Bear State Financial 10-K 2016 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 of incorporation or organization)	(I.R.S. Employer 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

Securities registered pursuant to Section 12(b) of the Act:

Common Stock (par value $.01 per share)                  The Nasdaq Stock Market LLC

                       (Title of Class)                                           (Exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

 Large Accelerated Filer ☐  Accelerated Filer ☒  Non-accelerated Filer ☐  Smaller reporting company ☐

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

As of June 30, 2016, the aggregate value of the 17,762,779 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 19,826,764 shares held by affiliates of the Registrant, was approximately $167.5 million. This figure is based on the closing price of $9.43 per share of the Registrant’s Common Stock on June 30, 2016.

Number of shares of Common Stock outstanding as of March 8, 2017: 37,689,939

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders to be held on May 17, 2017 (the “2017 Proxy Statement”) are incorporated by reference into Items 10 through 14 of Part III of this Form 10-K.

Bear State Financial, Inc.

Form 10-K

For the Year Ended December 31, 2016

PART I.
Item 1.	Business	2
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	22
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	95
Item 9A.	Controls and Procedures	95
Item 9B.	Other Information	95
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	95
Item 11.	Executive Compensation	95
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	96
Item 13.	Certain Relationships and Related Transactions, and Director Independence	96
Item 14.	Principal Accounting Fees and Services	96
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	97
Item 16.	Form 10-K Summary	98

PART I.

Item 1. Business

GENERAL

Bear State Financial, Inc.Bear State Financial, Inc. (the "Company”, “we”, “us” or “our”) is an Arkansas corporation and bank holding company. The Company was originally incorporated in Texas in January 1996 under the name First Federal Bancshares of Arkansas, Inc. to serve as the unitary holding company of First Federal Bank (“First Federal”). The Company reincorporated from the State of Texas to the State of Arkansas on July 20, 2011. On June 3, 2014, the Company changed its name from First Federal Bancshares of Arkansas, Inc. to Bear State Financial, Inc. and adopted the new NASDAQ ticker symbol “BSF.” On June 13, 2014, the Company completed its acquisition of First National Security Company (“FNSC”), the parent company for First National Bank headquartered in Hot Springs, Arkansas (“First National”) and Heritage Bank, N.A. headquartered in Jonesboro, Arkansas (“Heritage Bank”). On February 13, 2015 First Federal, First National and Heritage Bank were consolidated into a single charter forming Bear State Bank, N.A (“Bear State”). On October 1, 2015, the Company completed its acquisition of Metropolitan National Bank (“Metropolitan”) headquartered in Springfield, Missouri.

The primary asset of the Company is the capital stock of Bear State Bank. The business and management of the Company consists of the business and management of Bear State Bank. At December 31, 2016, the Company had $2.1 billion in total assets, $1.8 billion in total liabilities and $233.4 million in stockholders' equity. The Company's principal executive office is located at 900 South Shackleford Road, Suite 605, Little Rock, Arkansas 72211, and its telephone number is (501) 975-6033.

Bear State Bank.Bear State Bank is a state chartered bank conducting business from its home office in Little Rock, Arkansas, 48 banking locations and three loan production offices which are located in various communities in Arkansas, Missouri and Oklahoma. Except as the context otherwise requires, any reference in this Annual Report on Form 10-K to the “Bank” means (i) with respect to the period between January 1, 2014 through June 12, 2014, First Federal Bank; (ii) with respect to the period from June 13, 2014 through February 12, 2015, First Federal Bank, First National and Heritage Bank, collectively; (iii) with respect to the period from February 13, 2015 through September 30, 2015 or as of the date hereof, Bear State Bank, N.A.; and (iv) with respect to the period from October 1, 2015 through February 19, 2016, Bear State Bank, N.A. and Metropolitan, collectively. On February 19, 2016, Metropolitan was consolidated into the Bear State Bank, N.A. charter.

Effective June 28, 2016, the Bank converted from a national bank supervised by the Office of the Comptroller of the Currency (“OCC”) 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 Bank is also regulated by the Federal Deposit Insurance Corporation (“FDIC”), the administrator of the Deposit Insurance Fund ("DIF"). The Bank’s deposits are insured by the DIF to the maximum extent permitted by law. The Bank is a member of the Federal Home Loan Bank of Dallas ("the FHLB").

