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 June 30, 2013, as reflected on its balance sheet, was $149.4 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.

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.

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.”

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.

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.

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.  Accordingly, the FNSC board did not request, and therefore did not obtain, a fairness opinion to assist it in its determination.  The FNSC board may be incorrect in its assessment of the fairness of the business combination 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.  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.

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 June 30, 2013 and December 31, 2012, First Federal had $12.0 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.

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:

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.

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 June 30, 2013, nonperforming loans totaled $13.7 million, representing 4.0% of total loans and 2.7% of total assets. At June 30, 2013, real estate owned totaled $12.0 million or 2.3% of total assets. As a result, First Federal’s total nonperforming assets amounted to $25.7 million or 5.0% of total assets at June 30, 2013. Further, assets classified by management as substandard, including nonperforming loans and real estate owned, totaled $30.2 million, representing 5.9% of total assets.  At June 30, 2013, the allowance for loan and lease losses was $13.2 million, representing 96.5% 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:

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 June 30, 2013, approximately 48% 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.

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.

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 operations.

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.  In particular, First Federal had $48.2 million of investment securities at June 30, 2013, all of which were classified as available for sale.  At June 30, 2013, the investment securities portfolio had a net unrealized loss of $169,000.  A significant and prolonged increase in interest rates will have a material adverse effect on the fair value of the investment securities portfolio and, accordingly, shareholders’ equity.  Results of operations may be adversely affected during any period of changes in interest rates due to a number of factors which can have a material adverse impact on First Federal Bank’s interest rate risk position.  Such factors include among other items, call features and interest rate caps and floors on various assets and liabilities, prepayments, the current interest rates on assets and liabilities to be repriced in each period, and the relative changes in interest rates on different types of assets and liabilities.

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.

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 $218,000 for the six months ended June 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 six months ended June 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.

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:

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.

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.

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.

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined consolidated financial statements as of and for the six months ended June 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 June 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.

Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet

As of June 30, 2013

(in thousands)

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

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

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

Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Statements

As of and for the Six Months Ended June 30, 2013

And for the Year Ended December 31, 2012

Note 1 – Pro Forma Adjustments

(in thousands, except share data)

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 June 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 six months ended June 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 six months ended June 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 six months ended June 30, 2013 would have been approximately $1.5 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.

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:

Note 3 – Reclassifications

Certain historical amounts for First Federal and FNSC have been reclassified to ensure consistency and comparability of pro forma amounts. The reclassifications had no effect on net income.

COMPARATIVE PER SHARE DATA (UNAUDITED)

The following table sets forth for First Federal common stock and FNSC common stock certain historical, pro forma and pro forma equivalent per share financial information. The pro forma and pro forma equivalent per share information gives effect to the merger and the Private Placement as if the transactions had been effective on the dates presented, in the case of book value data, and as if the transactions had been effective on January 1, 2012 in the case of the income and dividend data. The pro forma information in the table assumes that the merger is accounted for under the purchase method of accounting. The information in the following table is based on the historical financial statements of each of FNSC and First Federal, and should be read together with the historical financial information that First Federal has presented in prior filings with the SEC. With respect to First Federal, see “Where You Can Find More Information” beginning on page [__].

The pro forma financial information is not necessarily indicative of results that would have occurred had the merger and the Private Placement been completed on the dates indicated or that may be obtained in the future.