QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File No.:0-28312
Bear State Financial, Inc.
(Exact name of registrant as specified in its charter)
Arkansas
71-0785261
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification Number)
900 South Shackleford Rd, Suite 605
Little Rock, Arkansas
72211
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (501) 975-6033
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☐
Accelerated Filer ☒
Non-accelerated Filer ☐
Smaller reporting company ☐
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of October 31, 2016, there were issued and outstanding 37,616,931 shares of the Registrant's Common Stock, par value $.01 per share.
BEAR STATE FINANCIAL, INC.
TABLE OF CONTENTS
Part I.
Financial Information
Page
Item 1.
Financial Statements
Condensed Consolidated Statements of Financial Condition
1
Condensed Consolidated Statements of Income
2
Condensed Consolidated Statements of Comprehensive Income
3
Condensed Consolidated Statement of Stockholders’ Equity
4
Condensed Consolidated Statements of Cash Flows
5
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
45
Item 4.
Controls and Procedures
46
Part II.
Other Information
Item 1.
Legal Proceedings
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 6.
Exhibits
46
Signatures
Exhibit Index
Part I. Financial Information
Item 1. Financial Statements
BEAR STATE FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
September 30,
2016
December 31,
2015
ASSETS
Cash and cash equivalents
$
86,887
$
52,131
Interest-bearing time deposits in banks
4,820
10,930
Federal funds sold
--
18
Investment securities—
Available for sale, at fair value
186,319
198,585
Held to maturity, at amortized cost
11,351
--
Other investment securities, at cost
11,838
9,563
Loans receivable, net of allowance of $15,112 and $14,550, respectively
1,500,054
1,444,102
Loans held for sale
13,995
7,326
Accrued interest receivable
6,694
6,157
Real estate owned - net
1,576
3,642
Office properties and equipment – net
55,052
63,641
Office properties and equipment held for sale
5,554
--
Cash surrender value of life insurance
56,849
52,602
Goodwill
40,196
40,196
Core deposit intangibles – net
10,608
11,374
Deferred tax asset, net
11,752
16,713
Prepaid expenses and other assets
4,393
3,236
TOTAL
$
2,007,938
$
1,920,216
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest bearing deposits
$
239,831
$
234,879
Interest bearing deposits
1,413,692
1,372,804
Total deposits
1,653,523
1,607,683
Short term borrowings
13,511
12,075
Other borrowings
102,656
72,380
Other liabilities
5,845
4,921
Total liabilities
1,775,535
1,697,059
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value—5,000,000 shares authorized; none issued at September 30, 2016 or December 31, 2015
--
--
Common stock, $0.01 par value—100,000,000 shares authorized; 37,600,986 and 37,987,722 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
376
380
Additional paid-in capital
209,131
211,817
Accumulated other comprehensive income
1,575
386
Retained earnings
21,321
10,574
Total stockholders’ equity
232,403
223,157
TOTAL
$
2,007,938
$
1,920,216
See notes to unaudited condensed consolidated financial statements.
1
BEAR STATE FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except earnings per share)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
September30,
September 30,
2016
2015
2016
2015
INTEREST INCOME:
Loans receivable
$
17,808
$
12,829
$
53,012
$
38,610
Investment securities:
Taxable
467
337
1,477
979
Nontaxable
508
516
1,456
1,546
Other
66
67
230
243
Total interest income
18,849
13,749
56,175
41,378
INTEREST EXPENSE:
Deposits
1,662
1,265
4,785
3,853
Other borrowings
352
264
1,027
767
Total interest expense
2,014
1,529
5,812
4,620
NET INTEREST INCOME
16,835
12,220
50,363
36,758
PROVISION FOR LOAN LOSSES
643
331
1,665
931
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
16,192
11,889
48,698
35,827
NONINTEREST INCOME:
Net gain on sales of investment securities
21
--
19
88
Deposit fee income
2,253
1,926
6,639
5,569
Earnings on life insurance policies
414
357
1,247
1,096
Gain on sales of loans
1,368
833
3,454
2,359
Other
277
202
960
715
Total noninterest income
4,333
3,318
12,319
9,827
NONINTEREST EXPENSES:
Salaries and employee benefits
7,618
5,518
23,725
17,521
Net occupancy expense
1,826
1,475
5,652
4,273
Real estate owned, net
(381
)
(341
)
(379
)
(431
)
FDIC insurance
224
199
870
637
Amortization of intangible assets
255
156
766
469
Data processing
1,341
1,103
4,180
3,814
Professional fees
545
261
1,700
1,391
Advertising and public relations
419
510
1,284
1,764
Postage and supplies
273
244
889
809
Other
1,280
1,340
5,036
3,726
Total noninterest expenses
13,400
10,465
43,723
33,973
INCOME BEFORE INCOME TAXES
7,125
4,742
17,294
11,681
INCOME TAX PROVISION
2,384
1,529
4,668
3,667
NET INCOME
$
4,741
$
3,213
$
12,626
$
8,014
Basic earnings per common share
$
0.13
$
0.10
$
0.34
$
0.24
Diluted earnings per common share
$
0.13
$
0.10
$
0.33
$
0.24
See notes to unaudited condensed consolidated financial statements.
2
BEAR STATE FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
September30,
September 30,
2016
2015
2016
2015
Net income
$
4,741
$
3,213
$
12,626
$
8,014
Other comprehensive income:
Unrealized holding gains (losses) on investment securities arising during the period
(359
)
1,159
1,946
373
Less: reclassification adjustments for realized loss (gain) included in net income
(21
)
--
(19
)
(88
)
Other comprehensive income (loss), before tax effect
(380
)
1,159
1,927
285
Tax effect
146
(444
)
(738
)
(109
)
Other comprehensive income (loss)
(234
)
715
1,189
176
COMPREHENSIVE INCOME
$
4,507
$
3,928
$
13,815
$
8,190
See notes to unaudited condensed consolidated financial statements.
3
BEAR STATE FINANCIAL, INC.
CONDENSEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(In thousands, except share data)
(Unaudited)
Issued
Additional
Accumulated Other
Total
Common Stock
Paid-In
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Income
Earnings
Equity
BALANCE – January 1, 2016
37,987,722
$
380
$
211,817
$
386
$
10,574
$
223,157
Net income
--
--
--
--
12,626
12,626
Other comprehensive income
--
--
--
1,189
--
1,189
Shares issued – restricted stock unit vesting
46,448
--
--
--
--
--
Shares issued – stock options exercised
19,998
--
130
--
--
130
Stock compensation
--
--
852
--
--
852
Dividends distributed - $0.050 per common share
--
--
--
--
(1,879
)
(1,879
)
Repurchase of common stock
(453,182
)
(4
)
(3,668
)
--
--
(3,672
)
BALANCE – September 30, 2016
37,600,986
$
376
$
209,131
$
1,575
$
21,321
$
232,403
See notes to unaudited condensed consolidated financial statements.
4
BEAR STATE FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2016
2015
OPERATING ACTIVITIES:
Net income
$
12,626
$
8,014
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
1,665
931
Provision for real estate losses
302
3
Deferred tax provision
5,115
3,590
Deferred tax valuation allowance
(897
)
(120
)
Net amortization of premiums on investment securities
950
332
Federal Home Loan Bank stock dividends
(26
)
(6
)
Gain on sales of fixed assets, net
(970
)
--
Impairment on office properties held for sale
987
--
Gain on sales of real estate owned and repossessed assets, net
(862
)
(583
)
Gain on sales of investment securities, net
(19
)
(88
)
Originations of loans held for sale
(124,450
)
(85,671
)
Proceeds from sales of loans held for sale
121,235
86,407
Gain on sales of loans originated to sell
(3,454
)
(2,359
)
Depreciation
2,842
2,117
Amortization of deferred loan costs, net
824
241
Accretion of purchased loans, net
(3,837
)
(2,636
)
Amortization of other intangible assets
766
469
Stock compensation
852
280
Earnings on life insurance policies
(1,247
)
(1,096
)
Changes in operating assets and liabilities:
Accrued interest receivable
(537
)
(535
)
Prepaid expenses and other assets
(1,062
)
1,535
Other liabilities
(48
)
(1,182
)
Net cash provided by operating activities
10,755
9,643
INVESTING ACTIVITIES:
Net decrease in federal funds sold
18
--
Purchases of interest-bearing time deposits in banks
(2,341
)
--
Redemptions of interest-bearing time deposits in banks
8,451
1,491
Purchases of investment securities held to maturity (“HTM”)
(10,383
)
--
Purchases of investment securities available for sale (“AFS”)
(64,964
)
(32,387
)
Proceeds from sales of investment securities AFS
30,386
2,082
Proceeds from maturities/calls/paydowns of investment securities AFS
47,844
38,392
Redemptions of Federal Home Loan Bank stock
1,199
605
Purchases of Federal Home Loan Bank stock
(2,299
)
(443
)
Redemptions of Federal Reserve Bank stock
790
907
Purchases of Federal Reserve Bank stock
(1,945
)
(3,396
)
Redemptions of other investments
6
--
Loan disbursements, net of repayments
(41,260
)
(20,766
)
Loan participations purchased
(23,631
)
(475
)
Loan participations sold
9,044
--
Proceeds from sales of real estate owned and repossessed assets
3,779
3,882
Proceeds from sales of office properties held for sale
1,875
--
Proceeds from sales of office properties and equipment
24
--
Purchases of office properties and equipment
(1,723
)
(3,553
)
Purchases of bank owned life insurance
(3,000
)
(772
)
Net cash used in investing activities
(48,130
)
(14,433
)
(Continued)
5
BEAR STATE FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2016
2015
FINANCING ACTIVITIES:
Net increase (decrease) in deposits
$
45,840
$
(54,621
)
Proceeds from advances from Federal Home Loan Bank
94,745
31,551
Repayment of advances from Federal Home Loan Bank
(68,125
)
(25,189
)
Proceeds from other borrowings
4,800
1,450
Repayment of other borrowings
(1,144
)
(770
)
Net increase (decrease) in short term borrowings
1,436
(1,717
)
Proceeds from exercise of stock options
130
2
Repurchase of common stock
(3,672
)
(256
)
Dividends distributed
(1,879
)
--
Net cash provided by (used in) financing activities
72,131
(49,550
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
34,756
(54,340
)
CASH AND CASH EQUIVALENTS:
Beginning of period
52,131
113,086
End of period
$
86,887
$
58,746
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest
$
5,834
$
4,650
Cash received for income tax refunds
$
--
$
2,135
Cash paid for income taxes
$
892
$
--
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate and other assets acquired in settlement of loans
$
1,389
$
1,069
Sales of real estate owned financed by the Bank
$
146
$
242
Investment securities purchased—not settled
$
972
$
--
See notes to unaudited condensed consolidated financial statements.
