National Bank, a federally chartered bank headquartered in Hot Springs, Arkansas and Heritage Bank, National Association, a federally chartered bank headquartered in Jonesboro, Arkansas. As of and for the nine months ended September 30, 2013, FNSC had consolidated total assets of approximately $941.9 million, total deposits of approximately $717.7 million, total common shareholders’ equity of approximately $151.8 million, net income of approximately $6.5 million and basic earnings per share of $60.61.

 

FNSC’s principal executive office is located at 135 Section Line Road, Hot Springs, Arkansas 71913, and its telephone number is (501) 525-7999.

 

Historic Market Value of Securities (page [__])

 

On June 28, 2013, the last trading day prior to the date of the merger agreement, the closing trading price for shares of First Federal common stock as reported on the NASDAQ Stock Market was $7.90. The trading range for shares of First Federal common stock during the 52-week period ending on July 1, 2013, the date of the merger agreement, was $7.50 to $10.74 per share. There is currently no established public trading market for the common stock of FNSC.

 

What FNSC Shareholders will receive in the Merger (page [__])

 

If the merger is completed, the aggregate merger consideration to be paid by First Federal to FNSC shareholders will consist of $74,000,000 in cash and 6,252,400 shares of First Federal common stock. Assuming that there are 107,800 shares of FNSC common stock outstanding at the closing, which was the number of shares of FNSC common stock outstanding as of July 1, 2013, each share of FNSC common stock will be converted into the right to receive $686.46 in cash and 58 shares of First Federal common stock. Based on a closing stock price of $8.09 per share of First Federal common stock on July 1, 2013, the value of the merger consideration on that date was $124,581,916 in the aggregate, or $1,155.68 per share. Based on a closing stock price of $______ per share of First Federal common stock on _________ , ___ , the last practicable trading day before the distribution of this joint proxy statement/prospectus, the value of the merger consideration on that date was $_____ in the aggregate, or $______ per share.  

 

Material United States Federal Income Tax Consequences of the Merger (page [__])

 

FNSC will not be required to complete the merger unless FNSC has received a legal opinion from its counsel to the effect that the merger will qualify as a tax-free reorganization for United States federal income tax purposes. The opinion will not bind the Internal Revenue Service, which could take a different view.

 

We expect that, for United States federal income tax purposes, FNSC shareholders generally will not recognize any gain or loss with respect to the exchange of their shares of FNSC common stock for the stock consideration in the merger. FNSC shareholders will, however, have to recognize gain in connection with the cash consideration received in the merger and any cash received in lieu of a fractional share of First Federal common stock.

 

 

 
7

 

 

 

You should read “Material United States Federal Income Tax Consequences of the Merger” starting on page [__] for a more complete discussion of the federal income tax consequences of the merger. Tax matters can be complicated and the tax consequences of the merger to you will depend on your particular tax situation. You should consult your tax advisor to fully understand the tax consequences of the merger to you.

 

FNSC’s Board of Directors Recommends Shareholder Approval of the Merger Agreement (page [__])

 

After careful consideration, the board of directors of FNSC approved the merger agreement. The board of directors of FNSC believes that the merger and the merger agreement are fair to and in the best interests of FNSC and its shareholders, and recommends that you vote “FOR” approval of the merger agreement.

 

First Federal’s Board of Directors Unanimously Recommends Shareholder Approval of the Merger Agreement (page [__])

 

After careful consideration, the board of directors of First Federal unanimously approved the merger agreement. The board of directors of First Federal believes that the merger and the merger agreement are fair to and in the best interests of First Federal and its shareholders, and unanimously recommends that you vote “FOR” approval of the merger agreement.

 

Authorized Share Amendment (page [__])

 

First Federal’s articles of incorporation currently authorize the issuance of 30,000,000 shares of common stock, par value $.01 per share. As of December 31, 2013, First Federal had 20,041,497 shares of its common stock outstanding and 1,930,269 shares of its common stock reserved for issuance under existing equity awards and reserved for future issuance under the First Federal Bancshares of Arkansas, Inc. 2011 Omnibus Incentive Plan and an aggregate of 1,373,882 shares reserved for issuance under outstanding warrants to purchase First Federal common stock. First Federal anticipates issuing an additional 6,252,400 shares in the merger and 2,531,645 shares in the Private Placement.

 

In order to have a sufficient number of authorized shares to be issued in the merger and the Private Placement and for the reasons stated in the following sentence, First Federal’s board of directors is asking First Federal’s shareholders to approve a proposal to amend the articles of incorporation of First Federal to increase the number of authorized shares of First Federal common stock from 30,000,000 to 100,000,000. In addition to providing First Federal with a sufficient number of shares to be issued in the merger and the Private Placement, increasing the number of authorized shares to 100,000,000 will enhance future financing flexibility by permitting First Federal to take advantage of favorable market conditions for the sale of additional common stock and to acquire desirable assets or companies using common stock as consideration, and will reduce the likelihood of experiencing a delay in pursuing such opportunities. The increase in authorized shares will also allow First Federal to issue stock for other corporate purposes, such as attracting and retaining qualified employees. First Federal currently has no plans to issue any shares of its common stock other than as described in this joint proxy statement/prospectus.

 

Name Change Amendment (page [__])

 

First Federal’s board of directors is asking First Federal’s shareholders to approve a proposal to amend the articles of incorporation of First Federal to change its name to Bear State Financial, Inc. If approved, the name change will become effective at or following the closing of the merger. In connection with the name change, First Federal intends to change its ticker symbol from “FFBH” to “BSF.” Following the name change and ticker symbol change, the shares of common stock will continue to trade on the NASDAQ Global Market.

 

Private Placement (page [__])

 

In order to raise additional capital to fund a portion of the cash consideration to be paid in the merger, First Federal proposed a private placement of common stock to certain accredited investors, including Bear State and certain members of Bear State individually (the “Private Placement”). First Federal also proposed entering into commitment letter agreements with five members of Bear State acting independently of one another (the “Investors”), which Investors include Richard N. Massey, the Company's Chairman and Bear State's Managing Member, and Scott T. Ford, a director of the Company, whereby such Investors would “backstop” the Private Placement and agree to purchase the common stock in the event First Federal was unable to cause the Private Placement to be fully subscribed or obtain financing from other sources. In exchange for these commitments, the Investors would be issued in the aggregate warrants to purchase 177,215 shares of common stock with an exercise price of $7.90 per share. The board engaged Southard Financial to opine on the fairness from a financial viewpoint of the Private Placement, the commitment letters and the warrants. The board also designated a special committee of directors (the “Special Committee”) to consider and evaluate the fairness of the Private Placement, the commitment letters and the warrants, with authority to ultimately approve the transactions if the Special Committee determined the transactions to be fair and in the best interests of First Federal’s shareholders.  

 

On July 1, 2013, prior to the board’s approval of the merger agreement, the Special Committee deliberated the fairness of the Private Placement and related transactions and unanimously approved them and subsequent thereto, First Federal accepted the commitments of the Investors.  In exchange for their commitments, the Investors were issued the warrants as described above on August 13, 2013. On August 23, 2013, First Federal entered into a subscription agreement with Bear State for the purchase and sale of 2,291,593 shares of common stock. First Federal also entered into a registration rights agreement with Bear State, which provided Bear State with customary registration rights with respect to the shares it has agreed to purchase in the Private Placement. First Federal intends to utilize the commitments of the Investors to backstop the remaining 240,052 shares to be purchased in the Private Placement. First Federal anticipates the closing of the Private Placement will occur immediately prior to the closing of the merger.

 

 

 
8

 

 

 

Special Meeting of Shareholders of FNSC (page [__])

 

FNSC will hold a special meeting of its shareholders on              , 2013, at 10:00 a.m., central time, at 1010 N. 6th Street, DeQueen, Arkansas 71832. At the special meeting of shareholders, FNSC shareholders will be asked to vote to approve the merger agreement.

 

You may vote at the special meeting of shareholders if you owned shares of FNSC common stock at the close of business on the record date,               , 2013. On that date, there were 107,800 shares of FNSC common stock outstanding and entitled to vote at the special meeting of shareholders. You may cast one vote for each share of FNSC common stock you owned on the record date.

 

Even if you expect to attend the special meeting of shareholders, FNSC recommends that you promptly complete and return your proxy card in the enclosed return envelope.

