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BEAR STATE FINANCIAL, INC. 10-Q 2016

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
bsf20160818_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, 2016  
     
  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 605

 

 

 

 

Little Rock, Arkansas

 

72211

 

 

(Address of principal executive offices)

 

(Zip Code)

 

 

Registrant's telephone number, including area code: (501) 975-6033

 

 

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 ☐

 

 

(Do not check if a 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 October 31, 2016, there were issued and outstanding 37,616,931 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

31

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

     

Item 4.

Controls and Procedures

46

     

Part II.

Other Information

 
     

Item 1.

Legal Proceedings

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 6.

Exhibits

46

     

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,

2016

   

December 31,

2015

 

ASSETS

               

Cash and cash equivalents

  $ 86,887     $ 52,131  

Interest-bearing time deposits in banks

    4,820       10,930  

Federal funds sold

    --       18  

Investment securities—

               

Available for sale, at fair value

    186,319       198,585  

Held to maturity, at amortized cost

    11,351       --  

Other investment securities, at cost

    11,838       9,563  

Loans receivable, net of allowance of $15,112 and $14,550, respectively

    1,500,054       1,444,102  

Loans held for sale

    13,995       7,326  

Accrued interest receivable

    6,694       6,157  

Real estate owned - net

    1,576       3,642  

Office properties and equipment – net

    55,052       63,641  

Office properties and equipment held for sale

    5,554       --  

Cash surrender value of life insurance

    56,849       52,602  

Goodwill

    40,196       40,196  

Core deposit intangibles – net

    10,608       11,374  

Deferred tax asset, net

    11,752       16,713  

Prepaid expenses and other assets

    4,393       3,236  
                 

TOTAL

  $ 2,007,938     $ 1,920,216  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

LIABILITIES:

               

Noninterest bearing deposits

  $ 239,831     $ 234,879  

Interest bearing deposits

    1,413,692       1,372,804  

Total deposits

    1,653,523       1,607,683  

Short term borrowings

    13,511       12,075  

Other borrowings

    102,656       72,380  

Other liabilities

    5,845       4,921  
                 

Total liabilities

    1,775,535       1,697,059  
                 

STOCKHOLDERS’ EQUITY:

               

Preferred stock, $0.01 par value—5,000,000 shares authorized; none issued at September 30, 2016 or December 31, 2015

    --       --  

Common stock, $0.01 par value—100,000,000 shares authorized; 37,600,986 and 37,987,722 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

    376       380  

Additional paid-in capital

    209,131       211,817  

Accumulated other comprehensive income

    1,575       386  

Retained earnings

    21,321       10,574  
                 

Total stockholders’ equity

    232,403       223,157  
                 

TOTAL

  $ 2,007,938     $ 1,920,216  

 

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,

   

September 30,

   

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 

INTEREST INCOME:

                               

Loans receivable

  $ 17,808     $ 12,829     $ 53,012     $ 38,610  

Investment securities:

                               

Taxable

    467       337       1,477       979  

Nontaxable

    508       516       1,456       1,546  

Other

    66       67       230       243  

Total interest income

    18,849       13,749       56,175       41,378  
                                 

INTEREST EXPENSE:

                               

Deposits

    1,662       1,265       4,785       3,853  

Other borrowings

    352       264       1,027       767  
                                 

Total interest expense

    2,014       1,529       5,812       4,620  
                                 

NET INTEREST INCOME

    16,835       12,220       50,363       36,758  
                                 

PROVISION FOR LOAN LOSSES

    643       331       1,665       931  
                                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    16,192       11,889       48,698       35,827  
                                 

NONINTEREST INCOME:

                               

Net gain on sales of investment securities

    21       --       19       88  

Deposit fee income

    2,253       1,926       6,639       5,569  

Earnings on life insurance policies

    414       357       1,247       1,096  

Gain on sales of loans

    1,368       833       3,454       2,359  

Other

    277       202       960       715  
                                 

Total noninterest income

    4,333       3,318       12,319       9,827  
                                 

NONINTEREST EXPENSES:

                               

Salaries and employee benefits

    7,618       5,518       23,725       17,521  

Net occupancy expense

    1,826       1,475       5,652       4,273  

Real estate owned, net

    (381 )     (341 )     (379 )     (431 )

FDIC insurance

    224       199       870       637  

Amortization of intangible assets

    255       156       766       469  

Data processing

    1,341       1,103       4,180       3,814  

Professional fees

    545       261       1,700       1,391  

Advertising and public relations

    419       510       1,284       1,764  

Postage and supplies

    273       244       889       809  

Other

    1,280       1,340       5,036       3,726  
                                 

Total noninterest expenses

    13,400       10,465       43,723       33,973  
                                 

INCOME BEFORE INCOME TAXES

    7,125       4,742       17,294       11,681  
                                 

INCOME TAX PROVISION

    2,384       1,529       4,668       3,667  
                                 

NET INCOME

  $ 4,741     $ 3,213     $ 12,626     $ 8,014  
                                 

Basic earnings per common share

  $ 0.13     $ 0.10     $ 0.34     $ 0.24  
                                 

Diluted earnings per common share

  $ 0.13     $ 0.10     $ 0.33     $ 0.24  

 

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,

   

September 30,

   

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income

  $ 4,741     $ 3,213     $ 12,626     $ 8,014  

Other comprehensive income:

                               

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

    (359 )     1,159       1,946       373  

Less: reclassification adjustments for realized loss (gain) included in net income

    (21 )     --       (19 )     (88 )

Other comprehensive income (loss), before tax effect

    (380 )     1,159       1,927       285  

Tax effect

    146       (444 )     (738 )     (109 )

Other comprehensive income (loss)

    (234 )     715       1,189       176  

COMPREHENSIVE INCOME

  $ 4,507     $ 3,928     $ 13,815     $ 8,190  

 

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, 2016

(In thousands, except share data)

(Unaudited)

 

    Issued     Additional     Accumulated Other           Total  
   

Common Stock

   

Paid-In

    Comprehensive     Retained     Stockholders’  
   

Shares

   

Amount

     Capital     Income     Earnings     Equity  

BALANCE – January 1, 2016

    37,987,722     $ 380     $ 211,817     $ 386     $ 10,574     $ 223,157  

Net income

    --       --       --       --       12,626       12,626  

Other comprehensive income

    --       --       --       1,189       --       1,189  

Shares issued – restricted stock unit vesting

    46,448       --       --       --       --       --  

Shares issued – stock options exercised

    19,998       --       130       --       --       130  

Stock compensation

    --       --       852       --       --       852  

Dividends distributed - $0.050 per common share

    --       --       --       --       (1,879 )     (1,879 )

Repurchase of common stock

    (453,182 )     (4 )     (3,668 )     --       --       (3,672 )

BALANCE – September 30, 2016

    37,600,986     $ 376     $ 209,131     $ 1,575     $ 21,321     $ 232,403  

 

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,

 
   

2016

   

2015

 
                 

OPERATING ACTIVITIES:

               

Net income

  $ 12,626     $ 8,014  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for loan losses

    1,665       931  

Provision for real estate losses

    302       3  

Deferred tax provision

    5,115       3,590  

Deferred tax valuation allowance

    (897 )     (120 )

Net amortization of premiums on investment securities

    950       332  

Federal Home Loan Bank stock dividends

    (26 )     (6 )

Gain on sales of fixed assets, net

    (970 )     --  

Impairment on office properties held for sale

    987       --  

Gain on sales of real estate owned and repossessed assets, net

    (862 )     (583 )

Gain on sales of investment securities, net

    (19 )     (88 )

Originations of loans held for sale

    (124,450 )     (85,671 )

Proceeds from sales of loans held for sale

    121,235       86,407  

Gain on sales of loans originated to sell

    (3,454 )     (2,359 )