(Concluded)
6
BEAR STATE FINANCIAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations — Bear State Financial, Inc. (the “Company”) is a bank holding company headquartered in Little Rock, Arkansas. Its subsidiary bank, Bear State Bank (the “Bank”), is a community oriented bank providing a broad line of financial products to individuals and business customers. As of September 30, 2016, the Bank operated 48 branches and three loan production offices throughout Arkansas, Missouri and Southeast Oklahoma.
The Company completed its merger with First National Security Company (“FNSC”) and the accompanying acquisition of FNSC’s subsidiaries, including First National Bank of Hot Springs (“First National”) and Heritage Bank, N.A. (“Heritage Bank”), on June 13, 2014. On February 13, 2015, First Federal Bank, First National and Heritage Bank were consolidated into a single charter forming Bear State Bank, N.A. On October 1, 2015, the Company completed its acquisition of Metropolitan National Bank (“Metropolitan”). On February 19, 2016, Metropolitan was merged into the Bear State Bank charter. Except as the context otherwise requires, any reference in this Quarterly Report on Form 10-Q to the “Bank” means (i) with respect to the period between January 1, 2015 through February 12, 2015, First Federal Bank, First National and Heritage Bank, collectively; (ii) with respect to the period from February 13, 2015 through September 30, 2015 or the period from February 19, 2016 through the date hereof, Bear State Bank, N.A.; and (iii) with respect to the period from October 1, 2015 through February 18, 2016, Bear State Bank and Metropolitan, collectively. Effective June 28, 2016, the Bank converted from a national bank supervised by the Office of the Comptroller of the Currency to a state chartered bank jointly supervised by the Arkansas State Bank Department and the Board of Governors of the Federal Reserve Bank. In connection with the charter change, the name of Bear State Bank, N.A. changed to Bear State Bank.
Principles of Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.
Operating Segments—The Company consolidated its subsidiary banks into one bank during the first quarter of 2016 and its operations are organized on a regional basis upon which management makes decisions regarding how to allocate resources and assess performance. Each region provides a group of similar community banking products and services, including loans, time deposits, and checking and savings accounts. The individual regions have similar operating and economic characteristics and are reported as one aggregated operating segment.
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U. S. GAAP”) for complete financial statements. However, such information reflects all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Those adjusting entries consist only of normal recurring adjustments.
Certain reclassifications of prior period amounts have been made to conform with the current period presentation. These reclassifications had no impact on previously reported net income.
The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016. The unaudited condensed consolidated financial statements of the Company and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015, contained in the Company’s 2015 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet of the Company as of December 31, 2015, included herein has been derived from the audited consolidated balance sheet of the Company as of that date.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-01, Income Statement-Extraordinary and Unusual Items, to simplify income statement classification by removing the concept of extraordinary items from U.S. GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained and expanded to include items that are both unusual and infrequent. The standard is effective for periods beginning after December 15, 2015. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis. The new guidance applies to entities in all industries and the amendments significantly change the consolidation analysis required under U.S. GAAP. This ASU makes targeted amendments to the current consolidation guidance in the investment management industry and ends the deferral granted to investment companies from applying the variable interest entities guidance. The standard became effective for public business entities for annual periods beginning after December 15, 2015. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.
7
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30). To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, the amendments in this ASU became effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity should apply the new guidance on a retrospective basis. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 became effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement(Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share. This ASU permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. Currently, there is diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this ASU remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The amendments in this ASU became effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years with early adoption. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805):Simplifying the Accounting for Measurement-Period Adjustments. This ASU applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this ASU became effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. The Company’s adoption of this ASU on January 1, 2016, did not have a material impact on the Company’s financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). This ASU requires certain equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of such investments; eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost; requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.
8
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU applies to all leases and is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. The previous standards did not require lessees to recognize operating leases on the balance sheet. This ASU provides for accounting requirements so that lessees will be required to recognize the rights and obligations associated with operating leases. The guidance on lessor accounting was not fundamentally changed with this ASU. For public entities, ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, however, early adoption is permitted. The Company is in the process of evaluating the impact this ASU will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU also eliminates the guidance in Topic 718 that was indefinitely deferred. For public entities, ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact this ASU will have on its financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Current U.S. GAAP requires an incurred loss methodology for recognizing credit losses that delays loss recognition until it is probable that a loss has been incurred. The amendments in this ASU replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. For public entities that are SEC filers, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those years. An entity will apply the amendments in this ASU through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is in the process of evaluating the impact this ASU will have on its financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU adds or clarifies guidance on the classification of certain cash receipts and cash payments in the statement of cash flows in an attempt to reduce the diversity of financial reporting. For public entities, ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply prospectively if retrospective application is impractical. The Company is in the process of evaluating the impact this ASU will have on its financial statements.
3.
ACQUISITION
On October 1, 2015, the Company completed its acquisition of Metropolitan National Bank (“Metropolitan”) of Springfield, Missouri from Marshfield Investment Company (“Marshfield”). Under the terms of the purchase agreement, the Company acquired 100% of the outstanding common stock of Metropolitan and Marshfield received proceeds of approximately $70 million, consisting of 4,610,317 shares of Company common stock valued at approximately $42 million and $28 million in cash. The Company paid $10.1 million of the total cash consideration and Metropolitan paid $17.9 million of the total cash consideration in conjunction with the closing of the acquisition. The acquisition expanded the Company’s market into Southern Missouri and further diversified the Company’s loan, customer and deposit base.
Prior to the acquisition, Metropolitan conducted business from twelve full service locations and one loan production office throughout Southwest Missouri. Including the effects of purchase accounting adjustments, the Company acquired total assets of $450.5 million, total loans of $365.0 million, net of loan discounts, and deposits of $370.6 million. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information regarding the acquisition of Metropolitan.
9
4.
INVESTMENT SECURITIES
Investment securities consisted of the following as of the dates indicated (in thousands):
September 30, 2016
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Available for sale
U.S. Treasuries and government agencies
$
22,165
$
20
$
--
$
22,185
Municipal securities
67,282
1,096
(23
)
68,355
Residential mortgage-backed securities
94,319
1,543
(83
)
95,779
Total available for sale
$
183,766
$
2,659
$
(106
)
$
186,319
Held to maturity
Municipal securities
$
11,351
$
7
$
(105
)
$
11,253
Total held to maturity
$
11,351
$
7
$
(105
)
$
11,253
December 31, 2015
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Available for sale
U.S. Treasuries and government agencies
$
49,612
$
5
$
(117
)
$
49,500
Municipal securities
63,276
717
(60
)
63,933
Residential mortgage-backed securities
85,072
647
(567
)
85,152
Total available for sale
$
197,960
$
1,369
$
(744
)
$
198,585
The mortgage-backed portfolios at September 30, 2016 and December 31, 2015 were composed entirely of residential mortgage-backed securities issued or guaranteed by GNMA, FNMA or FHLMC.
The following tables summarize the gross unrealized losses and fair value of the Company's investments classified as available for sale and held to maturity with unrealized losses that are not deemed to be other-than-temporarily impaired (“OTTI”), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
September 30, 2016
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
Municipal securities
$
13,983
$
128
$
--
$
--
$
13,983
$
128
Residential mortgage-backed securities
23,558
83
--
--
23,558
83
Total
$
37,541
$
211
$
--
$
--
$
37,541
$
211
December 31, 2015
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
U.S. Treasuries and government agencies
$
46,805
$
117
$
--
$
--
$
46,805
$
117
Municipal securities
4,741
32
2,707
28
7,448
60
Residential mortgage-backed securities
57,561
567
--
--
57,561
567
Total
$
109,107
$
716
$
2,707
$
28
$
111,814
$
744
On a quarterly basis, management conducts a formal review of securities for the presence of OTTI. Management assesses whether an OTTI is present when the fair value of a security is less than its amortized cost basis at the balance sheet date. For such securities, OTTI is considered to have occurred if the Company intends to sell the security, if it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis or if the present values of expected cash flows is not sufficient to recover the entire amortized cost.
10
The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Additionally, the unrealized losses are also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount.
The Company has pledged investment securities with carrying values of approximately $119.7 million at September 30, 2016 and $119.1 million at December 31, 2015, as collateral for certain deposits in excess of $250,000 and for other purposes, including investment securities with carrying values of approximately $13.5 million at September 30, 2016 and $12.1 million at December 31, 2015, for securities sold under agreements to repurchase.
The following table sets forth the amount (dollars in thousands) of investment securities that contractually mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2016. Weighted average yields for municipal obligations have not been adjusted to a tax-equivalent basis. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligation without prepayment penalties.
September 30, 2016
Available for Sale
Held to Maturity
Amortized
Fair
Weighted
Amortized
Fair
Weighted
Cost
Value
Average Rate
Cost
Value
Average Rate
Within one year
$
21,185
$
21,207
0.77
%
$
--
$
--
--
Due from one year to five years
21,259
21,444
2.06
%
--
--
--
Due from five years to ten years
16,327
16,748
2.86
%
--
--
--
Due after ten years
30,676
31,141
2.97
%
11,351
11,253
2.54
%
89,447
90,540
2.21
%
11,351
11,253
2.54
%
Residential mortgage-backed securities
94,319
95,779
2.18
%
--
--
--
Total
$
183,766
$
186,319
2.20
%
$
11,351
$
11,253
2.54
%
As of September 30, 2016 and December 31, 2015, investments with amortized cost totaling approximately $74.2 million and $68.4 million, respectively, have call options held by the issuer, of which approximately $26.5 million and $26.1 million, respectively, are or were callable within one year.
Sales of investment securities available for sale are summarized as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016
2015
2016
2015
Sales proceeds
$
22,297
$
--
$
30,386
$
2,082
Gross realized gains
97
--
$
195
$
88
Gross realized losses
(76
)
--
(176
)
--
Net gains (losses) on sales of investment securities
$
21
$
--
$
19
$
88
11
5.
LOANS RECEIVABLE
Loans receivable consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
September 30,
2016
December 31,
2015
Real estate:
One- to four-family residential
$
385,126
$
401,036
Multifamily residential
93,444
74,226
Nonfarm nonresidential
472,858
487,684
Farmland
94,187
94,235
Construction and land development
119,433
116,015
Commercial
312,957
246,304
Consumer
36,645
38,594
Total loans receivable
1,514,650
1,458,094
Unearned discounts and net deferred loan costs
516
558
Allowance for loan and lease losses
(15,112
)
(14,550
)
Loans receivable—net
$
1,500,054
$
1,444,102
Loan Origination and Underwriting – The Bank employs several tools to manage risk in its loan portfolio. Prior to origination, a borrower’s ability to repay is analyzed by reviewing financial information with a comparison of the sustainability of these cash flows to the proposed loan terms, with consideration given to possible changes in underlying business and economic conditions. The financial strength and support offered by any guarantors to the loan is evaluated and any collateral offered is assessed using internal and external valuation resources. Finally, the credit request is compared against the Bank’s Board approved written lending policies and standards. The ongoing risk in the loan portfolio is managed through regularly reviewing loans to assess key credit elements, providing for an adequate allowance for loan losses and diversifying the portfolio based on certain metrics including industry and collateral types, loan purpose and underlying source of repayment.