 

Special Meeting of Shareholders of First Federal (page [__])

 

First Federal will hold a special meeting of its shareholders on Wednesday, March 5, 2014, at 10:00 a.m., central time, at Three Financial Centre, 900 S. Shackleford Rd., Suite 605, Little Rock, Arkansas 72211. At the special meeting of shareholders, First Federal shareholders will be asked to vote to approve the merger agreement, the Authorized Share Amendment, the Name Change Amendment and the Private Placement.

 

You may vote at the special meeting of shareholders if you owned shares of First Federal common stock at the close of business on the record date, Tuesday, December 31, 2013. On that date, there were 20,041,497 shares of First Federal common stock outstanding and entitled to vote at the special meeting of shareholders. You may cast one vote for each share of First Federal common stock you owned on the record date.

 

Even if you expect to attend the special meeting of shareholders, First Federal recommends that you promptly complete and return your proxy card in the enclosed return envelope.

 

FNSC Shareholder Vote Required (page [__])

 

Approval of the merger agreement requires the affirmative vote of the holders of a majority of the shares of FNSC common stock outstanding and entitled to vote at the special meeting. Because the required vote is based upon the outstanding shares of FNSC common stock, a failure to vote or a vote to “ABSTAIN” will have the same effect as a vote against the merger.

 

John H. Hendrix, FNSC’s largest shareholder, owns or controls 60,084 shares of FNSC common stock. These shares represent approximately 56% of the FNSC common stock entitled to vote at the FNSC special meeting. Mr. Hendrix entered into a voting agreement with First Federal pursuant to which he agreed to vote his shares in favor of the merger agreement. Accordingly, no additional votes in favor of this voting item will be required from other FNSC shareholders at the special meeting to approve the merger agreement.

 

Approval of any proposal to adjourn or postpone the special meeting, if necessary, for the purpose of soliciting additional proxies, requires the affirmative vote of the holders of a majority of shares of FNSC common stock that are voted, either in person or by proxy, at the special meeting.

  

First Federal Shareholder Vote Required (page [__])

 

Approval of the merger agreement, approval of the Authorized Share Amendment and approval of the Name Change Amendment require the affirmative vote of the holders of a majority of the shares of First Federal common stock outstanding and entitled to vote at the special meeting. Because the required vote is based upon the outstanding shares of First Federal common stock, broker non-votes, a failure to vote or a vote to “ABSTAIN” will have the same effect as a vote against the merger agreement, the Authorized Share Amendment or the Name Change Amendment.

 

Approval of the Private Placement requires the affirmative vote of a majority of the total votes cast on the proposal. Broker non-votes, a failure to vote or a vote to “ABSTAIN” will have no effect on the outcome of a vote to approve the Private Placement. Additionally, approval of the Private Placement is conditioned upon shareholders of First Federal approving the merger agreement.

 

Approval of any proposal to adjourn or postpone the special meeting, if necessary, for the purpose of soliciting additional proxies, requires the affirmative vote of the holders of a majority of shares of First Federal common stock that are voted, either in person or by proxy, at the special meeting.

 

 

 
9

 

 

 

Bear State, First Federal’s largest shareholder, owns 15,600,962 shares of First Federal common stock, excluding exercisable warrants. These shares represent approximately 78% of the First Federal common stock entitled to vote at the First Federal special meeting. Bear State entered into a voting agreement with FNSC pursuant to which Bear State agreed to vote its shares in favor of the merger agreement. Accordingly, no additional votes in favor of this voting item will be required from other First Federal shareholders at the special meeting to approve the merger agreement. Additionally, Bear State has indicated that it will vote its shares of First Federal common stock in favor of the Authorized Share Amendment, the Name Change Amendment and the Private Placement although it is not contractually obligated to do so.

 

FNSC Dissenters’ Rights of Appraisal (page [__] and Appendix C)

 

If you are a FNSC shareholder and you follow the procedures prescribed by the Arkansas Business Corporation Act (“ABCA”), you may dissent from the merger and receive the fair value of your shares of FNSC common stock as determined pursuant to those procedures. To perfect your appraisal rights, you must precisely follow the procedures specified in the ABCA at Ark. Code Ann. §§ 4-27-1301, et. seq., which are summarized herein and the relevant portions of which have been excerpted and included as Appendix C to this joint proxy statement/prospectus.

 

In order to perfect your appraisal rights and receive payment as a dissenting shareholder, you must:

 

 

deliver to FNSC before the FNSC special meeting written notice of your intent to demand payment for your shares if the merger is effectuated;

 

 

not vote your shares in favor of the merger; and

 

 

make a written demand for payment of the fair value of your shares following the FNSC special meeting in accordance with the requirements of Ark. Code Ann. § 4-27-1323.

 

If you (i) fail to provide notice of dissent to the merger, (ii) vote in favor of the merger or (iii) fail to make a written demand for payment of fair value in accordance with the requirements of Ark. Code Ann. § 4-27-1323, you will be bound by the terms of the merger and the merger agreement, and your shares of FNSC common stock will be converted into the right to receive the merger consideration. While a vote in favor of the merger will waive your appraisal rights, a failure to vote against the merger will not constitute a waiver of your appraisal rights.

 

The value of dissenting shares will be determined, as of the time immediately before effectuation of the merger, by FNSC (or First Federal as the successor thereto). If a dissenting shareholder objects to such valuation, the shareholder may provide FNSC its estimate of the fair value of its shares and demand payment for such amount. After receipt of such demand, FNSC may either (i) pay the dissenting shareholder the amount demanded by him or (ii) within 60 days of such receipt, petition a court to determine the fair value of the shares. If FNSC fails to take either of the foregoing actions within 60 days of such receipt, it shall pay the dissenting shareholder the amount demanded by such shareholder.

 

If you comply with the appraisal rights requirements, the fair value of your FNSC shares, determined in the manner described above, and which may be more or less than the value of the merger consideration you would have received in the merger had you not dissented, will be paid to you in cash. This cash payment will be fully taxable to you.

 

First Federal Dissenters’ Rights of Appraisal (page [__] and Appendix C)

 

If you are a First Federal shareholder and you follow the procedures prescribed by the ABCA, you may dissent from the merger and receive the fair value of your shares of First Federal common stock as determined pursuant to those procedures. To perfect your appraisal rights, you must precisely follow the procedures specified in the ABCA at Ark. Code Ann. §§ 4-27-1301, et. seq., which are summarized herein and the relevant portions of which have been excerpted and included as Appendix C to this joint proxy statement/prospectus.

 

In order to perfect your appraisal rights and receive payment as a dissenting shareholder, you must:

 

 

deliver to First Federal before the First Federal special meeting written notice of your intent to demand payment for your shares if the merger is effectuated;

 

 

not vote your shares in favor of the merger; and

 

 

make a written demand for payment of the fair value of your shares following the First Federal special meeting in accordance with the requirements of Ark. Code Ann. § 4-27-1323.

 

If you (i) fail to provide notice of dissent to the merger, (ii) vote in favor of the merger or (iii) fail to make a written demand for payment of fair value in accordance with the requirements of Ark. Code Ann. § 4-27-1323, you will be bound by the terms of the merger and the merger agreement. While a vote in favor of the merger will waive your appraisal rights, a failure to vote against the merger will not constitute a waiver of your appraisal rights.

 

The value of dissenting shares will be determined, as of the time immediately before effectuation of the merger, by First Federal. If a dissenting shareholder objects to such valuation, the shareholder may provide First Federal its estimate of the fair value of its shares and demand payment for such amount. After receipt of such demand, First Federal may either (i) pay the dissenting shareholder the amount demanded by him or (ii) within 60 days of such receipt, petition a court to determine the fair value of the shares. If First Federal fails to take either of the foregoing actions within 60 days of such receipt, it shall pay the dissenting shareholder the amount demanded by such shareholder.

 

If you comply with the appraisal rights requirements, the fair value of your First Federal shares, determined in the manner described above, will be paid to you in cash. This cash payment will be subject to taxation. If you fail to exercise your appraisal rights in accordance with the above-described statutes, you will continue to hold shares of First Federal common stock.

 

 

 
10

 

 

 

Interests of FNSC Officers and Directors in the Merger (page [__])

 

In considering the recommendation of the board of directors of FNSC to approve the merger, you should be aware that certain of the executive officers and directors of FNSC have financial interests in the merger that are in addition to their interests as FNSC shareholders.