The Bank is a community-oriented financial institution offering a broad line of financial products to individuals and business customers. Retail and business deposit accounts include noninterest bearing and interest bearing checking accounts, savings and money market accounts, certificates of deposit, and individual retirement accounts. Loan products offered by the Bank include residential real estate, consumer, construction, lines of credit, commercial real estate and commercial business loans. Other financial services include automated teller machines; 24-hour telephone banking; online banking, including account access, bill payment, and e-statements; mobile banking, including remote deposit capture and funds transfer; Bounce Protection^TM overdraft service; debit cards; and safe deposit boxes.

Business Strategy

The Bank’s main goal is to be a high-performing community bank in offering the loan and deposit services described below. Management focuses on building high-quality and profitable banking relationships and providing exceptional service to attract and retain customers; building a performance-based culture; refining and expanding the delivery of commercial banking products; expanding market share in attractive markets; rehabilitating or closing underperforming branch locations; and pursuing opportunities to acquire other financial institutions or branches and to develop or acquire businesses that generate non-interest income.

Lending Activities

General.At December 31, 2016, the Bank’s portfolio of net loans receivable amounted to $1.5 billion or 75% of the Company's total assets. Loans collateralized by real estate comprise $1.2 billion or 77% of the Bank's total portfolio of loans receivable at December 31, 2016.

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Origination, Purchase and Sale of Loans. The lending activities of the Bank are subject to the written, non-discriminatory underwriting standards and policies established by management and approved by the Bank’s Board of Directors. Loan originations are obtained from a variety of sources, including referrals, walk-in customers to the Bank’s branch locations, solicitation by loan officers, advertising and the Bank’s Internet website. From time to time, the Bank may also purchase loan participations from other financial institutions.

To minimize interest rate risk, fixed rate one- to four-family residential mortgage loans with terms of fifteen years or greater are typically sold to specific investors in the secondary mortgage market. The rights to service such loans are typically sold with the loans. This allows the Bank to provide its customers competitive long-term fixed rate mortgage products while not exposing the Bank to undue interest rate risk. These loans are originated in conformance with Fannie Mae, Freddie Mac and the specific investor’s underwriting guidelines. The Bank typically locks and confirms the purchase price of the loan on the day of the loan application, which protects the Bank from market price movements and establishes the price that the Bank will receive at the sale of the respective loan. For the years ended December 31, 2016, 2015 and 2014, the Bank’s secondary market loan sales amounted to $162.1 million, $110.4 million and $98.3 million, respectively. The Bank is not involved in loan hedging or other speculative mortgage loan origination activities.

In addition to sales of loans in the secondary market, the Bank periodically sells loans or loan participations to other banks in order to comply with the Bank’s loans to one borrower limit or for credit diversification purposes. In such situations, the loans are typically sold with servicing retained. At December 31, 2016 and 2015, the balances of loans sold with servicing retained were approximately $14.7 million and $20.4 million, respectively. Loan servicing fee income for the years ended December 31, 2016, 2015 and 2014 was not material.

One- to Four-Family Residential Real Estate Loans.At December 31, 2016, $389.1 million or 25.0% of the Bank’s total loan portfolio consisted of one- to four-family residential real estate loans. Of the $389.1 million of such loans at December 31, 2016, $132.9 million or 34.1% had adjustable rates of interest and $256.2 million or 65.9% had fixed rates of interest. At December 31, 2016, the Bank had $6.7 million of nonaccrual one- to four-family residential real estate loans. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank currently originates both fixed rate and adjustable rate one- to four-family residential mortgage loans to be sold into the secondary market. Loans originated to be held in the Bank’s loan portfolio are typically originated as fixed or adjustable rate simple interest loans with a maturity of up to fifteen years and an amortization period generally not more than fifteen years. The Bank's residential loans typically include "due on sale" clauses.