Real Estate Loans – The real estate loan portfolio consists primarily of single family residential, commercial real estate and construction loans. Loans in this category are differentiated by whether the property owner or parties unrelated to the borrower occupy the property. This difference can directly affect the sensitivity of the source of loan repayment to changes in interest rates and market conditions, which can impact the underlying collateral value. Therefore, the analysis of these credits focuses on current and forecasted economic trends in certain sub-markets, including residential, industrial, retail, office and multi-family segments. Changes in these segments are influenced by both local and national cycles, which may fluctuate in both similar and opposing directions and sustain for varying durations. These differences provide the Bank with opportunities for diversification of loans by property type, geography and other factors.
Commercial Loans – This portfolio includes loans with funds used for commercial purposes including loans to finance enterprise, including agricultural, working capital needs; equipment purchases; accounts receivable and inventory and other similar business needs. The risk of loans in this category is driven by the cash flow and creditworthiness of the borrowers, the monitoring of which occurs through the ongoing analysis of interim financial information. Also, the terms of these loans are generally shorter than credits secured by real estate, helping to reduce the impact of changes in interest rates on the Bank’s interest rate sensitivity position.
Consumer Loans – Our portfolio of consumer loans generally includes loans to individuals for household, family and other personal expenditures. Proceeds from such loans are used to, among other things, fund the purchase of automobiles, recreational vehicles, boats, mobile homes and for other similar purposes. Consumer loans generally have higher interest rates. However, such loans pose additional risks of collectability and loss when compared to certain other types of loans. The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.
Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of such loans at September 30, 2016 and December 31, 2015 were $14.8 million and $20.4 million, respectively. Servicing loans for others generally consists of collecting payments and disbursing payments to investors. Servicing income for the periods ended September 30, 2016 and 2015 was not significant.
As of September 30, 2016 and December 31, 2015, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $27.9 million and $33.1 million, respectively, were held in custody by the Federal Home Loan Bank of Dallas (“FHLB”) and were pledged for outstanding advances or available for future advances. The Bank also pledged substantially all of its remaining loans at September 30, 2016 and December 31, 2015 under a blanket lien with the FHLB.
12
Purchased Loans – The Company evaluated $583.6 million of net loans ($595.1 million gross loans less $11.5 million discount) purchased in conjunction with the acquisition of FNSC in 2014 in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method.
The Company evaluated $364.5 million of net loans ($375.0 million gross loans less $10.5 million discount) purchased in conjunction with the acquisition of Metropolitan in 2015 in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method.
The Company evaluated $21.1 million of net loans ($26.9 million gross loans less $5.8 million discount) purchased in conjunction with the acquisition of FNSC in 2014 in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The following table reflects the carrying amount of purchased credit impaired (“PCI”) loans, which are included in the loan categories above (in thousands):
September 30, 2016
December 31, 2015
September 30, 2015
One- to four-family residential
$
2,833
$
3,189
$
3,963
Nonfarm nonresidential
8,353
9,886
10,035
Farmland
58
70
80
Construction and land development
1,419
2,127
2,242
Commercial
570
1,012
1,020
Consumer
55
63
76
Total carrying value of PCI loans
$
13,288
$
16,347
$
17,416
Outstanding principal balance of PCI loans
$
17,676
$
20,289
$
21,732
The following table documents changes for the nine months ended September 30, 2016 and 2015 to the amount of accretable yield on loans evaluated in accordance with the provisions of FASB ASC Topic 310-30 (in thousands).
2016
2015
Balance at January 1
$
1,370
$
2,165
Accretion
(622
)
(827
)
Adjustments to accretable differences due to:
Reclassification from nonaccretable difference
1,328
88
Changes in expected cash flows that do not affect nonaccretable differences
(868
)
(41
)
Transfers to real estate owned
5
7
Balance at September 30
$
1,213
$
1,392
Age analyses of loans as of the dates indicated, including both accruing and nonaccrual loans are presented below (in thousands):
September 30, 2016
30-89 Days
Past Due
90 Days or More
Past Due
Current
Total
One- to four-family residential
$
2,363
$
2,451
$
380,312
$
385,126
Multifamily residential
--
--
93,444
93,444
Nonfarm nonresidential
392
2,039
470,427
472,858
Farmland
986
647
92,554
94,187
Construction and land development
138
523
118,772
119,433
Commercial
1,185
1,418
310,354
312,957
Consumer
360
57
36,228
36,645
Total
$
5,424
$
7,135
$
1,502,091
$
1,514,650
13
December 31, 2015
30-89 Days Past Due
90 Days or More Past Due
Current
Total
One- to four-family residential
$
6,051
$
3,363
$
391,622
$
401,036
Multifamily residential
125
67
74,034
74,226
Nonfarm nonresidential
1,060
2,646
483,978
487,684
Farmland
42
668
93,525
94,235
Construction and land development
148
510
115,357
116,015
Commercial
1,722
336
244,246
246,304
Consumer
489
140
37,965
38,594
Total
$
9,637
$
7,730
$
1,440,727
$
1,458,094
As of September 30, 2016 and December 31, 2015, there were $1.4 million and $1.0 million, respectively, of PCI loans acquired in the merger with FNSC that were 90 days or more past due and accruing and there were two non-PCI loans totaling $451,000 past due 90 days and still accruing at December 31, 2015. Restructured loans totaled $1.5 million and $1.7 million as of September 30, 2016 and December 31, 2015, respectively, with $1.2 million and $1.4 million of such restructured loans on nonaccrual status at September 30, 2016 and December 31, 2015, respectively.
The following table presents age analyses of nonaccrual loans as of the dates indicated (in thousands):
September 30, 2016
30-89 Days Past Due
90 Days or More Past Due
Current
Total
One- to four-family residential
$
939
$
1,900
$
3,798
$
6,637
Nonfarm nonresidential
94
1,338
4,029
5,461
Farmland
--
647
140
787
Construction and land development
42
455
--
497
Commercial
237
1,240
2,463
3,940
Consumer
51
57
58
166
Total
$
1,363
$
5,637
$
10,488
$
17,488
December 31, 2015
30-89 Days Past Due
90 Days or More Past Due
Current
Total
One- to four-family residential
$
1,419
$
2,868
$
2,168
$
6,455
Multifamily
--
67
163
230
Nonfarm nonresidential
136
1,742
4,760
6,638
Farmland
--
668
305
973
Construction and land development
6
432
184
622
Commercial
23
325
3,887
4,235
Consumer
14
132
41
187
Total
$
1,598
$
6,234
$
11,508
$
19,340
As of both September 30, 2016 and December 31, 2015, there were $1.8 million of loans in the process of foreclosure.
14
The following tables summarize information pertaining to impaired loans as of September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015 (in thousands). The tables below do not include ASC 310-30 PCI loans which are disclosed separately above.
September 30, 2016
December 31, 2015
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
$
246
$
232
$
76
$
430
$
312
$
83
Nonfarm nonresidential
891
690
115
2,728
2,395
522
Farmland
--
--
--
616
473
112
Construction and land development
--
--
--
215
211
89
Commercial
3,269
3,156
580
1,153
1,150
250
Consumer
5
5
5
5
5
5
4,411
4,083
776
5,147
4,546
1,061
Impaired loans without a valuation allowance:
One- to four-family residential
8,584
6,604
--
7,605
6,348
--
Multifamily
--
--
--
282
230
--
Nonfarm nonresidential
6,165
4,771
--
5,352
4,243
--
Farmland
1,228
787
--
796
499
--
Construction and land development
757
573
--
686
490
--
Commercial
998
784
--
3,293
3,085
--
Consumer
176
162
--
188
183
--
17,908
13,681
--
18,202
15,078
--
Total impaired loans
$
22,319
$
17,764
$
776
$
23,349
$
19,624
$
1,061
Three Months Ended September 30,
2016
2015
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential
$
233
$
2
$
815
$
2
Nonfarm nonresidential
698
--
3,221
--
Farmland
--
--
478
--
Construction and land development
--
--
108
--
Commercial
3,209
--
577
--
Consumer
5
--
15
--
4,145
2
5,214
2
Impaired loans without a valuation allowance:
One- to four-family residential
7,177
--
4,785
--
Multifamily
75
--
--
--
Nonfarm nonresidential
4,842
--
1,373
--
Farmland
802
--
255
--
Construction and land development
576
1
566
1
Commercial
860
--
1,489
--
Consumer
198
--
143
--
14,530
1
8,611
1
Total impaired loans
$
18,675
$
3
$
13,825
$
3
Interest based on original terms
$
277
$
255
Interest income recognized on a cash basis on impaired loans
$
--
$
--
15
Nine Months Ended September 30,
2016
2015
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential
$
357
$
5
$
963
$
5
Nonfarm nonresidential
1,129
--
2,716
--
Farmland
118
--
480
--
Construction and land development
94
--
138
--
Commercial
2,707
--
288
--
Consumer
5
--
15
--
4,410
5
4,600
5
Impaired loans without a valuation allowance:
One- to four-family residential
7,173
1
4,496
1
Multifamily
134
--
--
--
Nonfarm nonresidential
4,715
--
1,122
--
Farmland
730
--
252
--
Construction and land development
606
4
546
5
Commercial
1,438
--
955
--
Consumer
209
--
89
--
15,005
5
7,460
6
Total impaired loans
$
19,415
$
10
$
12,060
$
11
Interest based on original terms
$
832
$
780
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 $500,000. 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 September 30, 2016 and December 31, 2015, the risk categories of loans are as follows (in thousands):
September 30, 2016
Pass/
Not Rated
Special Mention
Substandard
Total
One- to four-family residential
$
371,070
$
175
$
13,881
$
385,126
Multifamily residential
93,444
--
--
93,444
Nonfarm nonresidential
450,162
12
22,684
472,858
Farmland
92,234
--
1,953
94,187
Construction and land development
117,714
--
1,719
119,433
Commercial
307,298
5
5,654
312,957
Consumer
36,332
--
313
36,645
Total
$
1,468,254
$
192
$
46,204
$
1,514,650
December 31, 2015
Pass/
Not Rated
Special Mention
Substandard
Total
One- to four-family residential
$
384,193
$
1,098
$
15,745
$
401,036
Multifamily residential
74,063
--
163
74,226
Nonfarm nonresidential
462,552
10
25,122
487,684
Farmland
91,665
1,095
1,475
94,235
Construction and land development
114,534
91
1,390
116,015
Commercial
240,209
501
5,594
246,304
Consumer
38,283
12
299
38,594
Total
$
1,405,499
$
2,807
$
49,788
$
1,458,094
As of September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015 (dollars in thousands):