 

John Hendrix, Ian Robert Vaughan and Daniel Horton will serve on the board of directors of First Federal and Jason Lenderman and Steve May will serve as executive officers of First Federal. In addition, following the effective date of the merger, First Federal agreed to indemnify each present and former officer and director of FNSC to the fullest extent as presently provided under FNSC’s organizational documents for any claim against such present and former officers and directors in their capacities as such. Additionally, officers and directors of FNSC currently are covered by liability insurance for certain acts and omissions in their capacity as officers and/or directors of FNSC. This insurance coverage will be continued by First Federal for a period of time after the merger for acts and omissions of such persons in their capacity as officers and/or directors of FNSC occurring before the merger.

 

As of the date of the merger agreement, officers and directors of FNSC and its subsidiary banks collectively held approximately 58,900 shares of First Federal common stock.

 

Regulatory Approvals Required for the Merger (page [__])

 

To complete the merger, the parties must receive the prior approval of the Board of Governors of the Federal Reserve System (“FRB”). The U.S. Department of Justice is also able to provide input into the approval process of federal banking agencies and will have between fifteen (15) and thirty (30) days following any approval of a federal banking agency to challenge the approval on antitrust grounds. The payment of dividends by First National Bank, Heritage Bank, and First Federal Bank, which will be used to partially fund the cash portion of the merger consideration, will require the approval of the OCC.  

 

Conditions to the Merger (page [__])

 

Completion of the merger depends on a number of conditions being satisfied or waived, including the following:

 

 

Holders of a majority of the outstanding shares of common stock of First Federal and FNSC must have approved the merger agreement and the merger;

 

 

all regulatory approvals and consents must have been obtained, and all waiting periods required by law must have expired or been terminated; and

 

 

certain other conditions customary for agreements of this sort, such as the accuracy of representations and warranties subject to the materiality standards set forth in the merger agreement, the compliance in all material respects by the parties with their obligations under the merger agreement, and the non-existence of a material adverse effect (as such term is defined in the merger agreement).

 

We cannot be certain when, or if, the conditions to the merger will be satisfied or waived or whether or not the merger will be completed.

 

No Solicitation (page [__])

 

Both First Federal and FNSC have agreed, subject to certain limited exceptions, not to engage in discussions with another party regarding a business combination with such other party while the merger is pending.

 

Termination of the Merger Agreement (page [__])

 

First Federal and FNSC may mutually agree at any time to terminate the merger agreement without completing the merger, even if First Federal shareholders and the FNSC shareholders have approved it. Also, either party may decide, without the consent of the other party, to terminate the merger agreement before closing under specified circumstances, including if the merger is not consummated by March 31, 2014 (subject to certain extensions), if the required regulatory approvals are not received or if the other party breaches its representations, warranties or covenants in the merger agreement in a material respect and such breach cannot be or has not been cured within the applicable cure period.

 

Termination Fee (page [__])

 

In certain circumstances, if the merger has not been consummated by March 31, 2014 and either party consummates a competing transaction on or before March 31, 2015, the party to the competing transaction shall pay the other party a termination fee in the amount of $3,000,000.

 

 

 
11

 

 

 

Both First Federal and FNSC agreed to the mutual termination fee arrangement in order to induce the other party to enter into the merger agreement. The termination fee requirement may discourage other companies from trying or proposing to combine with First Federal or FNSC before the merger is completed.

 

Comparison of Shareholders’ Rights (page [__])

 

The rights of FNSC shareholders after the merger who continue as shareholders of the Combined Company will continue to be governed by Arkansas law. After the merger is completed, the articles of incorporation and bylaws of First Federal, rather than the articles of incorporation and bylaws of FNSC, will govern the rights of shareholders of the Combined Company. Material differences between the organizational documents of the First Federal and FNSC are explained in “Comparison of Shareholders’ Rights” on page [__].

 

 

 
12

 

 

RISK FACTORS

 

In addition to the general investment risks and other information contained in this joint proxy statement/prospectus, including the matters addressed under the section titled “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the following risk factors in deciding how to vote for the proposals presented in this joint proxy statement/prospectus.

 

Risks Associated with the Merger and the Combined Company

 

Because the value of First Federal common stock may fluctuate between now and the effective time of the merger, FNSC shareholders cannot be sure of the value of the shares of First Federal common stock they will receive in the merger.

 

Because First Federal is issuing a fixed number of shares in the merger, any change in the value of First Federal common stock prior to completion of the merger will affect the value of the shares of First Federal common stock that FNSC shareholders will receive upon completion of the merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in First Federal’s business, operations and prospects, regulatory considerations and others that influence the market value of equity securities generally. Many of these factors are beyond First Federal’s control. Accordingly, at the time of the special meeting, FNSC shareholders will not be able to determine the exact value of shares of First Federal common stock they will receive upon completion of the merger.

 

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated, any of which could prevent completion of the merger or reduce the anticipated benefits from the merger.

 

As a condition to First Federal’s and FNSC’s respective obligations to complete the merger, the approval of various regulators must be obtained. In determining whether to grant these approvals, the regulators consider a variety of factors, including the regulatory standing of each party and the factors described under “The Merger and the Merger Agreement—Regulatory Approvals for the Merger.” An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approval or delay its receipt. Regulators may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of the Combined Company following the merger, any of which might have an adverse effect on the Combined Company following the merger. Depending on their nature and extent, any objections, conditions or restrictions of regulatory authorities may jeopardize or delay completion of the merger or may lessen the anticipated potential benefits of the merger.

 

If FNSC is required to recognize a goodwill impairment loss, the amount of its net income will be reduced.

 

FNSC may be required to recognize a goodwill impairment loss if the value of the merger consideration is less than the carrying value of FNSC’s net assets, including goodwill.  Generally accepted accounting principles require that a company’s goodwill be tested for impairment when an event occurs or circumstances change including when it becomes more-likely-than-not that a company will be sold. An impairment charge may result if the price to be received in a sale of the company is less than the carrying value of the company’s net assets.  By way of example: At August 19, 2013, the total merger consideration to be paid by First Federal (based on a $9.51 stock price for First Federal Stock on such date) was $133.5 million. The carrying value of FNSC’s net assets, including goodwill as of September 30, 2013, as reflected on its balance sheet, was $151.8 million. Because the merger consideration is less than the carrying value of net assets, a goodwill impairment test would be required to be performed to measure the amount of impairment loss, if any.  If an impairment charge is required, it could result in a significant reduction in FNSC’s net income.  

 

FNSC will be subject to business uncertainties and contractual restrictions while the merger is pending, which may adversely affect its reputation, business prospects and results of operations.

 

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on FNSC and consequently, if the merger is completed, on the Combined Company. These uncertainties may impair FNSC’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with FNSC to seek to change existing business relationships with FNSC. In addition, the merger agreement restricts FNSC from making certain acquisitions and taking other specified actions until the merger occurs without the consent of First Federal. These restrictions may prevent FNSC from pursuing attractive business opportunities that may arise prior to the completion of the merger.

 

The merger may result in a loss of First Federal or FNSC employees and the Combined Company may be unable to attract, retain and integrate suitable replacements, which could harm the Combined Company’s business reputation and prospects or reduce the anticipated benefits from the merger.

 

Neither First Federal nor FNSC has entered into any employment or retention agreement with any of its officers or employees. Accordingly, each officer and employee of First Federal and FNSC are deemed at-will employees whose employment may be terminated at any time without any penalty, liability or severance obligation. Retention of employees of First Federal and FNSC may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the Combined Company. Similarly, despite its best efforts to retain quality employees, the Combined Company might lose some of First Federal’s or FNSC’s employees following the merger. For example, FNSC employees may not want to work for a publicly-traded company instead of a privately-held company or may not want to assume different duties, positions and compensation. The Combined Company’s future performance will depend in part on the continued service of certain employees, including key members of FNSC’s and First Federal’s management teams. Competitors may recruit employees prior to the merger and during integration, as is common in mergers of financial institutions. As a result, employees of First Federal or FNSC could leave with little or no prior notice, and the Combined Company may be unable to attract, retain and integrate employees following the merger.

 

 

 
13

 

 

The Combined Company may fail to realize the anticipated cost savings or any other benefits from the merger.

 

First Federal and FNSC entered into the merger agreement with the expectation that the merger will result in benefits to the Combined Company, including cost savings. Although First Federal estimates that it will realize cost savings of approximately $500,000 annually (excluding one-time costs and expenses associated with the merger with FNSC) from the merger, it is possible that the estimates of the potential cost savings could turn out to be incorrect. For example, future business developments may require the Combined Company to continue to operate or maintain some facilities or support functions that are currently expected to be combined or reduced. The cost savings estimates also depend on the Combined Company’s ability to combine the businesses of First Federal and FNSC in a manner that permits those costs savings to be realized. If the estimates turn out to be incorrect or the Combined Company is not able to combine the two companies successfully, the anticipated cost savings may not be fully realized or realized at all, or may take longer to realize than expected.

