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BEAR STATE FINANCIAL, INC. 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
bsf20150930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 ☒

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

 

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

OR

 

 ☐

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

 

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to _______________

 

Commission File No.: 0-28312

 

                    Bear State Financial, Inc.                

(Exact name of registrant as specified in its charter)

 

              Arkansas              

 

 

 

                    71-0785261                      

(State or other jurisdiction

 

 

 

(I.R.S. Employer

of incorporation or organization)       Identification Number)
         
900 South Shackleford Rd, Suite 401        
      Little Rock, Arkansas                      72211         
(Address of principal executive offices)       (Zip Code)

 

Registrant's telephone number, including area code: (501) 320-4904

 

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

                 Large Accelerated Filer  ☐      

Accelerated Filer  ☐      

Non-accelerated Filer  ☐      

Smaller reporting company  ☒ 

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 10, 2015, there were issued and outstanding 37,959,829 shares of the Registrant's Common Stock, par value $.01 per share.

 

 
 

 

 

BEAR STATE FINANCIAL, INC.

 

TABLE OF CONTENTS

 

Part I.

Financial Information

Page

     

Item 1.

Financial Statements

 
     
 

Condensed Consolidated Statements of Financial Condition

1

     
 

Condensed Consolidated Statements of Income

2

     
 

Condensed Consolidated Statements of Comprehensive Income

3

     
 

Condensed Consolidated Statement of Stockholders’ Equity

4

     
 

Condensed Consolidated Statements of Cash Flows

5

     
 

Notes to Unaudited Condensed Consolidated Financial Statements

7

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

     

Item 4.

Controls and Procedures

47

     

Part II.

Other Information

 
     

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 6.

Exhibits

48

     

Signatures

   
     

Exhibit Index

   

 

 
 

 

 

Part I.   Financial Information

 

Item 1.   Financial Statements 

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

(Unaudited)

 

 

 

 

September 30,

2015

   

December 31,

2014

 
ASSETS                
                 

Cash and cash equivalents

  $ 58,746     $ 113,086  

Interest-bearing time deposits in banks

    10,930       12,421  

Investment securities available for sale

    164,564       174,218  

Other investment securities, at cost

    8,197       5,864  

Loans receivable, net of allowance of $13,975 and $13,660, respectively

    1,063,100       1,041,222  

Loans held for sale

    8,032       6,409  

Accrued interest receivable

    5,020       4,485  

Real estate owned - net

    2,290       4,792  

Office properties and equipment - net

    51,768       50,332  

Cash surrender value of life insurance

    45,998       44,130  

Goodwill

    25,717       25,717  

Core deposit intangible - net

    6,869       7,338  

Deferred tax asset, net

    17,121       20,697  

Prepaid expenses and other assets

    2,373       3,884  
                 

TOTAL

  $ 1,470,725     $ 1,514,595  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

LIABILITIES:

               

Noninterest bearing deposits

  $ 173,525     $ 180,136  

Interest bearing deposits

    1,035,651       1,083,661  

Total deposits

    1,209,176       1,263,797  

Short term borrowings

    10,366       12,083  

Other borrowings

    68,300       61,258  

Other liabilities

    4,213       7,003  
                 

Total liabilities

    1,292,055       1,344,141  
                 

STOCKHOLDERS’ EQUITY:

               

Preferred stock, $0.01 par value—5,000,000 shares authorized; none issued at September 30, 2015 and December 31, 2014

    --       --  

Common stock, $0.01 par value—100,000,000 shares authorized; 33,349,512 and 33,365,845 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

    333       334  

Additional paid-in capital

    169,570       169,543  

Accumulated other comprehensive income

    753       577  

Retained earnings

    8,014       --  
                 

Total stockholders’ equity

    178,670       170,454  
                 

TOTAL

  $ 1,470,725     $ 1,514,595  

 

See notes to unaudited condensed consolidated financial statements.