Depreciation

    2,842       2,117  

Amortization of deferred loan costs, net

    824       241  

Accretion of purchased loans, net

    (3,837 )     (2,636 )

Amortization of other intangible assets

    766       469  

Stock compensation

    852       280  

Earnings on life insurance policies

    (1,247 )     (1,096 )

Changes in operating assets and liabilities:

               

Accrued interest receivable

    (537 )     (535 )

Prepaid expenses and other assets

    (1,062 )     1,535  

Other liabilities

    (48 )     (1,182 )
                 

Net cash provided by operating activities

    10,755       9,643  
                 

INVESTING ACTIVITIES:

               

Net decrease in federal funds sold

    18       --  

Purchases of interest-bearing time deposits in banks

    (2,341 )     --  

Redemptions of interest-bearing time deposits in banks

    8,451       1,491  

Purchases of investment securities held to maturity (“HTM”)

    (10,383 )     --  

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

    (64,964 )     (32,387 )

Proceeds from sales of investment securities AFS

    30,386       2,082  

Proceeds from maturities/calls/paydowns of investment securities AFS

    47,844       38,392  

Redemptions of Federal Home Loan Bank stock

    1,199       605  

Purchases of Federal Home Loan Bank stock

    (2,299 )     (443 )

Redemptions of Federal Reserve Bank stock

    790       907  

Purchases of Federal Reserve Bank stock

    (1,945 )     (3,396 )

Redemptions of other investments

    6       --  

Loan disbursements, net of repayments

    (41,260 )     (20,766 )

Loan participations purchased

    (23,631 )     (475 )

Loan participations sold

    9,044       --  

Proceeds from sales of real estate owned and repossessed assets

    3,779       3,882  

Proceeds from sales of office properties held for sale

    1,875       --  

Proceeds from sales of office properties and equipment

    24       --  

Purchases of office properties and equipment

    (1,723 )     (3,553 )

Purchases of bank owned life insurance

    (3,000 )     (772 )
                 

Net cash used in investing activities

    (48,130 )     (14,433 )

 

           

(Continued)

 

 

 
5

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended

September 30,

 
   

2016

   

2015

 

FINANCING ACTIVITIES:

               

Net increase (decrease) in deposits

  $ 45,840     $ (54,621 )

Proceeds from advances from Federal Home Loan Bank

    94,745       31,551  

Repayment of advances from Federal Home Loan Bank

    (68,125 )     (25,189 )

Proceeds from other borrowings

    4,800       1,450  

Repayment of other borrowings

    (1,144 )     (770 )

Net increase (decrease) in short term borrowings

    1,436       (1,717 )

Proceeds from exercise of stock options

    130       2  

Repurchase of common stock

    (3,672 )     (256 )

Dividends distributed

    (1,879 )     --  
                 

Net cash provided by (used in) financing activities

    72,131       (49,550 )
                 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    34,756       (54,340 )
                 

CASH AND CASH EQUIVALENTS:

               

Beginning of period

    52,131       113,086  
                 

End of period

  $ 86,887     $ 58,746  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid for interest

  $ 5,834     $ 4,650  
                 

Cash received for income tax refunds

  $ --     $ 2,135  
                 

Cash paid for income taxes

  $ 892     $ --  
                 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

               

Real estate and other assets acquired in settlement of loans

  $ 1,389     $ 1,069  
                 

Sales of real estate owned financed by the Bank

  $ 146     $ 242  
                 

Investment securities purchased—not settled

  $ 972     $ --  

 

 

 