September 30, 2016
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
$
199
6
$
322
8
$
521
Nonfarm nonresidential
--
--
3
421
3
421
Farmland
--
--
1
250
1
250
Construction and land development
1
77
2
220
3
297
Consumer
--
--
1
5
1
5
Total
3
$
276
13
$
1,218
16
$
1,494
December 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
$
205
6
$
450
8
$
655
Nonfarm nonresidential
--
--
3
461
3
461
Farmland
--
--
1
250
1
250
Construction and land development
1
79
2
242
3
321
Commercial
--
--
1
21
1
21
Consumer
--
--
1
5
1
5
Total
3
$
284
14
$
1,429
17
$
1,713
17
No loans receivable were restructured as TDRs during the three or nine months ended September 30, 2015. No loans were restructured as TDRs during the three months ended September 30, 2016. Loans receivable that were restructured as TDRs during the nine months ended September 30, 2016 were as follows (dollars in thousands):
Nine Months Ended September 30, 2016
Number of
Balance
Balance at
Nature of Modification
Loans
Prior to TDR
September 30, 2016
Payment Term (1)
Other
Commercial
1
$
35
$
--
$
35
$
--
Total
1
$
35
$
--
$
35
$
--
_________________________
(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 or nine months ended September 30, 2016 or 2015 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 September 30, 2016 and 2015 (in thousands):
July 1,
2016
Provision
(Reversals)
Charge-offs
Recoveries
September 30,
2016
One- to four-family residential
$
3,892
$
132
$
(171
)
$
10
$
3,863
Multifamily residential
779
168
--
--
947
Nonfarm nonresidential
3,146
(143
)
--
10
3,013
Farmland
716
76
--
--
792
Construction and land development
1,569
(65
)
--
2
1,506
Commercial
3,603
295
(5
)
3
3,896
Consumer
174
167
(108
)
17
250
Purchased credit impaired
872
13
(62
)
22
845
Total
$
14,751
$
643
$
(346
)
$
64
$
15,112
July 1,
2015
Provision
(Reversals)
Charge-offs
Recoveries
September 30,
2015
One- to four-family residential
$
4,165
$
407
$
(186
)
$
18
$
4,404
Multifamily residential
581
19
--
--
600
Nonfarm nonresidential
3,880
(408
)
--
10
3,482
Farmland
518
(15
)
--
--
503
Construction and land development
1,121
161
--
58
1,340
Commercial
1,765
192
(32
)
3
1,928
Consumer
121
67
(98
)
35
125
Purchased credit impaired
1,703
(92
)
(18
)
--
1,593
Total
$
13,854
$
331
$
(334
)
$
124
$
13,975
18
The tables below provide a rollforward of the ALLL by portfolio segment for the nine months ended September 30, 2016 and 2015 (in thousands):
January 1,
2016
Provision
(Reversals)
Charge-offs
Recoveries
September 30,
2016
One- to four-family residential
$
3,870
$
301
$
(340
)
$
32
$
3,863
Multifamily residential
665
283
(1
)
--
947
Nonfarm nonresidential
3,599
(587
)
(9
)
10
3,013
Farmland
714
78
--
--
792
Construction and land development
1,456
(11
)
--
61
1,506
Commercial
2,565
1,406
(83
)
8
3,896
Consumer
166
301
(277
)
60
250
Purchased credit impaired
1,515
(106
)
(638
)
74
845
Total
$
14,550
$
1,665
$
(1,348
)
$
245
$
15,112
January 1,
2015
Provision
(Reversals)
Charge-offs
Recoveries
September 30,
2015
One- to four-family residential
$
4,488
$
261
$
(399
)
$
54
$
4,404
Multifamily residential
791
(191
)
--
--
600
Nonfarm nonresidential
4,243
(804
)
--
43
3,482
Farmland
342
161
--
--
503
Construction and land development
1,023
166
(10
)
161
1,340
Commercial
2,315
(358
)
(32
)
3
1,928
Consumer
101
165
(232
)
91
125
Purchased credit impaired
357
1,531
(295
)
--
1,593
Total
$
13,660
$
931
$
(968
)
$
352
$
13,975
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 September 30, 2016 and December 31, 2015 (in thousands):
Allowance for Loan and Lease Losses
Loan Balances
September 30, 2016
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
$
76
$
3,787
$
288
$
6,836
$
375,457
$
2,833
Multifamily residential
--
947
--
--
93,444
--
Nonfarm nonresidential
115
2,898
342
5,461
459,044
8,353
Farmland
--
792
--
787
93,342
58
Construction and land development
--
1,506
--
573
117,441
1,419
Commercial
580
3,316
215
3,940
308,447
570
Consumer
5
245
--
167
36,423
55
Total
$
776
$
13,491
$
845
$
17,764
$
1,483,598
$
13,288
Allowance for Loan and Lease Losses
Loan Balances
December 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
$
83
$
3,787
$
381
$
6,660
$
391,187
$
3,189
Multifamily residential
--
665
--
230
73,996
--
Nonfarm nonresidential
522
3,077
552
6,638
471,160
9,886
Farmland
112
602
--
972
93,193
70
Construction and land development
89
1,367
21
701
113,187
2,127
Commercial
250
2,315
561
4,235
241,057
1,012
Consumer
5
161
--
188
38,343
63
Total
$
1,061
$
11,974
$
1,515
$
19,624
$
1,422,123
$
16,347
19
A summary of the activity in the allowance for losses on real estate owned is as follows for the three and nine months ended September 30, 2016 and 2015 (in thousands):
Three Months Ended
Nine Months Ended
September 30,
2016
September 30,
2015
September 30,
2016
September 30,
2015
Balance—beginning of period
$
3,825
$
4,642
$
4,268
$
6,575
Provisions for estimated losses
289
--
302
3
Losses charged off
(3,402
)
(402
)
(3,858
)
(2,338
)
Balance—end of period
$
712
$
4,240
$
712
$
4,240
7.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following as of September 30, 2016 and December 31, 2015 (in thousands):
September 30,
2016
December 31,
2015
Land and land improvements
$
10,896
$
12,701
Buildings and improvements
47,899
53,742
Furniture and equipment
12,996
13,372
Automobiles and other
841
823
Total
72,632
80,638
Accumulated depreciation
(17,580
)
(16,997
)
Office properties and equipment—net
$
55,052
$
63,641
Depreciation expense for the nine months ended September 30, 2016 and 2015 was approximately $2.8 million and $2.1 million, respectively.
At September 30, 2016, office properties held for sale included nine properties with a carrying value of $5.6 million. Office properties held for sale are carried at the lower of carrying amount or fair value less estimated costs to sell. Impairment charges of $0.6 million and $1.0 million were recognized for the three and nine months ended September 30, 2016, respectively. During the three months ended September 30, 2016, two properties were sold resulting in a net gain of $1.1 million. Impairment charges and realized gains and losses on office properties held for sale are recorded in other noninterest expense in the condensed consolidated statement of income.
8.
GOODWILL AND CORE DEPOSIT INTANGIBLES - NET
Goodwill represents the excess of the cost over the fair value of net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually and updated quarterly if necessary. At September 30, 2016, goodwill consisted of $25.7 million related to the FNSC acquisition which is not deductible for tax purposes and $14.5 million related to the Metropolitan acquisition which is deductible for tax purposes. The Company’s core deposit intangible is related to the core deposit premiums of First National, Heritage Bank and Metropolitan. 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 nine months ended September 30, 2016 and the year ended December 31, 2015, were as follows (in thousands):
September 30,
2016
December 31,
2015
Balance—beginning of period
$
11,374
$
7,338
Metropolitan acquisition
--
4,760
Amortization expense
(766
)
(724
)
Balance—end of period
$
10,608
$
11,374
The Company’s projected amortization expense for the remainder of 2016 is approximately $255,000 and approximately $1.0 million in each of the years ending December 31, 2017 through 2021, and $5.3 million thereafter.
20
9.
DEPOSITS
Deposits as of September 30, 2016 and December 31, 2015 are summarized as follows (in thousands):
September 30,
2016
December 31,
2015
Checking accounts
$
737,716
$
713,546
Money market accounts
212,973
220,589
Savings accounts
165,393
160,307
Certificates of deposit
537,441
513,241
Total
$
1,653,523
$
1,607,683
Overdrafts of checking accounts of $328,000 and $620,000 at September 30, 2016 and December 31, 2015, respectively, have been reclassified for financial reporting and are reflected in net loans receivable on the consolidated statements of financial condition.
As of September 30, 2016 and December 31, 2015, the Bank had $21.8 million and $22.0 million, respectively, of brokered deposits.
The aggregate amount of time deposits in denominations of $100 thousand or more was approximately $282.3 million and $254.9 million at September 30, 2016 and December 31, 2015, respectively. The aggregate amount of time deposits in denominations of $250 thousand or more was approximately $102.0 million and $87.1 million at September 30, 2016 and December 31, 2015, respectively.
At September 30, 2016, scheduled maturities of certificates of deposit were as follows (in thousands):
Amount
Within one year
$
333,039
One to two years
116,698
Two to three years
39,757
Three to four years
22,491
Four to five years
17,725
Over five years
7,731
Total
$
537,441
10.
SHORT TERM BORROWINGS
Short term borrowings consisted of repurchase agreements with customers totaling $13.5 million and $12.1 million at September 30, 2016 and December 31, 2015, 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 monitored and additional collateral is pledged or returned, as deemed appropriate.
The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2016 and December 31, 2015 consisted of the following (in thousands):
September 30, 2016
Overnight and Continuous
Up to 30 Days
30-90 Days
Greater than 90 days
Total
Securities sold under agreements to repurchase:
Municipal securities
$
593
$
--
$
--
$
--
$
593
Residential mortgage-backed securities
12,918
--
--
--
12,918
Total
$
13,511
$
--
$
--
$
--
$
13,511
21
December 31, 2015
Overnight and Continuous
Up to 30 Days
30-90 Days
Greater than 90 days
Total
Securities sold under agreements to repurchase:
U.S. Treasuries and government agencies
$
9,072
$
--
$
--
$
--
$
9,072
Residential mortgage-backed securities
3,003
--
--
--
3,003
Total
$
12,075
$
--
$
--
$
--
$
12,075
At September 30, 2016, the Company and the Bank had unused credit lines allowing contingent access to overnight borrowings of up to $103.0 million on an unsecured basis.
11.
OTHER BORROWINGS
Other borrowings are summarized as follows (in thousands):
September 30,
2016
December 31,
2015
Federal Home Loan Bank advances with rates ranging from 0.37% to 5.57% maturing through July 1, 2027
$
80,138
$
53,518
Line of credit with a bank, $14.75 million total credit line, floating rate of 1.95% above the three-month London Interbank Offered Rate (“LIBOR”) rate, reset quarterly, interest payments due quarterly, maturing May 30, 2017
4,950
5,150
Term notes 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
17,568
13,712
Total
$
102,656
$
72,380
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 September 30, 2016, the Bank has FHLB letters of credit totaling $60.0 million, of which $35.0 million matures in the first quarter of 2017 and $25.0 million matures in the fourth quarter of 2017. The letters of credit were used to collateralize public deposits and a repurchase agreement as of September 30, 2016.
