BSF Bear State Financial, Inc. (delisted)

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March 30, 2011

Dear Stockholder:

You are cordially invited to attend the Special Meeting of Stockholders (the “ Special Meeting ”) of First Federal Bancshares of Arkansas, Inc. (the “ Company ,” “ we ,” “ our ” or “ us ”).  The Special Meeting will be held at First Federal Bank located at 1401 Highway 62-65 North, Harrison, Arkansas 72601, on Friday, April 29, 2011 at 10:00 a.m., Central Time.

As previously disclosed by the Company and more fully described in the accompanying proxy statement, on January 28, 2011, we announced that we had entered into a definitive investment agreement (the “ Investment Agreement ”) with Bear State Financial Holdings, LLC (“ Bear State ”) pursuant to which Bear State will invest up to $55 million in the Company and our banking subsidiary, First Federal Bank (the “ Bank ”). We entered into the Investment Agreement with Bear State as part of a series of transactions contemplated by our recapitalization plan to satisfy the requirements of our federal regulators. As part of the recapitalization plan set forth in the Investment Agreement and described in the attached proxy statement, we also intend to conduct a rights offering following the closing of the initial investment by Bear State.  The rights offering will allow stockholders who hold shares of our common stock on March 23, 2011 to purchase additional shares of our common stock at the same purchase price per share paid by Bear State.

As more fully described in the accompanying proxy statement, at the Special Meeting, stockholders will be asked to consider and vote upon proposals to approve a 1-for-5 reverse stock split of our common stock, the issuance of our common stock to Bear State and a new equity incentive plan.  Our Board of Directors has approved these proposals and unanimously recommends that our stockholders vote “FOR” each of the proposals.  Unless stockholder approval is obtained for the 1-for-5 reverse stock split of our common stock and the issuance of our common stock to Bear State, the investment by Bear State and the recapitalization of the Company and the Bank will not occur.  As we discuss in the accompanying proxy statement, the failure to approve the proposals at the Special Meeting could have significant adverse consequences on the Company, the Bank and existing holders of our common stock including, additional regulatory action such as receivership or liquidation.

Please read the attached proxy statement carefully for information concerning the proposals we are asking you to approve.  Your vote is very important to us, and it is very important that you be represented at the Special Meeting regardless of the number of shares you own or whether you are able to attend the meeting in person.  We urge you to mark, sign, and date your proxy card today and return it in the envelope provided, even if you plan to attend the Special Meeting.  This will not prevent you from voting in person at the Special Meeting, but will ensure that your vote is counted if you are unable to attend.  The attached proxy statement and proxy card contain instructions on how to properly complete the proxy card and to vote your shares by mail.

Your continued support of and interest in the Company are sincerely appreciated.

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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

1401 Highway 62-65 North

Harrison, Arkansas  72601

(870) 741-7641

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on April 29, 2011

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of First Federal Bancshares of Arkansas, Inc. (the “ Company ,” “ we ,” “ our ” or “ us ”) will be held at First Federal Bank located at 1401 Highway 62-65 North, Harrison, Arkansas 72601, on Friday, April 29, 2011 at 10:00 a.m., Central Time, for the following purposes, all of which are more completely set forth in the accompanying proxy statement:

None of the Amendment, the Change of Control Issuance or the 2011 Plan will be implemented if either of Proposals 1 or 2 is not approved by our stockholders at the Special Meeting.

Our Board of Directors has fixed March 23, 2011 as the voting record date for the determination of stockholders entitled to receive notice of and to vote at the Special Meeting and any adjournments thereof. Only those stockholders of record as of the close of business on March 23, 2011 will be entitled to vote at the Special Meeting.

The Board of Directors unanimously recommends that stockholders vote “FOR” approval of each of the proposals listed above.

IMPORTANT

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 29, 2011.

The proxy materials for the Special Meeting of Stockholders, which consist of a proxy statement, proxy card and our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, are available over the Internet at www.cfpproxy.com/3947sm.

YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING.  IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN.  EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED.  IF YOU ARE THE RECORD OWNER OF YOUR SHARES AND YOU ATTEND THE MEETING, YOU MAY VOTE EITHER IN PERSON OR BY PROXY.  IF YOUR SHARES ARE HELD BY A BANK, BROKER, CUSTODIAN OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING IN PERSON, YOU MUST OBTAIN FROM THE RECORD HOLDER OF YOUR SHARES AND BRING WITH YOU A PROXY FROM THE RECORD HOLDER ISSUED IN YOUR NAME.

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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

PROXY STATEMENT

SPECIAL MEETING OF STOCKHOLDERS

April 29, 2011

This proxy statement is being furnished to holders of common stock, $.01 par value per share, of First Federal Bancshares of Arkansas, Inc. (the “ Company ,” “ we ,” “ our ” or “ us ”), the holding company of First Federal Bank (the “ Bank ”).  Proxies are being solicited by our Board of Directors on behalf of the Company to be used at the Special Meeting of Stockholders (the “ Special Meeting ”) to be held at First Federal Bank located at 1401 Highway 62-65 North, Harrison, Arkansas 72601, on Friday, April 29, 2011 at 10:00 a.m., Central Time.  This proxy statement, the enclosed proxy card and our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 are first being mailed to stockholders on or about March 30, 2011.

QUESTIONS AND ANSWERS

ABOUT THE SPECIAL MEETING OF STOCKHOLDERS

AND THIS PROXY STATEMENT

What is the purpose of the Special Meeting?

At the Special Meeting, stockholders will act upon proposals to (i) amend our Articles of Incorporation, as amended (our “ Articles ”), to effect a 1-for-5 reverse stock split (the “ Reverse Split ”) of all outstanding shares of our common stock (the “ Amendment ”), (ii) issue more than 20% of our post-Reverse Split outstanding common stock in accordance with the terms of the Investment Agreement dated as of January 27, 2011 (the “ Investment Agreement ”) between the Company, First Federal Bank and Bear State Financial Holdings, LLC (the “ Change of Control Issuance ”), (iii) adopt the First Federal Bancshares of Arkansas, Inc. 2011 Omnibus Incentive Plan (the “ 2011 Plan ”), and (iv) adjourn the Special Meeting, if necessary, to solicit additional proxies, in the event there are not sufficient votes at the time of the Special Meeting to approve any of the matters described in (i), (ii) or (iii) above (the “ Adjournment ”).  The Reverse Split, the Amendment, the Change of Control Issuance and the other transactions contemplated thereby are sometimes collectively referred to in this proxy statement as the “ Recapitalization ”.

Why is the Recapitalization taking place?

The Recapitalization has been initiated in response to a number of challenges in recent periods.  The economic downturn in our market areas and resulting decline in real estate values have had a direct and adverse effect on our financial condition and results of operations, as well as the results of operations of the Bank, our wholly-owned subsidiary.  These direct and adverse effects include reductions in our capital levels and the capital levels of the Bank as a result of our losses in 2010 and 2009 primarily due to expenses related to our nonperforming assets, particularly elevated loan charge-offs and increases in the provision for loan losses and real estate owned expenses.  Furthermore, as described below, we and the Bank are subject to orders (the “ Bank Cease and Desist Order ” and the “ Company Cease and Desist Order ” and, together, the “ Cease and Desist Orders ”), issued by the Office of Thrift Supervision (the “ OTS ”), our and the Bank’s primary regulator, requiring us to take steps to improve our and the Bank’s financial condition and results of operations, including increasing our capital levels.  Due to these challenges, we have been pursuing strategic alternatives to raise capital and strengthen our balance sheet.  Our Board of Directors has worked closely with management and our advisors to evaluate potential alternatives for raising additional capital, including possibly selling common stock in public or private offerings, disposing of branches or related assets, and considering other strategic alternatives.

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We are conducting the Recapitalization to return us to a sound capital footing and to satisfy our and the Bank’s obligations pursuant to the Cease and Desist Orders.

Why did you send me this proxy statement?

We sent you this proxy statement and the enclosed proxy card because the Board of Directors is soliciting your proxy vote to be used at the Special Meeting.  This proxy statement summarizes information on the proposals to be considered at the Special Meeting, including information regarding the Recapitalization as described below.

Our Board of Directors has determined that it is in the best interests of the Company and its stockholders that the Company undertake the Recapitalization in accordance with which:

·                   subject to stockholder approval, the Company will conduct a 1-for-5 reverse split of the Company’s issued and outstanding shares of common stock (the “ Reverse Split ”);

·                   Bear State Financial Holdings, LLC (“ Bear State ”) will purchase from the United States Department of Treasury (“ Treasury ”) for $6 million aggregate consideration, the Company’s 16,500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“ Series A Preferred Shares ”), including any accrued but unpaid dividends thereon, and related warrant dated March 6, 2009 to purchase 321,847 shares of the Company’s common stock at an exercise price of $7.69 per share (the “ TARP Warrant ”), both of which were previously issued to the Treasury through the Troubled Asset Relief Program — Capital Purchase Program (the purchase and surrender of the Series A Preferred Shares and TARP Warrant are referred to herein as the “ TARP Acquisition ”);

·                   subject to stockholder approval, the Company will sell to Bear State (i) 15,425,262 post-Reverse Split shares (the “ First Closing Shares ”) of the Company’s common stock at $3.00 per share (or $0.60 per share pre-Reverse Split) in a private placement, and (ii) a warrant (the “ Investor Warrant ”) to purchase 2 million post-Reverse Split shares of our common stock at an exercise price of $3.00 per share (or $0.60 per share pre-Reverse Split);

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

·                   as promptly as practical following Bear State’s purchase of the First Closing Shares and Investor Warrant, the Company intends to commence a stockholder rights offering (the “ Rights Offering ”) pursuant to which stockholders who hold shares of our common stock on March 23, 2011 will receive the right to purchase three (3) post-Reverse Split shares of the Company’s common stock for each one (1) post-Reverse Split share held by such stockholder at $3.00 per share (or $0.60 per share pre-Reverse Split); and

·                   on the closing date of the Rights Offering, the Company will sell to Bear State any unsold shares offered in the Rights Offering (the “ Second Closing ”), subject to the satisfaction of the conditions to the Second Closing as set forth in the Investment Agreement, at a purchase price of $3.00 per share (or $0.60 per share pre-Reverse Split) in a private placement, subject to an overall limitation on Bear State’s ownership of 94.90% of our common stock (the “ Second Closing Shares ” and together with the First Closing Shares, the “ Private Placement Shares ”).

The section of this proxy statement entitled Background to the Proposals — Summary of Investment Agreement contains a summary of the Recapitalization and the terms of the Investment Agreement, which sets forth the terms and conditions of the Recapitalization.  The TARP Acquisition, Bear State’s

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purchase of the Private Placement Shares and the Investor Warrant are collectively referred to in this proxy statement as the “ Investment .”

After giving effect to the Investment, Bear State will own at least 81.80% of our common stock (after taking into account the exercise of the Investor Warrant and assuming the Rights Offering is fully subscribed), and could own as much as 94.90% of our common stock (after taking into account the overall limitation on Bear State’s ownership and the exercise of the Investor Warrant and assuming no current stockholders subscribe to the Rights Offering).  As a result, our current stockholders would own between approximately 5.10% and 18.20% of our common stock following the Investment and the Rights Offering.

In addition to the Amendment and Change of Control Issuance, which relate to the Recapitalization, we are asking you to consider and vote upon the 2011 Plan, which, if approved, will be used to attract and retain qualified employees, executive officers and directors who may receive grants under the 2011 Plan of restricted shares of our common stock and options to purchase shares of our common stock.  If approved by our stockholders, the 2011 Plan will authorize awards in respect of an aggregate of 10% of our post-Recapitalization shares, or 1,930,269 shares.

The summaries of the material terms of the Investment Agreement and all other transaction documents, including the 2011 Plan, are qualified in their entirety by reference to the full text of each document, copies of which are attached to this proxy statement in Appendices A through D , respectively, and incorporated by reference herein.

Who is entitled to vote?

Only our stockholders of record as of the close of business on the record date, March 23, 2011, are entitled to vote at the Special Meeting.  On the record date, we had (i) 4,846,785 shares of common stock issued and outstanding and (ii) 16,500 shares of Series A Preferred Stock outstanding.  Each stockholder is entitled to one vote on each matter to be voted on at the Special Meeting for each share of common stock held by such stockholder on March 23, 2011.  Holders of shares of Series A Preferred Stock are not entitled to vote on the matters to be voted on at the Special Meeting.

Can I access the Company’s proxy materials electronically?

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of the Stockholders to Be Held on April 29, 2011.  The proxy statement, proxy card and our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 are available at www .cfpproxy.com/3947sm .

Why is the Amendment being proposed?

In order to consummate the Investment and the Rights Offering, the Company must have a sufficient number of shares of common stock available for issuance to Bear State in the Investment and stockholders who participate in the Rights Offering.  At the present time, the Company’s capital structure will not permit us to issue enough shares to satisfy the maximum number of shares that may be issued in the Investment and the Rights Offering.  If approved, the Amendment will result in an increase in the number of shares of our common stock available for issuance due to the reduction in the number of shares of our common stock issued and outstanding.

Must the Amendment and the Change of Control Issuance be approved for the Amendment, the Change of Control Issuance, and the 2011 Plan to proceed?

Yes.  Each of the Amendment and the Change of Control Issuance must be approved as a condition to any of the Amendment, the Change of Control Issuance or the adoption of the 2011 Plan taking place. 

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The Adjournment is not conditioned upon approval of the Amendment, the Change of Control or the 2011 Plan.

What happens if the Amendment and the Change of Control Issuance are approved?

If our stockholders approve the Amendment and the Change of Control Issuance, then promptly following such approvals, we will file with the Secretary of State of the State of Texas an amendment to our Articles to effect the Reverse Split.  The Reverse Split will become effective upon filing the Amendment, or such later date as specified in the filing.  As soon as practicable after the Reverse Split is effective, a letter of transmittal will be mailed to all holders of our common stock for use in surrendering their stock certificates in connection with the Reverse Split.  For additional information regarding the Reverse Split, please see the section of this proxy statement entitled Proposal 1 — The Amendment beginning on page 24.

Promptly following the filing of the Amendment reflecting the Reverse Split, and after satisfying all of the other closing conditions contemplated by the Investment Agreement, we and Bear State will close the sale and purchase of the First Closing Shares and Investor Warrant.

Not more than 30 days following the completion of the sale and purchase of the First Closing Shares and Investor Warrant, we will commence the Rights Offering described above.

How do I vote?

If your shares are registered in your name, or, in other words, you are the record holder of your shares or a stockholder of record, you may vote in person at the Special Meeting or by proxy without attending the Special Meeting.  Record stockholders may mark, sign, date, and mail the proxy card you received from management in the return envelope.  If you vote by attending the Special Meeting or by submitting a proxy card, your shares will be voted at the meeting 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 recommendations of the Board of Directors given below.

