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EX-31.2 - EXHIBIT 31.2 - BEAR STATE FINANCIAL, INC.ex31-2.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 March 31, 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 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 May 8, 2015, there were issued and outstanding 33,375,753 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 as of March 31, 2015 and December 31, 2014 (unaudited)

1

     
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)

2

     
 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)

3

     
 

Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2015 (unaudited)

4

     
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)

5

     
 

Notes to Unaudited Condensed Consolidated Financial Statements

7

     

Item 2.

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

29

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

     

Item 4.

Controls and Procedures

42

     

Part II.

Other Information

 
     

Item 1.

Legal Proceedings

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 6.

Exhibits

43

     

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)

 

ASSETS

 

March 31,

2015

   

December 31,

2014

 
                 

Cash and cash equivalents

  $ 82,416     $ 113,086  

Interest-bearing time deposits in banks

    11,923       12,421  

Investment securities available for sale

    176,599       174,218  

Other investment securities, at cost

    8,484       5,864  

Loans receivable, net of allowance of $13,762 and $13,660, respectively

    1,026,051       1,041,222  

Loans held for sale

    11,080       6,409  

Accrued interest receivable

    4,540       4,485  

Real estate owned - net

    4,719       4,792  

Office properties and equipment - net

    51,481       50,332  

Cash surrender value of life insurance

    45,269       44,130  

Goodwill

    25,717       25,717  

Core deposit intangible - net

    7,182       7,338  

Deferred tax asset, net

    19,564       20,697  

Prepaid expenses and other assets

    2,572       3,884  
                 

TOTAL

  $ 1,477,597     $ 1,514,595  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

LIABILITIES:

               

Noninterest bearing deposits

  $ 176,924     $ 180,136  

Interest bearing deposits

    1,059,334       1,083,661  

Total deposits

    1,236,258       1,263,797  

Short term borrowings

    5,576       12,083  

Other borrowings

    57,642       61,258  

Other liabilities

    4,993       7,003  
                 

Total liabilities

    1,304,469       1,344,141  
                 

STOCKHOLDERS’ EQUITY:

               

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

    --       --  

Common stock, $0.01 par value—100,000,000 shares authorized; 33,375,753 and 33,365,845 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

    334       334  

Additional paid-in capital

    169,543       169,543  

Accumulated other comprehensive income

    984       577  

Retained earnings

    2,267       --  
                 

Total stockholders’ equity

    173,128       170,454  
                 

TOTAL

  $ 1,477,597     $ 1,514,595  

 

See notes to unaudited condensed consolidated financial statements.

  

 
1

 

 

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except earnings per share)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

   

March 31,

 
   

2015

   

2014

 

INTEREST INCOME:

               

Loans receivable

  $ 13,204     $ 4,135  

Investment securities:

               

Taxable

    298       225  

Nontaxable

    508       286  

Other

    96       105  

Total interest income

    14,106       4,751  
                 

INTEREST EXPENSE:

               

Deposits

    1,304       869  

Other borrowings

    224       22  

Total interest expense

    1,528       891  
                 

NET INTEREST INCOME

    12,578       3,860  
                 

PROVISION FOR LOAN LOSSES

    300       --  
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    12,278       3,860  
                 

NONINTEREST INCOME:

               

Net gain on sales of investment securities

    88       --  

Deposit fee income

    1,739       625  

Earnings on life insurance policies

    367       200  

Gain on sale of loans

    637       304  

Other

    280       73  

Total noninterest income

    3,111       1,202  
                 

NONINTEREST EXPENSES:

               

Salaries and employee benefits

    6,459       3,062  

Net occupancy expense

    1,434       585  

Real estate owned, net

    38       217  

FDIC insurance

    222       120  

Amortization of intangible assets

    156       --  

Data processing

    1,169       418  

Professional fees

    376       195  

Advertising and public relations

    680       103  

Postage and supplies

    235       91  

Other

    1,468       548  

Total noninterest expenses

    12,237       5,339  
                 

INCOME (LOSS) BEFORE INCOME TAXES

    3,152       (277 )
                 

INCOME TAX PROVISION

    885       --  
                 

NET INCOME (LOSS)

  $ 2,267     $ (277 )
                 

Basic earnings (loss) per common share

  $ 0.07     $ (0.01 )
                 

Diluted earnings (loss) per common share

  $ 0.07     $ (0.01 )

 

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

 
   

March 31,

   

March 31,

 
   

2015

   

2014

 
                 

Net income (loss)

  $ 2,267     $ (277 )

Other comprehensive income :

               

Unrealized holding gains on investment securities arising during the period

    747       589  

Less: reclassification adjustments for realized gain included in net income

    (88 )     --  

Other comprehensive income, before tax effect

    659       589  

Tax effect

    (252 )     --  

Other comprehensive income

    407       589  

COMPREHENSIVE INCOME

  $ 2,674     $ 312  

 

See notes to unaudited condensed consolidated financial statements.

 

 
3

 

  

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2015

(In thousands, except share data)

(Unaudited)

 

   

Issued

Common Stock

    Additional Paid-In     Accumulated Other Comprehensive     Retained     Total Stockholders’  
   

Shares

   

Amount

    Capital     Income     Earnings     Equity  

BALANCE – January 1, 2015

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

Net income

    --       --       --       --       2,267       2,267  

Other comprehensive income

    --       --       --       407       --       407  

Shares issued – restricted stock unit vesting

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

Stock compensation

    --       --       20       --       --       20  

Repurchase of common stock

    (2,100 )     --       (20 )     --       --       (20 )
                                                 

BALANCE – March 31, 2015

    33,375,753     $ 334     $ 169,543     $ 984     $ 2,267     $ 173,128  

 

See notes to unaudited condensed consolidated financial statements.

  

 
4

 

  

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 
                 

OPERATING ACTIVITIES:

               

Net income (loss)

  $ 2,267     $ (277 )

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

               

Provision for loan losses

    300       --  

Provision for real estate losses

    --       242  

Deferred tax provision (benefit)

    885       (243 )

Deferred tax valuation allowance

    --       243  

Net amortization (accretion) of investment securities

    64       (1 )

Federal Home Loan Bank stock dividends

    (2 )     --  

Gain on sale of fixed assets, net

    --       6  

Gain on sale of real estate owned, net

    (42 )     (81 )

Gain on sale of investment securities, net

    (88 )     --  

Originations of loans held for sale

    (26,354 )     (15,750 )

Proceeds from sales of loans held for sale

    22,320       13,328  

Gain on sale of loans originated to sell

    (637 )     (304 )

Depreciation

    622       342  

Amortization of deferred loan costs, net

    23       39  

Accretion of purchased loans, net

    (1,128 )     --  

Amortization of other intangible assets

    156       --  

Stock compensation

    20       75  

Earnings on life insurance policies

    (367 )     (200 )

Changes in operating assets and liabilities:

               

Accrued interest receivable

    (55 )     (153 )

Prepaid expenses and other assets

    1,308       25  

Other liabilities

    (402 )     (43 )
                 

Net cash used in operating activities

    (1,110 )     (2,752 )
                 

INVESTING ACTIVITIES:

               

Redemptions of interest-bearing time deposits in banks

    498       249  

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

    (9,728 )     (100 )

Proceeds from sales of investment securities AFS

    2,082       --  

Proceeds from maturities/calls/paydowns of investment securities AFS

    4,340       701  

Redemptions of Federal Home Loan Bank stock

    141       --  

Purchases of Federal Home Loan Bank stock

    (423 )     --  

Redemptions of Federal Reserve Bank stock

    907       --  

Purchases of Federal Reserve Bank stock

    (3,243 )     --  

Loan repayments (originations), net

    25,735       (9,169 )

Loan participations purchased

    (10,225 )     (4,229 )

Proceeds from sales of real estate owned

    581       1,888  

Proceeds from sales of office properties and equipment

    --       144  

Purchases of office properties and equipment

    (1,771 )     (162 )

Purchases of bank owned life insurance

    (772 )     --  
                 

Net cash provided by (used in) investing activities

    8,122       (10,678 )

 

(Continued)

 

 
5

 

  

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 

FINANCING ACTIVITIES:

               

Net (decrease) increase in deposits

  $ (27,539 )   $ 18,992  

Proceeds from advances from Federal Home Loan Bank

    11,174       --  

Repayment of advances from Federal Home Loan Bank

    (15,333 )     (29 )

Net increase in other borrowings

    543       --  

Net decrease in short term borrowings

    (6,507 )     --  

Repurchase of common stock

    (20 )     --  
                 

Net cash (used in) provided by financing activities

    (37,682 )     18,963  
                 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (30,670 )     5,533  
                 

CASH AND CASH EQUIVALENTS:

               

Beginning of period

    113,086       23,970  
                 

End of period

  $ 82,416     $ 29,503  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—

               

Cash paid for interest

  $ 1,580     $ 867  
                 

Cash received for income tax refunds

  $ 1,746     $ --  
                 
                 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

               

Real estate and other assets acquired in settlement of loans

  $ 613     $ 453  
                 

Sales of real estate owned financed by the Bank

  $ 147     $ --  
                 

Investment securities purchased—not settled

  $ --     $ 1,234  

 

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 its 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 months ended March 31, 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 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.  ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016.  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 Accounting Standards Update 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. It 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 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 adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

3.

ACQUISITION

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 estimated fair values are subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period. The goodwill recognized by the Company will not be deductible for income tax purposes.

 

 
8

 

  

   

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.

 

 
9

 

 

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):

 

   

March 31, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. Treasuries and Government agencies

  $ 76,505     $ 39     $ (33 )   $ 76,511  

Municipal securities

    61,850       650       (176 )     62,324  

Mortgage-backed securities

    36,649       1,116       (1 )     37,764  
                                 

Total

  $ 175,004     $ 1,805     $ (210 )   $ 176,599  

 

   

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  

 

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):

 

   

March 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

  $ 42,188     $ 33     $ --     $ --     $ 42,188     $ 33  

Municipal securities

    14,604       171       465       5       15,069       176  

Mortgage-backed securities

    315       1       --       --       315       1  
                                                 

Total

  $ 57,107     $ 205     $ 465     $ 5     $ 57,572     $ 210  

 

   

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  

 

 
10

 

  

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 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 $113.8 million at March 31, 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 $5.6 million at March 31, 2015 and $2.1 million at December 31, 2014, for securities sold under agreements to repurchase.

 

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 March 31, 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.

 

   

March 31, 2015

   

Amortized

   

Fair

   

Weighted

   

Cost

   

Value

   

Average Rate

                         

Within one year

  $ 28,953     $ 28,955       0.52 %

Due from one year to five years

    68,748       68,886       0.98 %

Due from five years to ten years

    20,302       20,612       2.72 %

Due after ten years

    20,352       20,382       3.08 %
      138,355       138,835       1.45 %

Mortgage-backed securities

    36,649       37,764       2.69 %

Total

  $ 175,004     $ 176,599       1.71 %

 

As of March 31, 2015 and December 31, 2014, investments with amortized cost totaling approximately $75.5 million and $73.1 million, respectively, have call options held by the issuer, of which approximately $34.9 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):

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 
                 

Sales proceeds

  $ 2,082     $ --  
                 

Gross realized gains

  $ 88     $ --  

Gross realized losses

    --       --  

Net gains on sales of investment securities

  $ 88     $ --  

 

 
11

 

 

 

5.

LOANS RECEIVABLE

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

 

   

March 31,

2015

   

December 31,

2014

 

Real estate:

               

One- to four-family residential

  $ 315,146     $ 320,489  

Multifamily residential

    51,673       45,181  

Nonfarm nonresidential

    336,370       369,974  

Farmland

    50,244       47,199  

Construction and land development

    100,918       98,594  

Commercial

    152,913       139,871  

Consumer

    32,613       33,809  

Total loans receivable

    1,039,877       1,055,117  

Unearned discounts and net deferred loan costs

    (64 )     (235 )

Allowance for loan and lease losses

    (13,762 )     (13,660 )
                 

Loans receivable—net

  $ 1,026,051     $ 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.