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 (the “Bank”), is a community oriented bank providing a broad line of financial products to individuals and business customers.  As of September 30, 2016, the Bank operated 48 branches and three loan production offices throughout Arkansas, Missouri 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. On October 1, 2015, the Company completed its acquisition of Metropolitan National Bank (“Metropolitan”). On February 19, 2016, Metropolitan was merged into the Bear State Bank charter. Except as the context otherwise requires, any reference in this Quarterly Report on Form 10-Q to the “Bank” means (i) with respect to the period between January 1, 2015 through February 12, 2015, First Federal Bank, First National and Heritage Bank, collectively; (ii) with respect to the period from February 13, 2015 through September 30, 2015 or the period from February 19, 2016 through the date hereof, Bear State Bank, N.A.; and (iii) with respect to the period from October 1, 2015 through February 18, 2016, Bear State Bank and Metropolitan, collectively. Effective June 28, 2016, the Bank converted from a national bank supervised by the Office of the Comptroller of the Currency to a state chartered bank jointly supervised by the Arkansas State Bank Department and the Board of Governors of the Federal Reserve Bank. In connection with the charter change, the name of Bear State Bank, N.A. changed to Bear State Bank.

 

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.

 

Operating Segments—The Company consolidated its subsidiary banks into one bank during the first quarter of 2016 and its operations are organized on a regional basis upon which management makes decisions regarding how to allocate resources and assess performance. Each region provides a group of similar community banking products and services, including loans, time deposits, and checking and savings accounts. The individual regions have similar operating and economic characteristics and are reported as one aggregated operating segment.

 

Basis of PresentationThe accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U. S. 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 nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016. 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, 2015, contained in the Company’s 2015 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, 2015, included herein has been derived from the audited consolidated balance sheet of the Company as of that date.

 

2.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.

 

In February 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 became effective for public business entities for annual periods beginning after December 15, 2015. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.

 

 
7

 

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30). To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, the amendments in this ASU became effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity should apply the new guidance on a retrospective basis. The Company’s adoption of this ASU on January 1, 2016, did not 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 became effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s adoption of this ASU on January 1, 2016, did not 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 ASU 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 became effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years with early adoption. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU 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 ASU 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 ASU 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 ASU 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 ASU became effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). This ASU requires certain equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of such investments; eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost; requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

 
8

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU applies to all leases and is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. The previous standards did not require lessees to recognize operating leases on the balance sheet. This ASU provides for accounting requirements so that lessees will be required to recognize the rights and obligations associated with operating leases. The guidance on lessor accounting was not fundamentally changed with this ASU. For public entities, ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, however, early adoption is permitted. The Company is in the process of evaluating the impact this ASU will have on its financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU also eliminates the guidance in Topic 718 that was indefinitely deferred. For public entities, ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact this ASU will have on its financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Current U.S. GAAP requires an incurred loss methodology for recognizing credit losses that delays loss recognition until it is probable that a loss has been incurred. The amendments in this ASU replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. For public entities that are SEC filers, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those years. An entity will apply the amendments in this ASU through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is in the process of evaluating the impact this ASU will have on its financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU adds or clarifies guidance on the classification of certain cash receipts and cash payments in the statement of cash flows in an attempt to reduce the diversity of financial reporting. For public entities, ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply prospectively if retrospective application is impractical. The Company is in the process of evaluating the impact this ASU will have on its financial statements.

 

3.

ACQUISITION

On October 1, 2015, the Company completed its acquisition of Metropolitan National Bank (“Metropolitan”) of Springfield, Missouri from Marshfield Investment Company (“Marshfield”). Under the terms of the purchase agreement, the Company acquired 100% of the outstanding common stock of Metropolitan and Marshfield received proceeds of approximately $70 million, consisting of 4,610,317 shares of Company common stock valued at approximately $42 million and $28 million in cash. The Company paid $10.1 million of the total cash consideration and Metropolitan paid $17.9 million of the total cash consideration in conjunction with the closing of the acquisition. The acquisition expanded the Company’s market into Southern Missouri and further diversified the Company’s loan, customer and deposit base.