If your shares are held in the name of a bank, broker, custodian or other nominee, please mark, date, sign, and return the voting instruction form you received from your broker or other nominee with this proxy statement.  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 bank, broker, custodian or other nominee.  To do so, follow the instructions on the form you received from your bank, broker, custodian or other nominee.

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 the record holder (i.e. 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 my shares are held in street name by my bank, broker, custodian or other nominee, could such bank, broker, custodian or other nominee automatically vote my shares for me?

Under New York Stock Exchange Rule 452, which governs NYSE brokerage members, 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.  Although shares of our common stock are listed on the NASDAQ Global Market, Rule 452 affects us because our common shares held in “street name” may be held with NYSE member-brokers.  Brokerage firms may not vote on “non-routine” matters in their discretion on behalf of their clients if such clients have not furnished 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.  For such “non-routine” matters, the broker cannot vote either FOR or AGAINST a proposal and

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reports the number of such shares as “non-votes.”  We believe that the proposals (i) to approve the Amendment, (ii) to approve the Change of Control Issuance, and (iii) to approve the 2011 Plan currently qualify as “non-routine” matters.  Your broker, therefore, may not vote your shares in its discretion on these “non-routine” matters if you do not instruct your broker how to vote on them.

Can I attend the meeting and vote my shares in person?

Yes.  All stockholders are invited to attend the Special Meeting.  Stockholders of record can vote in person at the Special Meeting.  If your shares are held by a bank, broker, custodian or other nominee and you wish to vote in person at the Special Meeting, you must obtain from the record holder, and bring with you, a proxy from the record holder issued in your name.  The Special Meeting will be held at First Federal Bank located at 1401 Highway 62-65 North, Harrison, Arkansas 72601.  If you wish to attend the Special Meeting in person, you may obtain directions to First Federal Bank by calling 870.741.7641 or Brenda Jackson at 870.365.8331.

Can I change my vote or revoke my proxy after I return my proxy card?

Yes.  If you are a stockholder of record, there are three ways you can change your vote or revoke your proxy any time before the proxy is voted.

·                   First, you may send a written notice to Mr. Tommy Richardson, Corporate Secretary, First Federal Bancshares of Arkansas, Inc., P.O. Box 550, Harrison, Arkansas 72602, stating that you would like to revoke your proxy.

·                   Second, you may complete and submit a new proxy card with a later date.  Any earlier proxies will be revoked automatically by subsequently submitted proxies.  New proxy cards may be obtained over the internet at www.cfpproxy.com/3947sm.

·                   Third, you may attend the Special Meeting and vote in person.  Any earlier proxy will be revoked.  However, attending the Special Meeting without voting in person will not revoke your proxy.

If you have instructed a broker or other nominee to vote your shares, you must follow directions you receive from your broker or other nominee to change your vote.

What constitutes a quorum?

A quorum with respect to a matter considered at the Special Meeting consists of stockholders representing, either in person or by proxy, a majority of the outstanding capital stock entitled to vote on such matter at the Special Meeting.  Proxies received but marked “abstain” and broker non-votes will be included in the calculation of the number of votes considered to be present at the meeting.  As discussed above, a broker “non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary power with respect to that item and has not received instructions from the beneficial owner.

What happens if a quorum is not present?

If a quorum is not present, our stockholders may adjourn the Special Meeting until the time and to the place as may be determined by a vote of the holders of the majority of the shares who are present or represented by proxy at the Special Meeting.

What are the Board of Directors’ recommendations?

The recommendations of the Board of Directors are set forth under the description of each Proposal in this proxy statement.  In summary, the Board of Directors recommends that you vote (i) “FOR” the Amendment, (ii) “FOR” the Change of Control Issuance, (iii) “FOR” the 2011 Plan, and (vi) “FOR” the

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adjournment of the Special Meeting, if necessary, to solicit additional proxies, in the event there are not sufficient votes at the time of the Special Meeting to approve any of items (i), (ii) or (iii) above.

If you vote by attending the Special Meeting or submitting a completed proxy card, your shares will be voted at the Special Meeting 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 recommendations of the Board of Directors given below.

Proxies solicited hereby may be exercised only at the Special Meeting and any adjournment of the Special Meeting and will not be used for any other meeting.

What vote is required to approve each proposal?

The following describes the required vote of each proposal so long as a quorum is present at the Special Meeting.  The votes of holders of at least a majority of the total outstanding shares of our common stock entitled to vote is required to approve the Amendment.  Abstentions and broker non-votes will have the effect of a vote against the Amendment.  The holders of at least a majority of the votes present in person or by proxy at the Special Meeting or adjournment thereof is required to approve each of the Change of Control Issuance, the 2011 Plan and the adjournment Proposal.  Broker non-votes will have no effect on the outcome of the Change of Control Issuance, the 2011 Plan and the adjournment Proposal.  Abstentions will have the effect of a vote against the Change of Control Issuance, the 2011 Plan and the adjournment Proposal.

Who pays the cost for soliciting proxies by the Board of Directors?

The Company will bear the cost of preparing, printing and mailing the materials in connection with this solicitation of proxies.  In addition to mailing these materials, our officers and regular employees may, without being additionally compensated, solicit proxies personally and by mail, telephone, facsimile or electronic communication.  We have also retained Eagle Rock Proxy Advisors, a specialist in proxy solicitations, to solicit proxies from brokers, banks and other institutional holders of our common stock at an anticipated cost of $3,500 plus certain out-of-pocket expenses and, if necessary, telephone solicitation fees.  Proxies may also be solicited by our directors and employees personally, and by telephone, facsimile, or other means.

Whom should I contact if I have questions?

If you have questions regarding the Special Meeting, the information in this proxy statement or completion of the proxy card, please contact our proxy solicitor, Eagle Rock Proxy Advisors, at 855.612.6970.

Am I entitled to appraisal rights?

No.  The Company’s stockholders do not have dissenters’ rights of appraisal with respect to the proposals to be considered at the Special Meeting under Texas law.

Did the Company receive a fairness opinion in connection with the proposed issuance and sale?

Yes.  The Company engaged Stifel, Nicolaus & Company, Incorporated (“ Stifel ”) to provide a fairness opinion to the Company in connection with the Investment.  The full text of Stifel’s opinion is attached as Appendix C to this proxy statement.  See Background to the Proposals — Opinion of First Federal’s Financial Adviser .

Will a representative of BKD, LLP, the Company’s independent auditors be present at the Special Meeting?

A representative of BKD, LLP, the Company’s independent auditors, is expected to be present at the Special Meeting and will respond to appropriate questions and have an opportunity to make a statement if he or she desires to do so.

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BACKGROUND TO THE PROPOSALS

Corporate Overview

Overview.   As a community-oriented financial institution serving the borrowing and deposit needs of its primary market area of Northcentral and Northwest Arkansas, the Bank’s loan portfolio grew as a reflection of the economic strength and expansion of its primary market area.  Between December 31, 2002 and December 31, 2005, the Bank’s loan portfolio grew from $507.0 million to $790.6 million, primarily as a result of increased construction, commercial real estate, and land lending. However, beginning in late 2005, the Bank began to note an oversupply of homes and lots in the Northwest Arkansas market and limited its construction loan activity.  Construction loan originations dropped from $195.8 million in 2005 to $93.6 million in 2006, $39.0 million in 2007, $15.1 million in 2008, $12.5 million in 2009, and $7.5 million in 2010.  This oversupply and the recession that began in 2007 resulted in an increase in nonperforming assets, which amounted to $94.1 million or 15.68% of total assets at December 31, 2010.  The costs associated with the Bank’s nonperforming assets, including the provision for loan losses and real estate owned (“REO”) expenses, were the primary factors in the Company’s net losses of $4.0 million for 2010 and $45.5 million for 2009.  As discussed further below, management has taken various actions to address its operational issues and will continue to devote substantial resources toward the resolution of all delinquent and nonperforming assets.

Regulatory Enforcement Actions.  The OTS is the primary federal regulator of the Bank.  As a result of the loss in 2009 and the increase in nonperforming assets and based on a regulatory examination of the Company and the Bank in the fall of 2009, on April 12, 2010, the Company and the Bank each consented to the terms of Cease and Desist Orders issued by the OTS.  The Cease and Desist Orders became effective on April 14, 2010.

The Company Cease and Desist Order, among other things, provides that:

·                   By June 30, 2010, the Company shall submit to the OTS a written capital plan to preserve and enhance the capital of the Company and the Bank to ensure that the Bank complies with the capital requirements imposed by the Bank Cease and Desist Order.  This plan has been submitted as required.

·                   By June 30, 2010, the Company shall submit to the OTS a business plan for the remainder of the calendar year 2010 and calendar years 2011 and 2012 that is acceptable to the OTS Regional Director.  This plan has been submitted as required.

·                  The Company shall not declare or pay any cash dividends or capital distributions on the Company’s stock or repurchase such shares without the prior written non-objection of the OTS.

·                   The Company shall not issue a new class of stock or change the terms of any existing classes of stock, or convert any class of stock into another class of stock without the prior written non-objection of the OTS.

·                   The Company shall not incur, renew or increase any debt without the prior written non-objection of the OTS.

·                   The Company shall not enter into, renew, extend or revise any contractual arrangements related to compensation or benefits with any director or senior executive officer of the Company without first providing OTS prior written notice.

·                   The Company shall not make any “golden parachute payment” or any prohibited indemnification payment unless the Company complies with 12 C.F.R. Part 359.

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·                   The Company shall comply with the OTS prior notification requirements for changes in directors and senior executive officers set forth in 12 C.F.R. Part 563, Subpart H.

·                   The Company shall not engage in any new transactions with the Bank except exempt transactions under 12 C.F.R. 223 and intercompany cost-sharing transactions and tax sharing transactions without the prior written non-objection of the OTS.

The Company Cease and Desist Order will remain in effect until terminated, modified or suspended by the OTS.

Among other things, the Bank Cease and Desist Order provides that:

·                   No later than December 31, 2010, the Bank shall achieve and maintain a Tier 1 (Core) Capital Ratio of at least 8.0% and a Total Risk-Based Capital Ratio of at least 12.0%.

·                   By June 30, 2010, the Bank shall submit to the OTS a written capital plan to achieve and maintain the foregoing capital levels.  This plan has been submitted as required.

·                   In the event the Bank fails to meet the capital requirements of the Bank Cease and Desist Order, fails to comply with the capital plan or at the request of the OTS, the Bank shall prepare and submit a contingency plan to the OTS within 30 days of such event. The contingency plan shall detail actions to be taken to achieve either a merger or acquisition of the Bank by another depository institution or a voluntary liquidation of the Bank.  The Bank did not achieve by December 31, 2010 a Tier 1 (Core) Capital Ratio of at least 8.0% and a Total Risk-Based Capital Ratio of at least 12.0%.  A Contingency Plan was submitted to the OTS Regional Director on January 28, 2011.  The Contingency Plan for the Company and the Bank consists of meeting the capital requirements by completing the transaction as outlined in the Investment Agreement.

·                  The Bank shall not, without the prior written non-objection of the OTS, increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the prior quarter.

·                   By June 30, 2010, the Bank shall submit to the OTS a new business plan and budget for the remainder of the calendar year 2010 and calendar years 2011 and 2012 that is acceptable to the OTS Regional Director.  This plan has been submitted as required.

·                   The Bank shall not accept, renew or roll over any brokered deposit without a specific waiver from the OTS and the FDIC.

·                   The Bank shall review its liquidity position and prepare a daily liquidity report setting forth the uses and sources of funds for the Bank’s operations and cash flow projections for a 180 day period.  The liquidity report is required to be submitted daily to the OTS Regional Director and the Bank’s Asset/Liability Committee.

·                   The Bank shall not declare or pay dividends or make any other capital distributions without the prior written approval of the OTS.

·                   The Bank shall not make, purchase, or commit to make or purchase a commercial real estate (CRE) loan or an extension of credit for the purpose of land acquisition, development, and/or construction without the prior written non-objection of the OTS, except for construction of an owner occupied one-to-four family dwelling with at least a 20 percent down payment or that is subject to a binding pre-sold commitment.

·                   The Bank shall not make, purchase, or refinance or commit to make, purchase, or refinance an extension of credit if any of the proceeds of the loan will be used for the payment of interest on any

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loan or will be used for the establishment of an interest carry reserve on a loan without the prior written non-objection of the OTS.

·                   The Bank shall not make or purchase, or commit to make or purchase an extension of credit that is in excess of the supervisory loan-to-value limits set forth in the Appendix to 12 C.F.R. 560.101 without the prior written non-objection of the OTS.

·                   The Bank shall not enter into, renew, extend or revise any contractual arrangement relating to compensation or benefits for any senior executive officer or director unless prior written notice is provided to the OTS.

·                   The Bank shall not increase any salaries, bonuses or director’s fees or make any other similar payments to directors or senior executive officers without prior written non-objection from the OTS.

·                   The Bank shall not make any “golden parachute payments” or prohibited indemnification payment unless the Bank has complied with 12 C.F.R. Part 359 and 12 C.F.R. Section 545.121.

The Bank Cease and Desist Order will remain in effect until terminated, modified or suspended by the OTS.  Copies of the stipulations and the Cease and Desist Orders are included as Exhibits 10.7 to 10.10 to the Company’s 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “ SEC ”) on April 15, 2010.  The descriptions of the Cease and Desist Orders set forth herein do not purport to be complete, and are qualified by reference to the full text of the Cease and Desist Orders.

The Company and the Bank have taken such actions as necessary to comply with the provisions of the Cease and Desist Orders which are currently effective and are continuing to work toward compliance with the provisions of the Cease and Desist Orders with future compliance dates.  Any material failure by the Company and the Bank to comply with the provisions of the Cease and Desist Orders could result in further enforcement actions by the OTS. While the Company and the Bank intend to take such actions as may be necessary to comply with the requirements of the Cease and Desist Orders, there can be no assurance that the Company or the Bank will be able to comply fully with the Cease and Desist Orders, or that efforts to comply with the Cease and Desist Orders will not have adverse effects on the operations and financial condition of the Company or the Bank.

Reports of Independent Registered Public Accounting Firms.  The report of the Company’s independent registered public accounting firm for the year ended December 31, 2009 contained an explanatory paragraph as to the Company’s ability to continue as a going concern primarily due to the Company’s loss of $45.5 million in 2009, the Bank’s significant level of criticized assets and the decline of the Bank’s capital position.  Additionally, the report of the Company’s independent registered public accounting firm for the year ended December 31, 2010 contained an explanatory paragraph as to the Company’s ability to continue as a going concern. The Bank Cease and Desist Order specifically required the Bank to achieve and maintain, by December 31, 2010, a tier 1 (core) capital ratio of at least 8.0% and a total risk-based capital ratio of at least 12.0% and maintain these higher ratios for as long as the Bank Cease and Desist Order is in effect.  At December 31, 2010, the Bank’s core and total risk-based capital ratios were 6.36% and 10.72%.  The Bank needed additional capital of approximately $9.9 million to meet these capital requirements at December 31, 2010.  The Company anticipates that Bear State’s purchase of the Private Placement Shares will take place during the second quarter of 2011, which will bring the Company and the Bank into compliance with the capital requirements of the Bank Cease and Desist Order.  However, uncertainty regarding the conditions which must be met prior to the Investment and the Company’s current noncompliance with the capital requirements of the Bank Cease and Desist Order at December 31, 2010, raises substantial doubt about the Company’s ability to continue as a going concern.