 

 
1

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except earnings per share)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2015

   

September 30,

2014

   

September 30,

2015

   

September 30,

2014

 

INTEREST INCOME:

                               

Loans receivable

  $ 12,829     $ 15,390     $ 38,610     $ 25,381  

Investment securities:

                               

Taxable

    337       272       979       777  

Nontaxable

    516       456       1,546       1,069  

Other

    67       105       243       321  

Total interest income

    13,749       16,223       41,378       27,548  
                                 

INTEREST EXPENSE:

                               

Deposits

    1,265       1,320       3,853       3,174  

Other borrowings

    264       247       767       334  
                                 

Total interest expense

    1,529       1,567       4,620       3,508  
                                 

NET INTEREST INCOME

    12,220       14,656       36,758       24,040  
                                 

PROVISION FOR LOAN LOSSES

    331       600       931       830  
                                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    11,889       14,056       35,827       23,210  
                                 

NONINTEREST INCOME:

                               

Net gain on sales of investment securities

    --       30       88       30  

Deposit fee income

    1,926       1,956       5,569       3,445  

Earnings on life insurance policies

    357       349       1,096       758  

Gain on sale of loans

    833       968       2,359       1,923  

Other

    202       328       715       497  
                                 

Total noninterest income

    3,318       3,631       9,827       6,653  
                                 

NONINTEREST EXPENSES:

                               

Salaries and employee benefits

    5,518       6,261       17,521       15,864  

Net occupancy expense

    1,475       1,569       4,273       2,850  

Real estate owned, net

    (341 )     650       (431 )     1,458  

Amortization of intangible assets

    156       157       469       183  

Data processing

    1,103       4,177       3,814       5,159  

Professional fees

    133       213       616       644  

Advertising and public relations

    510       494       1,764       795  

Postage and supplies

    244       263       809       466  

Other

    1,667       1,540       5,138       3,264  
                                 

Total noninterest expenses

    10,465       15,324       33,973       30,683  
                                 

INCOME (LOSS) BEFORE INCOME TAXES

    4,742       2,363       11,681       (820 )
                                 

INCOME TAX PROVISION (BENEFIT)

    1,529       (20,312 )     3,667       (20,312 )
                                 

NET INCOME

  $ 3,213     $ 22,675     $ 8,014     $ 19,492  
                                 

Basic earnings per common share

  $ 0.10     $ 0.68     $ 0.24     $ 0.73  
                                 

Diluted earnings per common share

  $ 0.10     $ 0.68     $ 0.24     $ 0.71  

 

See notes to unaudited condensed consolidated financial statements.

 

 
2

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2015

   

September 30,

2014

   

September 30,

2015

   

September 30,

2014

 
                                 

Net income

  $ 3,213     $ 22,675     $ 8,014     $ 19,492  

Other comprehensive income (loss):

                               

Unrealized holding gains (losses) on investment securities arising during the period

    1,159       (27 )     373       1,272  

Less: reclassification adjustments for realized gain included in net income

    --       (30 )     (88 )     (30 )

Other comprehensive income (loss), before tax effect

    1,159       (57 )     285       1,242  

Tax effect

    (444 )     (296 )     (109 )     (296 )

Other comprehensive income (loss)

    715       (353 )     176       946  

COMPREHENSIVE INCOME

  $ 3,928     $ 22,322     $ 8,190     $ 20,438  

 

See notes to unaudited condensed consolidated financial statements.

 

 
3

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(In thousands, except share data)

(Unaudited)

 

   

Issued

Common Stock

   

Additional

Paid-

     

Accumulated
Other 

Comprehensive

      Retained       

Total

Stockholders’

 
   

Shares

   

Amount

     

In Capital 

     

Income 

     

Earnings 

     

  Equity

 

BALANCE – January 1, 2015

    33,365,845     $ 334     $ 169,543     $ 577     $ --     $ 170,454  
                                                 

Net income

    --       --       --       --       8,014       8,014  

Other comprehensive income

    --       --       --       176       --       176  

Shares issued – option exercises

    334       --       2       --       --       2  

Shares issued – restricted stock unit vesting

    12,008       --       --       --       --       --  

Stock compensation

    --       --       280       --       --       280  

Repurchase of common stock

    (28,675 )     (1 )     (255 )     --       --       (256 )
                                                 

BALANCE – September 30, 2015

    33,349,512     $ 333     $ 169,570     $ 753     $ 8,014     $ 178,670  

 

See notes to unaudited condensed consolidated financial statements.