 

First Federal and FNSC will incur significant, non-recurring merger-related transaction and integration costs in connection with the merger, which could adversely affect either company’s financial condition and results of operations.

 

Both First Federal and FNSC have incurred and will continue to incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, such as the cost and expenses of filing, printing and mailing this joint proxy statement/prospectus and all filing and other fees paid to the SEC in connection with the merger. These costs must be expensed as incurred under United States generally accepted accounting principles, or “GAAP,” and must be recognized even if the merger is not completed. Although First Federal believes that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of the businesses of First Federal and FNSC, will offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

 

Combining First Federal and FNSC may be more difficult, costly or time-consuming than expected, and failure to do so quickly and efficiently could reduce the Combined Company’s profitability, affect its stock price and either delay or prevent realization of many of the potential benefits of the merger.

 

The success of the Combined Company following the merger may depend in large part on the ability to integrate the businesses and cultures of First Federal and FNSC and their subsidiary banks. If First Federal and FNSC are not able to integrate their operations efficiently and timely, the expected benefits of the merger may not be realized. It is possible that the integration process following completion of the merger could result in the loss of key employees, disruption of each company’s ongoing business or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect the Combined Company’s ability to maintain relationship with First Federal’s or FNSC’s existing customers and employees or to achieve the anticipated benefits of the merger. As with any merger of banking institutions, there also may be business disruptions that cause First Federal and FNSC to lose customers. The Combined Company may be required to spend additional time and money on operating compatibility, which could otherwise be spent on developing the Combined Company’s business. If First Federal and FNSC do not integrate operations effectively or efficiently, it could harm the Combined Company’s business, financial condition and results of operations.

 

Results of the Combined Company may materially differ from the pro forma information presented in this joint proxy statement/prospectus, which could negatively impact the market value of the Combined Company’s stock.

 

Results of the Combined Company may be materially different from those shown in the unaudited pro forma condensed combined financial information presented in this joint proxy statement/prospectus, which are presented for illustrative purposes only, are not necessarily indicative of what the Combined Company’s actual financial condition or results of operations would have been had the merger been completed on the dates indicated, and are based on various assumptions and preliminary estimates. The actual financial condition and results of operations of the Combined Company following the merger may not be consistent with, or evident from, these unaudited pro forma condensed combined financial information. In addition, the assumptions used in preparing the unaudited pro forma condensed combined financial information may not prove to be accurate. Any potential decline in the Combined Company's financial condition or results of operations may cause significant variations in the stock price of the Combined Company.

 

FNSC and First Federal shareholders will have a reduced ownership and voting interest after the merger and completion of First Federal’s capital raising transactions, and will exercise less influence over management.

 

FNSC shareholders currently have the right to vote in the election of the board of directors of FNSC and on other matters affecting FNSC. The merger will significantly reduce the influence of FNSC shareholders. When the merger occurs, each FNSC shareholder will become a shareholder of the Combined Company with a percentage ownership of the Combined Company much smaller than such shareholder’s current percentage ownership of FNSC. Additionally, in connection with the merger, First Federal intends to complete the Private Placement that will result in additional shares of First Federal common stock being issued. After giving effect to the merger and consummation of the Private Placement, former FNSC shareholders are expected to hold approximately 22% of the Combined Company’s then-outstanding common stock, based on the assumptions described in “Board of Directors and Management of the Combined Company Following the Merger—Pro Forma Security Ownership.” Because of this, FNSC shareholders will have less influence on the management and policies of the Combined Company than they now have on the management and policies of FNSC.

 

 

 
14

 

 

Similarly, after the merger and the Private Placement, existing First Federal shareholders will have a percentage ownership of the Combined Company that is much smaller than such shareholders’ current percentage ownership of First Federal. After giving effect to the merger and consummation of the Private Placement, existing First Federal shareholders, other than the affiliates of First Federal, are expected to hold approximately 14% of the Combined Company’s then-outstanding common stock, while existing affiliates of First Federal are expected to hold approximately 63% of the Combined Company’s then-outstanding common stock. Because of this, existing non-affiliate First Federal shareholders will have less influence on the management and policies of the Combined Company after the merger than they now have on the management and policies of First Federal. The foregoing percentages are based on the assumptions described in “Board of Directors and Management of the Combined Company Following the Merger—Pro Forma Security Ownership.”

 

First Federal shareholders may experience dilution of their share ownership if the proposal to increase the number of authorized shares of First Federal common stock is approved.

 

As of December 31, 2013, First Federal had 20,041,497 shares of common stock outstanding and 3,304,151 shares of common stock reserved for issuance under outstanding equity awards, outstanding warrants, and for future equity awards. First Federal anticipates issuing 6,252,400 additional shares of common stock in the merger and 2,531,645 additional shares in the Private Placement. First Federal shareholders are being asked to approve an amendment to First Federal’s articles of incorporation that would increase the number of authorized shares of common stock, $.01 par value, from 30,000,000 to 100,000,000. This increase in authorized shares of common stock would allow for the issuance of shares in the merger and the Private Placement, and would also provide First Federal with the flexibility to issue more shares in the future without requiring further shareholder approval, which might cause dilution to First Federal shareholders. First Federal has no present plans to issue shares of common stock other than as provided in this proxy statement/prospectus.   

 

The price of the Combined Company’s common stock and its results of operations may be affected by factors different from, or may be affected differently by, those currently affecting the price of First Federal’s common stock and its results of operations or FNSC’s results of operations.

 

First Federal’s and FNSC’s businesses are different in certain ways, and First Federal’s results of operations, as well as the price of its common stock, may be affected by factors different from those affecting FNSC’s results of operations. Additionally, common factors that currently affect each company may have a different effect on each of their businesses. Following the merger, the Combined Company, its results of operations and the market price of its common stock will be affected by these factors and will be exposed to new or increased risks. As a result, the price of the Combined Company’s common stock may fluctuate significantly following the merger, including as a result of factors over which it has no control. For a discussion of risks associated with First Federal’s business, see “Risk Factors—Risks Associated with First Federal’s Business” below, and with FNSC’s business, see “Risk Factors—Risks Associated with FNSC’s Business” below.

 

If the merger does not constitute a reorganization under Section 368(a) of the Internal Revenue Code, then FNSC shareholders may be responsible for payment of additional U.S. federal income taxes.

 

Notwithstanding the legal opinion issued to FNSC by its counsel, the U.S. Internal Revenue Service may determine that the merger does not qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. In that case, and if the Internal Revenue Service was to prevail in that position, each FNSC shareholder would recognize a gain or loss equal to the difference between (i) the fair market value of the First Federal common stock and cash received by the shareholder in the merger and (ii) the shareholder’s adjusted tax basis in the shares of FNSC common stock exchanged therefor. Even if the merger qualifies as a tax-free reorganization, FNSC shareholders will recognize immediate gain on the cash portion of the consideration received in the merger.

 

The management of First Federal may be required to dedicate significant time and effort to the merger with FNSC and the integration of FNSC into First Federal, all of which may divert their attention from other business concerns of and their responsibility to First Federal.

 

The merger will cause the management of First Federal to focus a portion of its time and energies on matters related to the merger that otherwise would be directed to the business and operations of First Federal. Any significant diversion of management’s attention could affect First Federal’s ability to service existing business and develop new business and adversely affect the earnings of First Federal.

 

If the merger is not completed, First Federal’s and FNSC’s businesses may be adversely affected.

 

The merger agreement may be terminated prior to the closing, before or after approval by FNSC and/or First Federal shareholders, for various reasons, which could have negative consequences for either First Federal or FNSC, or both. For example, First Federal’s or FNSC’s business may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Also, First Federal and FNSC would have to recognize merger related expenses incurred prior to the termination of the merger, which could adversely affect either company’s financial condition and results of operations. Additionally, if the merger agreement is terminated, the market price of First Federal’s common stock could decline to the extent that the current market prices reflect an assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, including circumstances involving consummation of a competing transaction, First Federal or FNSC may be required to pay to the other party a termination fee of $3,000,000.

 

 
15

 

 

 

Certain officers and directors of FNSC have potential conflicts of interest in the merger.