 

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 March 31, 2015 and December 31, 2014 were $23.3 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 March 31, 2015 and December 31, 2014 was not significant.

 

As of March 31, 2015 and December 31, 2014, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $38.1 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 certain of its remaining loans at March 31, 2015 and December 31, 2014 under a blanket lien with the FHLB.

 

 
12

 

 

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

 

   

March 31, 2015

   

June 13, 2014

 

One- to four-family residential

  $ 4,208     $ 4,728  

Multifamily residential

    --       --  

Nonfarm nonresidential

    9,106       10,790  

Farmland

    86       95  

Construction and land development

    3,300       3,432  

Commercial

    1,502       1,882  

Consumer

    111       178  

Total carrying value of PCI loans

  $ 18,313     $ 21,105  

Outstanding principal balance of PCI loans

  $ 21,492     $ 26,942  

 

The following table reflects the carrying amount of the fair value adjustments for purchased loans with evidence of credit deterioration 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 March 31, 2015, to the amount of accretable yield (in thousands). There was no accretable yield at March 31, 2014.

 

   

2015

 

Balance at January 1

  $ 2,165  

Accretable difference acquired

    --  

Accretion

    (295 )

Reclassification from nonaccretable difference

    47  

Changes in expected cash flows that do not affect nonaccretable differences

    (31 )

Transfers to real estate owned

    12  

Balance at March 31, 2015

  $ 1,898  

 

 
13

 

 

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

 

March 31, 2015

 

30-89 Days Past Due

   

90 Days or More Past Due

   

Current

   

Total

 
                                 

One- to four-family residential

  $ 6,375     $ 2,783     $ 305,988     $ 315,146  

Multifamily residential

    --       --       51,673       51,673  

Nonfarm nonresidential

    917       972       334,481       336,370  

Farmland

    735       628       48,881       50,244  

Construction and land development

    375       625       99,918       100,918  

Commercial

    1,105       628       151,180       152,913  

Consumer

    302       70       32,241       32,613  

Total

  $ 9,809     $ 5,706     $ 1,024,362     $ 1,039,877  

 

December 31, 2014

 

30-89 Days Past Due

   

90 Days or More Past Due

   

Current

   

Total

 
                                 

One- to four-family residential

  $ 4,966     $ 3,545     $ 311,978     $ 320,489  

Multifamily residential

    --       --       45,181       45,181  

Nonfarm nonresidential

    3,350       2,449       364,175       369,974  

Farmland

    15       628       46,556       47,199  

Construction and land development

    127       649       97,818       98,594  

Commercial

    517       497       138,857       139,871  

Consumer

    379       47       33,383       33,809  

Total

  $ 9,354     $ 7,815     $ 1,037,948     $ 1,055,117  

 

As of March 31, 2015 and December 31, 2014, there were $1.3 million and $2.2 million, respectively, of PCI loans acquired in the merger with FNSC that were 90 days or more past due and accruing. There were no other loans that were 90 days or more past due and accruing at March 31, 2015 and one loan of $353,000 past due 90 days and still accruing at December 31, 2014. Restructured loans totaled $2.4 million and $2.5 million as of March 31, 2015 and December 31, 2014, respectively, with $2.1 million and $1.9 million of such restructured loans on nonaccrual status at March 31, 2015 and December 31, 2014, respectively.

 

 
14

 

 

The following table presents age analyses of nonaccrual loans as of the dates indicated (in thousands):

 

March 31, 2015

 

30-89 Days Past Due

   

90 Days or More Past Due

   

Current

   

Total

 
                                 

One- to four-family residential

  $ 1,158     $ 2,207     $ 1,581     $ 4,946  

Nonfarm nonresidential

    94       901       2,055       3,050  

Farmland

    --       628       103       731  

Construction and land development

    --       581       18       599  

Commercial

    143       92       301       536  

Consumer

    1       45       21       67  

Total

  $ 1,396     $ 4,454     $ 4,079     $ 9,929  

 

December 31, 2014

 

30-89 Days Past Due

   

90 Days or More Past Due

   

Current

   

Total

 
                                 

One- to four-family residential

  $ 1,121     $ 2,572     $ 1,266     $ 4,959  

Nonfarm nonresidential

    131       1,379       1,603       3,113  

Farmland

    --       628       106       734  

Construction and land development

    --       605       19       624  

Commercial

    --       --       306       306  

Consumer

    5       14       15       34  

Total

  $ 1,257     $ 5,198     $ 3,315     $ 9,770  

 

The following tables summarize information pertaining to impaired loans as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014 (in thousands). The tables below do not include ASC 310-30 PCI loans which are disclosed separately in the loans receivable footnote.

 

   

March 31, 2015

   

December 31, 2014

 
   

Unpaid Principal Balance

   

Recorded Investment

   

Valuation Allowance

   

Unpaid Principal Balance

   

Recorded Investment

   

Valuation Allowance

 

Impaired loans with a valuation allowance:

                                               

One- to four-family residential

  $ 1,176     $ 1,020     $ 201     $ 1,030     $ 1,204     $ 251  

Nonfarm nonresidential

    2,523       2,196       550       2,531       2,225       580  

Farmland

    619       481       120       620       484       123  

Construction and land development

    276       168       45       276       168       45  

Commercial

    --       --       --       --       --       --  

Consumer

    16       15       11       16       15       12  
      4,610       3,880       927       4,473       4,096       1,011  
                                                 

Impaired loans without a valuation allowance:

                                               

One- to four-family residential

    4,996       4,176       --       4,732       4,237       --  

Nonfarm nonresidential

    1,669       855       --       1,619       888       --  

Farmland

    537       250       --       537       250       --  

Construction and land development

    585       513       --       507       540       --  

Commercial

    596       536       --       362       306       --  

Consumer

    56       51       --       15       19       --  
      8,439       6,381       --       7,772       6,240       --  

Total impaired loans

  $ 13,049     $ 10,261     $ 927     $ 12,245     $ 10,336     $ 1,011  

 

 
15

 

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
   

Average Recorded Investment

   

Interest Income Recognized

   

Average Recorded Investment

   

Interest Income Recognized

 

Impaired loans with a valuation allowance:

                               

One- to four-family residential

  $ 1,112     $ 2     $ 1,125     $ 2  

Nonfarm nonresidential

    2,211       --       2,903       --  

Farmland

    483       --       494       --  

Construction and land development

    168       --       1,149       --  

Commercial

    --       --       125       --  

Consumer

    15       --       6       --  
      3,989       2       5,802       2  
                                 

Impaired loans without a valuation allowance:

                               

One- to four-family residential

    4,207       --       3,465       1  

Nonfarm nonresidential

    872       --       1,114       --  

Farmland

    250       --       281       --  

Construction and land development

    527       2       900       --  

Commercial

    421       --       347       --  

Consumer

    35       --       20       --  
      6,312       2       6,127       1  

Total impaired loans

  $ 10,301     $ 4     $ 11,929     $ 3  
                                 

Interest based on original terms

          $ 182             $ 192  
                                 

Interest income recognized on a cash basis on impaired loans

          $ --             $ --  

 

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, the Bank categorizes loans into risk categories based on available and relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by assigning a credit risk rating to loans on at least an annual basis for non-homogeneous loans over $250,000. The Bank uses the following definitions for risk ratings:

 

Pass. Loans rated as pass generally meet or exceed normal credit standards. Factors influencing the level of pass grade include repayment source and strength, collateral, borrower cash flows, existence of and strength of guarantors, industry/business sector, financial trends, performance history, etc.

 

Special Mention. Loans rated as special mention, while still adequately protected by the borrower’s repayment capability, exhibit distinct weakening trends. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming adversely classified credits.


Substandard.
Loans
rated as substandard are inadequately protected by the current sound net worth and paying capacity of the borrower or the collateral pledged, if any. These assets must have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans rated as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

 

Loss. Loans rated as a loss are considered uncollectible and of such little value that continuance as an asset is not warranted. A loss classification does not mean that an asset has no recovery or salvage value, but that it is not practical or desirable to defer writing off or reserving all or a portion of the asset, even though partial recovery may be effected in the future.

 

 
16

 

 

Based on analyses performed at March 31, 2015 and December 31, 2014, the risk categories of loans are as follows (in thousands):

 

    March 31, 2015  
   

Pass

   

Special Mention

   

Substandard

   

Not Rated

   

Total

 

One- to four-family residential

  $ 226,240     $ 1,440     $ 11,656     $ 75,810     $ 315,146  

Multifamily residential

    51,673       --       --       --       51,673  

Nonfarm nonresidential

    316,177       4,352       14,935       906       336,370  

Farmland

    48,572       --       1,192       480       50,244  

Construction and land development

    96,239       101       2,350       2,228       100,918  

Commercial

    137,549       --       5,230       10,134       152,913  

Consumer

    25,365       6       201       7,041       32,613  

Total

  $ 901,815     $ 5,899     $ 35,564     $ 96,599     $ 1,039,877  

 

   

December 31, 2014

 
   

Pass

   

Special Mention

   

Substandard

   

Not Rated

   

Total

 

One- to four-family residential

  $ 231,002     $ 1,833     $ 11,792     $ 75,862     $ 320,489  

Multifamily residential

    45,181       --       --       --       45,181  

Nonfarm nonresidential

    349,672       4,378       15,585       339       369,974  

Farmland

    46,002       --       1,197       --       47,199  

Construction and land development

    93,841       105       2,375       2,273       98,594  

Commercial

    135,547       --       4,059       265       139,871  

Consumer

    27,702       6       191       5,910       33,809  

Total

  $ 928,947     $ 6,322     $ 35,199     $ 84,649     $ 1,055,117  

 

As of March 31, 2015 and December 31, 2014, the Bank did not have any loans classified as doubtful or loss.

 

Troubled Debt Restructurings. Troubled debt restructurings (“TDRs”) are loans where the contractual terms on the loan have been modified and both of the following conditions exist: (i) the borrower is experiencing financial difficulty and (ii) the restructuring constitutes a concession that the Bank would not otherwise make. The Bank assesses all loan modifications to determine if the modifications constitute a TDR. Restructurings resulting in an insignificant delay in payment are not considered to be TDRs. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All TDRs are considered impaired loans. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

The following table summarizes TDRs as of March 31, 2015 and December 31, 2014: (dollars in thousands)

 

March 31, 2015

 

Number of Accruing TDR Loans

   

Balance

   

Number of Nonaccrual TDR Loans

   

Balance

   

Total Number of TDR Loans

   

Total Balance

 

One- to four-family residential

    2     $ 249       11     $ 952       13     $ 1,201  

Nonfarm nonresidential

    --       --       3       500       3       500  

Farmland

    --       --       1       250       1       250  

Construction and land development

    1       83       2       391       3       474  

Consumer

    --       --       2       15       2       15  
                                                 

Total

    3     $ 332       19     $ 2,108       22     $ 2,440  

 

December 31, 2014

 

Number of Accruing TDR Loans

   

Balance

   

Number of Nonaccrual TDR Loans

   

Balance

   

Total Number of TDR Loans

   

Total Balance

 

One- to four-family residential

    4     $ 482       9     $ 726       13     $ 1,208  

Nonfarm nonresidential

    --       --       3       511       3       511  

Farmland

    --       --       1       250       1       250  

Construction and land development

    1       84       2       396       3       480  

Consumer

    --       --       2       15       2       15  
                                                 

Total

    5     $ 566       17     $ 1,898       22     $ 2,464  

 

 
17

 

 

No loans receivable were restructured as TDRs during the three months ended March 31, 2015. Loans receivable that were restructured as TDRs during the three months ended March 31, 2014 were as follows: (dollars in thousands)

 

   

Three Months Ended March 31, 2014

 
    Number of     Balance    

Balance at

    Nature of Modification  
    Loans     Prior to TDR      March 31, 2014     

 Payment Term (1)

   

Other

 

One- to four-family residential

    1     $ 103     $ 100     $ 103     $ --  

Consumer

    1       11     $ 11     $ 11     $ --  
                                         

Total

    2     $ 114     $ 111     $ 114     $ --  

__________________________

 

(1)

Concessions represent skipped payments/maturity date extensions or amortization term extensions.