Capital Raising Efforts.  The issues associated with the significant loss in 2009 resulted in the imposition of the Cease and Desist Orders and the explanatory paragraph in the report of our independent registered public accounting firm for the year ended December 31, 2009 as to our ability to continue as a going concern.  In order to address these issues, we focused on resolving our problem

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assets, reducing our costs, addressing the operational requirements of the Cease and Desist Orders and, ultimately, raising capital in a better market environment in the latter part of 2010.  Our strategic efforts throughout 2010 were focused on raising capital although we did have informal conversations or indirect contact with five financial institutions regarding a potential merger.  All five institutions declined to pursue a merger transaction with us, primarily as a result of our high level of non-performing assets.

During the first six months of 2010, we reduced our assets and recorded net income of $1.5 million, which resulted in increased capital ratios.  We continued to address our nonperforming assets by working with borrowers, charging off certain loans, foreclosing and ultimately disposing of the asset and maintaining a significant allowance for loan losses.  Total nonperforming assets increased slightly at June 30, 2010, compared to December 31, 2009.  Our management team also filed all plans and took all actions required by the Cease and Desist Orders through June 30, 2010.

As a complement to our balance sheet restructuring and cost saving initiatives, in the second quarter of 2010, we began to explore our strategic alternatives to increase capital by contacting three investment banking firms with significant underwriting experience in the financial services sector.  However, due primarily to our high level of nonperforming assets, all three firms declined to conduct an underwritten offer of our common stock.  As a result, we began to pursue capital raising options other than an underwritten offering.

During the third quarter of 2010, we determined to engage a smaller bank advisory firm to assist us with a community offering on a best efforts basis, in conjunction with a significant but non-controlling investment by an investor or investor group.  At this time, we began negotiations with Bear State in earnest, after first being contacted by Bear State in December 2009.  However, in the fall of 2010, market conditions had not changed dramatically for smaller financial institution stock offerings.  In addition, in conjunction with a limited scope examination of the Bank by the OTS, we recorded a $5.6 million provision for loan losses and a $5.4 million net loss for the quarter ended September 30, 2010.  After further discussions with the OTS regarding their opinion of the necessary amount of significant additional capital to be raised beyond our original estimates and in light of our third quarter results, the tepid market for financial institution offerings and the requirement to reach the capital levels set forth in the Bank Cease and Desist Order by December 31, 2010, we determined to abandon a community offering and focus instead on a recapitalization through a controlling investment by Bear State and a subsequent rights offering to our stockholders.

Bear State continued its due diligence and the parties negotiated the Investment Agreement during the latter part of 2010.  The parties continued to negotiate the Investment Agreement through the end of 2010 and, after receiving a letter of non-objection from the OTS to enter into the Investment Agreement, the Company and Bear State executed the Investment Agreement on January 27, 2011.

Opinion of First Federal’s Financial Adviser

Stifel was engaged to provide a fairness opinion to the Company in connection with Bear State’s Investment.  Stifel is a nationally recognized investment-banking and securities firm with membership on all the principal United States’ securities exchanges and substantial expertise in transactions similar to the Investment.  As part of its investment banking activities, Stifel is regularly engaged in the independent valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes.

On January 27, 2011, Stifel rendered its written opinion to the Board of Directors of the Company that, as of the date of Stifel’s written opinion and based upon and subject to the assumptions, considerations, qualifications and limitations set forth in the written opinion, the consideration to be paid by Bear State to the Company in connection with the Investment pursuant to the Investment Agreement was fair to the Company, from a financial point of view.

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The full text of Stifel’s written opinion dated January 27, 2011, which sets forth the assumptions made, matters considered and limitations of the review undertaken, is attached as Appendix C to this proxy statement and is incorporated herein by reference. Holders of the Company’s common stock are urged to, and should, read this opinion carefully and in its entirety in connection with this proxy statement. You should read Stifel’s opinion for a discussion of the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Stifel in rendering its opinion.  The summary of the opinion of Stifel set forth in this proxy statement is qualified in its entirety by reference to the full text of such opinion. The opinion of Stifel will not reflect any developments that may occur or may have occurred after the date of its opinion and prior to the completion of the Investment. Stifel has no obligation to update, revise or reaffirm its opinion and the Company does not currently expect that it will request an updated opinion from Stifel.

In arriving at its opinion, Stifel did not ascribe a specific range of values to the Company.  Stifel’s opinion is based on the circumstances, financial and comparative analyses described below.  Stifel’s opinion is solely for the information of, and directed to, the Board of Directors of the Company for its information and assistance in connection with the Board’s evaluation of the financial terms of the Investment and is not to be relied upon by any stockholder of the Company, Bear State or any other person or entity.  Stifel’s opinion was not intended to be and does not constitute a recommendation to the Board of Directors of the Company as to how the Board of Directors of the Company should vote on the Investment or to any stockholder of the Company as to how any such stockholder should vote at the Special Meeting, or whether or not any stockholder of the Company should take any other action in connection with the Investment or any aspect thereof including entering into a voting, stockholders’ or affiliates’ agreement with respect to the Investment.  In addition, Stifel’s opinion does not compare the relative merits of the Investment with any other alternative transaction or business strategy which may have been available to the Company and does not address the underlying business decision of the Board or the Company to proceed with or effect the Investment or any aspect thereof. Stifel was engaged solely to assist the Company in evaluating the terms of the Investment and providing an opinion with respect to the Investment.

In connection with its opinion, Stifel, among other things:

(i)                          Reviewed a draft copy of the Investment Agreement dated January 25, 2011, as provided to Stifel by the Company;

(ii)                       Reviewed the audited consolidated financial statements of the Company as of and for the five years ended December 31, 2009 and the unaudited consolidated financial statements of the Company for the quarter ended September 30, 2010;

(iii)                    Reviewed certain other publicly available information concerning the Company;

(iv)                   Reviewed certain non-publicly available information concerning the Company including, without limitation, preliminary unaudited financial results for the quarter ended December 31, 2010, internal financial analyses and forecasts prepared by its management and held discussions with senior management regarding recent developments and regulatory matters;

(v)                      Discussed with the Company’s management the history and past and current operations of the Company, the Company’s financial performance and the Company’s outlook and future prospects, including estimates by the Company’s management as to the Company’s liquidity and ability to continue as a going concern, as well as certain analyses prepared by the Company’s management with respect to the Company’s capital adequacy;

(vi)                   Reviewed the Cease and Desist Orders and discussed with management of the Company the current non-compliance of the Bank with the capital requirements of the Bank Cease and Desist Order;

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Stifel also had been informed by the Company’s management that the business and prospects of the Company, including its financial condition and results of operations, have been severely and negatively affected by, among other things, the continuing recession and declines in real estate values, and that the Company and its Board of Directors are faced with a rapidly narrowing set of alternatives, such that absent promptly entering into a definitive transaction (such as the Investment Agreement) that would provide the Company with substantial capital, liquidity and funding, the Company and its subsidiaries may be unable to continue operating as a going concern and could face intervention by the United States federal banking regulators and/or be required to seek protection under applicable bankruptcy laws.  Nor is there any assurance or guarantee that the Company will be able to avoid such negative consequences even if the Investment and/or any related transactions are consummated.  The Company’s management has advised us that the Investment Agreement has been reviewed by the OTS and that the OTS issued a “non-objection” letter regarding the execution of the Investment Agreement.  Accordingly, Stifel also considered recent instances where deterioration of a financial institution’s financial condition resulted in it becoming insolvent, thereby necessitating government intervention or bankruptcy protection, and as a result of which the common equity holders of the institution received substantially diminished value, and in many instances no value at all, for their equity.  In light of the facts and circumstances, Stifel also assumed, without independent verification, that if the Company’s banking assets were taken over by the United States federal banking regulators and the Company’s non-banking assets were liquidated under applicable bankruptcy laws, the Company’s common equity holders would likely receive no material value.  Furthermore, with the Company’s consent, Stifel did not perform certain analyses that would customarily be prepared in connection with a fairness opinion for a stock sale transaction because such analyses are not meaningful as a result of the extraordinary negative circumstances of the Company described herein.

Stifel is not a legal, tax, regulatory or bankruptcy advisor. Stifel did not consider any potential legislative or regulatory changes currently being considered by the United States Congress, the various federal banking agencies, the SEC, or any other regulatory bodies, or any changes in accounting methods or generally accepted accounting principles that may be adopted by the SEC or the Financial Accounting Standards Board, or any changes in regulatory accounting principles that may be adopted by any or all of the federal banking agencies. Stifel’s opinion was not a solvency opinion and did not in any way address the solvency or financial condition of the Company.

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Stifel also considered the following:

·                   The provisions of the Cease and Desist Orders with the OTS that included, among other things:

·                   Requirement of the Bank to achieve and maintain by December 31, 2010, a tier 1 (core) capital ratio of at least 8% and a total risk-based capital ratio of at least 12% which it was unable to achieve;

·                   Restrictions on certain lending and dividends, including TARP dividends;

·                   Submission of capital plans and business plans to preserve and enhance capital of the Company and the Bank to the OTS;

·                   The Company’s consolidated financial statements have been prepared on a going concern basis since the Form 10-K filing for the year ended December 31, 2009 due to significant operating losses, significant levels of criticized assets, and decline in capital levels; and

·                   Substandard and nonperforming loans levels were significantly higher than reserves and common equity and continued capital deterioration was expected.

In rendering its opinion, Stifel relied upon and assumed, without independent verification, the accuracy and completeness of all financial and other information that was made available, supplied, or otherwise communicated to Stifel by or on behalf of the Company, and other publicly available information.  Stifel further relied upon the assurances of the management of the Company that they were unaware of any facts that would make such information incomplete or misleading.  Stifel has also relied upon the management of the Company as to the reasonableness and achievability of the financial forecasts and projections (and the assumptions and bases therein) provided to Stifel by the Company, and Stifel assumed such forecasts and projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of management as to the future operating performance of the Company.  Stifel has relied on these forecasts without independent verification or analyses and does not in any respect assume any responsibility for the accuracy or completeness thereof.

Stifel also assumed that there were no material changes in the assets, liabilities, financial condition, results of operations, business or prospects of the Company since the date of the last financial statements made available to Stifel.  Stifel also assumed, without independent verification and with consent of management of the Company, that the aggregate allowances for loan losses set forth in the financial statements of the Company are in the aggregate adequate to cover all such losses.  Stifel did not make or obtain any independent evaluation, appraisal or physical inspection of either the Company’s assets, properties, facilities or liabilities (contingent or otherwise), the collateral securing any of such assets or liabilities, or the collectability of any such assets nor did Stifel review loan or credit files of the Company, and Stifel has not been furnished with any such appraisals or evaluations.  Estimates of values of companies and assets do not purport to be appraisals or necessarily reflect the prices at which companies or assets may actually be sold.  Because such estimates are inherently subject to uncertainty, Stifel assumes no responsibility for their accuracy.  Stifel relied on advice of the Company’s counsel as to certain legal matters with respect to the Company, the Investment Agreement and other transactions and other matters contained or contemplated therein.  Stifel has assumed, with the consent of the Company’s management, that there are no factors that would delay or subject to any adverse conditions any necessary regulatory or governmental approval and that all conditions to the Investment will be satisfied.  In addition, Stifel assumed that the Investment Agreement would not differ materially from the draft Stifel reviewed.  Stifel has also assumed that the Investment will be consummated substantially on the terms and conditions described in the Investment Agreement, without any waiver of material terms or conditions by the Company or any other party to the Investment Agreement, and that obtaining any necessary regulatory approvals or satisfying any other conditions for consummation of the Investment will not have an adverse effect on the Company.  Stifel also expresses no opinion as to the likelihood that the closing conditions set forth in the Investment Agreement will be satisfied, and note that several of these

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conditions are beyond the control of the Company and/or subject to the sole discretion or subjective determination of Bear State.  Stifel assumed that the Investment would be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable federal and state statutes, rules and regulations.

Stifel’s opinion was necessarily based on financial, economic, market, and other conditions and circumstances as they existed on, and on the information made available to Stifel as of, the date of its opinion.  It is understood that subsequent developments may affect the conclusions reached in Stifel’s opinion and that Stifel does not have or assume any obligation to update, revise or reaffirm its opinion.

Stifel’s opinion was limited to whether the consideration to be received by the Company in connection with the Investment pursuant to the Investment Agreement is fair to the Company, from a financial point of view.  Stifel’s opinion does not consider, include or address: (i) any other strategic alternatives currently (or which have been or may be) contemplated by the Board of Directors or the Company; (ii) the legal, tax or accounting consequences of the Investment on the Company, the Company’s stockholders or Bear State; (iii) the fairness of the amount or nature of any compensation to any of the Company’s officers, directors or employees, or class of such persons, relative to the compensation to the holders of the Company’s securities; (iv) the capital structure or solvency of the Company; (v) any advice or opinions provided by any other advisor to the Board or the Company; (vi) the effect of the Investment on, or fairness (whether from a financial point of view or otherwise) of the Investment to, the holders of any class of securities, creditors or other constituencies of the Company; (vii) whether Bear State has sufficient cash, available lines of credit or other sources of funds to enable it to pay the aggregate consideration; or (viii) any other term of the Investment Agreement or the form or structure of the Investment or the likelihood, or timeframe in which, the Investment will be consummated.  In addition, Stifel is not expressing any opinion herein as to the prices, trading range or volume at which the Company’s securities will trade following public announcement or consummation of the Investment or any aspect thereof.

In connection with rendering its opinion, Stifel performed a variety of financial analyses that are summarized below.  Such summary does not purport to be a complete description of such analyses.  Stifel believes that its analyses and the summary set forth herein must be considered as a whole and that selecting portions of such analyses and the factors considered therein, without considering all factors and analyses, could create an incomplete view of the analyses and processes underlying its opinion.  The preparation of a fairness opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description.  In arriving at its opinion, Stifel considered the results of all of its analyses as a whole and did not attribute any particular weight to any analyses or factors considered by it.  The range of valuations resulting from any particular analysis described below should not be taken to be Stifel’s view of the actual value of the Company. In its analyses, Stifel made numerous assumptions with respect to industry performance, general business and economic conditions, and other matters, many of which are beyond the control of the Company.  Any estimates contained in Stifel’s analyses are not necessarily indicative of actual future values or results, which may be significantly more or less favorable than suggested by such estimates.  No company or transaction utilized in Stifel’s analyses was identical to the Company or the Investment. Accordingly, an analysis of the results described below is not mathematical; rather, it involves complex considerations and judgments concerning differences in regulatory, financial and operating characteristics of the companies and other facts that could affect the public trading value of the companies to which they are being compared.  None of the analyses performed by Stifel was assigned a greater significance by Stifel than any other, nor does the order of analyses described represent relative importance or weight given to those analyses by Stifel.  The analyses described below do not purport to be indicative of actual future results, or to reflect the prices at which the Company’s common stock may trade in the public markets, which may vary depending upon various factors, including changes in interest rates, dividend rates, market conditions, economic conditions, regulatory standing and other factors that influence the price of securities.