As of December 31, 2016, the Bank had a loan portfolio of adjustable rate mortgage loans (“ARMs”) totaling $132.9 million as described above. These ARMs provide for an interest rate that adjusts periodically in accordance with a designated index plus a margin. The Bank's adjustable rate loans are assumable (generally without release of the initial borrower), do not contain prepayment penalties and do not provide for negative amortization and typically contain "due on sale" clauses. Adjustable rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates.

The Bank’s residential mortgage loans generally do not exceed 80% of the lesser of purchase price or appraised value of the collateral. However, pursuant to the underwriting guidelines adopted by the Board of Directors, the Bank may lend up to 100% of the value of the property securing a one- to four-family residential loan with private mortgage insurance or other similar protection to support the portion of the loan that exceeds 80% of the value. The Bank may, on occasion, extend a loan up to 90% of the value of the secured property without private mortgage insurance coverage. However, these exceptions are minimal and are only approved on loans with exceptional credit scores, sizeable asset reserves, or other compensating factors.

The Bank’s home equity and second mortgage loans are fixed rate loans with fully amortized terms generally of up to fifteen years, variable rate interest only loans with terms up to three years, or home equity lines of credit. The variable rate loans are typically tied to the Wall Street Journal Prime Rate (“Prime Rate”), plus a margin commensurate with the risk as determined by the borrower’s credit score. The Bank originates both fixed and variable rate home equity lines of credit with terms up to five years. The Bank generally limits the total loan-to-value on these mortgages to 85% of the value of the secured property if the Bank holds the first mortgage and 80% if the first mortgage is held by another party.

The Bank originates residential construction loans to individual homeowners, local builders and developers for the purpose of constructing one- to four-family residences. At December 31, 2016, these loans totaled $23.9 million with undisbursed funds totaling $13.8 million. The Bank typically requires that permanent financing with the Bank or some other lender be in place prior to closing any non-speculative construction loan. At such time, the loan will convert to a permanent loan at the interest rate established at the initial closing of the construction/permanent loan or be paid off by another permanent lender.

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The Bank has made residential construction loans to local builders for the purpose of construction of speculative and pre-sold one- to four-family residential properties, and for the construction of pre-sold one- to four-family homes. These loans are subject to credit review, analysis of personal and, if applicable, corporate financial statements, and an appraisal of the property. Loan proceeds are disbursed during the construction term after a satisfactory inspection of the project has been made. Interest on these construction loans is due monthly. The Bank may extend the term of a construction loan if the property has not been sold by the maturity date.

Multifamily Residential Real Estate Loans.At December 31, 2016, $92.5 million or 5.9% of the Bank's total loan portfolio consisted of loans collateralized by multifamily residential real estate properties. At December 31, 2016, the Bank did not have any nonaccrual multifamily real estate loans. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank has originated both fixed rate and adjustable rate multifamily loans. Fixed rate loans are generally originated with amortization periods not to exceed 25 years, and typically have balloon periods no longer than ten years. Adjustable rate loans are typically amortized over terms up to 25 years, with interest rate adjustments periodically. The Bank’s loan policy limits loan-to-value percentages on multifamily real estate loans to 85%. It is also the Bank's general policy to obtain loan guarantees on its multifamily residential real estate loans from the principals of the borrower; however, the Bank may waive this requirement in certain circumstances.

The success of such projects is sensitive to changes in supply and demand conditions in the market for multifamily real estate as well as regional and economic conditions generally.

Nonfarm Nonresidential Loans.At December 31, 2016, $495.2 million or 31.8% of the Bank's total loan portfolio consisted of loans collateralized by nonfarm nonresidential properties. At December 31, 2016, the Bank had nonaccrual nonfarm nonresidential loans of $5.2 million. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Many of the Bank’s nonfarm nonresidential loans are collateralized by properties such as office buildings, strip and small shopping centers, churches, convenience stores and mini-storage facilities. Loans to borrowers that are corporations, limited liability companies or other such legal entities are also typically personally guaranteed by the principals of the borrowing entity. The financial strength of the guarantors of the loan is a primary underwriting factor.