 

 
4

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended

September 30,

 
   

2015

   

2014

 
                 

OPERATING ACTIVITIES:

               

Net income

  $ 8,014     $ 19,492  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Provision for loan losses

    931       830  

Provision for real estate losses

    3       1,513  

Deferred tax provision (benefit)

    3,590       (773 )

Deferred tax valuation allowance

    (120 )     (19,539 )

Net amortization of premiums on investment securities

    332       111  

Federal Home Loan Bank stock dividends

    (6 )     (6 )

Gain on sale of fixed assets, net

    --       (12 )

Gain on sale of real estate owned, net

    (583 )     (188 )

Gain on sale of investment securities, net

    (88 )     (30 )

Originations of loans held for sale

    (85,671 )     (73,423 )

Proceeds from sales of loans held for sale

    86,407       73,682  

Gain on sale of loans originated to sell

    (2,359 )     (1,923 )

Depreciation

    2,117       1,524  

Amortization of deferred loan costs, net

    241       65  

Accretion of purchased loans, net

    (2,636 )     (2,927 )

Amortization of other intangible assets

    469       183  

Stock compensation

    280       328  

Earnings on life insurance policies

    (1,096 )     (758 )

Changes in operating assets and liabilities:

               

Accrued interest receivable

    (535 )     (618 )

Prepaid expenses and other assets

    1,535       (398 )

Other liabilities

    (1,182 )     (66 )
                 

Net cash provided by (used in) operating activities

    9,643       (2,933 )
                 

INVESTING ACTIVITIES:

               

Cash paid for purchase of FNSC, net of cash received

    --       (8,985 )

Net decrease in federal funds sold

    --       32,775  

Redemptions of interest-bearing time deposits in banks

    1,491       9,458  

Purchases of investment securities available for sale (“AFS”)

    (32,387 )     (9,280 )

Proceeds from sales of investment securities AFS

    2,082       3,875  

Proceeds from maturities/calls/paydowns of investment securities AFS

    38,392       25,682  

Redemptions of Federal Home Loan Bank stock

    605       1,170  

Purchases of Federal Home Loan Bank stock

    (443 )     (331 )

Redemptions of Federal Reserve Bank stock

    907       --  

Purchases of Federal Reserve Bank stock

    (3,396 )     --  

Loan repayments (originations), net

    (20,766 )     (48,919 )

Loan participations purchased

    (475 )     (25,286 )

Proceeds from sales of real estate owned

    3,882       3,138  

Proceeds from sales of office properties and equipment

    --       377  

Purchases of office properties and equipment

    (3,553 )     (1,803 )

Purchases of bank owned life insurance

    (772 )     (16,628 )
                 

Net cash used in investing activities

    (14,433 )     (34,757 )

 

 

(Continued)

 

 
5

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended

September 30,

 
   

2015

   

2014

 

FINANCING ACTIVITIES:

               

Net increase (decrease) in deposits

  $ (54,621 )   $ 44,043  

Proceeds from advances from Federal Home Loan Bank

    31,551       22,000  

Repayment of advances from Federal Home Loan Bank

    (25,189 )     (537 )

Net increase in other borrowings

    680       14,400  

Net decrease short term borrowings

    (1,717 )     (2,214 )

Proceeds from private placement

    --       20,000  

Proceeds from exercise of warrants

    --       3,590  

Proceeds from exercise of stock options

    2       24  

Repurchase of common stock

    (256 )     --  
                 

Net cash (used in) provided by financing activities

    (49,550 )     101,306  
                 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (54,340 )     63,616  
                 

CASH AND CASH EQUIVALENTS:

               

Beginning of period

    113,086       23,970  
                 

End of period

  $ 58,746     $ 87,586  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid for interest

  $ 4,650     $ 3,400  
                 

Cash received for income tax refunds

  $ 2,135     $ --  
                 
                 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

               

Real estate and other assets acquired in settlement of loans

  $ 1,069     $ 1,313  
                 

Sales of real estate owned financed by the Bank

  $ 242     $ --  
                 

Investment securities purchased—not settled

  $ --     $ 624  
                 

Common stock issued for purchase of FNSC

  $ --     $ 49,852  

 

See notes to unaudited condensed consolidated financial statements.  