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In accordance with customary investment banking practice, Stifel employed generally accepted valuation methods in reaching its opinion. The following is a summary of the material financial analyses that Stifel used in providing its opinion. Some of the summaries of financial analyses are presented in tabular format. In order to understand the financial analyses used by Stifel more fully, you should read the tables together with the text of each summary. The tables alone do not constitute a complete description of Stifel’s financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of the financial analyses performed by Stifel.  The summary data set forth below do not represent and should not be viewed by anyone as constituting conclusions reached by Stifel with respect to any of the analyses performed by it in connection with its opinion.  Rather, Stifel made its determination as to the fairness to the Company of the consideration to be paid by Bear State to the Company , from a financial point of view, on the basis of its experience and professional judgment after considering the results of all of the analyses performed and taking into consideration regulatory and other nonfinancial factors.  Accordingly, the data included in the summary tables should be considered as a whole and in the context of the full narrative description of all of the financial analyses set forth in the following pages, including the assumptions underlying these analyses.

In connection with rendering its opinion and based upon the terms of the draft Investment Agreement reviewed by it, Stifel assumed (i)  the Company will sell to Bear State up to 18,333,334 shares of common stock at a purchase price of $3.00 per share (or $0.60 per share pre-Reverse Split) and a warrant to purchase 2,000,000 common shares at $3.00 per share on the terms and subject to the conditions described in the Investment Agreement, (ii) Bear State purchases from the Treasury all of the Series A Preferred Shares and the TARP Warrant, and the right to receive any accrued but unpaid dividends of the Series A Preferred Shares and delivers it to the Company, (iii) stockholders will approve the issuance of common shares and approve the Reverse Split and (iv) the Company will complete the Rights Offering at the same price per share paid by Bear State.

Discounted Cash Flow Analysis.   Using a discounted cash flow analysis, Stifel estimated the net present value of the future streams of after-tax cash flow that the Company could produce for dividends, referred to below as dividendable net income.  In this analysis, Stifel assumed that the Company would perform in accordance with management’s estimates and calculated assumed after-tax distributions such that the Company’s tangible common equity ratio would remain approximately 8.0% of tangible assets.  Stifel calculated the annual assumed dividendable net income streams beginning in the year 2011 through the year 2015.  To approximate the terminal value of the Company’s common stock, price to earnings multiples of 10.0x to 14.0x were applied to estimated earnings for 2016.  The dividendable net income and terminal value were then discounted to present values at assumed discount rates ranging from 15.0% to 25.0% which was calculated based on the Capital Asset Pricing Model.  This discounted cash flow analysis indicated an implied equity value reference range of ($12.5) million to $8.4 million of the Company’s common stock after requiring a capital infusion at the beginning of year 2011 and in each year from 2011 to 2013 to maintain a 8.0% tangible common equity to asset ratio.  A discounted cash flow analysis was included because it is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, including earnings growth rates, dividend payout rates and discount rates.  Additionally, the Company’s future cash flows are dependent on an initial capital injection and subsequent smaller capital raises to maintain the minimum specified capital level.  It is uncertain whether, absent the Investment, an adequate source of capital would be found.  Without additional capital, dividends for the projection period would be highly unlikely.

Comparison of Recapitalization Transactions . Using publicly available information, Stifel reviewed the following recapitalization transactions announced since April 2010: Capital Bank Corporation; Palmetto Bancshares; Hampton Roads Bankshares; TIB Financial Corp.; Sun Bancorp, Inc.; Pacific Capital Bancorp; and Sterling Financial Corporation.  No company or transaction utilized in this analysis is identical to the Company or the Investment.  The following table sets forth certain financial metrics derived from these transactions:

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(1)                                   Excludes impact of the Rights Offering.

Analysis of Selected Failed Bank Transactions.   Stifel analyzed certain information relating to recent transactions in the banking industry, consisting of each of the 91 failed U.S. banks and thrifts announced between January 1, 2008 and January 21, 2011, with assets at the time of failure between $500 million and $5 billion.   This analysis displayed a range of asset quality and regulatory capital ratio characteristics of bank and thrift failures as a comparison to the Bank’s ratios at September 30, 2010.  Stifel observed the following ratios among the selected transactions:

*                                          Nonaccrual loans included in nonperforming assets are before specific valuation allowances. Reserves include both general and specific.

(1)                                   Non-performing assets = Non-performing Loans + other real estate owned.

(2)                                   Non-performing loans = Nonaccrual + Renegotiated loans.

(3)                                   Texas Ratio = (Nonaccrual + Renegotiated + 90 day past due + other real estate owned) / (Tangible Equity + Reserves).

Pro Forma Effect of the Investment . Stifel reviewed certain financial information in order to determine the pro forma impact of the Investment on the Company’s regulatory capital ratios for the period ended September 30, 2010. Based on this analysis, the Bank’s regulatory capital ratios will be above “well capitalized” minimums and the minimums required by the OTS.

As described above, Stifel’s opinion was among the many factors taken into consideration by the Board of Directors of the Company in making its determination to approve the Investment.

Stifel has acted as financial advisor to the Board of Directors of the Company and received a fee of $165,000 upon the delivery of its opinion, none of which was contingent upon consummation of the Investment.  Stifel will not receive any other significant payment or compensation contingent upon the successful consummation of the Investment. The Company has agreed to reimburse Stifel for its reasonable fees and expenses and

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indemnify Stifel for certain liabilities arising out of Stifel’s engagement. There are no material relationships that existed during the two years prior to the date of Stifel’s opinion or that are mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between Stifel and any party to the Investment.  Stifel may seek to provide investment banking services to the Company or its affiliates in the future, for which Stifel would seek customary compensation.  In the ordinary course of business, Stifel may trade the Company’s securities for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.

Summary of Investment Agreement

Set forth below is a summary of the Recapitalization and the terms of the Investment Agreement.  The full text of the Investment Agreement is attached as Appendix B to this proxy statement and is incorporated herein by reference.

First Closing

If the conditions described below are satisfied or otherwise waived by the parties in writing, the Company will issue to Bear State (i) the First Closing Shares, which are comprised of 15,425,262 post-Reverse Split shares of the Company’s common stock, at $3.00 per share (or $0.60 per share pre-Reverse Split) for aggregate consideration of approximately $46.3 million and (ii) the Investor Warrant.  In exchange for the First Closing Shares and the Investor Warrant, Bear State will (a) transfer approximately $40.3 million in cash to the Company, and (b) surrender to the Company the Series A Preferred Shares and TARP Warrant and receive a $6 million credit against the purchase price of the First Closing Shares and the Investor Warrant.

Bear State’s purchase of the First Closing Shares and the Investor Warrant (the “ First Closing ”) is subject to certain preconditions, including the following:

·                   the Company’s stockholders must approve the Change of Control Issuance as required pursuant to NASDAQ Marketplace Rules 5635(b), 5635(c) and 5635(d);

·                   the Company’s stockholders must approve, and the Company must consummate, the Reverse Split;

·                   Treasury must sell to Bear State the Series A Preferred Shares (including accrued and unpaid dividends) and TARP Warrant for $6 million;

·                   the OTS must approve Bear State’s holding company application under the Home Owners’ Loan Act;

·                   the representations and warranties of the Company and the Bank contained in the Investment Agreement must be true as of the First Closing, and the Company and the Bank must perform their respective obligations under the Investment Agreement;

·                   the representations and warranties of Bear State contained in the Investment Agreement must be true as of the First Closing, and Bear State must perform its obligations under the Investment Agreement;

·                   there may not be any action taken, or in Bear State’s reasonable discretion, likely to be taken by any governmental entity which imposes any restriction or condition which Bear State determines, in its reasonable discretion, is materially and unreasonably burdensome or would reduce the benefits of the transactions contemplated by the Investment Agreement to Bear State to such a degree that Bear State would not have entered into the Investment Agreement had such condition or restriction been known to it on the date of the Investment Agreement;

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·                   the Company and Bank must satisfy certain financial performance requirements, including:

·                   As measured on a date that is within 14 days of the First Closing, the funding shortfall in the Bank’s defined benefit plan shall not exceed $3,200,000, as determined in accordance with the Investment Agreement;

·                   As measured at month end immediately prior to the First Closing, the Bank must have at least $490,000,000 in core deposits;

·                   As measured at month end immediately prior to the First Closing, the Bank’s general valuation allowance must be at least $23,000,000;

·                   As measured at month end immediately prior to the First Closing, nonperforming assets of the Bank may not exceed $104,000,000;

·                   As independently valued at month end immediately prior to the First Closing, the unrealized loss (net of unrealized gain) in the Company’s investment portfolio may not exceed $3,000,000;

·                   As measured at month end immediately prior to the First Closing, the Bank’s assets classified by the Company, any subsidiary of the Company or any Governmental Entity as “Other Loans Specially Mentioned,” “Special Mention,” “Substandard,” “Doubtful,” “Loss,” “Classified,” “Criticized,” “Credit Risk Assets,” “Concerned Loans” or words of similar import, may not exceed $203,000,000 in an aggregate amount; and

·                   As measured at month end immediately prior to the First Closing, tangible capital of the Bank may not be less than $36,000,000;

·                   there being no material adverse effect with respect to the Company since January 27, 2011;

·                   the Company has not agreed to enter into or entered into (i) any agreement or transaction in order to raise capital, or (ii) any agreement or transaction that resulted in, or would result in if consummated, a change of control of the Company;

·                   the Company and the Bank must take all requisite corporate action to increase the size of the Company’s and the Bank’s respective Boards of Directors so that each consists of seven (7) seats, and that four representatives of Bear State will be appointed to the Board of Directors of the Company and the Bank effective immediately following the closing of Bear State’s purchase of the First Closing Shares and Investor Warrant;

·                   no later than thirty (30) days after the date of the Investment Agreement, the Company shall have caused (i) certain executive officers to execute an agreement, in a form acceptable to Bear State, whereby each such executive agrees to terminate his or her employment agreement effective immediately prior to the First Closing and release the Company and the Bank from any and all claims and issues arising under such employment agreement and such executive’s employment with the Company and the Bank prior to the date of such release and (ii) certain executives to execute an agreement, in a form acceptable to Bear State, whereby each such executive agrees to terminate his or her change in control severance agreement effective immediately prior to the First Closing and release the Company and the Bank from any and all claims and issues arising in connection with such executive’s employment with the Company and the Bank prior to the date of such release;

·                   the Company has amended certain benefit plans to clarify that neither the transactions contemplated by the Investment Agreement nor the distribution of shares of the Company’s common stock to Bear State’s members pursuant to the terms of Bear State’s operating

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agreement will result in or accelerate any payment or severance benefit becoming due to any current or former employee, officer or director of the Company or Bank; and

·                   the shares of the Company’s common stock, including those issuable pursuant to the terms of the Investment Agreement, must be designated for listing and quotation on the NASDAQ stock market (“ NASDAQ ”), and must not have been suspended, as of the First Closing, by the SEC or NASDAQ from trading on the NASDAQ.

The Rights Offering and Second Closing

As promptly as practicable following the First Closing, and subject to compliance with all applicable law, the Company will distribute to each holder of record of the Company’s common stock as of March 23, 2011 (a “ Legacy Stockholder ”) non-transferable rights (the “ Rights ”) to purchase from the Company post-Reverse Split shares of the Company’s common stock at a purchase price of $3.00 per share (or $0.60 per share pre-Reverse Split).  Each Right entitles a Legacy Stockholder to a basic subscription right (“ Basic Subscription Right ”) and an oversubscription privilege (“ Oversubscription Privilege ”). The Basic Subscription Right entitles a Legacy Stockholder to purchase three (3) post-Reverse Split shares of the Company’s common stock for each one (1) post-Reverse Split share of the Company’s common stock held of record by such Legacy Stockholder.  For example, if a Legacy Stockholder owns five (5) shares of the Company’s common stock as of March 23, 2011, then after giving effect to the Reverse Split, such Legacy Stockholder would own one (1) post-Reverse Split share of the Company’s common stock.  The Basic Subscription Right would then entitle such Legacy Stockholder to purchase three (3) post-Reverse Split shares of the Company’s common stock for the one (1) post-Reverse Split share of the Company’s common stock held of record by such Legacy Stockholder.  If the Legacy Stockholder owns less than five (5) shares of the Company’s common stock as of the March 23, 2011 record date, then after giving effect to the Reverse Split, such Legacy Stockholder would receive cash in lieu of fractional shares of the Company’s common stock and would not be entitled to a Basic Subscription Right.  The Oversubscription Privilege will permit Legacy Stockholders to subscribe for post-Reverse Split shares of the Company’s common stock that are not purchased by other Legacy Stockholders under their Basic Subscription Right, provided that no Legacy Stockholder may exceed, together with any other person with whom such Legacy Stockholder may be aggregated under applicable law, 4.9% beneficial ownership of the Company’s equity securities.

Bear State has agreed, subject to certain conditions, to purchase any unsubscribed post-Reverse Split shares offered in the Rights Offering at $3.00 per share (or $0.60 per share pre-Reverse Split) in a private placement, subject to an overall limitation on Bear State’s ownership of 94.90% of the Company’s outstanding shares of common stock.  In the event that the shares offered to the Legacy Stockholders by the Company in the Rights Offering are purchased in their entirety by the Legacy Stockholders, the Second Closing will not occur.

The Second Closing is subject to certain preconditions, including:

·                   the First Closing and Rights Offering having been consummated in accordance with the terms of the Investment Agreement;

·                   the Company having received (or must receive concurrently with the Second Closing) proceeds from the sale of shares of common stock pursuant to the Investment Agreement in an aggregate amount not less than $55 million;

·                   the representations and warranties of the Company and the Bank contained in the Investment Agreement being true as of the Second Closing, and the Company and the Bank performing their respective obligations under the Agreement;

·                   the Company and Bank having satisfied certain financial performance requirements, including

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·                   As measured at month end immediately prior to the Second Closing, the Bank must have at least $490,000,000 in core deposits;

·                   As measured at month end immediately prior to the Second Closing, the Bank’s general valuation allowance must be at least $23,000,000;

·                   As measured at month end immediately prior to the Second Closing, nonperforming assets of the Bank may not exceed $104,000,000;

·                   As independently valued at month end immediately prior to the Second Closing, the unrealized loss (net of unrealized gain) in the Company’s investment portfolio may not exceed $3,000,000;

·                   As measured at month end immediately prior to the Second Closing, the Bank’s assets classified by the Company or any governmental entity as “Other Loans Specially Mentioned,” “Special Mention,” “Substandard,” “Doubtful,” “Loss,” “Classified,” “Criticized,” “Credit Risk Assets,” “Concerned Loans” or words of similar import, may not exceed $203,000,000 in an aggregate amount;

·                   As measured at month end immediately prior to the Second Closing, tangible capital of the Bank may not be less than $36,000,000; and

·                   As measured at month end immediately prior to the Second Closing, the funding shortfall in the Bank’s defined benefit plan may not exceed $3,200,000, as determined in accordance with the Investment Agreement; and

·                   there being no material adverse effect with respect to the Company since January 27, 2011.