Notes Payable. The line of credit and notes payable to a bank are collateralized by 100% of the stock of the Bank. The loan agreement governing the line of credit and notes payable contains affirmative and negative covenants addressing the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, maintain property and insurance coverage, pledge assets and incur liens, engage in mergers and acquisitions, redeem capital stock and engage in transactions with affiliates. The agreement also contains financial covenants, including a minimum fixed charge coverage ratio of 2.0 to 1.0, a maximum loan to value ratio of 65%, a maximum classified asset ratio of 50% and Tier 1 Leverage ratio of 8%. At September 30, 2016, the Company was in compliance with the applicable covenants imposed by the loan agreement.
At September 30, 2016, scheduled maturities of other borrowings were as follows (in thousands):
Weighted
Average
Rate
Amount
Within one year
1.12
%
$
27,543
One to two years
0.66
47,511
Two to three years
2.33
19,950
Three to four years
2.36
441
Four to five years
2.11
622
Over five years
2.68
6,589
Total
1.25
%
$
102,656
22
12.
INCOME TAXES
The provisions for income taxes are summarized as follows (in thousands):
Nine Months Ended
September 30,
2016
2015
Income tax provision:
Current:
Federal
$
254
$
152
State
196
45
Total current
450
197
Deferred:
Federal
4,351
2,808
State
764
782
Valuation allowance
(897
)
(120
)
Total deferred
4,218
3,470
Total
$
4,668
$
3,667
The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows (dollars in thousands):
Nine Months Ended September 30,
2016
2015
Taxes at statutory federal income tax rate
$
6,053
35.0
%
$
3,988
34.1
%
Increase (decrease) resulting from:
Graduated tax rates
(31
)
(0.2
)
--
--
State income tax—net of federal benefits
619
3.6
398
3.4
Valuation allowance—net
(897
)
(5.2
)
--
--
Earnings on life insurance policies
(411
)
(2.4
)
(373
)
(3.2
)
Nontaxable investments
(436
)
(2.5
)
(459
)
(3.9
)
Other—net
(229
)
(1.3
)
113
1.0
Total
$
4,668
27.0
%
$
3,667
31.4
%
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 basis 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 are adjusted through the provision for income taxes.
23
The Company’s temporary differences and carryforwards that give rise to deferred tax assets and liabilities are comprised of the following (in thousands):
September 30,
2016
December 31,
2015
Deferred tax assets:
Allowance for loan and lease losses
$
8,011
$
7,580
Discount on purchased loans
2,191
2,584
Real estate owned
371
1,743
Section 382 net operating loss carryforward
2,011
2,114
Net operating loss carryforward
3,461
7,710
Nonaccrual loan interest
1,390
1,266
Other
1,839
1,365
Total deferred tax assets
19,274
24,362
Valuation allowance
--
(897
)
Deferred tax asset, net of allowance
19,274
23,465
Deferred tax liabilities:
Office properties
(2,932
)
(2,990
)
Core deposit intangibles
(2,361
)
(2,562
)
Unrealized gain on securities available for sale
(977
)
(239
)
Prepaid expenses and other
(1,252
)
(961
)
Total deferred tax liabilities
(7,522
)
(6,752
)
Net deferred tax asset
$
11,752
$
16,713
For the nine months ended September 30, 2016, the net deferred tax asset decreased by $5.0 million or 29.6% primarily as a result of a decrease in the net operating loss ("NOL") carryforward which was utilized to offset taxable income for the nine months ended September 30, 2016.
A financial institution may, for federal income tax purposes, carryback net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At September 30, 2016, the Company had a $13.9 million NOL for federal income tax purposes that will be carried forward. The federal NOL carryforwards, if unused, expire in calendar years 2029 through 2032. The $13.9 million federal NOL includes $5.9 million of Internal Revenue Code (“IRC”) Section 382 NOL carryforwards that have an annual limit of $405,000 that can be utilized to offset taxable income. At September 30, 2016, the Company had a $17.7 million NOL for Arkansas state income tax purposes. The state NOL carryforwards, if unused, expire in calendar years 2017 through 2019.
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 Code 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 September 30, 2016 and December 31, 2015. 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.
Prior to the quarter ended June 30, 2016, the Company had certain deferred tax assets related to net unrealized built-in losses (“NUBILs”) established under IRC Section 382 on May 3, 2011, the date of the Company’s ownership change related to the initial investment by Bear State Financial Holdings, LLC. If these losses had been realized before May 3, 2016 (five years after the ownership change date), then they would not be allowed to be taken as a deduction and would have been permanently lost. If these losses were to be realized after May 3, 2016, then the future deduction for the losses is no longer limited. As a result of passing the five year anniversary date of the ownership change, during the second quarter of 2016 the Bank reversed the valuation allowance of $0.9 million for the remaining NUBILs.
The Company recognizes interest and penalties related to income tax matters as additional income taxes in the consolidated statements of income. The Company had less than $1,000 of interest or penalties related to income tax matters during the nine months ended September 30, 2016 or 2015. The Company files consolidated income tax returns in the U.S. federal jurisdiction and the states of Arkansas and Missouri while the Bank files in the state of Oklahoma. The Company is subject to U.S. federal and state income tax examinations by tax authorities for tax years ended December 31, 2013 and forward.
24
13.
STOCK BASED COMPENSATION
The Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) was approved by the Company’s stockholders on April 29, 2011 and became effective May 3, 2011. An amendment of the 2011 Plan was approved by the Company’s stockholders on May 25, 2016. 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 align 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. 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 nine months ended September 30, 2016, is presented below:
Shares Underlying
Awards
Weighted Average Exercise Price
Outstanding—January 1, 2016
227,449
$
6.68
Granted
--
$
--
Exercised
19,998
$
6.51
Forfeited
4,111
$
6.06
Outstanding— September 30, 2016
203,340
$
6.71
Exercisable— September 30, 2016
169,451
$
6.59
The weighted average remaining contractual life of the outstanding options was 2.2 years and the aggregate intrinsic value of the options was approximately $505,000 at September 30, 2016. The weighted average remaining contractual life of options exercisable was 2.1 years and the aggregate intrinsic value of the exercisable options was approximately $440,000 at September 30, 2016.
As of September 30, 2016, there was $49,000 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 0.9 years. Compensation expense attributable to option awards totaled approximately $24,000 and $38,000 for the three month periods ended September 30, 2016 and 2015 and approximately $92,000 and $110,000 for the nine month periods ended September 30, 2016 and 2015, 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 one to five years.
25
A summary of the RSU activity in the Company’s 2011 Plan for the nine months ended September 30, 2016, is presented below:
Restricted Stock Units
Weighted Average Grant Date Fair Value
Outstanding—January 1, 2016
273,316
$
8.37
Granted
85,337
$
8.54
Vested
(66,656
)
$
8.34
Forfeited
(5,078
)
$
7.73
Outstanding— September 30, 2016
286,919
$
8.44
As of September 30, 2016, there was $1.5 million 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 2.1 years. Compensation expense attributable to awards of RSUs totaled approximately $254,000 and $125,000 for the three month periods ended September 30, 2016 and 2015, respectively, and approximately $940,000 and $315,000 for the nine months ended September 30, 2016 and 2015, respectively.
Performance Awards. In January 2016, the Compensation Committee of the Company’s Board of Directors approved the grant of performance-based restricted stock units (“PSUs”) to certain members of executive and operational management under the 2011 Omnibus Incentive Plan for performance year 2016. PSUs are subject to the Company’s achievement of specified performance criteria for the year ended December 31, 2016. The value of the incentive can range from zero to 100% of the grantee’s base pay and will be paid 50% in cash and 50% in RSUs after the Compensation Committee has determined whether the performance goals have been achieved. The number of RSUs to be granted will be determined based on the dollar value of the award divided by the closing stock price on the date of grant following the performance period. The RSUs will vest 1/3 on the grant date and 1/3 on each of the next two anniversaries of the grant date. The Company began accruing estimated compensation cost as of the date of the Compensation Committee’s action, which was determined to be the service inception date.
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
September 30,
Nine Months Ended
September 30,
2016
2015
2016
2015
Basic weighted average shares outstanding
37,595,454
33,358,376
37,634,670
33,368,642
Effect of dilutive securities
211,965
138,922
197,558
154,423
Diluted weighted average shares outstanding
37,807,419
33,497,298
37,832,228
33,523,065
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.
26
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 September 30, 2016 and December 31, 2015, 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. Treasury securities, U.S. agency securities, residential mortgage-backed securities and municipal bonds. 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 September 30, 2016 or December 31, 2015.
The following table presents major categories of assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (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)
September 30, 2016
Available for sale investment securities:
U.S. Treasuries and government agencies
$
22,185
$
--
$
22,185
$
--
Municipal securities
68,355
--
68,355
--
Residential mortgage-backed securities
95,779
--
95,779
--
Total
$
186,319
$
--
$
186,319
$
--
December 31, 2015
Available for sale investment securities:
U.S. Treasuries and government agencies
$
49,500
$
--
$
49,500
$
--
Municipal securities
63,933
--
63,933
--
Residential mortgage-backed securities
85,152
--
85,152
--
Total
$
198,585
$
--
$
198,585
$
--
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. The majority of the Bank’s impaired loans at September 30, 2016 and December 31, 2015 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 0% to 25% and selling costs were estimated at 8%. Fair value adjustments are made by partial charge-offs and adjustments to the ALLL.
27
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. REO loss provisions recorded during the nine months ended September 30, 2016 and 2015 were $302,000 and $3,000, respectively.
The following table presents major categories of assets measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015 (in thousands). The assets disclosed in the following table represent REO properties or collateral dependent impaired loans that 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)
September 30, 2016
Impaired loans
$
7,105
$
--
$
--
$
7,105
REO, net
939
--
--
939
December 31, 2015
Impaired loans
$
7,909
$
--
$
--
$
7,909
REO, net
569
--
--
569
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):
September 30, 2016
December 31, 2015
Estimated
Estimated
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
FINANCIAL ASSETS:
Level 1 inputs:
Cash and cash equivalents
$
86,887
$
86,887
$
52,131
$
52,131
Federal funds sold
--
--
18
18
Level 2 inputs:
Investment securities—held to maturity
11,351
11,253
--
--
Interest-bearing time deposits in banks
4,820
4,885
10,930
11,016
Other investment securities
11,838
11,838
9,563
9,563
Loans held for sale
13,995
13,995
7,326
7,326
Cash surrender value of life insurance
56,849
56,849
52,602
52,602
Accrued interest receivable
6,694
6,694
6,157
6,157
Level 3 inputs:
Loans receivable—net
1,500,054
1,522,962
1,444,102
1,462,669
FINANCIAL LIABILITIES:
Level 1 inputs:
Short term borrowings
13,511
13,511
12,075
12,075
Level 2 inputs:
Checking, money market and savings accounts
1,116,082
1,116,082
1,094,442
1,094,442
Other borrowings
102,656
102,745
72,380
73,335
Accrued interest payable
270
270
292
292
Level 3 inputs:
��
Certificates of deposit
537,441
540,080
513,241
512,430
For cash and cash equivalents and federal funds sold, the carrying amount approximates fair value (level 1). For investment securities held to maturity, 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).