Regulatory guidelines and the Bank’s policies require that properties securing nonfarm nonresidential loans over $250,000 be appraised by licensed real estate appraisers pursuant to state licensing requirements and federal regulations. The Bank underwrites nonfarm nonresidential loans specifically in relation to the type of property being collateralized. Primary underwriting considerations for these loans include the creditworthiness of the borrower, the quality and location of the real estate, the sustainable cash flows of the project, projected occupancy rates, the quality of management involved with the project and the financial strength of the guarantor, if applicable. As part of the underwriting of these loans, the Bank prepares a cash flow analysis that includes a vacancy rate projection, expenses for taxes, insurance, maintenance and repair reserves as well as debt coverage ratios. The Bank’s nonfarm nonresidential loans are generally originated with amortization periods not to exceed 25 years and are structured with three to ten year balloon terms. The Bank attempts to keep maturities of these loans as short as possible in order to enable the Bank to better manage its interest rate risk profile.

Nonfarm nonresidential lending entails additional risks as compared to the Bank’s one- to four-family residential property loans. The repayment on such loans is typically dependent on the successful operation of the real estate project, which is sensitive to changes in supply and demand conditions in the market for commercial real estate, and on regional economic conditions.

Farmland Loans.At December 31, 2016, farmland loans amounted to $94.0 million or 6.0% of the Bank’s total loan portfolio. At December 31, 2016, the Bank had $783,000 of nonaccrual farmland loans. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The types of credits in this category include loans secured by real estate employed for row crop and livestock production, pasture and grazing, forestry and timber purposes and other similar uses. The terms for these loans are generally ten years or less with fixed or floating rates of interest and amortization periods typically not to exceed 25 years. The underwriting of these loans is based primarily on the cash flow generated by the intended productive use of the property and the financial strength of the borrowing entity and the guarantors of the loan, if any.

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The risks associated with these loans tend to be directly related to the economics of the underlying property use. There are certain macro-level factors, including environmental and weather patterns, national and global supply and demand for the product and the national political environment, that affect the strength of the agricultural, livestock and timber sectors. The experience and success of the borrower in the market segment, the Bank’s history with the borrower and the financial strength of any guarantors are all considered when extending loans in this category. Advance rates on these types of loans generally do not exceed 75% of the value of the real estate.

Construction and Land Development Loans.At December 31, 2016, construction loans amounted to $125.8 million or 8.0% of the Bank’s total loan portfolio. Of the $125.8 million of such loans at December 31, 2016, $69.7 million consisted of construction loans with $58.8 million of unadvanced construction funds and $56.1 million consisted of land loans. At December 31, 2016, the Bank had $463,000 of nonaccrual construction and land loans. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank’s commercial construction loans generally have fixed interest rates or variable rates that float with the Prime Rate and have typically been issued for terms of twelve to twenty-four months. However, the Bank has originated construction loans with longer terms, although this practice has generally been limited to larger projects that could not be completed in the typical twelve to twenty-four month period. Construction loans are typically made with a maximum loan-to-value percentage of 80% of the appraised value of the proposed project.

The Bank has made commercial construction loans to property developers and investors for the purpose of constructing multifamily residential housing units, stand-alone and multi-tenant retail projects and office buildings. These loans are subject to an assessment of the feasibility of the proposed project based on anticipated cash flows, vacancy and interest rates, an analysis of the forecasted economics of the particular sub-market where the project will be located, a complete credit underwriting of the guarantors of the proposed loan and an appraisal of the project. Loan proceeds are disbursed during the construction term after a review of the status of completion of the project.

Construction lending is generally considered to involve a higher level of risk as compared to other loans. This is due, in part, to the concentration of principal in a limited number of loans and borrowers, and the effects of general economic conditions on developers and builders. In addition, construction loans made on a speculative basis pose a greater potential risk to the Bank than those with a repayment source identified at origination. The Bank analyzes each borrower involved in speculative building and limits the principal amount and/or number of unsold speculative projects at any one time with such borrower.