 

FNSC shareholders should be aware of potential conflicts of interest and the benefits available to FNSC officers and directors when considering FNSC’s board of directors’ recommendation to approve the merger. Certain officers, directors and employees of FNSC will become officers, directors or employees of the Combined Company after completion of the merger. Other interests include rights to indemnification and directors and officers insurance following the merger. Although the members of each of FNSC’s and First Federal’s board of directors knew about these additional interests and considered them when they approved the merger agreement and the merger, you should understand that some of the directors and officers of FNSC, First National Bank and Heritage Bank will receive benefits in connection with the merger that you will not receive.

 

The Combined Company may not be able to manage future growth and competition in its target markets, which could adversely affect its results of operations, financial condition and stock price.

 

Following consummation of the merger, the Combined Company will be a larger financial institution and will serve a much larger market area. For example, the merger will result in a significant expansion of First Federal’s operations into southwestern and northeastern Arkansas, where it does not currently operate any offices. The Combined Company may not be able to successfully compete in these markets or to successfully achieve growth or manage additional growth. An inability to achieve growth, or an inability to effectively manage growth, could adversely affect the Combined Company’s results of operations, financial condition and stock price.

 

Neither the First Federal board nor the FNSC board obtained a fairness opinion in determining whether or not to proceed with the merger, and the boards’ assessment of the fairness of the merger from a financial point of view to the shareholders of First Federal and FNSC, respectively, may prove incorrect.

 

In analyzing the merger to determine fairness to the shareholders, the FNSC board conducted significant due diligence on First Federal. The board did not request, and therefore did not obtain, a fairness opinion to assist in its determination. While it is customary to obtain a fairness opinion from an independent financial advisor, such opinions are not the only way to evaluate fairness. The FNSC board believes that because of the financial skills and background of its directors, the FNSC board was qualified to conclude that the merger is fair from a financial perspective to FNSC’s shareholders. The FNSC board may be incorrect in its assessment of the fairness of the merger from a financial point of view to the shareholders of FNSC.

 

The First Federal board believes that because of the financial skills and background of its directors, the First Federal board was qualified to conclude that the merger is fair from a financial perspective to First Federal’s shareholders.  Accordingly, the First Federal board did not request, and therefore did not obtain, a fairness opinion to assist it in its determination, despite the fact that fairness opinions are commonly obtained by the boards of directors of companies involved in merger transactions.  The First Federal board may be incorrect in its assessment of the fairness of the business combination from a financial point of view to the shareholders of First Federal. If the board is incorrect in its assessment, shareholders may not receive the anticipated benefits of the merger.  

 

The fairness opinion issued to the First Federal board regarding the fairness from a financial perspective of the Private Placement, the commitment letters and the warrants has not been and is not expected to be updated to reflect any changes in circumstances that may have occurred since the date it was issued.

 

The First Federal board engaged Southard Financial, LLC to opine on the fairness from a financial perspective of the Private Placement, the commitment letters and the warrants. For a description of the Private Placement and the opinion of Southard Financial, see “The Merger and the Merger Agreement—The Private Placement” and “The Merger and the Merger Agreement—The Private Placement – Opinion of First Federal’s Financial Advisor.” Southard Financial’s fairness opinion speaks only as of the date it was issued. Changes in the operations and prospects of First Federal, general market and economic conditions and other factors which may be beyond the control of First Federal, and on which the fairness opinion was based, may have altered the value of First Federal or the market price of First Federal common stock by the time the Private Placement is completed. Southard Financial has no obligation to update, revise or reaffirm its opinion to reflect subsequent developments, and neither the First Federal board nor the Special Committee has the present intent to ask Southard Financial to update its opinion. Accordingly, the opinion will not address the fairness of the Private Placement, the commitment letters and the warrant from a financial point of view at the time the Private Placement is completed.

 

Risks Associated with First Federal’s Business

 

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

 

Difficult economic conditions in recent years 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 using the resources of the Deposit Insurance Fund (“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, noninterest expense could increase significantly.

 

 

 
16

 

 

Future bank failures in local markets could cause increased and bulk sales of bank-owned properties, reducing the value of our real estate owned (“REO”), resulting in additional losses, costs and expenses that may negatively affect First Federal’s operations.

 

Future bank failures or an increase in the number of troubled banks in First Federal Bank’s geographic regions could adversely impact the value of our REO. Declines in the housing market during recent years, 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 or an increase in the number of troubled banks in the areas in which First Federal Bank operates could 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 First Federal’s ultimate realization from any REO sales. At September 30, 2013 and December 31, 2012, First Federal had $9.8 million and $16.7 million of REO, respectively. While First Federal’s REO and REO-related expenses are trending downward due to a decrease in the amount of First Federal’s REO properties and First Federal management believes that general economic conditions in its market areas have been improving, a slowing or reverse in this economic recovery or future weakness in the housing market, particularly in Northwest Arkansas, could reduce the value of First Federal’s existing REO. Additionally, if such conditions materialize, the number of properties comprising First Federal’s REO portfolio could increase. If the amount of First Federal’s REO properties or real estate owned by other banks in our market areas increases, First Federal’s losses and the costs and expenses of maintaining our REO would likely increase. Any additional increase in losses, and maintenance costs and expenses due to REO could have a material adverse impact on First Federal’s business, results of operations and financial condition.  

 

Concentrations of loans in Northwest Arkansas may increase risk.

 

First Federal’s success depends primarily on the general economic conditions in its primary market areas – Northwest and North central Arkansas. As of September 30, 2013, approximately 55% of First Federal’s total loans receivable consisted of loans collateralized by real estate located in a six county region in northern Arkansas. Accordingly, the local economic conditions in Northwest and North central Arkansas have a significant impact on the ability of borrowers to repay loans as well as First Federal’s ability to originate new loans. As such, a decline in real estate valuations in this market could lower the value of the collateral securing those loans.   

 

FNSC’s loan portfolio consists primarily of loans collateralized by real estate located in Northeast and Southwest Arkansas. After giving pro forma effect to the merger, the geographic concentration of real estate loans of the Combined Company will still be primarily concentrated within the state of Arkansas, but will be diversified among different regions of the state.   

 

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

 

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

 

 

Economic conditions in First Federal Bank’s markets that negatively affect housing prices and the job market have resulted, and may continue to result, in deterioration in credit quality of First Federal Bank’s loan portfolio, and such deterioration in credit quality has had, and could continue to have, a negative impact on First Federal’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 First Federal uses to estimate the allowance for loan and lease 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.

 

 

First Federal 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.

 

 

First Federal 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, First Federal could experience continuing or increased adverse effects on its financial condition and results of operations.

 

 

 
17

 

 

First Federal Bank has an elevated percentage of nonperforming loans and classified assets relative to total assets.  If the allowance for loan and lease losses is not sufficient to cover actual loan losses, results of operations will be adversely affected.

 

At September 30, 2013, nonperforming loans totaled $13.1 million, representing 3.6% of total loans and 2.5% of total assets. At September 30, 2013, real estate owned totaled $9.8 million or 1.9% of total assets. As a result, First Federal’s total nonperforming assets amounted to $22.9 million or 4.3% of total assets at September 30, 2013. Further, assets classified by management as substandard, including nonperforming loans and real estate owned, totaled $26.7 million, representing 5.0% of total assets.  At September 30, 2013, the allowance for loan and lease losses was $13.1 million, representing 100% 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 First Federal’s financial condition and results of operations.

 

Management maintains an allowance for loan and lease 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 and lease 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 and lease 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 management believes that the allowance for loan and lease losses is adequate to cover current losses, management may determine that an increase in the allowance for loan and lease losses is needed or regulators may require an increase in the allowance. Either of these occurrences could materially and adversely affect First Federal’s financial condition and results of operations.

 

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 September 30, 2013, approximately 50% 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 that 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- and 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.

  

 

 
18

 

 

First Federal and First Federal Bank operate in a heavily regulated environment, and that regulation could limit or restrict our activities and adversely affect First Federal’s financial condition.

 

The financial services industry is highly regulated and 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.  These regulations may not always be in the best interest of investors.

 

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. Management cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulation to First Federal or First Federal Bank. 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 asset quality differs from ours, additional charges may be required that would have the effect of materially reducing our earnings, capital ratios and stock price.

 

The U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (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 larger financial institutions, and some will affect only institutions with different charters or institutions that engage in different activities, it will likely increase First Federal and First Federal Bank’s regulatory compliance burden and may have other adverse effects, including increasing the costs associated with regulatory examinations and compliance measures. First Federal and First Federal Bank are closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations. While the ultimate effects of the Dodd-Frank Act on First Federal and First Federal Bank is still undetermined, the law is likely to result in increased compliance costs, higher fees paid to regulators, and possible operational restrictions. 