(Concluded)

 

 
6

 

 

BEAR STATE FINANCIAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations — Bear State Financial, Inc. (the “Company”) is a bank holding company headquartered in Little Rock, Arkansas.  Its subsidiary bank, Bear State Bank, N.A. (the “Bank”), is a community oriented national bank providing a broad line of financial products to individuals and business customers.  The Bank operates 43 branches and three loan production offices throughout Arkansas and Southeast Oklahoma.

 

The Company completed its merger with First National Security Company (“FNSC”) and the accompanying acquisition of FNSC’s subsidiaries, including First National Bank of Hot Springs (“First National”) and Heritage Bank, N.A. (“Heritage Bank”), on June 13, 2014. On February 13, 2015, First Federal Bank, First National and Heritage Bank were consolidated into a single charter forming Bear State Bank, N.A. Any reference in this Quarterly Report on Form 10-Q to the “Bank” shall mean Bear State Bank, N.A., if such reference pertains to the time period after giving effect to the charter consolidation and shall mean each of First Federal Bank, First National and Heritage Bank, collectively, if such reference pertains to the time period before giving effect to the charter consolidation.

 

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated financial statements also include the accounts of First Harrison Service Corporation (“FHSC”), an inactive, indirect subsidiary of the Company. Intercompany transactions have been eliminated in consolidation.

 

Operating SegmentsThe Company consolidated its subsidiary banks into one bank during the first quarter of 2015 and its operations are organized on a regional basis upon which management makes decisions regarding how to allocate resources and assess performance. Each of the regions provides a group of similar community banking services, including such products and services as loans, time deposits, and checking and savings accounts. The individual regions have similar operating and economic characteristics and will be reported as one aggregated operating segment.

 

Basis of PresentationThe accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. However, such information reflects all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Those adjusting entries consist only of normal recurring adjustments.

 

Certain reclassifications of prior period amounts have been made to conform with the current period presentation. These reclassifications had no impact on previously reported net income.

 

The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015. The unaudited condensed consolidated financial statements of the Company and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2014, contained in the Company’s 2014 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet of the Company as of December 31, 2014, included herein has been derived from the audited consolidated balance sheet of the Company as of that date.

 

2.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (Topic 310-40): Receivables – Troubled Debt Restructurings by Creditors, which clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. The Company adopted this ASU effective January 1, 2015 using the prospective transition method. The adoption of this ASU did not have a material impact on the Company’s financial statements.

 

 
7

 

 

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

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  At its July 9, 2015 meeting, the FASB decided to delay the effective date of the revenue recognition standard by one year. ASU 2014-09 is now effective for annual and interim reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the impact of this ASU on its financial statements.

 

On January 9, 2015, the FASB issued ASU 2015-01, Income Statement-Extraordinary and Unusual Items, to simplify income statement classification by removing the concept of extraordinary items from U.S. GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained and expanded to include items that are both unusual and infrequent. The standard is effective for periods beginning after December 15, 2015. Early adoption is permitted, but only as of the beginning of the fiscal year of adoption. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

On February 18, 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis. The new guidance applies to entities in all industries and the amendments significantly change the consolidation analysis required under U.S. GAAP. This ASU makes targeted amendments to the current consolidation guidance in the investment management industry and ends the deferral granted to investment companies from applying the variable interest entities guidance. The standard is effective for public business entities for annual periods beginning after December 15, 2015. Early adoption is allowed, including in any interim period. The Company will adopt this ASU effective January 1, 2016. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is allowed, including in any interim period. The Company will adopt this ASU effective January 1, 2016. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share. This permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. Currently, there is diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this ASU remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years with early adoption. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

 
8

 

 

In September 2015, the FASB issued update ASU No. 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments (Topic 805). This update applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

3.

ACQUISITIONS

 

First National Security Company

On June 13, 2014, the Company completed its acquisition of FNSC whereby FNSC merged with and into the Company in a transaction valued at approximately $124.4 million. In connection with the merger, former FNSC stockholders received in the aggregate 6,252,400 shares of Company common stock, valued at approximately $50.4 million and $74 million in cash in exchange for 100% of the outstanding shares of FNSC common stock. The Company paid $50 million of the total cash consideration and FNSC paid $24 million of the total cash consideration to its stockholders from funds it received immediately prior to the closing of the acquisition from its subsidiary bank, First National Bank. The acquisition expanded the Company’s market into Northeast and Southwest Arkansas and further diversified the Company’s loan, customer and deposit base.