Competing Transactions

The Investment Agreement contains covenants of the Company and the Bank to conduct their respective businesses in the ordinary course until the Recapitalization is completed, and covenants of the Company and the Bank not to take certain actions during such period.  Each of the Company and the Bank has agreed not to solicit any inquiries, proposals or offers with respect to any merger, consolidation or other business combination, recapitalization, liquidation, dissolution, joint venture, binding share exchange, organization, sale of shares of stock, sale of assets, tender offer, exchange offer or similar transaction or series of related transactions that reasonably could result in (i) any acquisition of fifteen percent (15%) or more of the total voting power of any class of equity securities of the Company or the Bank, or (ii) any acquisition of fifteen percent (15%) or more of the consolidated revenues, net income or total assets of the Company and the Bank (a “ Competing Transaction ”).  Further, the Company may not enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any third party any information or afford access to the properties, books or records of the Company or the Bank, or otherwise cooperate in any way with a third party relating to or in connection with a Competing Transaction.

Superior Competing Transactions

If the Company receives a bona fide, written proposal or offer for a Competing Transaction by a third party at any time prior to obtaining stockholder approval of the Amendment and the Change of Control Issuance, which the Company’s Board of Directors determines in good faith may reasonably be likely to result in a transaction that, if consummated, would result in such third party owning, directly or indirectly, more than sixty-five percent (65%) of the shares of the Company’s common stock then outstanding, or all or substantially all the assets of the Company or the Bank, on terms more favorable to the stockholders of the Company from a financial point of view than the terms set forth in the Investment Agreement (a “ Superior Competing Transaction ”), then, subject to certain conditions, the Company may, in response to

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an unsolicited request therefor, furnish certain information and participate in discussions and negotiations with the third party proposing such Superior Competing Transaction.

Voting Agreements

Each member of the Company’s Board of Directors and certain of the Company’s executive officers who are not otherwise members of the Board of Directors have entered into a voting agreement with Bear State pursuant to which each such member of the Board of Directors and each such executive officer has agreed to vote his or her shares of the Company’s common stock in favor of the Amendment and the Change of Control Issuance.

Preemptive Rights

The Investment Agreement provides that, subject to certain exceptions, so long as Bear State owns 33% or more of the Company’s shares of common stock then outstanding, at any time that the Company proposes to offer or sell any equity (including common stock, preferred stock or restricted stock) or other securities, including options or debt that is convertible or exchangeable into equity or that includes an equity component, Bear State must first be afforded the opportunity to acquire its pro rata share of such offered securities for the same price (net of any underwriting discounts or sales commissions) and on the same terms as proposed to be offered to others.

Registration Rights

The Investment Agreement provides Bear State with certain demand and piggyback registration rights with respect to the Private Placement Shares, as more fully described in the Investment Agreement.

Termination Rights

The Investment Agreement contains certain termination rights for the Company, the Bank and Bear State, as the case may be, which may be triggered:

·                  by mutual written agreement of the Company, the Bank and Bear State;

·                   by Bear State, the Company or the Bank in the event that the closing of the Bear State investment does not occur on or before June 30, 2011;

·                   by Bear State or the Company upon certain breaches of any representation, warranty, covenant or agreement made by the other party;

·                   by Bear State or the Company in the event that (i) any governmental entity issues any order, decree or injunction or takes any other action restraining, enjoining or prohibiting any of the transactions contemplated by the Investment Agreement, and such order, decree, injunction or other action shall have become final and non-appealable; or (ii) the requisite governmental approvals are denied by final nonappealabe action of such governmental entity or an application or notice therefor shall have been permanently withdrawn at the request of a governmental entity;

·                   by Bear State or the Company if the Company’s stockholders do not approve the Amendment and the Change of Control Issuance;

·                   by Bear State if the Company does not deliver proxy materials or hold the stockholders meeting contemplated by the Investment Agreement within the time frames set forth in the Investment Agreement;

·                   by Bear State if (i) the Company’s Board of Directors does not provide in the proxy materials, or withdraws or modifies in certain circumstances, a recommendation that the Company’s stockholders

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vote in favor of the stockholder proposals contemplated by the Investment Agreement, or (ii) the Company’s Board of Directors approves a Competing Transaction or any agreement that could lead to a Competing Transaction, or the Company or any representative of the Company solicits or otherwise engages in discussions or negotiations regarding a Competing Transaction; and

·                   by Bear State or the Company if the Company delivers to Bear State a notice of Superior Competing Transaction and the Company determines that a Competing Transaction is a Superior Competing Transaction (as described above).

The Investment Agreement further provides that, in certain circumstances, upon termination of the Investment Agreement, the Company may be required to pay to Bear State a termination fee of $1 million plus up to $500,000 of out-of-pocket fees and expenses actually incurred by Bear State in connection with the Investment Agreement.  If the Investment Agreement is terminated because the Company’s stockholders do not approve either or both of the Amendment and the Change of Control Issuance, the Company must pay Bear State $500,000.

Indemnification

Pursuant to the terms of the Investment Agreement, following the closing of Bear State’s purchase of the Private Placement Shares and Investor Warrant, the Company and the Bank have agreed to indemnify Bear State and its affiliates (including officers, directors, partners, members and employees) from losses arising out of breaches of agreements or covenants made by the Company or the Bank, and any legal proceeding relating to the Investment Agreement or the transactions contemplated by the Investment Agreement (including the Rights Offering).  Following the closing of Bear State’s purchase of the Private Placement Shares and Investor Warrant, Bear State has agreed to indemnify the Company and the Bank (including officers, directors, partners, members and employees) from losses arising out of breaches of agreements or covenants made by Bear State.

Representations and Warranties

The Investment Agreement contains representations and warranties by the Company and the Bank, including, among others, with respect to:

·                   corporate organization and authority;

·                   capitalization;

·                   third party and governmental consents and approvals;

·                   financial statements;

·                   reports and regulatory matters;

·                   properties and leases;

·                   taxes;

·                   absence of certain changes;

·                   undisclosed liabilities, commitments and contracts;

·                   authorization of shares to be purchased;

·                   litigation;

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·                   compliance with law;

·                   labor and benefit plans;

·                   risk management;

·                   agreements with regulatory agencies;

·                   environmental liability;

·                   loan portfolio;

·                   insurance;

·                   intellectual property;

·                   knowledge as to conditions;

·                   related party transactions; and

·                   customer relationships.

The Investment Agreement also contains representations and warranties by Bear State, including, among others, with respect to:

·                  organization and authority;

·                   Bear State’s purchase of the Company’s common stock and warrant as an investment;

·                   Bear State’s financial capability; and

·                   Bear State’s knowledge as to conditions.

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THE AMENDMENT

(PROPOSAL 1)

Our Board of Directors proposes the Amendment to our Articles to effect the Reverse Split.  By way of example, assuming the Reverse Split is approved by our stockholders, if a stockholder currently holds 5,000 shares of our common stock before the Reverse Split, such stockholder would own 1,000 shares after the Reverse Split. If approved by our stockholders, the Reverse Split will reduce our issued and outstanding common stock from 4,846,785 shares to approximately 969,357 shares.

The Reverse Split will not be consummated unless our stockholders approve the Change of Control Issuance described in Proposal 2, so stockholders who wish to approve the Amendment should also approve the Change of Control Issuance.

Purpose of the Proposed Amendment

In order to consummate the Investment and the Rights Offering, the Company must have a sufficient number of authorized shares of our common stock available for issuance to Bear State in the Investment and stockholders who participate in the Rights Offering.  At the present time, the Company’s capital structure will not permit us to issue enough shares to satisfy the maximum number of shares that may be issued in the Investment and the Rights Offering.  However, if approved, the Amendment will result in an increase in the number of shares of our common stock available for issuance due to the reduction in the number of shares of our common stock issued and outstanding.  Therefore, our Board of Directors has determined that it is in the best interest of our stockholders to approve the Amendment in order to effect the Reverse Split.

Procedure for Effecting the Reverse Split; Exchange of Stock Certificates

If our stockholders approve the Amendment, we will file a Certificate of Amendment, which constitutes the Amendment, to our Articles with the Secretary of State of the State of Texas.  After the filing and effectiveness of the Amendment, five (5) shares of our common stock issued and outstanding (“ Old Shares ”) will be converted into one (1) fully paid and nonassessable share of our common stock (“ New Shares ”).  Holders of any fractional shares that result from the Reverse Split will receive cash in lieu of such fractional shares.   The text of the Amendment to effect the Reverse Split will be in substantially the form attached hereto as Appendix A .

Upon the effectiveness of the Reverse Split, the Company intends to treat shares held by stockholders through a bank, broker, custodian or other nominee (i.e. stockholders who hold in street name) in the same manner as registered stockholders whose shares are registered in their names.  Brokers, banks and other nominees will be instructed to effect the Reverse Split for their beneficial holders holding shares of our common stock in street name.  However, these brokers, banks and other nominees may have different procedures than registered stockholders for processing the Reverse Split and making payment for fractional shares. Stockholders who hold shares of our common stock with a bank, broker, custodian or other nominee and who have any questions in this regard are encouraged to contact their brokers, banks or other nominees.

Certain of the registered holders of our common stock may hold some or all of their shares electronically in book-entry form (i.e. stockholders that are registered on the exchange agent’s books and records but do not hold stock certificates) with the Company’s exchange agent.  These stockholders do not have stock certificates evidencing their ownership of our common stock.  They are, however, provided with a statement reflecting the number of shares registered in their accounts.  Stockholders who hold shares electronically in book-entry form with the Company’s exchange agent will not need to take action (the exchange will be automatic) to receive whole shares of our post-Reverse Split common stock or payment in lieu of any fractional share, if applicable.

Stockholders holding shares of our common stock in certificated form will be sent a transmittal letter by Registrar and Transfer Company, who will serve as the Company’s exchange agent in effecting the

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exchange of certificates following the effectiveness of the Reverse Split.  The letter of transmittal will contain instructions on how a stockholder should surrender his, her or its certificate(s) representing shares of our common stock (the “ Old Certificates ”) to the exchange agent in exchange for certificates representing the appropriate number of whole shares of our post-Reverse Split common stock (the “ New Certificates ”).  No New Certificates will be issued to a stockholder until such stockholder has surrendered all Old Certificates, together with a properly completed and executed letter of transmittal and such evidence of ownership of the Old Certificates as the Company may require, to the exchange agent.  Stockholders should not forward their Old Certificates to the exchange agent until they receive the letter of transmittal, and they should only send in their Old Certificates with the letter of transmittal.  No stockholder will be required to pay a transfer or other fee to exchange his, her or its Old Certificates.  Stockholders will then receive a New Certificate(s) representing the number of whole shares of our common stock that they are entitled as a result of the Reverse Split.  Until surrendered, the Company will deem outstanding Old Certificates held by stockholders to be cancelled and only to represent the number of whole shares of our post-Reverse Split common stock to which these stockholders are entitled.  Any Old Certificates submitted for exchange, whether because of a sale, transfer or other disposition of stock, will automatically be exchanged for New Certificates.  If a stockholder is entitled to a payment in lieu of any fractional share, such payment will be made as described below under “— Fractional Shares and Odd Lots. ”

Except for any changes as a result of the treatment of fractional shares, each stockholder will hold the same percentage of our common stock outstanding after the Reverse Split as such stockholder did immediately prior to the Reverse Split (and prior to the issuance of the Private Placement Shares). The text of the form of the Amendment attached to this proxy statement is subject to modification to include such changes as may be required by the Office of the Secretary of State of the State of Texas and as our Board of Directors deems necessary and advisable to effect the Reverse Split, including the insertion of the effective time determined by our Board of Directors.  If the purchase of the First Closing Shares is not consummated for any reason, our Board may elect not to effect the Reverse Split.

Principal Effects of the Reverse Split

If approved, the Reverse Split will have the following effects:

·                   Five (5) Old Shares owned by a stockholder will be exchanged for one (1) New Share.

·                   The number of shares of our common stock issued and outstanding will be proportionately reduced.

·                   Proportionate adjustments will be made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding options entitling the holders thereof to purchase shares of our common stock, which will result in approximately the same aggregate price being required to be paid for such options upon exercise of such options immediately preceding the Reverse Split.

The Reverse Split will not change the number of authorized shares of our common stock or preferred stock, or the par value of our common stock or preferred stock.  The Reverse Split will increase the available shares and could be construed as having an anti-takeover effect because we could use the increased available shares to frustrate persons seeking to effect a takeover or otherwise gain control of the Company.

Our common stock is currently registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and as a result, we are subject to the periodic reporting and other requirements of the Exchange Act. The Reverse Split will not affect the registration of our common stock under the Exchange Act.  Our common stock will continue to be listed on the NASDAQ Global Market under the symbol “FFBH”, although the letter “D” will be added to the end of the trading symbol for a period of 20 trading days after the Reverse Split to indicate that a reverse stock split has occurred.

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After the Reverse Split, our common stock will have new Committee on Uniform Securities Identification Procedures (“ CUSIP ”) numbers, which is a number used to identify the Company’s equity securities, and stock certificates with the older CUSIP numbers will need to be exchanged for stock certificates with the new CUSIP numbers by following the procedures described above.

Fractional Shares and Odd Lots

The Company will not issue fractional shares with respect to the Reverse Split.  In lieu of a fraction of a share of common stock, each stockholder who otherwise would have been entitled to a fraction of a share shall be paid cash (without interest and subject to applicable withholding taxes) in an amount determined by the Board of Directors to be the fair value of such fraction of a share as of the effective time of the Reverse Split. No such stockholder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share interest.  The Company’s stockholder list shows that some of our outstanding common stock is registered in the names of clearing agencies and broker nominees.  Because the Company does not know the number of shares held by each beneficial owner for whom the clearing agencies and broker nominees are record holders, the Company cannot predict with certainty the number of fractional shares that will result from the Reverse Split or the total number of additional shares that would be issued as a result of fractional shares.  However, the Company does not expect that the amount will be material.  The Company does not expect the Reverse Split to result in a significant reduction in the number of record holders.  The Company presently does not intend to seek any change in its status as a reporting company for federal securities law purposes, either before or after the Reverse Split.  If approved, the Reverse Split will result in some stockholders owning “odd lots” of less than 100 shares of our common stock. Brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares.