Commercial Loans.The Bank also offers secured and unsecured commercial loans. Secured commercial loans are primarily collateralized by equipment, inventory, accounts receivable and other assets. At December 31, 2016, commercial loans amounted to $323.1 million or 20.8% of the total loan portfolio. Within the commercial loan portfolio, the Bank also maintains a portfolio of syndicated credit facilities. At December 31, 2016, syndicated loans accounted for $139.4 million of the commercial loan portfolio or 8.7% of the total loan portfolio. At December 31, 2016, the Bank had nonaccrual commercial loans of $4.1 million. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This portfolio includes loans with funds used for commercial purposes including loans to finance working capital needs, including agricultural; purchase equipment; support accounts receivable and inventory and other similar business needs. Other common uses of funds include leveraged buyouts, dividends, acquisitions and expansions.

Primary underwriting considerations for these loans include a review of the historical and prospective cash flows of the borrower and the sustainability of these cash flows, the expected long term viability of the business, the quality and marketability of the collateral (if any) and the financial support offered by any guarantors to the transaction. The Bank's commercial loans are originated with fixed and variable interest rates and maturities generally range between one and five years. These loans are typically based on a maximum fifteen year amortization schedule.

Consumer Loans.The consumer loans offered by the Bank primarily consist of automobile loans, deposit account secured loans, and unsecured loans. Consumer loans amounted to $36.3 million or 2.3% of the total loan portfolio at December 31, 2016, of which $13.2 million consisted of automobile loans and $23.1 million consisted of other consumer loans. At December 31, 2016, the Bank had nonaccrual consumer loans of $173,000. See “Nonperforming Assets” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Bank's vehicle loans are typically originated for the purchase of new and used cars and trucks. Such loans are generally originated with a maximum term of six years. The Bank may offer extended terms on automobile loans to some customers based upon their creditworthiness.

Other consumer loans consist primarily of deposit account loans and unsecured loans. Loans secured by deposit accounts are generally originated for up to 95% of the deposit account balance, with a hold placed on the account restricting the withdrawal of the deposit account balance.

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Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of depreciation, damage or loss. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy laws, may limit the amount which can be recovered on such loans.

Sources of Funds

General.Deposits are the primary source of the Bank's funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from loan principal repayments and prepayments and interest payments, maturities, sales and calls of investment securities, and advances from the FHLB. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings are used when funds from loan and deposit sources are insufficient to meet funding needs or for asset/liability management purposes. FHLB advances are the primary source of borrowings.

Deposits.The Bank's deposit products include a broad selection of deposit instruments, including checking accounts, money market accounts, savings accounts and term certificate accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the time period the funds must remain on deposit, early withdrawal penalties and the interest rate.

The Bank considers its primary market area to be Arkansas, Missouri and Southeast Oklahoma. The Bank utilizes traditional marketing methods to attract new customers and deposits. The Bank does not advertise for retail deposits outside of its primary market area. The Bank uses brokered deposits and non-brokered institutional internet certificates of deposit as additional sources of funds to augment the retail CD market. At December 31, 2016, internet certificates of deposit represented approximately 3.3% of deposits and brokered deposits represented approximately 2.3% of deposits.

The Bank has been competitive in the types of accounts and in interest rates it has offered on its deposit products but does not necessarily seek to match the highest rates paid by competing institutions. Although market demand generally dictates which deposit maturities and rates will be accepted by the public, the Bank intends to continue to offer longer-term deposits to the extent possible and consistent with its asset and liability management goals. In addition, the Bank may use brokered deposits when this alternative funding source provides more cost effective deposits with terms that are consistent with its asset and liability management goals.

Borrowed funds. The Bank utilizes FHLB advances in its normal operating and investing activities when this funding source offers cost effective funds that are consistent with the Bank’s asset and liability management goals. The Bank pledges substantially all of its loans under a blanket lien and through certain loans held in custody at FHLB. The Bank’s borrowing capacity with the FHLB is directly tied to the amount of the Bank’s qualifying loans pledged. FHLB advances are subject to prepayment penalties if repaid prior to the maturity date.

At December 31, 2016, the Bank’s unused borrowing availability primarily consisted of (1) $456.0 million of available borrowing capacity with the FHLB, (2) $47.9 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 December 31, 2016, the Company had available borrowing capacity of $9.8 million with an unaffiliated bank.