 

There were no loans receivable for which a payment default occurred during the three months ended March 31, 2015 or 2014 that had been modified as a TDR within 12 months or less of the payment default.

 

6.

ALLOWANCES FOR LOAN AND LEASE LOSSES AND REAL ESTATE LOSSES

The tables below provide a rollforward of the allowance for loan and lease losses (“ALLL”) by portfolio segment for the three months ended March 31, 2015 and 2014 (in thousands):

 

   

December 31,

2014

   

Provision

(Reversals)

   

Charge-offs

   

Recoveries

   

March 31,

2015

 
                                         

One- to four-family residential

  $ 4,488     $ (210 )   $ (79 )   $ 20     $ 4,219  

Multifamily residential

    791       (158 )     --       --       633  

Nonfarm nonresidential

    4,243       (306 )     --       33       3,970  

Farmland

    342       145       --       --       487  

Construction and land development

    1,023       (54 )     --       101       1,070  

Commercial

    2,315       (659 )     --       3       1,659  

Consumer

    101       29       (54 )     31       107  

Purchased credit impaired

    357       1,513       (253 )     --       1,617  

Total

  $ 13,660     $ 300     $ (386 )   $ 188     $ 13,762  

 

   

December 31,

2013

   

Provision

(Reversals)

   

Charge-offs

   

Recoveries

   

March 31,

2014

 
                                         

One- to four-family residential

  $ 4,549     $ (144 )   $ (8 )   $ 10     $ 4,407  

Multifamily residential

    1,001       (154 )     --       --       847  

Nonfarm nonresidential

    4,271       (26 )     (113 )     2       4,134  

Farmland

    158       (6 )     --       --       152  

Construction and land development

    1,383       (213 )     (152 )     41       1,059  

Commercial

    1,268       530       --       1       1,799  

Consumer

    81       13       (28 )     14       80  

Purchased credit impaired

    --       --       --       --       --  

Total

  $ 12,711     $ --     $ (301 )   $ 68     $ 12,478  

 

 
18

 

 

The tables below present the allocation of the ALLL and the related loans receivable balances disaggregated on the basis of impairment method by portfolio segment as of March 31, 2015 and December 31, 2014 (in thousands):

 

   

Allowance for Loan and Lease Losses

   

Loan Balances

 

March 31, 2015

 

Individually Evaluated for Impairment

   

Collectively Evaluated for Impairment

   

Purchased Credit Impaired

   

Individually Evaluated for Impairment

   

Collectively Evaluated for Impairment

   

Purchased Credit Impaired

 
                                                 

One- to four-family residential

  $ 201     $ 4,018     $ 370     $ 5,196     $ 305,742     $ 4,208  

Multifamily residential

    --       633       --       --       51,673       --  

Nonfarm nonresidential

    550       3,420       647       3,051       324,213       9,106  

Farmland

    120       367       --       731       49,427       86  

Construction and land development

    45       1,025       44       681       96,937       3,300  

Commercial

    --       1,659       556       536       150,875       1,502  

Consumer

    11       96       --       66       32,436       111  

Total

  $ 927     $ 11,218     $ 1,617     $ 10,261     $ 1,011,303     $ 18,313  

 

   

Allowance for Loan and Lease Losses

   

Loan Balances

 

December 31, 2014

 

Individually Evaluated for Impairment

   

Collectively Evaluated for Impairment

   

Purchased Credit Impaired

   

Individually Evaluated for Impairment

   

Collectively Evaluated for Impairment

   

Purchased Credit Impaired

 
                                                 

One- to four-family residential

  $ 251     $ 4,237     $ 68     $ 5,441     $ 310,701     $ 4,347  

Multifamily residential

    --       791       --       --       45,181       --  

Nonfarm nonresidential

    580       3,663       289       3,113       357,186       9,675  

Farmland

    123       219       --       734       46,379       86  

Construction and land development

    45       978       --       708       94,518       3,368  

Commercial

    --       2,315       --       306       138,315       1,250  

Consumer

    12       89       --       34       33,638       137  

Total

  $ 1,011     $ 12,292     $ 357     $ 10,336     $ 1,025,918     $ 18,863  

 

A summary of the activity in the allowance for losses on real estate owned is as follows for the three months ended March 31, 2015 and 2014 (in thousands):

 

   

Three Months Ended

 
   

March 31, 2015

   

March 31, 2014

 
                 

Balance—beginning of period

  $ 6,575       8,794  
                 

Provisions for estimated losses

    --       242  

Losses charged off

    (7 )     (893 )
                 

Balance—end of period

  $ 6,568       8,143  

 

7.

OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment consisted of the following as of March 31, 2015 and December 31, 2014 (in thousands):

 

   

March 31,

2015

   

December 31,

2014

 
                 

Land and land improvements

  $ 10,796     $ 10,796  

Buildings and improvements

    43,073       42,995  

Furniture and equipment

    11,127       9,452  

Automobiles and other

    823       823  
                 

Total

    65,819       64,066  
                 

Accumulated depreciation

    (14,338 )     (13,734 )
                 

Office properties and equipment—net

  $ 51,481     $ 50,332  

 

Depreciation expense for the three months ended March 31, 2015 and 2014 was approximately $622,000 and $342,000, respectively.

 

 
19

 

 

8.

GOODWILL AND CORE DEPOSIT INTANGIBLE - NET

Goodwill represents the excess of the cost over the fair value of net assets acquired in a business combination. Goodwill is not amortized but is tested for impairment at least annually and periodically upon the occurrence of certain triggering events. At March 31, 2015, goodwill consisted of $25.7 million related to the FNSC acquisition. This goodwill is not deductible for tax purposes. The Company’s core deposit intangible is related to the core deposit premiums of First National and Heritage Bank. These core deposit intangibles are amortized on a straight line basis over their estimated lives ranging from 12 to 13 years.

 

Changes in the carrying amount and accumulated amortization of the Company’s core deposit intangible for the period ended March 31, 2015 were as follows (in thousands):

 

   

2015

 
         

Balance—beginning of period

  $ 7,338  
         

FNSC merger

    --  

Amortization expense

    (156 )
         

Balance—end of period

  $ 7,182  

 

The Company’s projected amortization expense for the remainder of 2015 is approximately $469,000, $625,000 in each of the years ending December 31, 2016 through 2019, and $4.2 million thereafter.

 

9.

DEPOSITS

Deposits as of March 31, 2015 and December 31, 2014 are summarized as follows (in thousands):

 

   

March 31,

2015

   

December 31,

2014

 
                 

Checking accounts

  $ 553,062     $ 576,034  

Money market accounts

    107,172       108,794  

Savings accounts

    119,621       115,375  

Certificates of deposit

    456,403       463,594  
                 

Total

  $ 1,236,258     $ 1,263,797  

 

Overdrafts of checking accounts of $342,000 and $540,000 at March 31, 2015 and December 31, 2014, respectively, have been reclassified for financial reporting and are reflected in net loans receivable on the consolidated statements of financial condition.

 

As of March 31, 2015 and December 31, 2014, the Bank had $22.2 million of brokered deposits.

 

The aggregate amount of time deposits in denominations of $100 thousand or more was approximately $241.5 million and $242.6 million at March 31, 2015 and December 31, 2014, respectively. The aggregate amount of time deposits in denominations of $250 thousand or more was approximately $83.5 million and $77.5 million at March 31, 2015 and December 31, 2014, respectively.

 

At March 31, 2015, scheduled maturities of certificates of deposit were as follows (in thousands):

 

   

Amount

 
         

Within one year

  $ 250,779  

One to two years

    66,975  

Two to three years

    60,927  

Three to four years

    41,245  

Four to five years

    23,778  

Over five years

    12,699  
         

Total

  $ 456,403  

 

 
20

 

 

10.

SHORT TERM BORROWINGS

Short term borrowings consist of repurchase agreements totaling $5.6 million and $12.1 million at March 31, 2015 and December 31, 2014, respectively. Securities sold under repurchase agreements generally have maturities of one day and are recorded based on the amount of cash received in connection with the borrowing. Securities pledged as collateral under repurchase agreements are included in investment securities on the Condensed Consolidated Balance Sheets and are disclosed in Note 4. The fair value of the collateral pledged to a third party is continually monitored and additional collateral is pledged or returned, as deemed appropriate.

 

At March 31, 2015, the Company and the Bank had unused credit lines allowing contingent access to overnight borrowings of up to $52.0 million on an unsecured basis.

 

11.

OTHER BORROWINGS

Other borrowings are summarized as follows (in thousands):

 

   

March 31, 2015

   

December 31, 2014

 
                 

Federal Home Loan Bank advances with rates ranging from 0.20% to 7.75% maturing through July 1, 2024

  $ 38,936     $ 43,095  

Line of credit with a bank, $14.75 million total credit line, floating rate of 1.95% above the three-month LIBOR rate, reset quarterly, interest payments due quarterly, maturing May 30, 2016

    9,100       8,300  

Term note payable to a bank, floating rate of 1.95% above the three-month LIBOR rate, reset quarterly, principal and interest payments due quarterly, maturing May 30, 2019

    9,606       9,863  
                 

Total

  $ 57,642     $ 61,258  

 

Federal Home Loan Bank. The Bank currently pledges as collateral for FHLB advances certain qualifying one- to four-family mortgage loans and a blanket lien on substantially all remaining loans. Additionally, as of March 31, 2015, the Bank has FHLB letters of credit totaling $25.0 million which mature in the fourth quarter of 2015. The letters of credit were used to secure public deposits.

 

Notes Payable. The line of credit and note payable to a bank are collateralized by 100% of the stock of the Bank. The related loan agreement requires the Company and the Bank to maintain certain financial ratios. As of March 31, 2015, the Company was in compliance with the applicable covenants imposed by the loan agreement.

 

At March 31, 2015, scheduled maturities of other borrowings were as follows: (in thousands):

 

   

Weighted

         
   

Average

         
   

Rate

   

Amount

 
                 

Within one year

    0.61 %   $ 15,099  

One to two years

    1.80       15,651  

Two to three years

    2.33       1,475  

Three to four years

    2.10       6,397  

Four to five years

    1.99       11,865  

Over five years

    2.66       7,155  
                 

Total

    1.68 %   $ 57,642  

 

 
21

 

 

12.

INCOME TAXES

The provisions (benefits) for income taxes are summarized as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
                 

Income tax provision (benefit):

               

Current:

               

Federal

  $ --     $ --  

State

    --       --  

Total current

    --       --  
                 

Deferred:

               

Federal

    735       (225 )

State

    150       (18 )

Valuation allowance

    --       243  

Total deferred

    885       --  
                 

Total

  $ 885     $ --  

 

The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows (in thousands):

 

   

Three Months Ended March 31

 
   

2015

   

2014

 
                                 

Taxes at statutory rate

  $ 1,072       34.0 %   $ (94 )     34.0 %

Increase (decrease) resulting from:

                               

State income tax—net

    99       3.1       (12 )     4.2  

Section 382 write-down

    --       --       27       (9.8 )

Change in valuation allowance

    --       --       243       (87.8 )

Earnings on life insurance policies

    (125 )     (4.0 )     (68 )     24.6  

Nontaxable investments

    (148 )     (4.6 )     (98 )     35.4  

Other—net

    (13 )     (0.4 )     2       (0.6 )
                                 

Total

  $ 885       28.1 %   $ --       -- %

 

During the three months ended March 31, 2015, the effective tax rate was of 28.1%, compared to 0.0% for the three months ended March 31, 2014.

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company recognizes deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If the Company determines that it would be able to realize the deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax valuation allowance, which would reduce the provision for income taxes.