If a stockholder who holds shares in certificated form is entitled to payment in lieu of any fraction of a share, the stockholder will receive a check as soon as practicable following the effectiveness of the Reverse Split and after the stockholder has submitted an executed transmittal letter and surrendered all pre-Reverse Split stock certificates.  If a stockholder who holds shares in book-entry form is entitled to a payment in lieu of any fraction of a share, the stockholder will receive a check as soon as practicable after the effectiveness of the Reverse Split without need for further action by the stockholder.  Those stockholders who hold shares of our common stock with a bank, broker, custodian or other nominee should contact their bank, broker, custodian or other nominee for information on the treatment and processing of factional shares by their bank, broker, custodian or other nominee.  By signing and cashing a check, stockholders will warrant that they owned the shares of our common stock for which they received payment.  The cash payment to be made in lieu of issuing fractional shares is subject to applicable federal and state income tax and state abandoned property laws. Stockholders will not be entitled to receive interest for the period of time between the effectiveness of the Reverse Split and the date payment is received.

Accounting Matters

The Reverse Split will not affect the par value of our common stock. As a result, as of the effective time of the Reverse Split, the stated capital on our balance sheet attributable to our common stock will be reduced proportionately, and the additional paid-in capital account will be credited with the amount by which the stated capital is reduced. The per-share net income or loss and net book value of our common stock will be restated because there will be fewer shares of our common stock outstanding.

Possible Effects of Approving the Proposed Reverse Split

While one effect of the proposed Reverse Split may be to increase the price of our common stock, there can be no assurance that the total market capitalization of our common stock after the proposed Reverse Split will be equal to or greater than the total market capitalization before the proposed Reverse Split or that the per share market price of our common stock following the Reverse Split will either exceed or remain higher than the current per share market price. There can be no assurance that the market price

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per share of the New Shares after the Reverse Split will rise or remain constant in proportion to the reduction in the number of the Old Shares outstanding before the Reverse Split.  For example, based on the closing market price of our common stock on March 25, 2011 of $2.87 per share, there can be no assurance that the post-Reverse Split market price of our common stock will be $14.35 per share or greater. Accordingly, the total market capitalization of our common stock after the proposed Reverse Split may be lower than the total market capitalization before the proposed Reverse Split and, in the future, the market price of our common stock following the Reverse Split may not exceed or remain higher than the market price prior to the proposed Reverse Split.  In many cases, the total market capitalization of a company following a Reverse Split is lower than the total market capitalization before the Reverse Split.

If approved, the Reverse Split will result in an increase in the number of authorized shares of common stock available for issuance due to the reduction in the number of shares of our common stock issued and outstanding.  As of the record date, we had 30,000,000 shares of common stock and 5,000,000 shares of preferred stock authorized.  The Reverse Split would reduce our issued and outstanding common stock from 4,846,785 shares to approximately 969,357 shares.  If our stockholders approve the Amendment, our Board of Directors will have the ability to issue additional shares of our common stock without further vote of our stockholders, except as provided under Texas corporate law or under the rules of any securities exchange on which shares of our common stock are then issued.  Aside from Bear State following its Investment, holders of our common stock have no preemptive or similar rights, which means that current and future holders of our common stock do not and will not have a prior right to purchase any new issue of our capital stock in order to maintain their proportionate ownership thereof.  Following the First Closing and subject to certain exceptions (including the Rights Offering), Bear State will have preemptive rights any time the Company proposes to make any public or nonpublic offering or sale of any equity, or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component.  The issuance of additional shares of our common stock would decrease the proportionate equity interest of our current stockholders and, depending upon the price paid for such additional shares, could result in dilution to our current stockholders.  The issuance of additional shares of our common stock could also depress the market price of our common stock.

Possible Effects of NOT Approving the Proposed Reverse Split

If our stockholders do not approve the Amendment and the Change of Control Issuance, the Recapitalization will not proceed.  If the Recapitalization does not proceed, we will have to seek other alternatives to satisfy the capital requirements of the Cease and Desist Orders, and we would likely be subject to additional regulatory actions and may be unable to continue as a going concern in the future.

No Dissenter’s Rights

Under the Texas Business Organizations Code, our stockholders are not entitled to dissenter’s rights with respect to the proposed approval of the Amendment to effect the Reverse Split, and we will not independently provide our stockholders with any such right.

Federal Income Tax Consequences of the Reverse Split

The following is a summary of important tax considerations of the Reverse Split. It addresses only stockholders who hold the pre-Reverse Split shares and post-Reverse Split shares as capital assets. It does not purport to be complete and does not address stockholders subject to special rules, such as financial institutions, tax-exempt organizations, insurance companies, dealers in securities, mutual funds, foreign stockholders, stockholders who hold the pre-Reverse Split shares as part of a straddle, hedge, or conversion transaction, stockholders who hold the pre-Reverse Split shares as qualified small business stock within the meaning of Section 1202 of the Internal Revenue Code of 1986, as amended (the “ Code ”), stockholders who are subject to the alternative minimum tax provisions of the Code, and stockholders who acquired their pre- Reverse Split shares pursuant to the exercise of employee stock options or otherwise as compensation. This summary is based upon current law, which may change, possibly even retroactively. It does not address tax considerations under state, local, foreign, and other

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laws. Furthermore, we have not obtained a ruling from the Internal Revenue Service or an opinion of legal or tax counsel with respect to the consequences of the Reverse Split. EACH STOCKHOLDER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT ON HIS OR HER OWN SITUATION.

U.S. Holders

The discussion in this section is addressed to “U.S. holders.”  A U.S. holder is a beneficial owner of our common stock who for U.S. federal income tax purposes is (a) a citizen or resident of the United States, (b) a corporation, or an entity treated as a corporation, created or organized in or under the laws of the United States or any state or political subdivision thereof, (c) a trust that (i) is subject to (a) the primary supervision of a court within the United States and (b) the authority of one or more United States persons to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable Treasury Regulations to be treated as a United States person, or (d) an estate that is subject to U.S. federal income tax on its income regardless of its source. The reverse stock split should be treated as a tax-free recapitalization for U.S. federal income tax purposes. Therefore, except as described below with respect to the receipt of cash in lieu of fractional shares, no gain or loss will be recognized by a stockholder on account of the reverse stock split. Accordingly, the aggregate tax basis in the common stock received pursuant to the Reverse Split should equal the aggregate tax basis in the common stock surrendered (excluding the portion of the tax basis that is allocable to any fractional share), and the holding period for the common stock received should include the holding period for the common stock surrendered.

Cash in lieu of fractional shares.   A U.S. holder who receives cash in lieu of a fractional share of our common stock pursuant to the Reverse Split will recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the U.S. holder’s tax basis in the shares of our common stock surrendered that is allocated to such fractional share of our common stock. Such capital gain or loss will be long term capital gain or loss if the U.S. holder’s holding period for our common stock surrendered exceeded one year at the effective time of the Reverse Split. The deductibility of capital losses is subject to limitation under the Internal Revenue Code.

U.S. Information Reporting and Backup Withholding.   Information returns generally will be required to be filed with the Internal Revenue Service ( IRS ) with respect to the receipt of cash in lieu of a fractional share of our common stock pursuant to the Reverse Split in the case of certain U.S. holders. In addition, U.S. holders will be subject to backup withholding (at the current applicable rate of 28%) on the payment of such cash if they do not provide proof of an applicable exemption or furnish their taxpayer identification number and otherwise comply with all applicable requirements of the applicable backup withholding tax rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the U.S. holder’s federal income tax liability, if any, provided the required information is timely furnished to the IRS.

Non-U.S. Holders

The discussion in this section is addressed to “non-U.S. holders.” A non-U.S. holder is a beneficial owner of our common stock who is a foreign corporation or a non-resident alien individual.  Generally, non-U.S. holders will not recognize gain or loss for U.S. income tax purposes on account of the Reverse Split.

Cash in lieu of fractional shares.  A non-U.S. holder will not recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of a fractional share provided that (a) such gain or loss is not effectively connected with the conduct of a trade or business in the United States by such non-U.S. holder (or, if certain income tax treaties apply, is not attributable to such non-U.S. holder’s permanent establishment in the United States), (b) with respect to a non-U.S. holder who is an individual, such non-U.S. holder is present in the United States for less than 183 days in the taxable year of the Reverse Split and other conditions are met, and (c) such non-U.S. holder complies with certain certification requirements.

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U.S. Information Reporting and Backup Withholding Tax.   In general, backup withholding and information reporting will not apply to a payment of cash in lieu of a fractional share of our common stock to a non-U.S. holder pursuant to the Reverse Split if the non-U.S. holder certifies under penalties of perjury that it is a non-U.S. holder and the applicable withholding agent does not have actual knowledge to the contrary. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that certain required information is timely furnished to the IRS. In certain circumstances the amount of cash paid to a non-U.S. holder in lieu of a fractional share of our common stock, the name and address of the beneficial owner and the amount, if any, of tax withheld may be reported to the IRS.

Required Vote

The votes of holders of at least a majority of the total outstanding shares of our common stock entitled to vote on the Amendment to effect the Reverse Split is required to approve the Amendment.  Properly executed proxies will be voted by the individuals named on the proxy card in accordance with the stockholder’s instructions.  Where properly executed proxies are returned to us with no specific instruction as to how to vote on the Amendment at the Special Meeting, the person named in the proxy will vote the shares FOR the Amendment.  Abstentions and broker non-votes will have the effect of a vote AGAINST the Amendment.  The Amendment and the Reverse Split will not be effected unless the Change of Control Issuance described in Proposal 2 is approved, and the Change of Control Issuance described in Proposal 2 will not be effected unless the Amendment is approved.  As such, if the Amendment is approved and the Change of Control Issuance is not approved, the Reverse Split and the other transactions related to the Recapitalization will not proceed.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE “FOR” THE APPROVAL OF THE AMENDMENT.

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THE CHANGE OF CONTROL ISSUANCE

(PROPOSAL 2)

The following description of the terms of the Investment and the reasons for contemplating the Investment are included for informational purposes to our common stockholders in connection with this proxy solicitation and do not constitute an offer to sell or a solicitation of an offer to buy any securities of the Company.

The Change of Control Issuance is conditioned upon stockholder approval of the Amendment described in Proposal 1, so stockholders who wish to approve the Change of Control Issuance should also approve the Amendment.

Our Board of Directors unanimously adopted a resolution recommending that our stockholders approve the issuance of shares of our common stock pursuant to the Investment Agreement in which Bear State has committed, subject to the terms of the Investment Agreement, to purchase (A) the First Closing Shares, which are comprised of 15,425,262 shares of our post-Reverse Split common stock at $3.00 per share (or $0.60 per share pre-Reverse Split) for aggregate consideration of approximately $46.3 million, (B) the Investor Warrant, which is exercisable into 2 million post-Reverse Split shares of our common stock at an exercise price of $3.00 per share (or $0.60 per pre-Reverse Split share), and (C) the Second Closing Shares at $3.00 per share (or $0.60 per pre-Reverse Split share), subject to an overall limitation on Bear State’s ownership of 94.90% of our outstanding shares of common stock.

Background of the Change of Control Issuance

As described above in Background to the Proposals , the Company suffered a loss of $45.5 million for 2009 and on April 12, 2010, the Company and the Bank each consented to the terms of the Cease and Desist Orders issued by the OTS, the Bank’s primary federal regulator.  Among other things, the Cease and Desist Orders require the Company and the Bank to submit plans for, in particular, capital preservation and enhancement strategies, as well as for identifying specific sources of additional capital and timeframes and methods by which additional capital will be raised.  As a result, our Board of Directors has been pursuing strategic alternatives to raise capital and strengthen our balance sheet.   Our Board of Directors has worked closely with management and our advisors to evaluate potential alternatives for raising additional capital, including possibly selling common stock in public or private offerings, disposing of branches or related assets, and considering other strategic alternatives.   If the Change of Control Issuance is approved and the Recapitalization is consummated, the Company will receive $55 million in gross proceeds in the aggregate from the issuance of the Private Placement Shares and the Rights Offering (after taking into account the $6 million credit Bear State will receive following the surrender to the Company of the Series A Preferred Stock and TARP Warrant).  These proceeds will be used to enhance the capital of both the Company and the Bank.

Our Board of Directors unanimously approved the Investment Agreement and the transactions contemplated by the Investment Agreement, including the Change of Control Issuance, and unanimously recommended that our stockholders approve the Change of Control Issuance.

Reasons for the Change of Control Issuance

As part of the Recapitalization and under the terms of the Investment Agreement, we are required to issue and have available 18,333,334 post-Reverse Split shares of our common stock.

We intend to use the proceeds from the issuance of the Private Placement Shares and Rights Offering to provide the Company with adequate capital to serve as a source of strength for the Bank and to satisfy the capital requirements of the Bank Cease and Desist Order. If we are unable to complete the Recapitalization, our business, financial results, and prospects will be adversely affected and we would likely be subject to additional regulatory actions and may be unable to continue as a going concern in the future.

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Reasons Against the Change of Control Issuance

The issuance of common stock under the terms of the Investment by Bear State will result in substantial dilution to our existing common stockholders and a significant reduction in the percentage interests of our current common stockholders in the voting power and in the future earnings per share of their common stock. The sale or resale of these securities could also cause the market price of our common stock to decline. Assuming that the Change of Control Issuance is consummated, our current common stockholders will own between approximately 5.10% (after taking into account the overall limitation on Bear State’s ownership and the exercise of the Investor Warrant and assuming none of our current stockholders subscribe to the Rights Offering) and 18.20% (after taking into account the exercise of the Investor Warrant and assuming the Rights Offering is fully subscribed) of our issued and outstanding common stock. For additional information regarding the dilutive effect of the Change of Control Issuance, please see the section of this proxy statement entitled Change of Control Issuance — Pro Forma Financial Information below.

Our Board of Directors has weighed the reasons for and against the Change of Control Issuance and has determined that the reasons in favor of the Change of Control Issuance far outweigh the reasons against it.

Reasons for Seeking Stockholder Approval

Because shares of our common stock are listed on the NASDAQ Global Market, we are subject to the NASDAQ’s rules and regulations. NASDAQ Listing Rule 5635(d) requires stockholder approval prior to the issuance of common stock, or securities convertible into or exercisable for common stock, equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book value or market value of the stock.

Under Listing Rule 5635(b), companies are required to obtain stockholder approval prior to the issuance of securities when the issuance or potential issuance would result in a “change of control” as defined by NASDAQ. NASDAQ generally characterizes a transaction whereby an investor or group of investors acquires, or obtains the right to acquire, 20% of more of the voting power of an issuer on a post-transaction basis as a “change of control” for purposes of Rule 5635(b).

In addition, Listing Rule 5635(c) requires stockholder approval in connection with an issuance of securities in connection with equity-based compensation of directors.  The issuance of stock, or securities convertible into or exercisable for common stock, by a company to its directors or an Affiliated Entity of such person, in a private placement at a price less than market value of the stock is considered a form of “equity compensation” and requires stockholder approval.  An “Affiliated Entity” is any entity where a director of the Company (i) is a partner, executive officer, or controlling stockholder or (ii) would be the beneficial owner or have a pecuniary interest in the securities issued by the Company.  Our proposed issuance of the Second Closing Shares to Bear State may fall under this rule because certain of the directors appointed by Bear State following the First Closing may be executive officers and/or have a pecuniary interest in the common stock issued to Bear State and/or its respective affiliates at the Second Closing.