 

Prior to the acquisition, Metropolitan conducted business from twelve full service locations and one loan production office throughout Southwest Missouri. Including the effects of purchase accounting adjustments, the Company acquired total assets of $450.5 million, total loans of $365.0 million, net of loan discounts, and deposits of $370.6 million. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information regarding the acquisition of Metropolitan.

 

 
9

 

 

4.

INVESTMENT SECURITIES

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

 

   

September 30, 2016

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Available for sale

                               

U.S. Treasuries and government agencies

  $ 22,165     $ 20     $ --     $ 22,185  

Municipal securities

    67,282       1,096       (23 )     68,355  

Residential mortgage-backed securities

    94,319       1,543       (83 )     95,779  
                                 

Total available for sale

  $ 183,766     $ 2,659     $ (106 )   $ 186,319  
                                 

Held to maturity

                               

Municipal securities

  $ 11,351     $ 7     $ (105 )   $ 11,253  
                                 

Total held to maturity

  $ 11,351     $ 7     $ (105 )   $ 11,253  

 

   

December 31, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Available for sale

                               

U.S. Treasuries and government agencies

  $ 49,612     $ 5     $ (117 )   $ 49,500  

Municipal securities

    63,276       717       (60 )     63,933  

Residential mortgage-backed securities

    85,072       647       (567 )     85,152  
                                 

Total available for sale

  $ 197,960     $ 1,369     $ (744 )   $ 198,585  

 

The mortgage-backed portfolios at September 30, 2016 and December 31, 2015 were composed entirely of residential mortgage-backed securities issued or guaranteed by GNMA, FNMA or FHLMC.

 

The following tables summarize the gross unrealized losses and fair value of the Company's investments classified as available for sale and held to maturity 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, 2016

 
   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

Municipal securities

  $ 13,983     $ 128     $ --     $ --     $ 13,983     $ 128  

Residential mortgage-backed securities

    23,558       83       --       --       23,558       83  
                                                 

Total

  $ 37,541     $ 211     $ --     $ --     $ 37,541     $ 211  

 

   

December 31, 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

  $ 46,805     $ 117     $ --     $ --     $ 46,805     $ 117  

Municipal securities

    4,741       32       2,707       28       7,448       60  

Residential mortgage-backed securities

    57,561       567       --       --       57,561       567  
                                                 

Total

  $ 109,107     $ 716     $ 2,707     $ 28     $ 111,814     $ 744  

 

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.

 

 
10

 

 

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 other-than-temporarily impaired.  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 $119.7 million at September 30, 2016 and $119.1 million at December 31, 2015, as collateral for certain deposits in excess of $250,000 and for other purposes, including investment securities with carrying values of approximately $13.5 million at September 30, 2016 and $12.1 million at December 31, 2015, for securities sold under agreements to repurchase.

 

The following table sets forth the amount (dollars in thousands) of investment securities that contractually mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2016. 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, 2016

 
   

Available for Sale

   

Held to Maturity

 
   

Amortized

   

Fair

   

Weighted

   

Amortized

   

Fair

   

Weighted

 
   

Cost

   

Value

   

Average Rate

   

Cost

   

Value

   

Average Rate

 
                                                 

Within one year

  $ 21,185     $ 21,207       0.77 %   $ --     $ --       --  

Due from one year to five years

    21,259       21,444       2.06 %     --       --       --  

Due from five years to ten years

    16,327       16,748       2.86 %     --       --       --  

Due after ten years

    30,676       31,141       2.97 %     11,351       11,253       2.54 %
      89,447       90,540       2.21 %     11,351       11,253       2.54 %

Residential mortgage-backed securities

    94,319       95,779       2.18 %     --       --       --  

Total

  $ 183,766     $ 186,319       2.20 %   $ 11,351     $ 11,253       2.54 %

 

As of September 30, 2016 and December 31, 2015, investments with amortized cost totaling approximately $74.2 million and $68.4 million, respectively, have call options held by the issuer, of which approximately $26.5 million and $26.1 million, respectively, are or were callable within one year.