 

 
22

 

 

The Company’s temporary differences and carry-forwards that give rise to deferred tax assets and liabilities are comprised of the following (in thousands):

 

   

March 31,

2015

   

December 31, 2014

 
                 

Deferred tax assets:

               

Allowance for loan and lease losses

  $ 6,319     $ 6,343  

Discount on loans

    3,492       4,511  

Real estate owned

    2,639       2,649  

Section 382 net operating loss carry-forward

    2,218       2,252  

Net operating loss carry-forward

    11,305       11,239  

Nonaccrual loan interest

    870       920  

Other

    785       736  

Total deferred tax assets

    27,628       28,650  

Valuation allowance

    (1,017 )     (1,017 )

Deferred tax asset, net of allowance

    26,611       27,633  
                 

Deferred tax liabilities:

               

Office properties

    (3,234 )     (3,240 )

Core deposit intangible

    (2,750 )     (2,810 )

Unrealized gain on investments

    (675 )     (426 )

Pension plan

    (12 )     (24 )

Prepaid expenses

    (376 )     (436 )
                 

Total deferred tax liabilities

    (7,047 )     (6,936 )
                 

Net deferred tax asset

  $ 19,564     $ 20,697  

 

At March 31, 2015, the deferred tax assets were primarily the result of net operating loss (“NOL”) carry-forwards and temporary differences for the allowance for loan and lease losses and the discount on purchased loans.

 

A financial institution may, for federal income tax purposes, carry back NOLs to the preceding two taxable years and forward to the succeeding 20 taxable years. At March 31, 2015, the Company had a $35.1 million NOL for federal income tax purposes that will be carried forward. The federal NOL carry-forwards, if unused, expire in calendar years 2029 through 2035. The federal NOL includes $6.5 million remaining from the pre-ownership change NOL carry-forward. The investment by Bear State Financial Holdings, LLC in the Company on May 3, 2011, constituted an “ownership change” as defined in the Internal Revenue Code (the “Code”). In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOL carry-forwards and certain recognized built-in losses. The annual limit under Section 382 is approximately $405,000. At March 31, 2015, the Company had a $37.0 million NOL for state income tax purposes. The state NOL carry-forwards, if unused, expire in calendar years 2015 through 2020.

 

Specifically exempted from deferred tax recognition requirements are bad debt reserves for tax purposes of U.S. savings and loans in the institution’s base year, as defined under IRC Section 593(g)(2)(A)(ii). Base year reserves totaled approximately $4.2 million. Consequently, a deferred tax liability of approximately $1.6 million related to such reserves was not provided for in the consolidated statements of financial condition at March 31, 2015 and December 31, 2014. Payment of dividends to stockholders out of retained earnings deemed to have been made out of earnings previously set aside as bad debt reserves may create taxable income to the Bank. No provision has been made for income tax on such a distribution as the Bank does not anticipate making such distributions.

 

The Company files consolidated income tax returns in the U.S. federal jurisdiction and the state of Arkansas. Also, the Bank files a separate income tax return in the state of Oklahoma. The Company and the Bank are subject to U.S. federal and state income tax examinations by tax authorities for tax years ended December 31, 2011 and forward.

 

 
23

 

 

13.     STOCK BASED COMPENSATION

The 2011 Omnibus Incentive Plan (the “2011 Plan”), became effective May 3, 2011, after approval by the Company’s stockholders on April 29, 2011. The objectives of the 2011 Plan are to optimize the profitability and growth of the Company through incentives that are consistent with the Company’s goals and that link the personal interests of participants to those of the Company’s stockholders. The 2011 Plan provides for a committee of the Company’s Board of Directors to award nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other awards representing up to 2,144,743 shares of Company stock (adjusted for the 11% stock dividend paid in 2014). Awards may be granted under the 2011 Plan up to ten years following the effective date of the plan. Each award under the 2011 Plan is governed by the terms of the individual award agreement, which specifies pricing, term, vesting, and other pertinent provisions. Shares issued in connection with stock compensation awards are issued from available authorized shares.

 

Stock Options. Option awards are generally granted with an exercise price equal to the fair market value of the Company’s stock at the date of grant, generally vest based on five years of continuous service and have seven year contractual terms. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise, employee termination, and expected term of the options within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

A summary of the stock option activity in the Company’s 2011 Plan for the three months ended March 31, 2015, is presented below:

 

   

Shares

Underlying

Awards

   

Weighted

Average

Exercise Price

 
                 

Outstanding—January 1, 2015

    234,002     $ 6.66  

Granted

    --     $ --  

Exercised

    --     $ --  

Forfeited

    --     $ --  
                 

Outstanding—March 31, 2015

    234,002     $ 6.66  

Exercisable—March 31, 2015

    111,646     $ 6.11  

 

The weighted average remaining contractual life of the outstanding options was 3.7 years and the aggregate intrinsic value of the options was approximately $756,000 at March 31, 2015. The weighted average remaining contractual life of options exercisable was 3.5 years and the aggregate intrinsic value of the exercisable options was approximately $422,000 at March 31, 2015.

 

As of March 31, 2015, there was $258,000 of total unrecognized compensation costs related to nonvested stock options under the 2011 Plan. The cost is expected to be recognized over a weighted-average period of 1.9 years. Compensation expense attributable to option awards totaled approximately $36,000 and $35,000 for the three month periods ended March 31, 2015 and 2014, respectively.   

 

Restricted Stock Units. The fair value of each restricted stock unit (“RSU”) award is determined based on the closing market price of the Company’s stock on the grant date and amortized to compensation expense on a straight-line basis over the vesting period. The vesting periods range from three to seven years.

 

A summary of the RSU activity in the Company’s 2011 Plan for the three months ended March 31, 2015, is presented below:

 

   

Restricted

Stock Units

   

Weighted Average Grant Date Fair Value

 
                 

Outstanding—January 1, 2015

    203,797     $ 7.58  

Granted

    12,500     $ 10.92  

Vested

    (16,596 )   $ 7.88  

Forfeited

    (40,722 )   $ 7.31  
                 

Outstanding—March 31, 2015

    158,979     $ 7.88  

 

As of March 31, 2015, there was $981,000 of total unrecognized compensation costs related to nonvested RSUs under the 2011 Plan. The cost is expected to be recognized over a weighted-average period of 3.3 years. Compensation expense attributable to awards of RSUs totaled approximately $79,000 and $51,000 for the three months ended March 31, 2015 and 2014, respectively.

 

 
24

 

 

14.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing reported earnings available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing reported earnings available to common stockholders by the weighted average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options and warrants using the treasury stock method. The following table reflects the calculation of weighted average shares outstanding for the basic and diluted earnings per share calculations:

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 

Basic weighted average shares outstanding

    33,371,946       22,268,376  

Effect of dilutive securities

    179,830       --  

Diluted weighted average shares outstanding

    33,551,776       22,268,376  

 

All share amounts have been adjusted to give effect to the 11% common stock dividend paid by the Company in December 2014. The calculation of diluted earnings per share for the three months ended March 31, 2014 excluded the following antidilutive securities: warrants representing 1,525,009 shares, stock options representing 239,760 shares, and RSUs representing 97,809 shares.

 

15.

FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurement, provides a framework for measuring fair value and defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value: 

 

Level 1

Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

   

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.  

   

 Level 3

Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 

Financial instruments are broken down by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, due to an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

 

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at March 31, 2015 and December 31, 2014, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. The fair values used by the Company are obtained from an independent pricing service, which represent either quoted market prices for the identical asset or fair values determined by pricing models, or other model-based valuation techniques, that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems. Recurring Level 2 securities include U.S. agency securities, mortgage-backed securities, municipal bonds and corporate debt securities. Inputs used for valuing Level 2 securities include observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels and market consensus prepayment speeds, among other things. Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models. No securities were included in the Recurring Level 3 category at or for the periods ended March 31, 2015 or December 31, 2014.

 

 
25

 

 

The following table presents assets measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 (in thousands):

 

   

Fair Value

   

Quoted Prices in Active Markets for Identical Assets

(Level 1)

   

Significant

Other Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

March 31, 2015

                               

Available for sale investment securities:

                               

U.S. Treasuries and Government agencies

  $ 76,511     $ --     $ 76,511     $ --  

Municipal securities

    62,324       --       62,324       --  

Mortgage-backed securities

    37,764       --       37,764       --  

Total

  $ 176,599     $ --     $ 176,599     $ --  
                                 

December 31, 2014

                               

Available for sale investment securities:

                               

U.S. Treasuries and Government agencies

  $ 77,332     $ --     $ 77,332     $ --  

Municipal securities

    59,080       --       59,080       --  

Mortgage-backed securities

    37,806       --       37,806       --  

Total

  $ 174,218     $ --     $ 174,218     $ --  

 

The following is a description of valuation methodologies used for significant assets measured at fair value on a nonrecurring basis.

 

Impaired Loans Receivable

Loans which meet certain criteria are evaluated individually for impairment. A loan is considered impaired when, based upon current information and events, it is probable the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.  Substantially all of the Bank’s impaired loans at March 31, 2015 and December 31, 2014 are secured by real estate.  Impaired loans are individually measured for impairment by comparing the carrying value of the loan to the discounted cash flows or the fair value of the collateral, less estimated selling costs, as appropriate. Fair value is estimated through current appraisals, real estate brokers’ opinions or listing prices.  Fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.   During the reported periods, collateral discounts ranged from 15% to 25% and selling costs were estimated at 8%. Fair value adjustments are made by partial charge-offs and adjustments to the allowance for loan and lease losses.

 

Real Estate Owned, net

Real Estate Owned (“REO”) represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs.  Fair value is estimated through current appraisals, real estate brokers’ opinions or listing prices.  As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.  During the reported periods, collateral discounts ranged from 0% to 25% and selling costs were typically estimated at 8%. Fair value adjustments are recorded in earnings during the period such adjustments are made. There were no REO provisions recorded during the three months ended March 31, 2015. REO loss provisions recorded during the three months ended March 31, 2014 were $242,000.

 

 
26

 

 

The following table presents assets measured at fair value on a nonrecurring basis for the three months ended March 31, 2015 and 2014 (in thousands). The assets disclosed in the following table were remeasured at fair value during the period with a resulting valuation adjustment or fair value write-down.

 

   

Fair Value

   

Quoted Prices in Active Markets for Identical Assets

(Level 1)

   

Significant

Other Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

March 31, 2015

                               

Impaired loans

  $ 3,213     $ --     $ --     $ 3,213  

REO, net

    --       --       --       --  
                                 

March 31, 2014

                               

Impaired loans

  $ 5,203     $ --     $ --     $ 5,203  

REO, net

    1,645       --       --       1,645  

 

16.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

The estimated fair values of financial instruments that are reported at amortized cost in the Company’s statement of financial condition, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value, are as follows (in thousands):

 

   

March 31, 2015

   

December 31, 2014

 
           

Estimated

           

Estimated

 
   

Carrying

   

Fair

   

Carrying

   

Fair

 
   

Value

   

Value

   

Value

   

Value

 

FINANCIAL ASSETS:

                               

Level 1 inputs:

                               

Cash and cash equivalents

  $ 82,416     $ 82,416     $ 113,086     $ 113,086  

Level 2 inputs:

                               

Interest-bearing time deposits in banks

    11,923       12,147       12,421       12,663  

Other investment securities

    8,484       8,484       5,864       5,864  

Loans held for sale

    11,080       11,080       6,409       6,409  

Cash surrender value of life insurance

    45,269       45,269       44,130       44,130  

Accrued interest receivable

    4,540       4,540       4,485       4,485  

Level 3 inputs:

                               

Loans receivable—net

    1,026,051       1,053,704       1,041,222       1,063,529  
                                 

FINANCIAL LIABILITIES:

                               

Level 1 inputs:

                               

Short term borrowings

    5,576       5,576       12,083       12,083  

Level 2 inputs:

                               

Checking, money market and savings accounts

    779,855       779,855       800,203       800,203  

Other borrowings

    57,642       59,444       61,258       62,175  

Accrued interest payable

    251       251       304       304  

Level 3 inputs:

                               

Certificates of deposit

    456,403       459,033       463,594       464,650  

 

For cash and cash equivalents, the carrying amount approximates fair value (level 1). For other investment securities, loans held for sale, cash surrender value of life insurance and accrued interest receivable, the carrying value is a reasonable estimate of fair value, primarily because of the short-term nature of the instruments or, as to other investment securities, the ability to sell the stock back to the issuer at cost (level 2). Interest bearing time deposits in banks were valued using discounted cash flows based on current rates for similar types of deposits (level 2). Fair values of impaired loans are estimated as described in Note 15. Non-impaired loans were valued using discounted cash flows. The discount rates used to determine the present value of these loans were based on interest rates currently being charged by the Bank on comparable loans (level 3).