 

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 First Federal or First Federal Bank in substantial and unpredictable ways, including limiting the types of financial services and products offered or increasing the ability of non-banks to offer competing financial services and products. While management cannot predict the regulatory changes that may be borne out of the current economic crisis, and cannot predict whether First Federal or First Federal Bank 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. Management cannot predict whether additional legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on the business, financial condition or results of operations of First Federal and First Federal Bank.

 

 

 
19

 

 

First Federal and First Federal Bank could be materially and adversely affected if any of our officers or directors fails to comply with bank and other laws and regulations.

 

First Federal and First Federal 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 First Federal or First Federal Bank or its officers or directors could materially and adversely affect First Federal and First Federal Bank’s business, financial condition or results of operations or cause significant reputational harm.

 

Changes in interest rates could have a material adverse effect on First Federal Bank’s profitability and asset values.   

 

The operations of financial institutions such as First Federal 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.  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.   

 

As of September 30, 2013, First Federal Bank estimates that its one-year cumulative repricing gap position was a positive 2% of total assets and the one-year ratio of interest earning assets to interest bearing liabilities was 105% with both measures including assumptions for loan prepayments and calls of investment securities. Based on these measures, First Federal Bank estimates a limited impact on earnings for various interest rate change scenarios. Floating or adjustable rate loans made up approximately 38% of the $362 million of total loans receivable.  Fixed rate loans of approximately 62% of total loans receivable had a weighted average remaining contractual term of approximately 5.5 years. Significant composition changes in our rate sensitive assets or liabilities could result in a more unbalanced position and then interest rate changes could have a material impact on our earnings.  In addition, earnings may be adversely affected during any period of changes in interest rates due to a number of factors including 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.     

 

In addition a significant and prolonged increase in interest rates could have a material adverse effect on the fair value of the investment securities portfolio classified as available for sale and, accordingly, shareholders’ equity.  At September 30, 2013 First Federal had $73.3 million of investment securities, all of which were classified as available for sale which resulted in recording a net unrealized gain of $105,000.  Based on market rates at September 30, 2013 it was estimated that a 200 basis point increase in rates would have resulted in an approximate 7.7% decrease in the fair value of the securities.     

 

First Federal Bank may incur increased employee benefit costs which could have a material adverse effect on its financial condition and results of operations.

 

First Federal 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.

 

 

 
20

 

 

On April 30, 2010, the Board of Directors of First Federal 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, First Federal 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.  Net pension expense was approximately $369,000 for the nine months ended September 30, 2013, and approximately $566,000 and $630,000 for the years ended December 31, 2012 and 2011, respectively, and contributions to the Pentegra DB Plan totaled $991,000 and $139,000 for the years ended December 31, 2012 and 2011, respectively. There were no contributions to the Pentegra DB Plan for the nine months ended September 30, 2013. 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 First Federal Bank’s required contribution in the near term. Additionally, if First Federal Bank were to terminate its participation in the Pentegra DB Plan, First Federal 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.

 

First Federal and First Federal Bank face strong competition that may adversely affect profitability.

 

First Federal and First Federal Bank 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, and 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.  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.

 

 

 
21

 

 

An inability to make technological advances may reduce First Federal and First Federal Bank’s ability to successfully compete.

 

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, First Federal and First Federal Bank’s future success will depend in part on the ability to address customers’ needs by using technology.  First Federal and First Federal Bank may be unable to effectively develop new technology-driven products and services and may be unsuccessful in marketing these products to our customers.  Many competitors have greater resources to invest in technology. Any failure to keep pace with technological change affecting the financial services industry could have a material adverse impact on First Federal and First Federal Bank’s business, financial condition and results of operations.

 

First Federal and First Federal Bank are subject to security and operational risks relating to technology that could damage our reputation and our business.

 

Security breaches in internet banking activities could expose First Federal and First Federal Bank to possible liability and reputational damage.  Any security compromise could also deter customers from using internet banking services that involve the transmission of confidential information.  First Federal and First Federal Bank rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data.  These precautions and security measures may not protect systems from compromises or breaches that could result in reputational damage.  Additionally, First Federal and First Federal Bank outsource data processing to a third party.  If the third party provider encounters difficulties or if First Federal and First Federal Bank 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.  First Federal 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.

 

Risks Associated with First Federal’s Common Stock

 

The trading volume of First Federal’s 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 First Federal’s common stock at times, volumes and prices attractive to our shareholders.

 

First Federal’s 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 and an active trading market may not develop or be sustained after the merger.  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 elsewhere in this registration statement:

 

 

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.

 

 

 
22

 

 

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.  First Federal expects 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 First Federal and First Federal Bank specifically and the banking industry in general.

 

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

 

Bear State Financial Holdings, LLC holds a controlling interest in First Federal’s common stock and may have interests that differ from the interests of other shareholders.

 

Bear State currently owns approximately 79% of First Federal’s common stock, assuming full exercise of the outstanding warrants held by it. After giving effect to the merger and consummation of the expected capital raising transactions (in which Bear State will participate), it is expected Bear State will hold approximately 63% of the Combined Company’s outstanding common stock. As a result, Bear State is able to control the election of directors, to determine corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to First Federal shareholders for approval. Such transactions may include mergers and acquisitions, sales of all or some of First Federal’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 First Federal’s other shareholders, and it may take actions that advance its interests to the detriment of other shareholders. 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 First Federal. 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 First Federal.

 

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

 

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

 

First Federal’s 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. First Federal is a controlled company because Bear State owns more than 50% of the voting power for the election of directors. Accordingly, First Federal is exempt from certain corporate governance requirements, and holders of First Federal’s common stock may not have all the protections that these rules are intended to provide. Notwithstanding First Federal’s exemption from these requirements, six of the nine current directors of First Federal are deemed to be independent in accordance with NASDAQ listing requirements. Following consummation of the merger and the Private Placement, Bear State will continue to own more than 50% of the voting stock of First Federal.

 

The future price of First Federal common stock may be less than the price at which you received it in the merger, and you may not be able to sell your shares at a price equal to or greater than such price or at all.

 

The market value of the First Federal common stock may decline to a price less than the price at which you received it in the merger. If this occurs, you may not be able to sell your shares at a price equal to or greater than price at which you received your shares in the merger or at all.

 

 

 
23

 

 

Shares of First Federal common stock are not an insured deposit and are subject to substantial investment risk.

 

Investments in First Federal common stock are not a savings or deposit account or other obligation of its subsidiary bank and will not be insured or guaranteed by the FDIC or any other governmental agency. Investment in First Federal common stock is inherently risky for the reasons described in this "RISK FACTORS" section, elsewhere in this joint proxy statement/prospectus and in the documents incorporated by reference, and is subject to the same market forces that affect the market price of common stock of any company. As a result, you may lose some or all of your investment.

 

 
24

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION

 

 

The following unaudited pro forma condensed combined consolidated financial statements as of and for the nine months ended September 30, 2013 and for the year ended December 31, 2012 combine the historical consolidated financial statements of First Federal and FNSC. The unaudited pro forma condensed combined consolidated financial statements give effect to the proposed merger and the Private Placement as if such transactions occurred on September 30, 2013 with respect to the pro forma combined consolidated balance sheet, and on January 1, 2012, with respect to the pro forma combined consolidated income statements.

 

The notes to the unaudited pro forma combined consolidated financial statements describe the pro forma amounts and adjustments presented below.

 

This pro forma data is not necessarily indicative of the operating results that First Federal would have achieved had it completed the merger and the Private Placement as of January 1, 2012 and should not be considered as representative of future operations. In addition, as explained in more detail in the accompanying notes to the unaudited condensed combined consolidated financial information, the fair values of the FNSC assets acquired and liabilities assumed reflected in the unaudited pro forma condensed combined consolidated financial information are subject to adjustment and may vary from the actual fair values assigned that will be recorded upon completion of the merger.

 

The unaudited pro forma combined consolidated financial information presented below is based on, and should be read together with, the historical financial information that First Federal and FNSC have included in this joint proxy statement/prospectus as of and for the indicated periods.

 

 
25

 

 

Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet

As of September 30, 2013

(in thousands)

 

   

First Federal Bancshares of Arkansas, Inc.