Actions to be Taken If Issuance is not Approved

In the event our stockholders do not approve the Change of Control Issuance, Bear State will not be required to close the Investment.  In addition, if the Amendment is approved but the Change of Control Issuance is not approved, we will not effect the Reverse Split and the Recapitalization will not proceed.  If the Recapitalization does not proceed, we will have to seek other alternatives to satisfy the capital requirements of the Cease and Desist Orders, and we would likely be subject to additional regulatory actions and may be unable to continue as a going concern in the future.

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Pro Forma Financial Information

The following tables contain certain financial information as of December 31, 2010 and for the year ended December 31, 2010:

·                   on an actual basis; and

·                   on a pro forma, as adjusted, basis to give effect to the Recapitalization (which includes the Reverse Split, the issuance of the Private Placement Shares and the Investor Warrant, the redemption of our Series A Preferred Stock and the TARP Warrant, and the Rights Offering).

These tables should be read together with our consolidated historical financial statements and Management’s Discussion and Analysis, which appears in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, a copy of which is included in the materials sent to you with this proxy statement.

  FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

Pro Forma Statement of Financial Condition

(Footnotes on following page)

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(1)                                  The following table illustrates the impact of each of the proposed transactions on the statement of financial condition as of December 31, 2010, as reported ($ in thousands) :

(2)                                  Cash proceeds assumes $40.3 million of cash received, before deducting transaction costs, from the First Closing Shares from Bear State and $8.7 million of cash received, before deducting transaction costs, from the Rights Offering.  Estimated transaction costs for the First Closing Shares and the Rights Offering are $900,000 of which $348,000 of transaction costs had already been paid in cash through December 31, 2010 and is reflected as a component of Prepaid Expenses and Other Assets above.

(3)                                  Represents $930,000 of accrued preferred stock dividends and $20,000 of accrued interest on the unpaid preferred stock dividends.

(4)                                  The Investor Warrant was valued for financial reporting purposes using the Black-Scholes option pricing model. The estimated option value per share of $1.40 was based on the following assumptions: stock price and exercise price $3.00, term 3 years, dividend yield of zero, risk free rate of 1.50% and volatility of 70%.

(5)                                  Book value per common share is calculated based on common shares outstanding as noted in the table above, which do not include the 2 million shares of our common stock issuable upon the exercise of the Investor Warrant.

The following tables illustrate the potential dilutive effect and impact on stockholders’ equity of the Reverse Split, the Investment by Bear State and the Rights Offering:

(1)                                  Shares are reflected post-Reverse Split.

(2)                                  Includes the Investor Warrant of 2 million shares.

(3)                                  This table assumes the Rights Offering is fully subscribed by Legacy Stockholders.  If no Legacy Stockholders purchase common stock in the Rights Offering, Bear State could own as much as 94.9% of our common stock.  As a result, our current stockholders would own between 5.1% and 18.2% of our common stock following the Investment and the Rights Offering.

The following table sets forth the pro forma regulatory capital ratios for the Bank following the Recapitalization and assumes an infusion of $47.3 million to the Bank from the Company. It is assumed that $39.3 million is infused to the Bank after the First Closing Shares are issued and $8 million is infused to the Bank following the Rights Offering.  For risk-weighted asset purposes, the cash infusion into the Bank was assumed to be 50% risk-weighted.

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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

Pro Forma Statement of Operations

(1)            Reflects the reversal of accrued interest on unpaid preferred stock dividends.

(2)            No tax effect of the transactions was assumed due to the Company’s $13.3 million net operating loss carryforward at December 31, 2010.

(3)            Reflects the reversal of preferred stock dividends recognized during 2010 of $825,000, reversal of preferred stock discount accretion of $66,000 recognized during 2010, and the $10.5 million gain on redemption of preferred stock.

(4)            Basic weighted average shares outstanding were adjusted for the impact of the Reverse Split of 3,877,428 shares, the First Closing Shares of 15,425,262, and the Rights Offering of 2,908,071 shares.

(5)            Diluted weighted average shares outstanding includes the Investor Warrant for 2,000,000 shares.

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No Preemptive Rights

Holders of our common stock currently have no preemptive or similar rights, which means that current holders of our common stock do not have a prior right to purchase any new issue of our capital stock in order to maintain their proportionate ownership thereof.  Following the First Closing and subject to certain exceptions (including the Rights Offering), Bear State will have preemptive rights any time the Company proposes to make any public or nonpublic offering or sale of any equity, or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component.

No Dissenter’s Rights

Under the Texas Business Organizations Code, our stockholders are not entitled to dissenter’s rights with respect to the Change of Control Issuance and we will not independently provide our stockholders with any such right.

Vote Required

The votes of the holders of at least a majority of the votes present in person or by proxy at the Special Meeting or adjournment thereof is required to approve the Change of Control Issuance.  Properly executed proxies will be voted by the individuals named on the proxy card in accordance with the stockholder’s instructions.  Where properly executed proxies are returned to us with no specific instruction as to how to vote on the Change of Control Issuance at the Special Meeting, the person named in the proxy will vote the shares FOR the Change of Control Issuance.  Abstentions will have the effect of a vote AGAINST the Change of Control Issuance.   Broker non-votes will have no effect on the outcome of the Change of Control Issuance Proposal.  The Change of Control Issuance will not be effected unless the Amendment described in Proposal 1 is approved.  As such, if the Change of Control Issuance is approved and the Amendment is not approved, the Recapitalization will not proceed.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE CHANGE OF CONTROL ISSUANCE.

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THE 2011 PLAN

(PROPOSAL 3)

The implementation of the 2011 Plan is conditioned upon stockholder approval of the Amendment described in Proposal 1 and the Change of Control Issuance described in Proposal 2, so stockholders who wish to approve the 2011 Plan should also approve the Amendment and the Change of Control Issuance.

Background of the 2011 Plan

Our Board of Directors has adopted the First Federal Bancshares of Arkansas, Inc. 2011 Omnibus Incentive Plan (the “ 2011 Plan ”), which is designed to promote the long-term success of the Company and the Bank and the creation of stockholder value by (i) encouraging officers, employees, directors and individuals performing services for the Company and the Bank or their subsidiaries as consultants or independent contractors to focus on critical long-range objectives, (ii) encouraging the attraction and retention of officers, employees, directors, consultants and independent contractors with exceptional qualifications, and (iii) linking officers, employees, directors, consultants and independent contractors directly to stockholder interests through ownership of the Company.

The 2011 Plan provides for the grant of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”), nonqualified stock options and restricted stock (collectively “ Awards ”). Awards will be available for grant to certain eligible persons which, in the case of incentive stock options, are employees of either or both of the Company and the Bank, and in the case of all other types of Awards, include any consultant or other independent contractor and non-employee directors who provide services to either or both of the Company and the Bank (collectively, “ Participants ”).

Introduction

The Compensation Committee views employee equity ownership as a significant motivation for the Company’s employees, directors and consultants to maximize value for our stockholders. The Compensation Committee believes that the grant of stock options and other stock-based awards provides such motivation and offers a long-term incentive for employees, directors and consultants to contribute to the growth of the Company. In addition, the Compensation Committee values performance-based awards that establish a direct link between compensation and stockholder return, such as stock options (which only yield value to the extent that our stock price appreciates) and performance-conditioned stock awards (which require the attainment of specified performance goals in order for the recipient to realize value).

The Compensation Committee also feels that equity and equity-based awards should be made to a cross section of the Company’s employees, including, but not limited to, the Company’s executive officers. Consequently, the Compensation Committee believes that it is important to ensure that it will be able to provide such equity and equity-based compensation to employees, directors and consultants of the Company in the future.

General

On March 15, 2011, the Board of Directors, upon the recommendation of the Compensation Committee, unanimously approved the 2011 Plan subject to stockholder approval of the 2011 Plan.

The 2011 Plan is intended to promote the long-term interests of the Company and its stockholders by providing a broad based group of employees, directors and consultants with equity-based incentives and rewards to encourage them to enter into and continue in the employ of the Company.  The equity-based incentives and rewards provided under the 2011 Plan also give recipients a proprietary interest in the long-term success of the Company, thereby aligning their interests with those of our stockholders.

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The 2011 Plan is also intended to permit the grant of performance-based compensation within the meaning of Section 162(m) of the Code, which generally limits the annual deduction that the Company may take for compensation of its covered officers, which consist of our CEO and three other most highly compensated executive officers (other than our CFO) who are serving at the end of the year to $1 million. Under Section 162(m), certain compensation, including compensation based on the attainment of performance goals, will not be subject to this limitation if certain requirements are met. Among these requirements is a requirement that the material terms pursuant to which the performance-based compensation is to be paid be disclosed to and approved by the Company’s stockholders. Accordingly, if the 2011 Plan is approved by our stockholders and the other conditions of Section 162(m) relating to performance-based compensation are satisfied, qualified performance-based compensation paid to covered officers pursuant to the 2011 Plan will not fail to be deductible due to the operation of Section 162(m).

A form of the 2011 Plan is attached as Appendix D to this proxy statement. The following description of the material terms of the 2011 Plan is qualified in its entirety by the complete text of the 2011 Plan.

Description of Principal Features of the 2011 Plan

Types of Awards.  Grants under the 2011 Plan may be made in the form of stock options, stock appreciation rights (“ SARs ”), restricted stock, restricted stock units (“ RSUs ”), performance shares, performance units and other cash or stock-based awards.

Number of Authorized Shares .  If approved by our stockholders, the 2011 Plan will authorize awards in respect of an aggregate of 1,930,269 shares of our common stock. Of the 1,930,269 shares authorized under the 2011 Plan, no more than 965,134 shares will be available for grants of “full-value” awards, meaning awards other than stock options, SARs or other awards for which the recipient pays the exercise price. If an award under the 2011 Plan is canceled, forfeited, terminates or is settled in cash, the shares related to that award will not be treated as having been delivered under the 2011 Plan. For purposes of determining the number of shares available for grant as incentive stock options, only shares that are subject to an award that expires or is cancelled, forfeited or settled in cash shall be treated as not having been issued under the 2011 Plan.

Maximum Grants under the 2011 Plan .   For purposes of Section 162(m) of the Code, the maximum (i) number of our shares with respect to which stock options or SARs may be granted to any participant in any fiscal year is 193,027 shares, (ii) number of our shares of restricted stock that may be granted to any participant in any fiscal year is 193,027 shares, (iii) number of our shares with respect to which RSUs may be granted to any participant in any fiscal year is 193,027 shares, (iv) number of our shares with respect to which performance shares may be granted to any participant in any fiscal year is 193,027 shares, (v) amount of compensation that may be paid with respect to performance units or other cash or stock-based awards awarded to any participant in any fiscal year is $1,000,000 or a number of shares having a fair market value not in excess of that amount and (vi) dividend or dividend equivalent that may be paid to any one participant in any one fiscal year is $1,000,000.

Administration .  The 2011 Plan will be administered by our Compensation Committee or another committee selected by the Board of Directors, any of which we refer to herein as the “ Committee .”  The Committee has the full power to (i) select the employees, directors and consultants who will participate in the 2011 Plan, (ii) determine the size and types of awards, (iii) determine the terms and conditions of awards, (iv) construe and interpret the 2011 Plan and any award agreement or other instrument entered into under the 2011 Plan, (v) establish, amend and waive rules and regulations for the administration of the 2011 Plan and (vi) subject to certain limitations, amend the terms and conditions of outstanding awards. The Committee’s determinations and interpretations under the 2011 Plan are binding on all interested parties. The Committee is empowered to delegate its administrative duties and powers as it may deem advisable, to the extent permitted by law.  The number of shares of common stock that may be issued, or the amount of cash that may be paid, to an employee, director or consultant of the Company or any of its subsidiaries pursuant to the 2011 Plan is at the discretion of the Committee, and as such, cannot be determined in advance.

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Effective Date and Duration .  If approved by our stockholders, the 2011 Plan will become effective upon the First Closing, and will authorize the granting of awards for up to ten years. The 2011 Plan will remain in effect with respect to outstanding awards until no awards remain outstanding.

Amendment and Termination .  The 2011 Plan may be amended or terminated by our Board of Directors at any time and, subject to limitations under the 2011 Plan, the awards granted under the 2011 Plan may be amended by the Committee at any time, provided that no such action to the plan or an award may, without a participant’s written consent, adversely affect in any material way any previously granted award. No amendment that would require stockholder approval under NASDAQ’s listing standards or to comply with securities laws may become effective without stockholder approval. No amendment that would require stockholder approval under Code Section 162(m)’s requirements, NASDAQ’s listing standards or to comply with securities laws may become effective without stockholder approval. Amendment of the Plan without further shareholder approval also could jeopardize the Plan’s 162(m) status.

Change in Capitalization .  In the event of any equity restructuring, such as a stock dividend, stock split, spinoff, rights offering or recapitalization through a large, nonrecurring cash dividend, the Committee shall cause an equitable adjustment to be made (i) in the number and kind of shares of our common stock that may be delivered under the 2011 Plan, (ii) in the individual annual limitations on each type of award under the 2011 Plan and (iii) with respect to outstanding awards, in the number and kind of shares subject to outstanding awards, the exercise price, grant price or other price of shares subject to outstanding awards, any performance conditions relating to shares, the market price of shares, or per-share results and other terms and conditions of outstanding awards, in the case of (i), (ii) and (iii) to prevent dilution or enlargement of rights. In the event of any other change in corporate capitalization, such as a merger, consolidation or liquidation, the Committee may, in its sole discretion, cause an equitable adjustment as described in the foregoing sentence to be made, to prevent dilution or enlargement of rights.

Repricing .  Neither the Company nor the Committee may (i) reduce the exercise price of outstanding options (except to the extent described above in the event of an equity restructuring or other change in corporate capitalization), (ii) cancel options and grant substitute options with a lower exercise price or (iii) purchase outstanding underwater options from participants for cash.

Eligibility and Participation .  Eligible participants include all employees, directors and consultants of the Company and our subsidiaries, as determined by the Committee.

Termination of Employment or Service .  Each award agreement will set forth the participant’s rights with respect to the award following termination of employment with or service to the Company.

Change in Control .  Except as otherwise provided in a participant’s award agreement, upon the occurrence of a change in control (as defined in the 2011 Plan), unless otherwise specifically prohibited under applicable laws or by the rules and regulations of any governing governmental agencies or national securities exchanges, any and all outstanding options and SARs granted under the 2011 Plan will become immediately exercisable, any restriction imposed on restricted stock, RSUs and other awards granted under the 2011 Plan will lapse, and any and all performance shares, performance units and other awards granted under the 2011 Plan with performance conditions will be deemed earned at the target level, or, if no target level is specified, the maximum level.