 

For securities sold under agreements to repurchase, the carrying amount approximates fair value (level 1). The fair value of checking accounts, savings accounts and money market deposits is the amount payable on demand at the reporting date (level 2). The fair value of fixed-maturity certificates of deposit is estimated using the discount rates currently offered by the Bank for deposits of similar terms (level 3). The fair value of other borrowings is estimated using the rates for borrowings of similar remaining maturities at the reporting date (level 2). For accrued interest payable the carrying value is a reasonable estimate of fair value, primarily because of the short-term nature of the instruments (level 2).

 

 
27

 

 

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2015 and December 31, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the reporting date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

17.

REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. The Office of the Comptroller of the Currency (“OCC”) is the primary regulator for the Bank. The Federal Reserve Bank is the primary regulator for the Company. Failure to meet minimum capital requirements can result in certain mandatory—and possible additional discretionary—actions by regulators that, if undertaken, could have a direct and material effect on the Company’s or the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.  

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of tier 1 capital (as defined by regulation) to average assets (as defined by regulation) and common equity tier 1 capital, tier 1 capital and total capital (as defined by regulation) to risk-weighted assets (as defined by regulation). Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

As of the most recent notification from regulatory authorities, the Company and the Bank were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed any of the Bank’s categorizations.

 

The actual and required capital amounts (in thousands) and ratios of the Company (Consolidated) and the Bank as of March 31, 2015 are presented in the following table:

 

                                   

To be Categorized

 
                                   

as Well

 
                                   

Capitalized Under

 
                   

For Capital

   

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                                 
                                                 

Tier 1 Capital to Adjusted Average Assets

                                               

Consolidated

  $ 131,131       8.96 %   $ 58,531       4.00 %   $ 73,164       5.00 %

Bear State

    148,052       10.12 %     58,542       4.00 %     73,177       5.00 %
                                                 

Common Equity Tier 1 to Risk-Weighted Assets

                                               

Consolidated

  $ 131,131       11.39 %   $ 51,817       4.50 %   $ 74,847       6.50 %

Bear State

    148,052       12.86 %     51,787       4.50 %     74,803       6.50 %
                                                 

Tier I Capital to Risk-Weighted Assets

                                               

Consolidated

  $ 131,131       11.39 %   $ 69,090       6.00 %   $ 92,119       8.00 %

Bear State

    148,052       12.86 %     69,049       6.00 %     92,065       8.00 %
                                                 

Total Capital to Risk-Weighted Assets

                                               

Consolidated

  $ 144,893       12.58 %   $ 92,119       8.00 %   $ 115,149       10.00 %

Bear State

    161,814       14.06 %     92,065       8.00 %     115,082       10.00 %

 

 
28

 

 

The actual and required capital amounts (in thousands) and ratios of the Company (Consolidated) and First Federal Bank (“First Federal”), First National Bank (“FNB”) and Heritage Bank (“Heritage”) as of December 31, 2014 are presented in the following table:

 

                                   

To be Categorized

 
                                   

as Well

 
                                   

Capitalized Under

 
                   

For Capital

   

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                                 
                                                 

Tangible Capital to Tangible Assets

                                               

First Federal

  $ 54,215       9.21 %   $ 8,825       1.50 %  

N/A

   

N/A

 
                                                 

Tier 1 Capital to Average Assets

                                               

Consolidated

  $ 122,537       8.29 %   $ 59,146       4.00 %  

N/A

   

N/A

 

First Federal (1)

    54,215       9.21 %     23,534       4.00 %   $ 29,417       5.00 %

FNB

    56,245       9.40 %     17,951       3.00 %     29,919       5.00 %

Heritage

    29,086       9.76 %     11,925       4.00 %     14,906       5.00 %
                                                 

Tier I Capital to Risk-Weighted Assets

                                               

Consolidated

  $ 122,537       10.89 %   $ 45,001       4.00 %  

N/A

   

N/A

 

First Federal

    54,215       11.42 %  

N/A

   

N/A

    $ 28,488       6.00 %

FNB

    56,245       13.14 %     17,117       4.00 %     25,675       6.00 %

Heritage

    29,086       13.35 %     8,716       4.00 %     13,074       6.00 %
                                                 

Total Capital to Risk-Weighted Assets

                                               

Consolidated

  $ 136,197       12.11 %   $ 90,002       8.00 %  

N/A

   

N/A

 

First Federal

    60,226       12.68 %     37,984       8.00 %   $ 47,480       10.00 %

FNB

    57,100       13.34 %     34,234       8.00 %     42,792       10.00 %

Heritage

    29,786       13.67 %     17,432       8.00 %     21,790       10.00 %
                                                 
 

(1)

In the case of First Federal, the ratio is calculated based on adjusted assets at period end.

 

Dividends. The Company may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause the Company’s stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements for insured institutions or below the special liquidation account established by the Company in connection with First Federal’s conversion from the mutual holding company structure on May 3, 1996. In addition, federal regulations, as currently applied to the Bank, impose limitations upon payment of capital distributions to the Company. No dividends were available for distribution at March 31, 2015, without prior regulatory approval.

 

The principal source of the Company’s revenues is dividends from the Bank. Our ability to pay dividends to our stockholders depends to a large extent upon the dividends we receive from the Bank.

 

On October 22, 2014, the Company’s Board of Directors declared an 11% stock dividend per common share payable on December 15, 2014, to stockholders of record at the close of business on December 1, 2014. Stockholders received 1 additional share of Company common stock for every 9 shares owned. They also received the cash equivalent of any fractional shares to which they were entitled, since no fractional shares were issued.

 

Repurchase Program. During the first quarter of 2015, the Company repurchased 2,100 shares of its common stock under a share repurchase program that was approved by the Board of Directors on March 13, 2015, whereby the Company is permitted to repurchase up to $1 million of its common stock. The 2015 repurchase program will expire March 13, 2016 and can be renewed annually by the Board of Directors.

 

18.

CONTINGENCIES

As of March 31, 2015, the Company was in a dispute with a third party vendor regarding a $2 million invoice received during the first quarter of 2015.  The resolution of the dispute may result in no payment by the Company or a settlement of the asserted contractual obligation.  A timeframe for resolving the dispute is unknown at this time and no liability has been accrued as of March 31, 2015.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Management's discussion and analysis of financial condition and results of operations (“MD&A”) is intended to assist a reader in understanding the consolidated financial condition and results of operations of the Company and its subsidiaries for the periods presented. The information contained in this section should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements and the other sections contained herein. References to the Company and the Bank throughout this MD&A are made using the first person notations of “we”, “us” or “our”.

 

 
29

 

 

The Company is a bank holding company headquartered in Little Rock, Arkansas.  Its subsidiary bank, Bear State Bank, N.A., 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 acquisition of First National Security Company (“FNSC”) and its 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. The Company has achieved significant operational and organizational improvements as a result of the charter consolidation and technology integration, the benefits of which are expected to begin to be realized in the second quarter of 2015.

 

2015 FIRST QUARTER OVERVIEW

 

The Company’s net income was $2.3 million for the three months ended March 31, 2015, compared to a net loss of $277,000 for the three months ended March 31, 2014. The increase in net income for the comparative period was primarily due to the addition of the results of operations for First National and Heritage Bank, partially offset by increases in certain operating expenses, primarily related to merger and integration related expenses.

 

CRITICAL ACCOUNTING POLICIES

 

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of this MD&A and in the Notes to the Consolidated Financial Statements included herein. In particular, Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” generally describes our accounting policies. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

 

Determination of the adequacy of the allowance for loan and lease losses. In estimating the amount of credit losses inherent in our loan portfolio, various judgments and assumptions are made. For example, when assessing the condition of the overall economic environment, assumptions are made regarding market conditions and their impact on the loan portfolio. In the event the economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan and lease losses. For impaired loans that are collateral dependent and for real estate owned, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

 

Acquired loan amounts deemed uncollectible at acquisition date become part of the fair value calculation and are excluded from the ALLL. Quarterly reviews are completed on acquired loans to determine if changes in estimated cash flows have occurred. Subsequent decreases in the amount expected to be collected may result in a provision for loan and lease losses with a corresponding increase in the ALLL. Subsequent increases in the amount expected to be collected result in a reversal of any previously recorded provision for loan and lease losses and related ALLL, if any, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded.

 

Acquired Loans. Acquired loans and leases are recorded at fair value at the date of acquisition. No allowance for loan and lease losses is recorded on the acquisition date as the fair value of the acquired assets incorporates assumptions regarding credit risk. The fair value adjustment on acquired loans without evidence of credit deterioration since origination will be accreted into earnings as a yield adjustment using the level yield method over the remaining life of the loan.

 

Acquired loans and leases with evidence of credit deterioration since origination such that it is probable at acquisition that the Bank will be unable to collect all contractually required payments are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of the acquisition date, the difference between contractually required payments and the cash flows expected to be collected is the nonaccretable difference, which is included as a reduction of the carrying amount of acquired loans and leases. If the timing and amount of the future cash flows is reasonably estimable, any excess of cash flows expected at acquisition over the estimated fair value is the accretable yield and is recognized in interest income over the asset's remaining life using a level yield method.

 

Goodwill and other intangible assets. The Company accounts for acquisitions using the acquisition method of accounting. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer's balance sheet as goodwill. An intangible asset is recognized as an asset apart from goodwill if it arises from contractual or other legal rights or if it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. Intangible assets are identifiable assets, such as core deposit intangibles, resulting from acquisitions which are amortized on a straight-line basis over an estimated useful life and evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.

 

Goodwill is not amortized but is evaluated at least annually for impairment or more frequently if events occur or circumstances change that may trigger a decline in the value of the reporting unit or otherwise indicate that a potential impairment exists. Potential impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value. To the extent the reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired, and implied fair value of the reporting unit's goodwill will be determined. If the implied fair value of the reporting unit's goodwill is lower than its carrying amount, goodwill is impaired and is written down to the implied fair value. The loss recognized is limited to the carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair value will not result in the reversal of previously recognized losses.

 

Valuation of real estate owned. Fair value is estimated through current appraisals, real estate brokers’ opinions or listing prices.  As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. The estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

 

Valuation of investment securities. The Company has classified all of its investment securities as available for sale. Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income taxes, reported as a separate component of stockholders’ equity with any related changes included in accumulated other comprehensive income (loss). The Company utilizes independent third parties as its principal sources for determining fair value of its investment securities that are measured on a recurring basis. For investment securities traded in an active market, the fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. The fair values of the Company’s investment securities traded in both active and inactive markets can be volatile and may be influenced by a number of factors including market interest rates, prepayment speeds, discount rates, credit quality of the issuer, general market conditions including market liquidity conditions and other factors. Factors and conditions are constantly changing and fair values could be subject to material variations that may significantly impact the Company’s financial condition, results of operations and liquidity.

 

Valuation of deferred tax assets. We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We evaluate our deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including our historical profitability and projections of future taxable income. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management-approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between our projected operating performance, our actual results and other factors.