 

The following table provides a summary of the assets acquired and liabilities assumed as recorded by FNSC, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The goodwill recognized by the Company will not be deductible for income tax purposes.

 

 
9

 

 

   

June 13, 2014

 
   

As Recorded

by FNSC

   

Fair Value
Adjustments

   

As Recorded
by the
Company

 
   

(Dollars in thousands)

 

Assets acquired:

                       

Cash and cash equivalents

  $ 41,015     $ --     $ 41,015  

Federal funds sold

    43,025       --       43,025  

Investment securities available for sale

    138,140       --       138,140  

Other investment securities, at cost

    7,480       --       7,480  

Loans receivable

    622,758       (17,294 )     605,464  

Allowance for loan losses

    (13,179 )     13,179       --  

Loans receivable, net

    609,579       (4,115 )     605,464  

Accrued interest receivable

    2,954       --       2,954  

Real estate owned - net

    69       --       69  

Office properties and equipment, net

    33,074       (2,775 )     30,299  

Cash surrender value of life insurance

    1,935       --       1,935  

Core deposit intangible

    568       7,109       7,677  

Deferred tax asset, net

    542       (51 )     491  

Prepaid expenses and other assets

    2,899       362       3,261  

Total assets acquired

    881,280       530       881,810  

Liabilities assumed:

                       

Deposits – noninterest bearing

    151,331       --       151,331  

Deposits – interest bearing

    611,841       366       612,207  

Total deposits

    763,172       366       763,538  

Short term borrowings

    14,295       --       14,295  

Other borrowings

    27,434       64       27,498  

Other liabilities

    1,802       --       1,802  

Total liabilities assumed

    806,703       430       807,133  

Net assets acquired

  $ 74,577     $ 100       74,677  

Consideration paid:

                       

Cash

                    50,000  

Common stock

                    50,394  

Total consideration paid

                    100,394  
                         

Goodwill

                  $ 25,717  

 

The following is a description of the fair value adjustments used to determine the fair values of assets and liabilities presented above:

 

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The fair value adjustment reflects the elimination of the recorded allowance for loan and lease losses.

 

Office properties and equipment – Office properties and equipment were acquired from FNSC with a $2.8 million adjustment to market value. This represents the difference between current appraisal value completed in connection with the acquisition and FNSC’s book value at the time of acquisition.

 

Deferred tax asset – Deferred income tax assets and liabilities are recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes, at the Company’s statutory federal and state income tax rate of 38.29%.

 

Core deposit intangible – This intangible asset represents the value of the relationships that FNSC had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded a $7.7 million core deposit intangible with a weighted average life of 12.3 years.

 

 
10

 

 

Deposits – The weighted average interest rate of FNSC’s time deposits was estimated to be slightly above the current market rates, resulting in a $366,000 fair value adjustment for time deposits.

 

Other borrowings – The fair value of Federal Home Loan Bank of Dallas (“FHLB”) borrowed funds is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

 

4.

INVESTMENT SECURITIES AVAILABLE FOR SALE

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

 

   

September 30, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. Treasuries and Government agencies

  $ 48,835     $ 48     $ (16 )   $ 48,867  

Municipal securities

    63,601       488       (220 )     63,869  

Mortgage-backed securities

    50,908       986       (66 )     51,828  
                                 

Total

  $ 163,344     $ 1,522     $ (302 )   $ 164,564  

 

   

December 31, 2014

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. Treasuries and Government agencies

  $ 77,550     $ 7     $ (225 )   $ 77,332  

Municipal securities

    58,812       456       (188 )     59,080  

Mortgage-backed securities

    36,920       900       (14 )     37,806  
                                 

Total

  $ 173,282     $ 1,363     $ (427 )   $ 174,218  

 

 
11

 

 

The following tables summarize the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired (“OTTI”), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

   