28
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).
The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2016 and December 31, 2015. 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 federal and state banking regulators. Effective June 28, 2016, the Bank converted from a national bank supervised by the Office of the Comptroller of the Currency to a state chartered bank jointly supervised by the Arkansas State Bank Department (“ASBD”) and the Board of Governors of the Federal Reserve Bank (“FRB”). The FRB is the primary regulator for the Company. Failure to meet minimum regulatory 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.
29
The actual and required capital amounts (in thousands) and ratios of the Company (Consolidated) and the Bank as of September 30, 2016 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
$
180,734
9.37
%
$
77,154
4.00
%
N/A
N/A
Bear State Bank
200,920
10.42
%
77,097
4.00
%
$
96,371
5.00
%
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
$
180,734
11.00
%
$
73,937
4.50
%
N/A
N/A
Bear State Bank
200,920
12.24
%
73,849
4.50
%
$
106,670
6.50
%
Tier I Capital to Risk-Weighted Assets
Consolidated
$
180,734
11.00
%
$
98,583
6.00
%
N/A
N/A
Bear State Bank
200,920
12.24
%
98,465
6.00
%
$
131,286
8.00
%
Total Capital to Risk-Weighted Assets
Consolidated
$
195,846
11.92
%
$
131,443
8.00
%
N/A
N/A
Bear State Bank
216,032
13.16
%
131,286
8.00
%
$
164,108
10.00
%
*Beginning in 2016, a Capital Conservation Buffer (“CCB”) requirement became effective for banking organizations. The Basel III Rules limit capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer began to be phased in on January 1, 2016, at 0.625% of risk-weighted assets, and will continue to be increased each year by that amount until fully implemented at 2.5% on January 1, 2019. When fully phased in on January 1, 2019, the Basel III Rules will require the Company and Bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer, which effectively results in a minimum ratio of 7.0% upon full implementation, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer, which effectively results in a minimum ratio of 8.50% upon full implementation, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus a 2.5% capital conservation buffer, which effectively results in a minimum ratio of 10.5% upon full implementation and (iv) a minimum leverage ratio of at least 4.0%.
The actual and required capital amounts (in thousands) and ratios of the Company (Consolidated) and Bear State Bank and Metropolitan as of December 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
$
170,819
9.15
%
$
74,705
4.00
%
N/A
N/A
Bear State Bank
150,561
10.58
%
56,933
4.00
%
$
71,166
5.00
%
Metropolitan
36,776
8.30
%
17,717
4.00
%
22,147
5.00
%
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
$
170,819
10.62
%
$
72,395
4.50
%
N/A
N/A
Bear State Bank
150,561
12.19
%
55,564
4.50
%
$
80,288
6.50
%
Metropolitan
36,776
9.89
%
16,740
4.50
%
24,180
6.50
%
Tier I Capital to Risk-Weighted Assets
Consolidated
$
170,819
10.62
%
$
96,526
6.00
%
N/A
N/A
Bear State Bank
150,561
12.19
%
74,112
6.00
%
$
98,816
8.00
%
Metropolitan
36,776
9.89
%
22,320
6.00
%
29,760
8.00
%
Total Capital to Risk-Weighted Assets
Consolidated
$
185,369
11.52
%
$
128,702
8.00
%
N/A
N/A
Bear State Bank
164,500
13.32
%
98,816
8.00
%
$
123,519
10.00
%
Metropolitan
37,388
10.05
%
29,760
8.00
%
37,200
10.00
%
30
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. In addition, the Bank is subject to limitations on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. ASBD regulations specify that the maximum dividend state banks may payto the parent company in any calendar year without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the FRB, the maximum dividend that may be paid without prior approval by the FRB is the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. At September 30, 2016, the Bank had approximately $11.7 million available for payment of dividends to the Company without prior regulatory approval from the ASBD and approximately $10.9 million available for payment of dividends to the Company without prior regulatory approval from the FRB.
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.
Repurchase Program.During the nine months ended September 30, 2016, the Company repurchased 5,114 shares of its common stock under a share repurchase program that was initially approved by the Board of Directors on March 13, 2015 and most recently amended on April 20, 2016, whereby the Company is authorized to repurchase up to $2 million of its common stock (the “Repurchase Program”).
On February 3, 2016, the Company purchased through one broker in an unsolicited single block trade 448,068 shares of its common stock for a cash purchase price of $8.05 per share, or an aggregate purchase price for all of the shares of approximately $3.6 million. This repurchase was approved by the Board of Directors of the Company, including all of the independent directors, and is in addition to, and did not reduce, the then remaining capacity under the Repurchase Program.
18.
SUBSEQUENT EVENTS
On October 19, 2016, the Company announced that its Board of Directors authorized a $0.025 per share cash dividend to shareholders of record at the close of business on November 1, 2016 payable on November 15, 2016.
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 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”.
OVERVIEW
The Company’s net income was $4.7 million for the three months ended September 30, 2016, compared to $3.2 million for the three months ended September 30, 2015. The Company’s net income was $12.6 million for the nine months ended September 30, 2016, compared to $8.0 million for the nine months ended September 30, 2015. Factors impacting the increases in net income for the comparative periods include:
●
The results of operations for the three and nine months ended September 30, 2016, include the results of operations of Metropolitan, whereas the three and nine months ended September 30, 2015 did not include the results of operations of Metropolitan.
●
The Company’s net interest margin for the three and nine months ended September 30, 2016 was 3.78% and 3.89%, respectively, compared to 3.74% and 3.76%, respectively, for the same periods in 2015.
●
The yield on interest-earning assets increased to 4.23% and 4.34% for the three and nine months ended September 30, 2016, respectively, compared to 4.21% and 4.24% for the same periods in 2015, respectively. The cost of interest-bearing liabilities decreased to 0.53% and 0.52% for the three and nine months ended September 30, 2016, respectively, compared to 0.55% for each of the same periods in 2015.
●
The Company’s noninterest expenses generally increased in the three and nine months ended September 30, 2016 compared to the same periods in 2015 due to the acquisition of Metropolitan. The increases were due primarily to normal operating expenses.
●
The Bank reversed its valuation allowance on the deferred tax asset related to net unrealized built-in losses (“NUBILs”) established under IRC Section 382 on May 3, 2011, the date of the Company’s ownership change related to the initial investment by Bear State Financial Holdings, LLC. As a result of passing the five year anniversary date of the ownership change, during the second quarter of 2016, the Bank reversed the valuation allowance of $0.9 million for the remaining NUBILs.
ACQUISITION
Metropolitan National Bank
On October 1, 2015, the Company completed its acquisition of Metropolitan National Bank (“Metropolitan”) from Marshfield Investment Company (“Marshfield”). Under the terms of the purchase agreement, the Company acquired 100% of the outstanding common stock of Metropolitan and Marshfield received proceeds of approximately $70 million, consisting of 4,610,317 shares of Company common stock valued at approximately $42 million and $28 million in cash. The Company paid $10.1 million of the total cash consideration and Metropolitan paid $17.9 million of the total cash consideration in conjunction with the closing of the acquisition. On February 19, 2016, Metropolitan was merged into Bear State Bank.
31
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 Unaudited Condensed 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 (“ALLL”). 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 ALLL. For impaired loans that are collateral dependent and for REO, 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 the 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.
32
Valuation of investment securities. The Company’s investment securities available for sale 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.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2016 Compared to Three and Nine Months EndedSeptember 30, 2015
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 third quarter of 2016 was $16.8 million compared to $12.2 million in 2015. Net interest income for the nine months ended September 30, 2016 was $50.4 million compared to $36.8 million in 2015. The increases in net interest income resulted from changes in interest income and interest expense discussed below.
Interest Income. Interest income for the third quarter of 2016 was $18.8 million compared to $13.7 million for the same period in 2015. Interest income for the nine months ended September 30, 2016 was $56.2 million compared to $41.4 million for the same period in 2015. The increases in interest income for the three and nine months ended September 30, 2016 compared to the same periods in 2015 were primarily due to increases in the average balances of loans receivable as a result of the Metropolitan acquisition, partially offset by a decrease in the average yield earned on loans receivable.
Interest Expense. Interest expense for the third quarter of 2016 was $2.0 million compared to $1.5 million for the same period in 2015. Interest expense for the nine months ended September 30, 2016 was $5.8 million compared to $4.6 million for the same period in 2015. The increases in interest expense for the three and nine months ended September 30, 2016 compared to the same periods in 2015 were primarily due to increases in the average balances of deposit accounts due to the Metropolitan acquisition and an increase in other borrowings, partially offset by decreases in the average rates paid on deposits and borrowings.