 

 
30

 

 

RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

 

Net Interest Income. The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest earning assets, such as loans and investments, and interest expense on interest bearing liabilities, such as deposits and borrowings. Net interest income for the first quarter of 2015 was $12.6 million compared to $3.9 million in 2014. The increase in net interest income resulted from changes in interest income and interest expense discussed below.

 

Interest Income. Interest income for the first quarter of 2015 was $14.1 million compared to $4.8 million in 2014. The increase in interest income for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to increases in the average balances of loans receivable and investment securities and yields earned on loans receivable as a result of the merger with FNSC.

 

Interest Expense.   Interest expense for the first quarter of 2015 was $1.5 million compared to $0.9 million for the same period in 2014. The increase in interest expense for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to an increase in the average balances of deposit accounts and borrowings due to the merger with FNSC, partially offset by a decrease in the average rate paid on deposits.

 

Rate/Volume Analysis. The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by prior rate); (ii) changes in rate (changes in rate multiplied by prior average volume); (iii) changes in rate-volume (changes in rate multiplied by the change in average volume); and (iv) the net change.

 

   

Three Months Ended March 31,

 
   

2015 vs. 2014

 
   

Increase (Decrease)

Due to

         
   

Volume

   

Rate

   

Rate/

Volume

   

Total

Increase

(Decrease)

 
   

(In Thousands)

 

Interest income:

                               

Loans receivable

  $ 6,926     $ 801     $ 1,342     $ 9,069  

Investment securities

    803       (197 )     (311 )     295  

Other interest-earning assets

    110       (58 )     (61 )     (9 )

Total interest-earning assets

    7,839       546       970       9,355  
                                 

Interest expense:

                               

Deposits

    1,174       (314 )     (425 )     435  

Other borrowings

    277       (5 )     (70 )     202  

Total interest-bearing liabilities

    1,451       (319 )     (495 )     637  

Net change in net interest income

  $ 6,388     $ 865     $ 1,465     $ 8,718  

 

 
31

 

 

Average Balance Sheets. The following table sets forth certain information relating to the Company's average balance sheets and reflects the average annualized yield on assets and average annualized cost of liabilities for the periods indicated. Such yields and costs are derived by dividing interest income or interest expense by the average balance of assets or liabilities, respectively, for the periods presented and are presented on an annualized basis. Average balances are based on daily balances during the periods. Interest rate spread represents the difference between the weighted average yield on average interest earning assets and the weighted average cost of average interest bearing liabilities. Net interest margin represents net interest income as a percentage of average interest earning assets.

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
   

Average

Balance

   

Interest

   

Average

Yield/

Cost

   

Average

Balance

   

Interest

   

Average

Yield/

Cost

 
   

(Dollars in Thousands)

 

Interest-earning assets:

                                               

Loans receivable(1)

  $ 1,045,946     $ 13,204       5.12 %   $ 391,024     $ 4,135       4.29 %

Investment securities(2)

    183,857       806       1.78       71,521       511       2.90  

Other interest-earning assets

    95,322       96       0.41       46,471       105       0.91  

Total interest-earning assets

    1,325,125       14,106       4.32       509,016       4,751       3.78  

Noninterest-earning assets

    179,591                       47,410                  

Total assets

  $ 1,504,716                     $ 556,426                  

Interest-bearing liabilities:

                                               

Deposits

  $ 1,072,255       1,304       0.49     $ 456,275       869       0.77  

Other borrowings

    80,590       224       1.13       5,923       22       1.51  

Total interest-bearing liabilities

    1,152,845       1,528       0.54       462,198       891       0.78  

Noninterest-bearing deposits

    175,457                       20,313                  

Noninterest-bearing liabilities

    3,603                       2,102                  

Total liabilities

    1,331,905                       484,613                  

Stockholders' equity

    172,811                       71,813                  

Total liabilities and stockholders' equity

  $ 1,504,716                     $ 556,426                  
                                                 

Net interest income

          $ 12,578                     $ 3,860          

Net earning assets

  $ 172,280                     $ 46,818                  

Interest rate spread

                    3.78 %                     3.00 %

Net interest margin

                    3.85 %                     3.08 %

Ratio of interest-earning assets to Interest-bearing liabilities

                    114.94 %                     110.13 %

(1) Includes nonaccrual loans. 

(2) Includes FHLB of Dallas and Federal Reserve Bank stock.

 

The Company’s net interest margin increased primarily as a result of an increase in yields on loans receivable resulting from loans acquired in the FNSC transaction.

 

Provision for Loan Losses. The provision for loan losses represents the amount added to the allowance for loan and lease losses (“ALLL”) for the purpose of maintaining the ALLL at a level considered adequate to cover probable credit losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of the balance sheet date. The adequacy of the ALLL is evaluated quarterly by management of the Bank based on the Bank’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and other qualitative factors.

 

Management determined that a provision for loan losses of $300,000 was required for the three months ended March 31, 2015, to maintain the ALLL at an adequate level. Management determined the necessity of the provision and the amount thereof taking into consideration (i) loans originated by the Bank during the quarter, (ii) changes in the overall portfolio of nonperforming and classified loans of the Bank, (iii) continued improvement in the credit quality of the Bank’s loan portfolio, and (iv) ALLL coverage of nonaccrual loans. The ALLL as a percentage of loans receivable was 1.3% at March 31, 2015 and December 31, 2014. The ALLL as a percentage of nonaccrual loans was 138.6% at March 31, 2015, compared to 139.8% at December 31, 2014. The ALLL as a percentage of classified loans was 38.7% at March 31, 2015, compared to 38.8% at December 31, 2014. See “Allowance for Loan and Lease Losses” in the “Asset Quality” section. A regular review will be completed on acquired loans to determine if changes in estimated cash flows have occurred. Subsequent decreases in the amount expected to be collected may result in a provision for loan and lease losses with a corresponding increase in the ALLL.

 

Noninterest Income. Noninterest income is generated primarily through deposit account fee income, profit on sale of loans, and earnings on life insurance policies. Total noninterest income of $3.1 million for the three months ended March 31, 2015 increased from $1.2 million for the same period in 2014. The increase in the three month comparison period was primarily due to an increase in deposit fee income and gain on sale of loans. The increase in deposit fee income was attributable to the merger with FNSC. The increase in profit on sales of loans was due to an increase in the number of loans sold and the average profit on sales of loans.

 

 
32

 

 

Noninterest Expense. Noninterest expense consists primarily of employee compensation and benefits, data processing expense, office occupancy expense, real estate owned expense, and other operating expense. Total noninterest expense increased $6.9 million or 129.2% during the first quarter of 2015 compared to the first quarter of 2014. The variances in certain noninterest expense items are further explained in the following paragraphs, with the aggregate expense increase for the three month comparison periods being primarily related to the increase in employee compensation expense, net occupancy expense, data processing related expenses and other expenses related to the acquisition of FNSC.

 

Salaries and Employee Benefits. Salaries and employee benefits increased $3.3 million for the three months ended March 31, 2015 compared to the same period in 2014, respectively. The increase in the three month comparison period was primarily due to the merger with FNSC. The changes in the composition of this line item are presented below (in thousands):

 

   

Three Months Ended

March 31,

       
   

2015

   

2014

    Change  

Salaries

  $ 5,528     $ 2,450     $ 3,078  

Payroll taxes

    509       286       223  

Insurance

    441       131       310  

401(k) plan expenses

    66       38       28  

Defined benefit plan

    32       153       (121 )

Stock compensation

    115       87       28  

Other

    (232 )     (83 )     (149 )

Total

  $ 6,459     $ 3,062     $ 3,397  

 

Net Occupancy Expense. The increase in net occupancy expense during the three months ended March 31, 2015 compared to the same period in 2014 of $849,000 was primarily related to the merger with FNSC.

 

Real Estate Owned, net. The changes in the composition of this line item are presented below (in thousands):

 

   

Three Months Ended

March 31,

       
   

2015

   

2014

    Change  

Loss provisions

  $ --     $ 242     $ (242 )

Net gain on sales

    (42 )     (81 )     39  

Rental income

    (23 )     (53 )     30  

Taxes and insurance

    41       37       4  

Other

    62       72       (10 )

Total

  $ 38     $ 217     $ (179 )

 

The decrease in loss provisions on REO for the first quarter of 2015 compared to the same period in 2014 is due to the Company’s review of REO properties in the first quarter of 2014 and its decision to more aggressively market certain properties, resulting in 2014 REO losses. No additional provisions were needed in 2015 above those previously recorded. Real estate owned expenses such as taxes, insurance and maintenance as well as rental income are expected to continue to decline as the size of the REO portfolio decreases. Future levels of loss provisions and net gains or losses on sales of real estate owned will depend on market conditions. The acquisition of FNSC had no material impact on REO, net.

 

Data Processing. The increase in data processing expense during the three months ended March 31, 2015 compared to the same period in 2014 of $751,000 was primarily related to core conversion expenses paid in the first quarter of 2015 associated with integrating the data processing platforms of First National and Heritage Bank to certain of the Company’s data processing platforms.

 

 
33

 

 

Other Noninterest Expenses. The increases in other noninterest expenses during the three months ended March 31, 2015 compared to the same period in 2014 of $2.1 million was primarily due to expenses related to the integration of FNSC and rebranding expenses. During the first quarter of 2015, the charters of First Federal Bank, First National and Heritage Bank were merged into a single bank charter known as Bear State Bank, N.A. The changes in other noninterest expenses are presented below (in thousands):

 

   

Three Months Ended

March 31,

   

 

 
   

2015

   

2014

    Change  

FDIC insurance

  $ 222     $ 120     $ 102  

Amortization of intangible assets

    156       --       156  

Professional fees

    376       195       181  

Advertising and public relations

    680       103       577  

Postage and supplies

    235       91       144  

Other

    1,468       548       920  

Total

  $ 3,137     $ 1,057     $ 2,080  

 

Income Taxes. The provision for income taxes was $885,000 for the three months ended March 31, 2015 compared to zero for the three months ended March 31, 2014. The increase between the periods was the result of increased taxable income in the 2015 period compared to the 2014 period. The effective tax rate for the three months ended March 31, 2015 was 28.1%. A reconciliation between the statutory federal income tax rates and the Company’s effective tax rate is included in Note 12 to the Unaudited Condensed Consolidated Financial Statements.

  

LENDING ACTIVITIES

 

Loans Receivable. Changes in loan composition between March 31, 2015 and December 31, 2014, are presented in the following table (dollars in thousands).

 

   

March 31,

   

December 31,

   

Increase

         
   

2015

   

2014

   

(Decrease)

   

% Change

 
                                 

One- to four-family residential

  $ 315,146     $ 320,489     $ (5,343 )     (1.7 )%

Multifamily residential

    51,673       45,181       6,492       14.4  

Nonfarm nonresidential

    336,370       369,974       (33,604 )     (9.1 )

Farmland

    50,244       47,199       3,045       6.5  

Construction and land development

    100,918       98,594       2,324       2.4  

Total real estate loans

    854,351       881,437       (27,086 )     (3.1 )
                                 

Commercial

    152,913       139,871       13,042       9.3  
                                 

Consumer

    32,613       33,809       (1,196 )     (3.5 )
                                 

Total loans receivable

    1,039,877       1,055,117       (15,240 )     (1.4 )

Unearned discounts and net deferred loan costs

    (64 )     (235 )     171       (72.8 )

Allowance for loan and lease losses

    (13,762 )     (13,660 )     (102 )     0.7  
                                 

Loans receivable, net

  $ 1,026,051     $ 1,041,222     $ (15,171 )     (1.5 )%

 

Total loans receivable decreased $15.2 million to $1.04 billion at March 31, 2015, compared to $1.06 billion at December 31, 2014. The decrease in the Bank’s loan portfolio was primarily due to a decrease in nonfarm nonresidential loans related to loans paid off and principal payments made during the quarter.

 

 
34

 

 

ASSET QUALITY

 

Nonperforming Assets. The following table sets forth the amounts and categories of the Company’s nonperforming assets at the dates indicated (dollars in thousands).