September 30, 2015

 
   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. Treasuries and Government agencies

  $ 18,995     $ 7     $ 202     $ 9     $ 19,197     $ 16  

Municipal securities

    14,762       205       1,258       15       16,020       220  

Mortgage-backed securities

    15,726       65       9       1       15,735       66  
                                                 

Total

  $ 49,483     $ 277     $ 1,469     $ 25     $ 50,952     $ 302  

 

   

December 31, 2014

 
   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. Treasuries and Government agencies

  $ 75,985     $ 225     $ --     $ --     $ 75,985     $ 225  

Municipal securities

    16,353       171       1,028       17       17,381       188  

Mortgage-backed securities

    2,102       14       --       --       2,102       14  
                                                 

Total

  $ 94,440     $ 410     $ 1,028     $ 17     $ 95,468     $ 427  

 

On a quarterly basis, management conducts a formal review of securities for the presence of OTTI.  Management assesses whether an OTTI is present when the fair value of a security is less than its amortized cost basis at the balance sheet date.  For such securities, OTTI is considered to have occurred if the Company intends to sell the security, if it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis or if the present values of expected cash flows is not sufficient to recover the entire amortized cost.

 

The unrealized losses are primarily a result of increases in market yields from the time of purchase.  In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as OTTI.  Additionally, the unrealized losses are also considered temporary because scheduled coupon payments have been made. It is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount.

 

The Company has pledged investment securities with carrying values of approximately $110.3 million at September 30, 2015 and $119.0 million at December 31, 2014, as collateral for certain deposits in excess of $250,000 and for other purposes, including investment securities with carrying values of approximately $10.4 million at September 30, 2015 and $2.1 million at December 31, 2014, for securities sold under agreements to repurchase.

 

 
12

 

 

The following table sets forth the amount (dollars in thousands) of investment securities available for sale that contractually mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2015. Weighted average yields for municipal obligations have not been adjusted to a tax-equivalent basis. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligation without prepayment penalties.

 

   

September 30, 2015

 
   

Amortized

   

Fair

   

Weighted

 
   

Cost

   

Value

   

Average Rate

 
                         

Within one year

  $ 20,235     $ 20,231       0.64%  

Due from one year to five years

    50,528       50,681       1.17%  

Due from five years to ten years

    18,776       19,011       2.91%  

Due after ten years

    22,897       22,813       3.14%  
      112,436       112,736       1.77%  

Mortgage-backed securities

    50,908       51,828       2.45%  

Total

  $ 163,344     $ 164,564       1.98%  

 

As of September 30, 2015 and December 31, 2014, investments with amortized cost totaling approximately $66.5 million and $73.1 million, respectively, have call options held by the issuer, of which approximately $23.8 million and $35.0 million, respectively, are or were callable within one year.

 

Sales of investment securities available for sale are summarized as follows (in thousands):

 

   

Nine Months Ended

September 30,

 
   

2015

   

2014

 
                 

Sales proceeds

  $ 2,082     $ 3,875  
                 

Gross realized gains

  $ 88     $ 30  

Gross realized losses

    --       --  

Net gains on sales of investment securities

  $ 88     $ 30  

 

 

5.

LOANS RECEIVABLE

Loans receivable consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

 

   

September 30,

2015

   

December 31,

2014

 

Real estate:

               

One- to four-family residential

  $ 309,658     $ 320,489  

Multifamily residential

    53,133       45,181  

Nonfarm nonresidential

    347,911       369,974  

Farmland

    53,192       47,199  

Construction and land development

    93,688       98,594  

Commercial

    186,772       139,871  

Consumer

    32,428       33,809  

Total loans receivable

    1,076,782       1,055,117  

Unearned discounts and net deferred loan costs

    293       (235 )

Allowance for loan and lease losses

    (13,975 )     (13,660 )
                 

Loans receivable—net

  $ 1,063,100     $ 1,041,222  

 

Loan Origination and Underwriting – The Bank employs several tools to manage risk in its loan portfolio. Prior to origination, a borrower’s ability to repay is analyzed by reviewing financial information with a comparison of the sustainability of these cash flows to the proposed loan terms, with consideration given to possible changes in underlying business and economic conditions. The financial strength and support offered by any guarantors to the loan is evaluated and any collateral offered is assessed using internal and external valuation resources. Finally, the credit request is compared against the Bank’s written and Board approved lending policies and standards. The ongoing risk in the loan portfolio is managed through regularly reviewing loans to assess key credit elements, providing for an adequate allowance for loan losses and diversifying the portfolio based on certain metrics including industry type, loan purpose and underlying source of repayment.