   

First National Security Company

   

Pro Forma Adjustments

     

Pro Forma Combined

 

Assets

                                 

Cash and cash equivalents

  $ 23,435     $ 108,780     $ (54,000 )

(a)

  $ 78,215  

Interest bearing time deposits in banks

    25,111       -                 25,111  

Investment securities held to maturity

    -       882       8  

(b)

    890  

Investment securities available for sale

    73,335       152,461                 225,796  

Loans receivable

    365,860       586,871       (14,519 )

(c)

    938,212  

Allowance for loan losses

    (13,078 )     (12,595 )     12,595  

(d)

    (13,078 )

Loans receivable, net

    352,782       574,276       (1,924 )       925,134  

Other real estate owned, net

    9,835       1,041       (321 )

(e)

    10,555  

Office properties and equipment, net

    18,940       32,971                 51,911  

Cash surrender value of life insurance

    23,606       1,901                 25,507  

Goodwill

            56,219       (24,670 )

(f)

    31,549  

Core deposit and other intangibles

            685       7,217  

(g)

    7,902  

Prepaid expenses and other assets

    2,697       12,724       (562 )

(h)

    14,859  

TOTAL ASSETS

  $ 529,741     $ 941,940     $ (74,252 )     $ 1,397,429  
                                   

Liabilities

                                 

Deposits – noninterest bearing

  $ 20,998     $ 140,819               $ 161,817  

Deposits – interest bearing

    434,458       576,868       705  

(i)

    1,012,031  

Total deposits

    455,456       717,687       705         1,173,848  
                                   

Repurchase agreements and federal funds purchased

    -       10,750                 10,750  

Other borrowings

    968       58,794       1,552  

(j)

    61,314  

Other liabilities

    1,831       2,862       942  

(h)(k)

    5,635  

Total liabilities

    458,255       790,093       3,199         1,251,547  
                                   

Stockholders’ equity

                                 

Common stock

    200       1       (1 )

(l)

    288  
                      88  

(m)

       

Additional paid-in capital

    92,666       10,866       (10,866 )

(l)

    166,974  
                      74,308  

(m)

       

Accumulated other comprehensive income (loss)

    105       172       (172 )

(l)

    105  

Retained earnings (accumulated deficit)

    (21,485 )     140,808       (140,808 )

(l)

    (21,485 )

Total stockholders’ equity

    71,486       151,847       (77,451 )       145,882  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 529,741     $ 941,940     $ (74,252 )     $ 1,397,429  

 

See accompanying notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Information

 

 
26

 

 

Unaudited Pro Forma Condensed Combined Consolidated Income Statement

For the Nine Months Ended September 30, 2013

(in thousands, except share data)

 

   

First Federal Bancshares of Arkansas, Inc.

   

First National Security Company

   

Pro Forma Adjustments

     

Pro Forma Combined

 

Interest Income:

                                 

Loans receivable

  $ 12,084     $ 24,119     $ 2,384  

(n)

  $ 38,587  

Investment securities – taxable

    256       441                 697  

Investment securities - nontaxable

    896       137                 1,033  

Other

    381       398                 779  

Total interest income

    13,617       25,095       2,384         41,096  
                                   

Interest Expense:

                                 

Deposits

    2,477       1,457       (117 )

(o)

    3,817  

Other borrowings

    37       1,528       (191 )

(p)

    1,374  

Total interest expense

    2,514       2,985       (308 )       5,191  
                                   

Net interest income before provision for loan losses

    11,103       22,110       2,692         35,905  

Provision for loan losses

    -       270                 270  
                                   

Net interest income after provision for loan losses

    11,103       21,840       2,692         35,635  
                                   

Noninterest Income:

                                 

Net gain on sale of investment securities

    25       100                 125  

Deposit fee income

    2,352       3,724                 6,076  

Earnings on life insurance policies

    603       49                 652  

Gain on sale of loans

    726       29                 755  

Other

    307       2,061                 2,368  

Total noninterest income

    4,013       5,963       -         9,976  
                                   

Noninterest Expense:

                                 

Salaries and employee benefits

    8,365       8,981                 17,346  

Net occupancy expense

    1,809       3,398                 5,207  

Real estate owned, net

    82       61                 143  

Amortization of intangible assets

    -       204       425  

(q)

    629  

Other

    4,319       4,497                 8,816  

Total noninterest expense

    14,575       17,141       425         32,141  
                                   

Income before provision for income taxes

    541       10,662       2,267         13,470  

Provision for income taxes

    11       4,128       868  

(r)(s)

    5,007  

Net income available to common stockholders

  $ 530     $ 6,534     $ 1,399       $ 8,463  
                                   

Basic earnings per share:

                                 

Earnings per share

  $ 0.03     $ 60.61               $ 0.30  

Weighted average shares outstanding

    19,779,684       107,800                 28,563,729  
                                   

Diluted earnings per share:

                                 

Earnings per share

  $ 0.03     $ 60.61               $ 0.29  

Weighted average shares outstanding

    20,845,108       107,800                 29,660,687  

 

See accompanying notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Information 

 

 
27

 

 

Unaudited Pro Forma Condensed Combined Consolidated Income Statement

For the Year Ended December 31, 2012

(in thousands, except share data)

 

   

First Federal Bancshares of Arkansas, Inc.

   

First National Security Company

   

Pro Forma Adjustments

     

Pro Forma Combined

 

Interest Income:

                                 

Loans receivable

  $ 17,644     $ 34,608     $ 6,844  

(n)

  $ 59,096  

Investment securities – taxable

    386       743                 1,129  

Investment securities - nontaxable

    1,232       212                 1,444  

Other

    537       469                 1,006  

Total interest income

    19,799       36,032       6,844         62,675  
                                   

Interest Expense:

                                 

Deposits

    4,322       2,745       (483 )

(o)

    6,584  

Other borrowings

    100       1,979       (334 )

(p)

    1,745  

Total interest expense

    4,422       4,724       (817 )       8,329  
                                   

Net interest income before provision for loan losses

    15,377       31,308       7,661         54,346  

Provision for loan losses

    22       1,122                 1,144  
                                   

Net interest income after provision for loan losses

    15,355       30,186       7,661         53,202  
                                   

Noninterest Income:

                                 

Net gain on sale of investment securities

    542       67                 609  

Deposit fee income

    3,951       5,110                 9,061  

Earnings on life insurance policies

    790       67                 857  

Gain on sale of loans

    923       93                 1,016  

Other

    381       1,631                 2,012  

Total noninterest income

    6,587       6,968       -         13,555  
                                   

Noninterest Expense:

                                 

Salaries and employee benefits

    11,024       11,873                 22,897  

Net occupancy expense

    2,554       3,951                 6,505  

Real estate owned, net

    717       218                 935  

Amortization of intangible assets

    -       418       567  

(q)

    985  

Other

    6,892       6,124                 13,016  

Total noninterest expense

    21,187       22,584       567         44,338  
                                   

Income before provision for income taxes

    755       14,570       7,094         22,419  

Provision for income taxes

    -       5,480       2,716  

(r)(s)

    8,196  

Net income available to common stockholders

  $ 755     $ 9,090     $ 4,378       $ 14,223  
                                   

Basic earnings per share:

                                 

Earnings per share

  $ 0.04     $ 84.32               $ 0.51  

Weighted average shares outstanding

    19,302,603       107,800                 28,086,648  
                                   

Diluted earnings per share:

                                 

Earnings per share

  $ 0.04     $ 84.32               $ 0.48  

Weighted average shares outstanding

    20,587,775       107,800                 29,375,122  

 

See accompanying notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Information

 

 
28

 

 

Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Statements

As of and for the Nine Months Ended September 30, 2013

And for the Year Ended December 31, 2012

 

 

Note 1 – Pro Forma Adjustments

(in thousands, except share data)

 

(a)

This represents the cash merger consideration of $74.0 million, net of estimated proceeds of $20.0 million to be generated from the Private Placement. The remaining cash merger consideration of $54 million is to be funded by dividends to be declared and paid by First Federal Bank (approximately $20 million), and FNSC's subsidiary banks (approximately $34 million) at the time of and in connection with the closing of the merger. While the approximate aggregate amount of dividends to be declared and paid by FNSC's subsidiary banks to partially fund the cash merger consideration is presently determinable, the specific amount of dividends to be declared and paid by each of First National Bank and Heritage Bank will not be determined until immediately prior to closing. The banks will be required to obtain approval from the OCC before they may pay these dividends. The parties have not yet submitted an application for approval of the dividends to the OCC, but intend to do so .

(b)

This represents the recording of the mark-to-market adjustment on FNSC’s held-to-maturity investment portfolio.