Transferability .  Awards generally will be non-transferable except upon the death of a participant, although the Committee may permit a participant to transfer awards (for example, to family members or trusts for family members) subject to such conditions as the Committee may establish.

Deferrals .  The Committee may permit the deferral of vesting or settlement of an award and may authorize crediting of dividends or interest or their equivalents in connection with any such deferral. Any such deferral and crediting will be subject to the terms and conditions established by the Committee and any terms and conditions of the plan or arrangement under which the deferral is made.

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Types of Awards

The following is a general description of the types of awards that may be granted under the 2011 Plan. Terms and conditions of awards will be determined on a grant-by-grant basis by the Committee, subject to the limitations contained in the 2011 Plan.

Stock Options .  The Committee may grant incentive stock options (“ ISOs ”), nonqualified stock options (“ NQSOs ”) or a combination thereof under the 2011 Plan. The exercise price for each such award will be at least equal to 100% of the fair market value of a share of common stock on the date of grant (110% of fair market value in the case of an ISO granted to a person who owns more than 10% of the voting power of all classes of stock of the Company or any subsidiary). Options will expire at such times and will have such other terms and conditions as the Committee may determine at the time of grant; provided , however , that no option may be exercisable later than the tenth anniversary of its grant (fifth anniversary in the case of an ISO granted to a person who owns more than 10% of the voting power of all classes of stock of the Company or any subsidiary).  The exercise price of options granted under the 2011 Plan may be paid in cash, by tendering previously acquired shares of common stock having a fair market value equal to the exercise price, through broker-assisted cashless exercise or any other means permitted by the Committee consistent with applicable law or by a combination of any of the permitted methods. The Committee may also award dividend equivalent payments in connection with a stock option.

Stock Appreciation Rights .  SARs granted under the 2011 Plan may be in the form of freestanding SARs (SARs granted independently of any option), tandem SARs (SARS granted in connection with a related option) or a combination thereof. The grant price of a freestanding SAR will be equal to the fair market value of a share of common stock on the date of grant. The grant price of a tandem SAR will be equal to the exercise price of the related option. Freestanding SARs may be exercised upon such terms and conditions as are imposed by the Committee and set forth in the SAR award agreement. Tandem SARs may be exercised only with respect to the shares of common stock for which its related option is exercisable. Upon exercise of a SAR, a participant will receive the product of the excess of the fair market value of a share of common stock on the date of exercise over the grant price multiplied by the number of shares with respect to which the SAR is exercised. Payment upon SAR exercise may be in cash, in shares of common stock of equivalent value, or in some combination of cash and shares, as determined by the Committee. The Committee may also award dividend equivalent payments in connection with SARs.

Restricted Stock .  The Committee will be authorized to award restricted stock under the 2011 Plan. Restricted stock is an award that is non-transferable and subject to a substantial risk of forfeiture until vesting conditions, which can be related to continued service or other conditions established by the Committee, are satisfied. Prior to vesting, holders of restricted stock may receive dividends and voting rights. If the vesting conditions are not satisfied, the participant forfeits the shares.

Restricted Stock Units and Performance Shares .  The Committee will be authorized to award RSUs and performance shares under the 2011 Plan. RSUs and performance shares represent a right to receive a share of common stock, an equivalent amount of cash, or a combination of shares and cash, as the Committee may determine, if vesting conditions are satisfied. The initial value of an RSU or performance share granted under the 2011 Plan shall be at least equal to the fair market value of our common stock on the date the award is granted. The Committee may also award dividend equivalent payments in connection with such awards. RSUs may contain vesting conditions based on continued service or other conditions established by the Committee. Performance shares may contain vesting conditions based on attainment of performance goals established by the Committee in addition to service conditions.

Performance Units .  Performance units are awards that entitle a participant to receive shares of common stock, cash or a combination of shares and cash if certain performance conditions are satisfied. The amount received depends upon the value of the performance units and the number of performance units earned, each of which is determined by the Committee. The Committee may also award dividend equivalent payments in connection with such awards.

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Other Cash and Stock-Based Awards .  Other cash and stock-based awards are awards other than those described above, the terms and conditions of which are determined by the Committee. These awards may include, without limitation, the grant of shares of our common stock based on attainment of performance goals established by the Committee, the payment of shares as a bonus or in lieu of cash based on attainment of performance goals established by the Committee, and the payment of shares in lieu of cash under an incentive or bonus program. Payment under or settlement of any such awards will be made in such manner and at such times as the Committee may determine.

Dividend Equivalents .  Dividend equivalents granted to participants will represent a right to receive payments equivalent to dividends with respect to a specified number of shares.

Replacement Awards .  Replacement awards are awards issued in substitution of awards granted under equity-based incentive plans sponsored or maintained by an entity with which we engage in a merger, acquisition or other business transaction, pursuant to which awards relating to interests in such entity are outstanding immediately prior to such transaction. Replacement awards will have substantially the same terms and conditions as the award it replaces; provided , however , that the number of shares, the exercise price, grant price or other price of shares, any performance conditions or the market price of underlying shares or per-share results may differ from the awards they replace to the extent such differences are determined to be appropriate and equitable by the Committee, in its sole discretion.

Performance Goals

The Committee will have the discretion to designate any award under the 2011 Plan as a performance compensation award (a “ Performance Compensation Award ”). While awards in the form of stock options and SARs are intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee may treat certain other awards under the 2011 Plan as “performance-based compensation” and thus preserve deductibility by the Company for federal income tax purposes of such awards which are made to individuals who are “covered employees” as defined in Section 162(m) of the Code.

Each Performance Compensation Award will be payable only upon achievement over a specified performance period of a duration of at least one year of a pre-established objective performance goal established by the Committee for such period. The Committee may designate one or more performance criteria for purposes of establishing a performance goal with respect to Performance Compensation Awards made under the 2011 Plan. Performance goals will be chosen from among the following performance measures: earnings per share, economic value created, market share (actual or targeted growth), net income (before or after taxes), operating income, adjusted net income after capital charge, return on assets (actual or targeted growth), return on capital (actual or targeted growth), return on equity (actual or targeted growth), return on investment (actual or targeted growth), revenue (actual or targeted growth), cash flow, operating margin, share price, share price growth, total stockholder return, and strategic business criteria consisting of one or more objectives based on meeting specified market penetration goals, productivity measures, geographic business expansion goals, cost targets, customer satisfaction or employee satisfaction goals, goals relating to merger synergies, management of employment practices and employee benefits, or supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures. The targeted level or levels of performance with respect to such performance measures may be established at such levels and on such terms as the Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies.

The Committee may make adjustments in the terms and conditions of, and the criteria included in, awards in recognition of unusual or nonrecurring events, including, for example, events affecting us or our financial statements or changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2011 Plan. With respect to any awards intended to qualify as performance-based compensation under section 162(m) of the Code,

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any such adjustments shall be specified at such times and in such manner as will not cause such awards to fail to so qualify.

Certain U.S. Federal Income Tax Consequences

Set forth below is a discussion of certain United States federal income tax consequences with respect to certain awards that may be granted pursuant to the 2011 Plan. The following discussion is a brief summary only, and reference is made to the Code and the regulations and interpretations issued thereunder for a complete statement of all relevant federal tax consequences. This summary is not intended to be exhaustive and does not describe state, local or foreign tax consequences of participation in the 2011 Plan.

Incentive Stock Options.   In general, no taxable income is realized by a participant upon the grant of an ISO. If shares of common stock are issued to a participant pursuant to the exercise of an ISO, then, generally (i) the participant will not realize ordinary income with respect to the exercise of the option, (ii) upon sale of the underlying shares acquired upon the exercise of an ISO, any amount realized in excess of the exercise price paid for the shares will be taxed to the participant as capital gain and (iii) the Company will not be entitled to a deduction. The amount by which the fair market value of the stock on the exercise date of an ISO exceeds the purchase price generally will, however, constitute an item which increases the participant’s income for purposes of the alternative minimum tax. However, if the participant disposes of the shares acquired on exercise before the later of the second anniversary of the date of grant or one year after the receipt of the shares by the participant (a “ Disqualifying Disposition ”), the participant generally would include in ordinary income in the year of the Disqualifying Disposition an amount equal to the excess of the fair market value of the shares at the time of exercise (or, if less, the amount realized on the disposition of the shares), over the exercise price paid for the shares. If ordinary income is recognized due to a disqualifying disposition, the Company would generally be entitled to a deduction in the same amount. Subject to certain exceptions, an ISO generally will not be treated as an ISO if it is exercised more than three months following termination of employment. If an ISO is exercised at a time when it no longer qualifies as an ISO, it will be treated for tax purposes as a nonqualified stock option (“ NQSO ”) as discussed below.

Nonqualified Stock Options .  In general, no taxable income is realized by a participant upon the grant of an NQSO. Upon exercise of an NQSO, the participant generally would include in ordinary income at the time of exercise an amount equal to the excess, if any, of the fair market value of the shares at the time of exercise over the exercise price paid for the shares. At the time the participant recognizes ordinary income, the Company generally will be entitled to a deduction in the same amount. In the event of a subsequent sale of shares received upon the exercise of an NQSO, any appreciation after the date on which taxable income is realized by the participant in respect of the option exercise should be taxed as capital gain in an amount equal to the excess of the sales proceeds for the shares over the participant’s basis in such shares. The participant’s basis in the shares will generally equal the amount paid for the shares plus the amount included in ordinary income by the participant upon exercise of the NQSO.

Stock Appreciation Rights .  In general, the grant of a SAR will not result in income for the participant or in a tax deduction for the Company. Upon the settlement of a SAR, the participant will recognize ordinary income equal to the aggregate value of the payment received, and the Company generally will be entitled to a tax deduction at such time in the same amount.

Restricted Stock .  In general, a participant will not recognize any income upon the grant of restricted stock, unless the participant elects under Section 83(b) of the Code, within thirty days after such grant, to recognize ordinary income in an amount equal to the fair market value of the restricted stock at the time of grant, less any amount paid for the shares. If the election is made, the participant will not be allowed a deduction for amounts subsequently required to be returned to the Company. If the election is not made, the participant will generally recognize ordinary income on the date that the restrictions to which the restricted stock lapse, in an amount equal to the fair market value of such shares on such date, less any amount paid for the shares. At the time the participant recognizes ordinary income, the Company generally will be entitled to a deduction in the same amount. Generally, upon a sale or other disposition of

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restricted stock with respect to which the participant has recognized ordinary income (i.e., where a Section 83(b) election was previously made or the restrictions were previously removed), the participant will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or other disposition and the participant’s basis in such shares.

Restricted Stock Units and Other Awards .  Restricted stock units and other awards granted under the 2011 Plan are generally not subject to tax at the time of the award but are subject to ordinary income tax at the time of payment, whether paid in cash or shares of our common stock. With respect to such awards, we generally will be allowed a tax deduction for the amount included in the taxable income of the participant in the taxable year of inclusion.

New Plan Benefits

If approved by our stockholders, participants in the 2011 Plan will be eligible for annual long-term awards which may include performance shares, stock options and restricted stock (or other awards permitted under the 2011 Plan). The level and types of awards will be fixed by the Committee in light of the participants’ targeted long-term incentive level. The Committee may impose additional conditions or restrictions to the vesting of such awards as it deems appropriate, including, but not limited to, the achievement of performance goals based on one or more business criteria.

Awards under the 2011 Plan are made in the discretion of the Committee and therefore are not determinable at this time. Moreover, the ultimate value of any grants that are made will depend on the value of the underlying shares of common stock at the time of settlement, which likewise is not determinable at this time.

Vote Required

The votes of the holders of at least a majority of the votes present in person or by proxy at the Special Meeting or adjournment thereof is required to approve the 2011 Plan.  Properly executed proxies will be voted by the individuals named on the proxy card in accordance with the stockholder’s instructions.  Where properly executed proxies are returned to us with no specific instruction as to how to vote on the 2011 Plan at the special meeting, the person named in the proxy will vote the shares FOR the 2011 Plan.  Abstentions will have the effect of a vote AGAINST the 2011 Plan.  Broker non-votes will have no effect on the outcome of the 2011 Plan Proposal.  The implementation of the 2011 Plan is conditioned upon stockholder approval of the Amendment described in Proposal 1 and the Change of Control Issuance described in Proposal 2.  As such, if the 2011 Plan is approved and either or both of the Amendment and the Change of Control Issuance is not approved, the 2011 Plan will not be implemented.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE 2011 PLAN.

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THE ADJOURNMENT

(PROPOSAL 4)

In the event there are not sufficient votes at the time of the Special Meeting to approve the Amendment, Change of Control Issuance, or the 2011 Plan, our Board of Directors may propose to adjourn the Special Meeting to a later date or dates in order to permit the solicitation of additional proxies. Pursuant to the Texas Business Organizations Code, the Board of Directors is not required to fix a new record date to determine the stockholders entitled to vote at the adjourned meeting.  If the Board of Directors does not fix a new record date, it is not necessary to give any notice of the time and place of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken.  If a new record date is fixed, notice of the adjourned meeting shall be given as in the case of an original meeting.

In order to permit proxies that have been received by us at the time of the Special Meeting to be voted for an adjournment, if necessary, we have submitted the Adjournment to you as a separate matter for your consideration (the “ Adjournment Proposal ”). If approved, the Adjournment Proposal will authorize the holder of any proxy solicited by our Board of Directors to vote in favor of adjourning the Special Meeting and any later adjournments. If our stockholders approve the Adjournment, we could adjourn the Special Meeting, and any adjourned session of the Special Meeting, to use the additional time to solicit additional proxies in favor of the other proposals, including the solicitation of proxies from our stockholders who have previously voted against the other proposals. Among other things, approval of the Adjournment Proposal could mean that, even if proxies representing a sufficient number of votes against the proposals relating to the Amendment, the Change of Control Issuance and the 2011 Plan have been received, we could adjourn the Special Meeting without a vote on the proposal and seek to convince the holders of those shares to change their votes to votes in favor of the proposals.

Vote Required

The votes of the holders of at least a majority of the votes present in person or by proxy at the Special Meeting or adjournment thereof is required to approve the Adjournment.  Properly executed proxies will be voted by the individuals named on the proxy card in accordance with the stockholder’s instructions. Where properly executed proxies are returned to us with no specific instruction as to how to vote on the Adjournment at the Special Meeting, the persons named in the proxy will vote the shares FOR the Adjournment.   Abstentions will have the effect of a vote AGAINST the Adjournment.   Broker non-votes will have no effect on the outcome of the Adjournment.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY.

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BENEFICIAL OWNERSHIP OF COMMON STOCK BY CERTAIN BENEFICIAL OWNERS

AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of the voting record date, certain information as to the common stock beneficially owned by (i) each person or entity, including any “group” as that term is used in Section 13(d)(3) of the 1934 Act, who or which was known to the Company to be the beneficial owner of more than 5% of the issued and outstanding common stock, (ii) the directors of the Company, (iii) certain executive officers of the Company named in the Summary Compensation Table, and (iv) all directors and executive officers of the Company and the Bank as a group.