 

 
13

 

 

Real Estate Loans – The real estate loan portfolio consists primarily of single family residential, commercial real estate and construction loans. Loans in this category are differentiated by whether the property owner or parties unrelated to the borrower occupy the property. This difference can directly affect the sensitivity of the source of loan repayment to changes in interest rates and market conditions, which can impact the underlying collateral value. Therefore, the analysis of these credits focuses on current and forecasted economic trends in certain sub-markets, including residential, industrial, retail, office and multi-family segments. Changes in these segments are influenced by both local and national cycles, which may fluctuate in both similar and opposing directions and sustain for varying durations. These differences provide the Bank with opportunities for diversification of loans by property type, geography and other factors.

 

Commercial Loans – This portfolio includes loans with funds used for commercial purposes including loans to finance enterprise, including agricultural, working capital needs; equipment purchases; accounts receivable and inventory and other similar business needs. The risk of loans in this category is driven by the cash flow and creditworthiness of the borrowers, the monitoring of which occurs through the ongoing analysis of updated and interim financial information. Also, the terms of these loans are generally shorter than credits secured by real estate, helping to reduce the impact of changes in interest rates on the Bank’s interest rate sensitivity position.

 

Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of such loans at September 30, 2015 and December 31, 2014 were $17.7 million and $23.5 million, respectively. Servicing loans for others generally consists of collecting payments and disbursing payments to investors. Servicing income for the periods ended September 30, 2015 and December 31, 2014 was not significant.

 

As of September 30, 2015 and December 31, 2014, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $34.7 million and $41.4 million, respectively, were held in custody by the FHLB and were pledged for outstanding advances or available for future advances. The Bank also pledged its remaining loans at September 30, 2015 and certain of its remaining loans at December 31, 2014 under a blanket lien with the FHLB.

 

As of September 30, 2015, the Bank did not have any loans pledged with the Federal Reserve Bank (“FRB”). At December 31, 2014, qualifying loans collateralized by commercial real estate with balances of $6.8 million were pledged with the FRB. No FRB borrowings were outstanding at September 30, 2015 or December 31, 2014.

 

The Company evaluated $583.6 million of net loans ($595.1 million gross loans less $11.5 million discount) purchased in conjunction with the acquisition of FNSC in 2014 in accordance with the provisions of FASB ASC Topic 310-20,  Nonrefundable Fees and Other Costs . The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method.

 

The Company evaluated $21.1 million of net loans ($26.9 million gross loans less $5.8 million discount) purchased in conjunction with the acquisition of FNSC in 2014 in accordance with the provisions of FASB ASC Topic 310-30,  Loans and Debt Securities Acquired with Deteriorated Credit Quality. The following table reflects the carrying amount of those purchased credit impaired (“PCI”) loans (in thousands):

 

   

September 30,

2015

   

June 13,

2014

 

One- to four-family residential

  $ 3,963     $ 4,728  

Nonfarm nonresidential

    10,035       10,790  

Farmland

    80       95  

Construction and land development

    2,242       3,432  

Commercial

    1,020       1,882  

Consumer

    76       178  

Total carrying value of PCI loans

  $ 17,416     $ 21,105  

Outstanding principal balance of PCI loans

  $ 21,732     $ 26,942  

 

 
14

 

 

The following table reflects the carrying amount of the fair value adjustments for PCI loans as of June 13, 2014 (in thousands).

 

 

Contractually required principal and interest

  $ 29,704  

Nonaccretable differences

    (6,293 )

Cash flows expected to be collected

    23,411  

Accretable differences

    (2,306 )

Day 1 Fair Value

  $ 21,105  

 

The following table documents changes as of September 30, 2015 and 2014, to the amount of accretable yield (in thousands). 

 

   

2015

   

2014

 

Balance at January 1

  $