 

   

March 31, 2015

   

December 31, 2014

         
   

Net (2)

   

% Total

Assets

   

Net (2)

   

% Total

Assets

   

Increase

(Decrease)

 

Nonaccrual Loans:

                                       

One- to four-family residential

  $ 4,946       0.34 %   $ 4,959       0.33 %   $ (13 )

Nonfarm nonresidential

    3,050       0.21 %     3,113       0.21 %     (63 )

Farmland

    731       0.05 %     734       0.05 %     (3 )

Construction and land development

    599       0.04 %     624       0.04 %     (25 )

Commercial

    536       0.03 %     306       0.02 %     230  

Consumer

    67       --       34       --       33  
                                         

Total nonaccrual loans

    9,929       0.67 %     9,770       0.65 %     159  
                                         

Accruing loans 90 days or more past due

    --       --       353       0.02 %     (353 )
                                         

Real estate owned

    4,719       0.32 %     4,792       0.31 %     (73 )
                                         

Total nonperforming assets

    14,648       0.99 %     14,915       0.98 %     (267 )

Performing restructured loans

    332       0.02 %     566       0.04 %     (234 )
                                         

Total nonperforming assets and performing restructured loans (1)

  $ 14,980       1.01 %   $ 15,481       1.02 %   $ (501 )
 

(1)

The table does not include substandard loans which were judged not to be impaired totaling $25.3 million at March 31, 2015 and $24.9 million at December 31, 2014 or acquired ASC 310-30 purchased credit impaired loans which are considered performing at March 31, 2015.

 

(2)

Loan balances are presented net of undisbursed loan funds, partial charge-offs and interest payments recorded as reductions in principal balances for financial reporting purposes.

 

Nonaccrual Loans. The composition of nonaccrual loans by status was as follows as of the dates indicated (dollars in thousands):

 

   

March 31, 2015

   

December 31, 2014

   

Increase (Decrease)

 
   

Balance

   

Percentage of Total

   

Balance

   

Percentage of Total

   

Balance

   

Percentage of Total

 
                                                 

Bankruptcy or foreclosure

  $ 1,817       18.3 %   $ 953       9.8 %   $ 864       8.5 %

Over 90 days past due

    2,974       30.0       4,255       43.5       (1,281 )     (13.5 )

30-89 days past due

    1,683       17.0       1,249       12.8       434       4.2  

Not past due

    3,455       34.7       3,313       33.9       142       0.8  
    $ 9,929       100.0 %   $ 9,770       100.0 %   $ 159       --  

 

The following table presents nonaccrual loan activity for the three months ended March 31, 2015 and 2014 (in thousands):

 

   

Three Months Ended

March 31, 2015

   

Three Months Ended

March 31, 2014

 
                 

Balance of nonaccrual loans—beginning of period

  $ 9,770     $ 11,938  

Loans added to nonaccrual status

    756       811  

Net cash payments

    (306 )     (690 )

Loans returned to accrual status

    --       (393 )

Charge-offs to the ALLL

    (69 )     (121 )

Transfers to REO

    (222 )     (614 )
                 

Balance of nonaccrual loans—end of period

  $ 9,929     $ 10,931  

 

 
35

 

 

Real Estate Owned. Changes in the composition of real estate owned between December 31, 2014 and March 31, 2015 are presented in the following table (dollars in thousands).

 

   

December 31,

2014

   

Additions

   

Fair Value Adjustments

   

Net Sales

Proceeds(1)

   

Net Gain

(Loss)

   

March 31,

2015

 

One- to four-family residential

  $ 1,041     $ 318     $ --     $ (333 )   $ 27     $ 1,053  

Multifamily

    --       293       --       --       --       293  

Land

    2,795       2       --       (395 )     15       2,417  

Nonfarm nonresidential

    956       --       --       --       --       956  

Total

  $ 4,792     $ 613     $ --     $ (728 )   $ 42     $ 4,719  
                                                 

(1) Net sales proceeds include $147,000 of loans made by the Bank to facilitate the sale of real estate owned.

 

Classified Assets. Federal regulations require that each financial institution risk rate their classified assets into three classification categories - substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is generally considered uncollectible and of such little value that continuance as an asset is not warranted. As of March 31, 2015 and December 31, 2014, the Bank did not have any assets classified as doubtful or loss.  

 

The table below summarizes the Bank’s classified assets as of the dates indicated (dollars in thousands):

 

   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 

Nonaccrual loans

  $ 9,929     $ 9,770     $ 10,931  

Accruing classified loans

    25,635       25,429       3,138  

Classified loans

    35,564       35,199       14,069  

Real estate owned

    4,719       4,792       7,031  
                         

Total classified assets

  $ 40,283     $ 39,991     $ 21,100  

Texas Ratio (1)

    9.1 %     9.7 %     21.6 %

Classified Assets Ratio (2)

    24.9 %     26.1 %     25.3 %
     
 

(1)

Defined as the ratio of nonaccrual loans, accruing loans over 90 days past due and real estate owned to Tier 1 capital plus the allowance for loan and lease losses.

  (2) Defined as the ratio of total classified assets to Tier 1 capital plus the allowance for loan and lease losses.

 

Allowance for Loan and Lease Losses. The Bank maintains an allowance for loan and lease losses for known and inherent losses determined by ongoing quarterly assessments of the loan portfolio. The estimated appropriate level of the ALLL is maintained through a provision for loan losses charged to earnings. Charge-offs are recorded against the ALLL when management believes the estimated loss has been confirmed. Subsequent recoveries, if any, are credited to the ALLL.

 

The ALLL consists of general and allocated (also referred to as specific) loan loss components. For loans that are determined to be impaired that are troubled debt restructurings (“TDRs”) and impaired loans where the relationship totals $250,000 or more, a specific loan loss allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than its carrying value. The general loan loss allowance applies to loans that are not impaired and those impaired relationships under $250,000 and is based on historical loss experience adjusted for qualitative factors.

 

The ALLL represents management’s estimate of incurred credit losses inherent in the Bank’s loan portfolio as of the balance sheet date. The estimation of the ALLL is based on a variety of factors, including past loan loss experience, the current credit profile of the Bank’s borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, and general economic conditions, including unemployment, bankruptcy trends, vacancy rates and the level and trend of home sales and prices. Losses are recognized when available information indicates that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or conditions change.

 

 
36

 

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the note. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the short fall in relation to the principal and interest owed. Each quarter, classified loans where the borrower’s total loan relationship exceeds $250,000 are evaluated for impairment on a loan-by-loan basis. Nonaccrual loans and TDRs are considered to be impaired loans. TDRs are restructurings in which the Bank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that the Bank would not otherwise consider. Impairment is measured quarterly on a loan-by-loan basis for all TDRs and impaired loans where the aggregate relationship balance exceeds $250,000 by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, if the loan is collateral dependent. Impaired loans under this threshold are aggregated and included in loan pools with their ALLL calculated as described in the following paragraph.

 

Groups of smaller balance homogeneous loans are collectively evaluated for impairment. Homogeneous loans are those that are considered to have common characteristics that provide for evaluation on an aggregate or pool basis. The Bank considers the characteristics of (1) one- to four-family residential mortgage loans; (2) unsecured consumer loans; and (3) collateralized consumer loans to permit consideration of the appropriateness of the ALLL of each group of loans on a pool basis. The primary methodology used to determine the appropriateness of the ALLL includes segregating impaired loans from the pools of loans, valuing these loans, and then applying a loss factor to the remaining pool balance based on several factors including past loss experience, inherent risks, and economic conditions in the primary market areas.

 

Acquired loan amounts deemed uncollectible at acquisition date are factored into the fair value calculation and are excluded from the ALLL. Quarterly reviews are completed on acquired loans to determine if changes in estimated cash flows have occurred. Subsequent decreases in the amount expected to be collected may result in a provision for loan and lease losses with a corresponding increase in the ALLL. Subsequent increases in the amount expected to be collected result in a reversal of any previously recorded provision for loan and lease losses and related increase in ALLL, if any, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded.

 

In estimating the amount of credit losses inherent in the loan portfolio, various judgments and assumptions are made. For example, when assessing the condition of the overall economic environment, assumptions are made regarding market conditions and their impact on the loan portfolio. For impaired loans that are collateral dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold in the event that the Bank has to foreclose or repossess the collateral.

 

The Company considers the ALLL totaling approximately $13.8 million to be appropriate based on evaluations of the management of the Bank of the loan portfolio and the losses inherent in the loan portfolio as of March 31, 2015. Actual losses may substantially differ from currently estimated losses. Adequacy of the ALLL is periodically evaluated, and the ALLL could be significantly decreased or increased, which could materially affect the Company’s financial condition and results of operations.

 

 
37

 

 

The following table summarizes changes in the allowance for loan and lease losses and other selected statistics for the periods indicated.

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
   

(Dollars in Thousands)

 
                 

Total loans outstanding at end of period

  $ 1,039,877     $ 396,590  

Average loans outstanding

  $ 1,045,946     $ 391,024  

Allowance at beginning of period

  $ 13,660     $ 12,711  

Charge-offs:

               

One- to four-family residential

    (79 )     (8 )

Multifamily residential

    --       --  

Nonfarm nonresidential

    --       (113 )

Farmland

    --       --  

Construction and land development

    --       (152 )

Commercial

    --       --  

Consumer (1)

    (54 )     (28 )

Purchased credit impaired

    (253 )     --  

Total charge-offs

    (386 )     (301 )

Recoveries:

               

One- to four-family residential

    20       10  

Multifamily residential

    --       --  

Nonfarm nonresidential

    33       2  

Farmland

    --       --  

Construction and land development

    101       41  

Commercial

    3       1  

Consumer (1)

    31       14  

Purchased credit impaired

    --       --  

Total recoveries

    188       68  

Net charge-offs

    (198 )     (233 )

Total provisions for losses

    300       --  

Allowance at end of period

  $ 13,762     $ 12,478  
                 

ALLL as a percentage of total loans outstanding at end of period (2)

    1.3 %     3.2 %
                 

Net loans charged-off as a percentage of average loans outstanding

    0.1 %     0.2 %
                 

ALLL as a percentage of nonaccrual loans

    138.6 %     114.2 %
                 
 

(1)

Consumer loan charge-offs include overdraft charge-offs of $51,000 and $21,000 for the three months ended March 31, 2015 and 2014, respectively. Consumer loan recoveries include recoveries of overdraft charge-offs of $14,000 and $14,000 for the three months ended March 31, 2015 and 2014, respectively.

 

(2)

The allowance for loan losses plus the discount on acquired loans as a percentage of total loans outstanding gross of the acquired loan discount was 2.2% at March 31, 2015. There were no acquired loans for the period ended March 31, 2014.

 

 
38

 

 

The following table presents, on a consolidated basis, the allocation of the Bank’s ALLL by the type of loan at each of the dates indicated as well as the percentage of loans in each category to total loans receivable. These allowance amounts have been computed using the Bank’s internal models. The amounts shown are not necessarily indicative of the actual future losses that may occur within a particular category.

 

   

March 31,

 
   

2015

   

2014

 
   

Amount

   

Percentage
of Loans

   

Amount

   

Percentage
of Loans

 
   

(Dollars in Thousands)

 
                                 

One-to-four family residential

  $ 4,219       29.90 %   $ 4,407       31.93 %

Multifamily residential

    633       4.97       847       6.44  

Nonfarm nonresidential

    3,970       31.47       4,134       44.74  

Farmland

    487       4.82       152       1.22  

Construction and land development

    1,070       9.39       1,059       6.04  

Commercial

    1,659       14.56       1,799       8.63  

Consumer

    107       3.13       80       1.00  

Purchased credit impaired

    1,617       1.76       --       --  

Total

  $ 13,762       100.00 %   $ 12,478       100.00 %

 

INVESTMENT SECURITIES

 

The following table sets forth the carrying values of the Company's investment securities available for sale (dollars in thousands).