33
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 September 30,
2016 vs. 2015
Increase (Decrease) Due to
Volume
Rate
Rate/
Volume
Total
Increase
(Decrease)
(In Thousands)
Interest income:
Loans receivable
$
5,294
$
(223
)
$
(92
)
$
4,979
Investment securities
104
16
2
122
Other interest-earning assets
14
(12
)
(3
)
(1
)
Total interest-earning assets
5,412
(219
)
(93
)
5,100
Interest expense:
Deposits
439
(31
)
(11
)
397
Other borrowings
136
(32
)
(16
)
88
Total interest-bearing liabilities
575
(63
)
(27
)
485
Net change in net interest income
$
4,837
$
(156
)
$
(66
)
$
4,615
Nine Months Ended September 30,
2016 vs. 2015
Increase (Decrease) Due to
Volume
Rate
Rate/
Volume
Total
Increase
(Decrease)
(In Thousands)
Interest income:
Loans receivable
$
15,605
$
(857
)
$
(346
)
$
14,402
Investment securities
201
192
15
408
Other interest-earning assets
(75
)
89
(27
)
(13
)
Total interest-earning assets
15,731
(576
)
(358
)
14,797
Interest expense:
Deposits
1,213
(214
)
(67
)
932
Other borrowings
346
(59
)
(27
)
260
Total interest-bearing liabilities
1,559
(273
)
(94
)
1,192
Net change in net interest income
$
14,172
$
(303
)
$
(264
)
$
13,605
34
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 September 30,
2016
2015
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)
$
1,522,106
$
17,808
4.64
%
$
1,077,500
$
12,829
4.72
%
Investment securities(2)
202,868
975
1.91
180,831
853
1.87
Other interest-earning assets
43,918
66
0.60
36,288
67
0.73
Total interest-earning assets
1,768,892
18,849
4.23
1,294,619
13,749
4.21
Noninterest-earning assets
212,690
171,723
Total assets
$
1,981,582
$
1,466,342
Interest-bearing liabilities:
Deposits
$
1,395,501
1,662
0.47
$
1,036,330
1,265
0.48
Other borrowings
109,751
352
1.27
72,421
264
1.45
Total interest-bearing liabilities
1,505,252
2,014
0.53
1,108,751
1,529
0.55
Noninterest-bearing deposits
239,886
176,219
Noninterest-bearing liabilities
4,686
3,548
Total liabilities
1,749,824
1,288,518
Stockholders' equity
231,758
177,824
Total liabilities and stockholders' equity
$
1,981,582
$
1,466,342
Net interest income
$
16,835
$
12,220
Net earning assets
$
263,640
$
185,868
Interest rate spread
3.70
%
3.66
%
Net interest margin
3.78
%
3.74
%
Ratio of interest-earning assets to Interest-bearing liabilities
117.51
%
116.76
%
Nine Months Ended September 30,
2016
2015
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)
$
1,492,010
$
53,012
4.75
%
$
1,062,552
$
38,610
4.86
%
Investment securities(2)
199,324
2,933
1.97
184,648
2,525
1.83
Other interest-earning assets
40,863
230
0.75
58,988
243
0.55
Total interest-earning assets
1,732,197
56,175
4.34
1,306,188
41,378
4.24
Noninterest-earning assets
214,644
173,547
Total assets
$
1,946,841
$
1,479,735
Interest-bearing liabilities:
Deposits
$
1,386,540
4,785
0.46
$
1,054,412
3,853
0.49
Other borrowings
103,764
1,027
1.32
71,530
767
1.43
Total interest-bearing liabilities
1,490,304
5,812
0.52
1,125,942
4,620
0.55
Noninterest-bearing deposits
225,905
175,028
Noninterest-bearing liabilities
3,043
3,508
Total liabilities
1,719,252
1,304,478
Stockholders' equity
227,589
175,257
Total liabilities and stockholders' equity
$
1,946,841
$
1,479,735
Net interest income
$
50,363
$
36,758
Net earning assets
$
241,893
$
180,246
Interest rate spread
3.82
%
3.69
%
Net interest margin
3.89
%
3.76
%
Ratio of interest-earning assets to Interest-bearing liabilities
116.23
%
116.01
%
(1) Includes nonaccrual loans.
(2) Includes FHLB and FRB stock.
35
Provision for Loan Losses.The provision for loan losses represents the amount added to the 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 $643,000 and $1.7 million was required for the three and nine months ended September 30, 2016, respectively, 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 period, (ii) changes in the overall portfolio of nonperforming and classified loans of the Bank, (iii) the credit quality of the Bank’s loan portfolio, (iv) ALLL coverage of classified loans and (v) discount balance of acquired loans. The ALLL as a percentage of loans receivable was 1.0% at September 30, 2016 and December 31, 2015. The ALLL plus the discount on acquired loans as a percentage of total loans receivable gross of the acquired loan discount was 1.8% at September 30, 2016, compared to 2.1% at December 31, 2015. The ALLL as a percentage of nonaccrual loans was 86.4% at September 30, 2016, compared to 75.2% at December 31, 2015. The ALLL as a percentage of classified loans was 32.7% at September 30, 2016, compared to 29.2% at December 31, 2015. See “Allowance for Loan and Lease Losses” in the “Asset Quality” section. A quarterly review is completed on purchased credit impaired (“PCI”) 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 $4.3 million for the three months ended September 30, 2016 increased from $3.3 million for the same period in 2015. Total noninterest income of $12.3 million for the nine months ended September 30, 2016 increased from $9.8 million for the same period in 2015. The increases in the three and nine month comparison periods were primarily due to increases in deposit fee income and gain on sales of loans. The increase in deposit fee income was attributable to the acquisition of Metropolitan. The increase in gain on sales of loans was due to an increase in the volume of loans sold.
Noninterest Expense. Noninterest expense consists primarily of employee compensation and benefits, office occupancy expense, data processing expense and other operating expense. Total noninterest expense for the three months ended September 30, 2016 was $13.4 million, which was an increase of $2.9 million or 28.1% from $10.5 million during the same period in 2015. Total noninterest expense for the nine months ended September 30, 2016 was $43.7 million, which was an increase of $9.7 million or 28.7% from $34.0 million during the same period in 2015. The variances in certain noninterest expense items are further explained in the following paragraphs.
Salaries and Employee Benefits. Salaries and employee benefits increased $2.1 million and $6.2 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. The increase was impacted primarily by the increase in personnel attributable to the acquisition of Metropolitan. The changes in the composition of this line item are presented below (in thousands):
Three Months Ended
September 30,
Change
Nine Months Ended
September 30,
Change
2016
2015
2016
2015
Salaries
$
6,170
$
4,525
$
1,645
$
18,886
$
14,288
$
4,598
Payroll taxes
438
322
116
1,646
1,241
405
Insurance
572
390
182
1,710
1,236
474
401(k) plan expenses
106
74
32
294
208
86
Other retirement plans
45
38
7
130
112
18
Stock compensation
286
162
124
1,055
424
631
Other
1
7
(6
)
4
12
(8
)
Total
$
7,618
$
5,518
$
2,100
$
23,725
$
17,521
$
6,204
Net Occupancy Expense.The increases in net occupancy expense during the three and nine months ended September 30, 2016 compared to the same periods in 2015 of $351,000 and $1.4 million, respectively, were primarily related to the Metropolitan acquisition.
Advertising and Public Relations. The decrease in advertising and public relations expense during the nine months ended September 30, 2016 compared to the same period in 2015 of $480,000, was primarily due to expenses associated with the name change of the Bank in 2015. 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.
Income Taxes. The provision for income taxes was $2.4 million and $4.7 million for the three and nine months ended September 30, 2016, respectively, compared to $1.5 million and $3.7 million for the same respective periods in 2015. Income tax provisions for the three and nine months ended September 30, 2016 increased compared to the same periods in 2015 as a result of increases in taxable income, which was partially offset in the nine month comparative period by the reversal in the second quarter of 2016 of the valuation allowance on the deferred tax asset.
36
LENDING ACTIVITIES
Loans Receivable. Changes in loan composition between September 30, 2016 and December 31, 2015, are presented in the following table (dollars in thousands).
September 30,
December 31,
Increase
2016
2015
(Decrease)
% Change
One- to four-family residential
$
385,126
$
401,036
$
(15,910
)
(4.0
)%
Multifamily residential
93,444
74,226
19,218
25.9
Nonfarm nonresidential
472,858
487,684
(14,826
)
(3.0
)
Farmland
94,187
94,235
(48
)
(0.1
)
Construction and land development
119,433
116,015
3,418
2.9
Total real estate loans
1,165,048
1,173,196
(8,148
)
(0.7
)
Commercial
312,957
246,304
66,653
27.1
Consumer
36,645
38,594
(1,949
)
(5.1
)
Total loans receivable
1,514,650
1,458,094
56,556
3.9
Unearned discounts and net deferred loan costs
516
558
(42
)
(7.5
)
Allowance for loan and lease losses
(15,112
)
(14,550
)
(562
)
3.9
Loans receivable, net
$
1,500,054
$
1,444,102
$
55,952
3.9
%
Total loans receivable increased $56.6 million at September 30, 2016, compared to December 31, 2015. The change in the Bank’s loan portfolio was primarily due to an increase in commercial loans as a result of an increasing emphasis on this line of business partially offset by loans paid off and principal payments made during the period.
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).
September 30, 2016
December 31, 2015
Net (2)
% Total Assets
Net (2)
% Total Assets
Increase
(Decrease)
Nonaccrual Loans:
One- to four-family residential
$
6,637
0.33
%
$
6,455
0.34
%
$
182
Multifamily
--
0.00
%
230
0.01
%
(230
)
Nonfarm nonresidential
5,461
0.27
%
6,638
0.35
%
(1,177
)
Farmland
787
0.04
%
973
0.05
%
(186
)
Construction and land development
497
0.02
%
622
0.03
%
(125
)
Commercial
3,940
0.20
%
4,235
0.22
%
(295
)
Consumer
166
0.01
%
187
0.01
%
(21
)
Total nonaccrual loans
17,488
0.87
%
19,340
1.01
%
(1,852
)
Accruing loans 90 days or more past due
--
--
451
0.02
%
(451
)
Real estate owned, net
1,576
0.08
%
3,642
0.19
%
(2,066
)
Total nonperforming assets
19,064
0.95
%
23,433
1.22
%
(4,369
)
Performing restructured loans
276
0.01
%
284
0.01
%
(8
)
Total nonperforming assets and performing restructured loans (1)
$
19,340
0.96
%
$
23,717
1.23
%
$
(4,377
)
(1)
The table does not include substandard loans which were judged not to be impaired totaling $28.4 million at September 30, 2016 and $30.2 million at December 31, 2015 or acquired ASC 310-30 purchased credit impaired loans which are considered performing at September 30, 2016.
(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.
37
Nonaccrual Loans. The composition of nonaccrual loans by status was as follows as of the dates indicated (dollars in thousands):
September 30, 2016
December 31, 2015
Increase (Decrease)
Balance
Percentage of Total
Balance
Percentage of Total
Balance
Percentage of Total
Bankruptcy or foreclosure
$
1,733
9.9
%
$
2,154
11.1
%
$
(421
)
(1.2
)%
Over 90 days past due
4,337
24.8
4,382
22.7
(45
)
2.1
30-89 days past due
1,141
6.5
1,527
7.9
(386
)
(1.4
)
Not past due
10,277
58.8
11,277
58.3
(1,000
)
0.5
$
17,488
100.0
%
$
19,340
100.0
%
$
(1,852
)
--
The following table presents nonaccrual loan activity for the nine months ended September 30, 2016 and 2015 (in thousands):
Nine Months Ended September 30,
2016
2015
Balance of nonaccrual loans—beginning of period
$
19,340
$
9,770
Loans added to nonaccrual status
5,343
9,463
Net cash payments
(3,653
)
(1,103
)
Loans returned to accrual status
(2,099
)
(301
)
Charge-offs to the ALLL
(344
)
(321
)
Transfers to REO
(1,099
)
(708
)
Balance of nonaccrual loans—end of period
$
17,488
$
16,800
Real Estate Owned. Changes in the composition of real estate owned between December 31, 2015 and September 30, 2016 are presented in the following table (dollars in thousands).