 

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

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Sales proceeds

  $ 22,297     $ --     $ 30,386     $ 2,082  
                                 

Gross realized gains

    97       --     $ 195     $ 88  

Gross realized losses

    (76 )     --       (176 )     --  

Net gains (losses) on sales of investment securities

  $ 21     $ --     $ 19     $ 88  
 
 
11

 

 

5.

LOANS RECEIVABLE

Loans receivable consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):

 

   

September 30,

2016

   

December 31,

2015

 

Real estate:

               

One- to four-family residential

  $ 385,126     $ 401,036  

Multifamily residential

    93,444       74,226  

Nonfarm nonresidential

    472,858       487,684  

Farmland

    94,187       94,235  

Construction and land development

    119,433       116,015  

Commercial

    312,957       246,304  

Consumer

    36,645       38,594  

Total loans receivable

    1,514,650       1,458,094  

Unearned discounts and net deferred loan costs

    516       558  

Allowance for loan and lease losses

    (15,112 )     (14,550 )
                 

Loans receivable—net

  $ 1,500,054     $ 1,444,102  

 

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 Board approved written 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 and collateral types, loan purpose and underlying source of repayment.

 

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 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.

 

Consumer Loans – Our portfolio of consumer loans generally includes loans to individuals for household, family and other personal expenditures. Proceeds from such loans are used to, among other things, fund the purchase of automobiles, recreational vehicles, boats, mobile homes and for other similar purposes. Consumer loans generally have higher interest rates. However, such loans pose additional risks of collectability and loss when compared to certain other types of loans. The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.

 

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, 2016 and December 31, 2015 were $14.8 million and $20.4 million, respectively. Servicing loans for others generally consists of collecting payments and disbursing payments to investors. Servicing income for the periods ended September 30, 2016 and 2015 was not significant.

 

As of September 30, 2016 and December 31, 2015, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $27.9 million and $33.1 million, respectively, were held in custody by the Federal Home Loan Bank of Dallas (“FHLB”) and were pledged for outstanding advances or available for future advances. The Bank also pledged substantially all of its remaining loans at September 30, 2016 and December 31, 2015 under a blanket lien with the FHLB.

 

 
12

 

 

 

Purchased Loans – 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 $364.5 million of net loans ($375.0 million gross loans less $10.5 million discount) purchased in conjunction with the acquisition of Metropolitan in 2015 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 purchased credit impaired (“PCI”) loans, which are included in the loan categories above (in thousands):

 

   

September 30, 2016

   

December 31, 2015

   

September 30, 2015

 

One- to four-family residential

  $ 2,833     $ 3,189     $ 3,963  

Nonfarm nonresidential

    8,353       9,886       10,035  

Farmland

    58       70       80  

Construction and land development

    1,419       2,127       2,242  

Commercial

    570       1,012       1,020  

Consumer

    55       63       76  

Total carrying value of PCI loans

  $ 13,288     $ 16,347     $ 17,416  

Outstanding principal balance of PCI loans

  $ 17,676     $ 20,289     $ 21,732  

 

The following table documents changes for the nine months ended September 30, 2016 and 2015 to the amount of accretable yield on loans evaluated in accordance with the provisions of FASB ASC Topic 310-30 (in thousands).

 

   

2016

   

2015

 

Balance at January 1

  $ 1,370     $ 2,165  

Accretion

    (622 )     (827 )

Adjustments to accretable differences due to:

               

Reclassification from nonaccretable difference

    1,328       88  

Changes in expected cash flows that do not affect nonaccretable differences

    (868 )     (41 )

Transfers to real estate owned

    5       7  

Balance at September 30

  $ 1,213     $ 1,392  

 

Age analyses of loans as of the dates indicated, including both accruing and nonaccrual loans are presented below (in thousands):

 

September 30, 2016

 

30-89 Days

Past Due

   

90 Days or More

Past Due

   

Current

   

Total

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