 

   

March 31, 2015

   

December 31, 2014

   

Increase (Decrease)

 
                         

U.S. Treasuries and Government agencies

  $ 76,511     $ 77,332     $ (821 )

Municipal securities

    62,324       59,080       3,244  

Mortgage-backed securities

    37,764       37,806       (42 )

Total

  $ 176,599     $ 174,218     $ 2,381  

 

Municipal securities increased due to purchases in the first quarter of 2015. The overall yield of the investment portfolio was 1.71% as of March 31, 2015 and December 31, 2014.

 

DEPOSITS

 

Changes in the composition of deposits between March 31, 2015 and December 31, 2014, are presented in the following table (dollars in thousands).

 

   

March 31,

   

December 31,

   

Increase

   

 

 
   

2015

   

2014

    (Decrease)     % Change  
                                 

Checking accounts

  $ 553,062     $ 576,034     $ (22,972 )     (3.99 )%

Money market accounts

    107,172       108,794       (1,622 )     (1.49 )

Savings accounts

    119,621       115,375       4,246       3.68  

Certificates of deposit

    456,403       463,594       (7,191 )     (1.55 )
                                 

Total deposits

  $ 1,236,258     $ 1,263,797     $ (27,539 )     (2.18 )%

 

The decrease in checking accounts was due primarily to a decrease in account balances of existing customers. The Bank manages the pricing of its deposits to maintain deposit balances commensurate with its overall balance sheet management and liquidity position.

 

 
39

 

 

OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS

 

In the normal course of business and to meet the needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments could involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statements of financial condition.

 

The Bank does not use financial instruments with off-balance sheet risk as part of its asset/liability management program or for trading purposes. The Bank’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

 

The funding period for construction loans is generally 6 to 18 months and commitments to originate mortgage loans are generally outstanding for no more than 60 days.

 

In the normal course of business, the Bank makes commitments to buy or sell assets or to incur or fund liabilities. Commitments include, but are not limited to:

 

the origination, purchase or sale of loans; and

 

the fulfillment of commitments under letters of credit, extensions of credit on lines of credit, construction loans, and under predetermined overdraft protection limits.

 

At March 31, 2015, the Bank’s off-balance sheet arrangements principally included lending commitments, which are described below. At March 31, 2015, the Company had no interests in non-consolidated special purpose entities.

 

At March 31, 2015, commitments included:

 

total approved loan origination commitments outstanding amounting to $4.6 million, including approximately $147,000 of loans committed to sell;

 

rate lock agreements with customers of $11.1 million, all of which have been locked with an investor;

 

funded mortgage loans committed to sell of $11.1 million;

 

unadvanced portion of construction loans of $53.2 million;

 

unused lines of credit of $81.8 million;

 

revolving credit card unused credit of $5.1 million;

 

outstanding standby letters of credit of $3.4 million; and

 

total predetermined overdraft protection limits of $14.2 million.

 

Total unfunded commitments to originate loans for sale and the related commitments to sell of $11.1 million meet the definition of a derivative financial instrument. The related asset and liability are considered immaterial at March 31, 2015.

 

Historically, a very small percentage of predetermined overdraft limits have been used. At March 31, 2015, overdrafts of accounts with Bounce Protection™ represented usage of 2.41% of the limit.

 

Liquidity and Capital Resources

 

The primary source of funds for the Company is the receipt of dividends from the Bank, the receipt of management fees from the Bank, cash balances maintained, and borrowings from nonaffiliated sources. Payment of dividends by the Bank is subject to certain regulatory restrictions as set forth in banking laws and regulations.

 

 
40

 

 

The Company’s primary uses of cash include injecting capital into subsidiaries, stock repurchases, debt service requirements, and paying for general operating expenses.

 

The Company's objective as it relates to liquidity is to ensure that the Bank has funding and access to sources of funding to ensure that cash flow requirements for deposit withdrawals and credit demands are met in an orderly and timely manner without unduly penalizing profitability. A major component of our overall asset/liability management efforts surrounds pricing of the liability side to ensure adequate liquidity and proper spread and interest margin management. Reliance on any one funding source is kept to a minimum by prioritizing those sources in terms of both availability and time to activation.

 

In order to maintain proper levels of liquidity, the Bank has several sources of funds available. Generally the Bank relies on cash on hand and due from banks, fed funds sold, cash flow generated by the repayment of principal and interest on and/or the sale of loans and securities and deposits as its primary sources of funds. Commercial, consumer and public funds customers in our local markets are the principal deposit sources utilized. The Bank uses those local market deposits, along with secondary sources of funding including FHLB advances, federal funds purchased, FRB borrowings and other alternative funding sources to fund continuing operations, make loans and leases, acquire investment securities and other assets.

 

At March 31, 2015, the Bank’s unused borrowing availability primarily consisted of (1) $66.4 million of available borrowing capacity with the FHLB, (2) $62.8 million of investment securities available to pledge for federal funds or other borrowings and (3) $52.0 million of available unsecured federal funds borrowing lines. In addition, at March 31, 2015, the Company had available borrowing capacity of $5.7 million with an unaffiliated bank.

 

At March 31, 2015, the Company’s and the Bank’s overall liquidity ratio was approximately 11.79% which represents liquid assets as a percentage of deposits and borrowings. As of the same date, the Company’s overall adjusted liquidity ratio was 16.06%, which represents liquid assets plus borrowing capacity at the FHLB, FRB and correspondent banks as a percentage of deposit and borrowings. The Company anticipates it will continue to rely primarily on principal and interest repayments on loans and securities, and deposits to provide liquidity, as well as other funding sources as appropriate. Additionally, where appropriate, the secondary sources of borrowed funds described above will be used to augment the Company’s primary funding sources. We believe that we have sufficient liquidity to satisfy the current and projected operations of the Company and the Bank.

 

At March 31, 2015, the Company’s leverage, common equity tier 1, tier 1 risk-based and total risk-based capital ratios were 8.96%, 11.39%, 11.39% and 12.58%, respectively, compared to capital adequacy requirements of 4%, 4.5%, 6% and 8%, respectively. See Note 17 to the Consolidated Financial Statements for more information about the Company’s and the Bank’s capital requirements and ratios.

 

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the SEC and other oral and written statements or reports by the Company, the Bank or the management thereof, include certain forward-looking statements that are intended to be covered by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements presented herein with respect to, among other things, the Company’s or the Bank’s plans, objectives, expectations and intentions, anticipated changes in noninterest expenses in future periods, changes in earnings, impact of outstanding off-balance sheet commitments, sources of liquidity and that we have sufficient liquidity, the sufficiency of the allowance for loan losses, expected loan, asset, and earnings growth, growth in new and existing customer relationships, our intentions with respect to our investment securities, and financial and other goals and plans are forward looking. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “will,” “should,” and similar expressions, or the negative thereof, as they relate to the Company, the Bank or the management thereof, are intended to identify forward-looking statements.

 

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, assumptions and changes in circumstances that are difficult to predict and many of which are outside of our control. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, but are not limited to, general economic, capital market, credit market and real estate market conditions, competitive factors, strategic actions, including integrating or managing acquisitions, failure of assumptions underlying the establishment of our allowance for loan and lease losses, legislative and regulatory changes, and disruptions to our technology network. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on Form 10-K as filed with the SEC on March 27, 2015. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake the responsibility, and specifically disclaims any obligation, to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

MARKET RISK MANAGEMENT

 

Market risk arises from changes in interest rates.  We have risk management policies to monitor and limit exposure to market risk.  In asset and liability management activities, policies designed to minimize structural interest rate risk are in place.  The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified.

 

 
41

 

 

INTEREST RATE SENSITIVITY

 

Interest rate risk represents the potential impact of interest rate changes on net income and capital resulting from mismatches in repricing opportunities of assets and liabilities over a period of time.  A number of tools are used to monitor and manage interest rate risk, including simulation models and interest sensitivity gap analysis.  Management uses simulation models to estimate the effects of changing interest rates and various balance sheet strategies on the level of the Company’s net income and capital.  As a means of limiting interest rate risk to an acceptable level, management may alter the mix of floating and fixed-rate assets and liabilities, change pricing schedules on assets and liabilities and manage investment maturities during future security purchases.

   

The simulation model incorporates management’s assumptions regarding the level of interest rates or balance changes for indeterminate maturity deposits for a given level of market rate changes.  These assumptions have been developed through anticipated pricing behavior.  Key assumptions in the simulation models include the relative timing of prepayments, cash flows and maturities.  These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of a change in interest rates on net income or capital.  Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

 

As of March 31, 2015, the model simulations projected that 100, 200 and 300 basis point increases in interest rates would result in positive variances in net interest income of 1.14%, 2.10% and 2.31%, respectively, relative to the base case over the next twelve months and decreases in interest rates of 100 basis points would result in a negative variance in net interest income of (0.12)% relative to the base case over the next twelve months.  The likelihood of a decrease in interest rates as of March 31, 2015 is considered remote given current interest rate levels.  These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve month measurement period and that changes in market interest rates are instantaneous, parallel and sustained across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates.  We believe these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude.  As interest-bearing assets and liabilities reprice in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion.  Since these correlations are based on competitive and market conditions, we anticipate that our future results will likely be different from the foregoing estimates, and such differences could be material.

 

Item 4. Controls and Procedures.

 

Our management evaluated, with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are operating effectively.

 

The Company’s management, including the Company’s Principal Executive Officer and the Principal Financial Officer, regularly review our controls and procedures and make changes intended to ensure the quality of our financial reporting. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1.      Legal Proceedings

 

Neither the Company nor the Bank are a party to or involved in any pending legal proceedings other than non-material legal proceedings occurring in the ordinary course of business.

 

 
42

 

 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Repurchases of Equity Securities

 

Period

 

Total Number of Shares Purchased

   

Average Price Paid per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

   

Maximum Dollar Value that May Yet Be Purchased Under the Plans or Programs

 
                                 

January 1 to January 31, 2015

    --       --       --     $ 1,000,000  

February 1 to February 28, 2015

    --       --       --     $ 1,000,000  

March 1 to March 31, 2015

    --     $ 9.75       2,100     $ 979,462  

 

The shares were repurchased under a share repurchase program that was approved by the Board of Directors on March 13, 2015, whereby the Company is permitted to repurchase up to $1 million of its common stock. The 2015 repurchase program will expire March 13, 2016 but can be renewed annually by the Board of Directors.

 

 

Item 6.     Exhibits

 

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

 

 
43

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

    BEAR STATE FINANCIAL, INC.  
       

 

 

 

 

 

 

 

 

Date:                         May 14, 2015

By:

/s/ Richard N. Massey

 

 

 

Richard N. Massey 

 

 

 

Chairman

(principal executive officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:                         May 14, 2015

By:

/s/ Matt Machen

 

 

 

Matt Machen 

 

 

 

Executive Vice President and Chief

Financial Officer

(principal financial officer) 

 

 

 

44

 

 

Bear State Financial, Inc.

Exhibit Index

 

Exhibit No.

Description

   

2.1

Agreement and Plan of Merger by and between Bear State Financial, Inc. (formerly known as First Federal Bancshares of Arkansas, Inc.) and First National Security Company, dated July 1, 2013 (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2013). (1)

3.1

Amended and Restated Articles of Incorporation of Bear State Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on June 3, 2014).

3.2

Amended and Restated Bylaws of Bear State Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on June 19, 2014).

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Section 906 Certification of the PEO.

32.2

Section 906 Certification of the PFO.

   

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase.

101.LAB

XBRL Taxonomy Extension Label Linkbase.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase.

101.DEF

XBRL Taxonomy Extension Definition Linkbase

   

 

 

(1)

Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules to this Agreement have not been filed with this exhibit. The schedules contain various items related to the business of and the representations and warranties made by the Company and FNSC. The Registrant agrees to furnish supplementally any omitted schedule to the SEC upon request.