December 31, 2015
Additions
Fair Value Adjustments
Net Sales Proceeds(1)
Net Gain
September 30,
2016
One- to four-family residential
$
1,125
$
924
$
(92
)
$
(1,062
)
$
62
$
957
Multifamily
316
--
--
(356
)
40
--
Land
1,677
--
(173
)
(1,826
)
767
445
Nonfarm nonresidential
524
156
(37
)
(469
)
--
174
Total
$
3,642
$
1,080
$
(302
)
$
(3,713
)
$
869
$
1,576
(1)
Net sales proceeds include $146,000 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 September 30, 2016 and December 31, 2015, the Bank did not have any assets classified as doubtful or loss.
38
The table below summarizes the Bank’s classified assets as of the dates indicated (dollars in thousands):
September 30, 2016
December 31, 2015
September 30, 2015
Nonaccrual loans
$
17,488
$
19,340
$
16,800
Accruing classified loans
28,716
30,448
18,375
Classified loans
46,204
49,788
35,175
Real estate owned
1,576
3,642
2,290
Total classified assets
$
47,780
$
53,430
$
37,465
Texas Ratio (1)
8.8
%
11.6
%
11.9
%
Classified Assets Ratio (2)
22.1
%
26.5
%
23.4
%
(1)
Defined as the ratio of nonperforming loans and real estate owned to the Bank’s Tier 1 capital plus the ALLL.
(2)
Defined as the ratio of classified assets to the Bank’s Tier 1 capital plus the ALLL.
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 troubled debt restructurings (“TDRs”) and other impaired loans where the relationship totals $500,000 or more, a specific loan loss allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of the loan. The general loan loss allowance applies to loans that are not impaired and those impaired relationships under $500,000 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.
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 $500,000 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 $500,000 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.
39
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 increase in ALLL, if any, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded or if the provision is less than the subsequent increase.
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 $15.1 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 September 30, 2016. 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.
40
The following table summarizes changes in the ALLL and other selected statistics for the periods indicated.
Nine Months Ended September 30,
2016
2015
(Dollars in Thousands)
Total loans outstanding at end of period
$
1,514,650
$
1,076,782
Average loans outstanding
$
1,492,010
$
1,062,552
Allowance at beginning of period
$
14,550
$
13,660
Charge-offs:
One- to four-family residential
(340
)
(399
)
Multifamily residential
(1
)
--
Nonfarm nonresidential
(9
)
--
Farmland
--
--
Construction and land development
--
(10
)
Commercial
(83
)
(32
)
Consumer (1)
(277
)
(232
)
Purchased credit impaired
(638
)
(295
)
Total charge-offs
(1,348
)
(968
)
Recoveries:
One- to four-family residential
32
54
Multifamily residential
--
--
Nonfarm nonresidential
10
43
Farmland
--
--
Construction and land development
61
161
Commercial
8
3
Consumer (1)
60
91
Purchased credit impaired
74
--
Total recoveries
245
352
Net charge-offs
(1,103
)
(616
)
Total provisions for losses
1,665
931
Allowance at end of period
$
15,112
$
13,975
ALLL as a percentage of total loans outstanding at end of period (2)
1.0
%
1.3
%
Net loans charged-off as a percentage of average loans outstanding
0.1
%
0.1
%
ALLL as a percentage of nonaccrual loans
86.4
%
83.2
%
(1)
Consumer loan charge-offs include overdraft charge-offs of $237,000 and $209,000 for the nine months ended September 30, 2016 and 2015, respectively. Consumer loan recoveries include recoveries of overdraft charge-offs of $57,000 and $54,000 for the nine months ended September 30, 2016 and 2015, 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 1.8% and 2.0% at September 30, 2016 and 2015, respectively.
41
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.
September 30,
2016
2015
Amount
Percentage of Loans
Amount
Percentage of Loans
(Dollars in Thousands)
One-to-four family residential
$
3,863
25.2
%
$
4,404
28.4
%
Multifamily residential
947
6.2
600
4.9
Nonfarm nonresidential
3,013
30.7
3,482
31.4
Farmland
792
6.2
503
4.9
Construction and land development
1,506
7.8
1,340
8.5
Commercial
3,896
20.6
1,928
17.3
Consumer
250
2.4
125
3.0
Purchased credit impaired
845
0.9
1,593
1.6
Total
$
15,112
100.0
%
$
13,975
100.0
%
INVESTMENT SECURITIES
The following table sets forth the carrying values of the Company's investment securities (in thousands):
September 30,
2016
December 31,
2015
Increase (Decrease)
Available for Sale
U.S. Treasuries and government agencies
$
22,185
$
49,500
$
(27,315
)
Municipal securities
68,355
63,933
4,422
Residential mortgage-backed securities
95,779
85,152
10,627
Total available for sale
$
186,319
$
198,585
$
(12,266
)
Held to Maturity
Municipal securities
$
11,351
$
--
$
11,351
Total held to maturity
$
11,351
$
--
$
11,351
The decrease in U.S. Treasury and government agency securities was primarily due to maturities during the nine months ended September 30, 2016. The increases in municipal securities and residential mortgage backed securities during the nine months ended September 30, 2016 were due to reinvestment of proceeds from maturities of investment securities to provide a better risk adjusted return. The overall yield of the available for sale investment portfolio improved to 2.22% at September 30, 2016 compared to 2.06% at December 31, 2015.
DEPOSITS
Changes in the composition of deposits between September 30, 2016 and December 31, 2015, are presented in the following table (dollars in thousands).
September 30,
December 31,
Increase
2016
2015
(Decrease)
% Change
Checking accounts
$
737,716
$
713,546
$
24,170
3.4
%
Money market accounts
212,973
220,589
(7,616
)
(3.5
)
Savings accounts
165,393
160,307
5,086
3.2
Certificates of deposit
537,441
513,241
24,200
4.7
Total deposits
$
1,653,523
$
1,607,683
$
45,840
2.9
%
The increase in certificates of deposit was primarily related to an increase in public fund certificates of deposit.
42
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 six to twenty-four 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 September 30, 2016 and December 31, 2015, the Bank’s off-balance sheet arrangements principally included lending commitments, which are described below (in thousands). At September 30, 2016, the Company had no interests in non-consolidated special purpose entities.
September 30,
December 31,
2016
2015
Commitments to extend or originate loans
$
123,216
$
44,153
Rate lock agreements with customers
19,030
10,893
Funded mortgage loans committed to sell
13,995
7,326
Unadvanced portion of construction loans
71,792
50,109
Unused lines of credit
132,348
131,940
Revolving credit card unused credit*
--
5,414
Standby letters of credit
2,912
3,220
Overdraft protection limits
16,626
20,426
* Note that the Bank sold its credit card portfolio during the second quarter of 2016.
Total unfunded commitments to originate loans for sale and the related commitments to sell included above totaled $632,000 at September 30, 2016, all of which meet the definition of a derivative financial instrument. The related asset and liability are considered immaterial at September 30, 2016.
Historically, a very small percentage of predetermined overdraft limits have been used. At September 30, 2016, overdrafts of accounts with Bounce Protection™ represented usage of 2.0% 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 an unaffiliated bank. Payment of dividends by the Bank is subject to certain regulatory restrictions as set forth in banking laws and regulations.
43
The Company’s primary uses of cash include injecting capital into subsidiaries, stock repurchases, debt service requirements, the payment of dividends, and paying for general operating expenses.
The Company's liquidity objective 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, federal 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 for continuing operations, to fund loans and leases, and to acquire investment securities and other assets. Commercial, consumer and public funds customers in our local markets are the principal deposit sources utilized.
At September 30, 2016, the Bank’s unused borrowing availability primarily consisted of (1) $496.9 million of available borrowing capacity with the FHLB, (2) $66.6 million of investment securities available to pledge for federal funds or other borrowings and (3) $103.0 million of available unsecured federal funds borrowing lines. In addition, at September 30, 2016, the Company had available borrowing capacity of $9.8 million with an unaffiliated bank.
At September 30, 2016, the Company’s consolidated liquidity ratio was approximately 10.2% which represents liquid assets as a percentage of deposits and short-term borrowings. As of the same date, the Company’s overall adjusted liquidity ratio was 45.8%, which represents liquid assets plus borrowing capacity with the FHLB and correspondent banks as a percentage of deposits and short-term 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 September 30, 2016, the Company’s leverage, common equity tier 1, tier 1 risk-based and total risk-based capital ratios were 9.37%, 11.00%, 11.00% and 11.92%, respectively, compared to capital adequacy requirements of 4%, 4.5%, 6% and 8%, respectively. See Note 17 to the Unaudited Condensed Consolidated Financial Statements – “Regulatory Matters” for more information about the Company’s and the Bank’s capital requirements and ratios.
The loan agreement governing the line of credit and notes payable to an unaffiliated bank contains affirmative and negative covenants addressing the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, maintain property and insurance coverage, pledge assets and incur liens, engage in mergers and acquisitions, redeem capital stock and engage in transactions with affiliates. The agreement also contains financial covenants, including a minimum fixed charge coverage ratio of 2.0 to 1.0, a maximum loan to value ratio of 65%, a maximum classified asset ratio of 50% and a minimum Tier 1 Leverage ratio of 8% for the Bank. At September 30, 2016, the Company was in compliance with the applicable covenants imposed by the loan agreement.
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 come within the safe harbor afforded 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, potential resolution of litigation or other disputes, our intentions with respect to our investment securities, the payment of dividends 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 are described in the Company’s Annual Report on Form 10-K as filed with the SEC on March 11, 2016. 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.
44
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.
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 September 30, 2016, the model simulations projected that 100, 200 and 300 basis point increases in interest rates would result in negative variances in net interest income of (0.1)%, (0.8)% and (2.0)%, 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 (5.7)% relative to the base case over the next twelve months. 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 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.
45
Item 4. Controls and Procedures.
Our management evaluated, with the participation of our Chief Executive Officer and Chief 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 Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are operating effectively.
The Company’s management, including the Company’s Chief Executive Officer and the Chief 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 September 30, 2016 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 is involved in any pending legal proceedings other than non-material legal proceedings occurring in the ordinary course of business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We had no unregistered sales of equity securities and did not purchase any shares of our common stock during the period covered by this report.
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.
46
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: November 4, 2016
By:
/s/ Mark McFatridge
Mark McFatridge
Chief Executive Officer
Date: November 4, 2016
By:
/s/ Sherri Billings
Sherri Billings
Chief Financial and Accounting Officer
47
Bear State Financial, Inc.
Exhibit Index
Exhibit No.
Description
2.1
Stock Purchase Agreement dated as of June 22, 2015 by and between Bear State Financial, Inc. and Marshfield Investment Company (incorporated herein by reference to Exhibit 2.1 to the Company’s Amended Current Report on Form 8-K filed with the SEC on June 25, 2015). (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 Chief 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 Chief 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 the Regulation S-K, certain schedules to this agreement have not been filed with this exhibit. The schedules contain various items relating to the business of and the representations and warranties made by Marshfield Investment Company. The Registrant agrees to furnish supplementally any omitted schedule to the SEC upon request.
48
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