(c)

This adjustment represents First Federal’s estimate of the necessary write down of FNSC’s loan portfolio to estimated fair value as part of the purchase accounting adjustments. The estimated purchase accounting adjustment for FNSC’s loan portfolio is comprised of approximately $401,000 of non-accretable credit adjustments and approximately $14.1 million of accretable yield adjustments. Subsequent to the completion of the merger, First Federal will finalize its determination of the fair value of acquired loans which could significantly change both the amount and the composition of these estimated purchase accounting adjustments. The weighted average remaining maturity of this acquired loan portfolio is approximately 4.4 years.

(d)

This adjustment represents the elimination of FNSC’s allowance for loan losses as part of the purchase accounting adjustments.

(e)

This adjustment represents First Federal’s estimate of the necessary write down of FNSC’s foreclosed assets to estimated fair value.

(f)

The consideration paid for FNSC exceeded the fair value of the net assets received; therefore First Federal recorded $31.5 million of goodwill.

(g)

This intangible asset represents the value of the relationships FNSC had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits.

(h)

An adjustment of $1,053,000 is for the deferred income tax assets and liabilities recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes, at First Federal’s statutory federal and state income tax rate of 38.29%. This adjustment includes the reclassification of FNSC’s net deferred tax asset of $562,000 to a net deferred tax liability of $491,000. See Note 1(s) below for discussion of First Federal’s net deferred tax asset and related valuation allowance.

(i)

The fair values used for fixed term deposits was estimated using a discounted cash flow methodology based on current market rates for similar remaining maturities.

(j)

The fair value of FHLB borrowed funds is estimated based on borrowing rates currently available to First Federal for borrowings with similar terms and remaining maturities.

(k)

This adjustment includes First Federal’s estimate of remaining transaction costs of $451,000, including legal, accounting, and other transaction costs.

(l)

This adjustment represents the elimination of the historical equity of FNSC as part of the purchase price adjustment.

(m)

This adjustment represents the issuance of 6,252,400 shares of merger consideration at $8.70 per share, the closing price of First Federal’s common stock on December 31, 2013, and 2,531,645 shares from the Private Placement at the contractual sales price of $7.90 per share. The actual valuation of the 6,252,400 shares issued as merger consideration will be determined on the closing date, and, as a result, the amount of such consideration could change materially.

(n) Upon the completion of the merger, First Federal will evaluate the acquired loan portfolio to finalize the necessary credit and interest rate fair value adjustments. Subsequently, the accretable portion of the fair value adjustment will be accretd into earnings using the level yield method over the remaining maturity of the underlying loans. For the purposes of the pro forma impact on the nine months ended September 30, 2013 and the year ended December 31, 2012, the net discount accretion was calculated by summing monthly estimates of accretion/amortization on each loan pool, which was calculated based on the remaining maturity of each loan pool. The overall weighted average maturity of the loan portfolio is 3.8 years. This adjustment represents First Federal’s best estimate of the expected accretion that would have been recorded in 2012 and in the first nine months of 2013 assuming the merger closed on January 1, 2012. The estimated nonaccretable portion of the net discount of approximately $440,000 will not be accreted into earnings.

(o)

Upon the completion of the merger, First Federal will evaluate the acquired time deposits to finalize the necessary fair value adjustment to reflect current interest rates for comparable deposits. The fair value adjustment will be accreted into earnings as a reduction of the cost of such time deposits over an estimated life of 4.5 years using the level yield method. This adjustment represents First Federal’s best estimate of the expected accretion that would have been recorded in 2012 and in the first nine months of 2013 assuming the merger closed on January 1, 2012.

(p)

Upon the completion of the merger, First Federal will evaluate the acquired Federal Home Loan Bank (“FHLB”) advances to finalize the necessary fair value adjustment to reflect current interest rates for comparable advances. The fair value adjustment will be accreted into earnings as a reduction of the cost of such borrowings over an estimated life of 17.8 years using the level yield method. This adjustment represents the estimated amount of accretion on FHLB advances that would have been recorded as a reduction of interest expense in 2012 and the first nine months of 2013 assuming the transaction closed on January 1, 2012.

(q)

This represents the expected amortization during 2012 and the first nine months of 2013 of the core deposit intangible asset expected to be acquired in the merger, assuming the transaction closed on January 1, 2012. The useful life of this intangible asset is estimated to be fourteen years.

 

 
29

 

 

(r)

This represents income tax expense on the pro forma adjustments at First Federal’s statutory federal and state income tax rate of 38.29%.

(s)

The following is a discussion of First Federal’s net deferred tax asset and related valuation allowance and its potential effect on the pro forma income statement. The credits to income tax expense noted in this discussion are not presented in the pro forma condensed income statement:

 

A full valuation allowance was provided against First Federal’s net deferred tax asset as of December 31, 2009 due to operating losses caused by deterioration in credit quality. At September 30, 2013 a full valuation allowance continued to be provided against First Federal’s net deferred tax asset based on First Federal’s assessment of available positive and negative evidence. Although First Federal returned to profitability in 2012, positive taxable income has not been attained. As a result of the effect of the valuation allowance, First Federal’s total deferred tax expense was zero for the year ended December 31, 2012 and the nine months ended September 30, 2013. See Note 12 to First Federal’s Audited Consolidated Financial Statements for the Years ended December 31, 2012 and 2011 on page F-[ ] for further information regarding First Federal’s net deferred tax asset valuation allowance.

 

First Federal plans to file a consolidated tax return for the Combined Company. If the proposed merger occurred on January 1, 2012, First Federal’s net operating loss (“NOL”) carry forward for federal income tax purposes of approximately $7.8 million at December 31, 2012 as well as a portion of the NOL carry forward for state income tax purposes of approximately $30.1 million would have been used by the taxable income generated by the Combined Company resulting in a credit to income tax expense of approximately $3.3 million. The credit to income tax expense is a result of the valuation allowance reversal attributable to the use of the NOL carry forward.

 

For the nine months ended September 30, 2013, credits to income tax expense for the Combined Company would also result from the use of the NOL carry forward and resulting reversal of the valuation allowance on the portion of the NOL carry forward used. It is estimated the credit to income tax expense for the nine months ended September 30, 2013 would have been approximately $3.6 million giving effect to the remaining amount of the NOL carry forward from 2012 based on the amount assumed to be used in 2012 and the additional NOL generated in 2013 by First Federal.

 

After the merger transaction closes and when there is positive evidence indicating that it is more likely than not that the net deferred tax asset will be realized, First Federal expects to reverse the entire amount of its valuation allowance at that time with the exception of amounts related to net unrealized built in losses.

 

 

 
30

 

 

Note 2 – Pro Forma Allocation of Purchase Price

(in thousands, except share data)

 

The following table shows the pro forma allocation of purchase price to net assets acquired and the pro forma goodwill generated for the transaction:

 

Purchase Price

               

Cash

          $ 74,000  

FNSC shares to be paid in stock

    107,800          

Exchange ratio

    58          

First Federal shares to be issued for FNSC shares

    6,252,400          

Price per share, based on closing price of First Federal common stock as of December 31, 2013

  $ 8.70          

Pro forma value of First Federal shares to be issued

            54,396  

Total pro forma purchase price

          $ 128,396  
                 

Net Assets Acquired at Fair Value

               

Cash and cash equivalents

  $ 108,780          

Investment securities

    153,351          

Loans receivable

    572,352          

Other real estate owned

    720          

Office properties

    32,971          

Core deposit intangible

    7,902          

Prepaid and other assets

    14,063          

Total assets

    890,139          
                 

Deposits – noninterest bearing

    140,819          

Deposits – interest bearing

    577,573          

Borrowings

    71,096          

Other liabilities

    3,804          

Total liabilities

    793,292          

Net assets acquired at fair value

            96,847  

Pro forma goodwill

          $ 31,549  

 

Note 3 – Pro Forma Weighted Average Shares

 

Weighted average shares outstanding for the nine months ended September 30, 2013 and for the year ended December 31, 2012 were calculated as follows:   

 

   

Nine Months Ended

September 30, 2013

   

Year Ended

December 31, 2012

 

Basic weighted average shares outstanding, as reported

    19,779,684       19,302,603  

Shares to be issued as merger consideration

    6,252,400       6,252,400  

Shares to be issued in the Private Placement

    2,531,645       2,531,645  

Pro forma basic weighted average shares outstanding

    28,563,729       28,086,648  
                 

Diluted weighted average shares outstanding, as reported

    20,845,108       20,587,775  

Shares to be issued as merger consideration

    6,252,400       6,252,400  

Shares to be issued in the Private Placement

    2,531,645       2,531,645  

Dilutive effect of Private Placement warrants

    31,534       3,302  

Pro forma diluted weighted average shares outstanding