Market Disruption Opens New Doors for Bear State Financial

The June acquisition of First National Security Co. propelled Bear State Financial Inc. of Harrison into the top tier of Arkansas bank holding companies.

The corporate combination expanded total assets at the public company to more than $1.5 billion, tripled its network of full-service branches and expanded its footprint from northwest Arkansas to southwest and northeast Arkansas. The deal extended Bear State’s reach into Oklahoma, with two branches in Broken Bow and Idabel.

“We’re tickled because now we’re part of a bigger family,” said Chris Wewers, president and CEO of First Federal Bank of Harrison.

A round of reshuffled titles accompanied the $122.4 million cash-stock swap purchase of First National Security, parent company of First National Bank of Hot Springs and Heritage Bank of Jonesboro.

Wewers was the president and CEO of Bear State Financial. Those titles are now held by Rick Massey, who is also chairman of Bear State.

Related: Click to purchase the list of Arkansas banks ranked by return on equity.

“Our story is customer satisfaction,” Massey said.

“We think there’s room for a banking enterprise that values and measures the happiness of its loan and deposit customers, and its people.

“Some of our competitors are focused on efficiencies. We’re not going to be so obsessed with it that we destroy the culture and the franchise we liked in the first place.

“You’ll see more efficiencies out of us by the middle of next year, but we want to use a scalpel and not a chainsaw.”

In addition to his role at First Federal Bank, Wewers is an executive vice president with Bear State, as are Jason Lenderman, president and CEO of First National Bank of Hot Springs, and Steve May, president and CEO of Heritage Bank of Jonesboro.

Lenderman couldn’t be reached for comment.

May referred questions to Massey.

During Lenderman’s 13 years in banking, he’s helped oversee the consolidation of nearly a dozen bank charters assembled by First National Security.

May worked in his family’s regional bank data processing business, Advance Data, for 10 years before getting into banking in 1990.

In May 1993, he became president and CEO at Heritage Bank, originally known as Leachville State Bank and later as Buffalo Island Bank.

Matt Machen, formerly a senior vice president and regional president at First Federal Bank, was named executive vice president and chief financial officer of Bear State.

Former CFO Sherri Billings is now chief accounting officer while remaining an EVP at Bear State.

John Suskie, EVP and chief lending officer at First Federal Bank, is no longer chief lending officer for Bear State. That position was eliminated after the merger.

For now, Bear State will operate First Federal, First National and Heritage as three separate lenders. The possibility of consolidating the three charters into one lies somewhere in the undefined future, according to Wewers.

The only common market shared among the three lenders is Little Rock, where First National and First Federal each have one branch.

First Federal has a network of 12 full-service branches that stretches across north Arkansas from Mountain Home to Fayetteville.

First National operates 19 full-service branches across southwest Arkansas along with two in Oklahoma. The Heritage Bank network numbers seven in two northeast Arkansas counties: Craighead and Mississippi.

“We want to make sure we don’t lose our identity in those communities,” Wewers said.

“There’s disruption in all three markets. Some of these are generational opportunities.”

Those regional market disruptions in Arkansas are caused by three acquisitions during the past 18 months:

  • In the northeast, Jonesboro's Liberty Bancshares Inc. was purchased by Home BancShares Inc. of Conway.
  • The bankruptcy acquisition of Metropolitan National Bank by Simmons First National Corp. of Pine Bluff put surplus branches in play in the northwest as well as in central Arkansas.
  • In southwest Arkansas, Arkadelphia's Summit Bancorp Inc. was bought by Bank of the Ozarks Inc. of Little Rock.

"Anytime there's change, we think that creates opportunity for us," Wewers said. "Anyone can build a branch, but banks are built by people. With the right people, you can make the brick and mortar work."

The assimilation process of merging the operations of two bank holding companies involves sorting through technology platforms, policy and procedures and more.

"You have things you can teach us, and we think we can bring some things to the table," Wewers said. "Nothing is sacred. We're looking at everything.

"It's a real opportunity to learn for all of us."

Tracking a Merger

The acquisition of $984 million-asset First National Security Co. of Hot Springs was announced by Bear State Financial Inc. of Harrison in July 2013.

But talks between the parties date back to early 2012. Those initial negotiations produced a would-be $150 million agreement in June 2012.

The proposal entailed 8 million shares of Bear State common stock, $57 million cash and $30 million worth of preferred shares.

First National rejected the offer, and the companies parted ways in July 2012. Taxable consequences were identified as the deal killer.

The two were back at the negotiating table in June 2013, which led to an offer of $74 million cash, 4.5 million shares of common stock and $5 million in preferred shares.

More dickering resulted in mutual agreement that culminated in a transaction involving $74 million cash and 6.25 million shares of common stock. The acquisition was consummated on June 13, 2014.

When the dust settled, Bear State Financial Holdings LLC held a 63.2 percent stake in the company, worth more than $158 million. The limited liability company had been the catalyst for restoring the financial soundness of First Federal Bancshares Inc. in 2011 and transforming it into Bear State Financial Inc.

Addressing regulatory concerns that Bear State should have sufficient operational capabilities and safeguards in place to manage a much larger organization resulted in a protracted approval process for the purchase of First National Security.

The Bear State Financial Holdings investment group includes Witt Stephens Jr., co-chairman and CEO of the Stephens Group LLC; Joe and Scott Ford, the father-son team of Alltel Corp. fame and partners in Westrock Capital Partners; Gus Blass III, general partner with Capital Properties LLC and principal with Falcon Securities Inc.; and Ron Cameron, CEO of Mountaire Corp.

John Hendrix of McKinney, Texas, individually controls a 9 percent stake in Bear State Financial worth about $22.6 million.

His family owned 77 percent of First National Security, where Hendrix was chairman.

Prior to the merger, Bear State Financial Holdings held stock and warrants that represented a possible 79 percent of the company’s outstanding shares.

Shares of Bear State closed at $8.06 when the acquisition of First National Security closed on June 13. More recently the stock has traded around $8.35 per share.

Bear State announced that its second-quarter results will be released by mid-August. Company officials anticipate reporting a loss for the second quarter due to transaction expenses, retirement of certain pension liabilities and other one-time expenses.

Bear State recorded a net loss of $277,000 for the three months ended March 31, compared with $303,000 profit for the first quarter of 2013.

The company attributed the decrease in earnings to increased operating expenses, primarily related to salaries and employee benefits and real estate owned.

Since its restructuring and recapitalization in 2011, Bear State has recorded annual profits of $729,000 in 2013 and $755,000 in 2012. The company lost $19 million in 2011.

Accompanying the merger were three new members of the Bear State board of directors: Hendrix, 77, largest shareholder in First National Security; Dan Horton, 72, chief executive officer of First National Security; and Ian Vaughn, 37, Hendrix’s stepson and a director at FNS’s First National Bank of Hot Springs.