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Competition

The Bank conducts business through 48 branches in the market areas listed below in Arkansas, Missouri and Oklahoma. The following table presents the Bank’s respective market share percentages for total deposits at June 30, 2016, in each county where we have operations. The table also indicates the ranking by deposit size in each market. All information in the table was obtained from SNL Financial, which compiles deposit data published by the FDIC as of June 30, 2016 and updates the information for any bank mergers and acquisitions completed subsequent to the reporting date.

	June 30, 2016
County	Market Share (%)	Market Rank	Number of Branches
Bear State Bank
Barton, MO	15.74	2	2
Baxter, AR	10.42	4	3
Benton, AR	1.15	16	2
Boone, AR	32.22	1	3
Christian, MO	1.89	12	1
Craighead, AR	6.74	5	5
Faulkner, AR	0.21	13	1
Garland, AR	7.78	6	4
Greene, MO	1.44	17	3
Howard, AR	15.65	3	2
Little River, AR	36.16	2	1
Marion, AR	7.79	4	1
McCurtain, OK	10.94	4	2
Mississippi, AR	4.29	6	1
Montgomery, AR	66.78	1	2
Pike, AR	16.67	2	2
Polk, AR	20.63	2	2
Pulaski, AR	0.26	19	1
Scott, AR	39.28	1	1
Sevier, AR	15.52	3	1
Stone, MO	23.53	1	3
Taney, MO	1.67	12	1
Washington, AR	1.17	15	2
Webster, MO	21.37	2	2

The Bank faces strong competition in its market areas both in attracting deposits and making loans. The most direct competition for deposits has historically come from commercial banks, savings associations and credit unions. In addition, the Bank has faced additional significant competition for investors' funds from short-term money market securities, mutual funds and other corporate and government securities. The ability of the Bank to attract and retain savings and certificates of deposit depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. The Bank’s ability to increase checking deposits depends on offering competitive checking accounts and promoting these products through effective channels. Additionally, the Bank offers convenient hours, locations and online services to maintain and attract customers.

The Bank experiences strong competition for loans principally from commercial banks and mortgage companies. The Bank competes for loans through interest rates, loan terms, and fees charged and the efficiency and quality of services provided.

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Employees

The Company and the Bank had 466 full-time employees and 36 part-time employees at December 31, 2016, compared to 541 full-time employees and 45 part-time employees at December 31, 2015. The decrease in the number of employees is primarily related to branch consolidations and efficiencies gained in the integration of Metropolitan. None of our employees is represented by any union or similar group, and the Bank believes that it enjoys good relations with its personnel.

Subsidiaries

The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary service corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. In addition to investments in service corporations, the Bank is permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities in which the Bank may engage directly. As of December 31, 2016, the Bank does not have any operating subsidiaries.

Available Information

The Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports filed pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable on or through its website located at www.bearstatefinancial.com after filing with the United States Securities and Exchange Commission (“SEC”). Information on, or accessible through, the Company’s website is not a part of and is not incorporated into this Annual Report on Form 10-K and the inclusion of the Company’s website address in this report is an inactive textual reference.

REGULATION

Set forth below is a brief description of those laws and regulations which, together with the descriptions of laws and regulations contained elsewhere herein, are deemed material to an investor's understanding of the extent to which the Company and the Bank are regulated. The description of the laws and regulations hereunder, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

The Company

General. The Company, as a bank holding company within the meaning of the Bank Holding Company Act ("BHCA"), is subject to FRB regulations, examinations, supervision and reporting requirements. The most recent regulatory examination of the Company by the FRB was conducted during May 2016. As a subsidiary of a bank holding company, the Bank is also subject to certain restrictions in its dealings with the Company and affiliates thereof.

The BHCA limits the activities of the Company and any entities controlled by the Company to the activities of banking, managing and controlling banks, furnishing or performing services for its subsidiaries, and any other activity that the FRB determines to be incidental to or clearly and closely related to banking.

Acquisitions. Under the BHCA, a bank holding company must obtain prior FRB approval before engaging in acquisitions of banks or bank holding companies. In particular, the FRB must generally approve:

● the acquisition of direct or indirect ownership or control of any voting securities of a bank or bank holding company if the acquisition results in the company’s control of more than 5% of the outstanding shares of any class of voting securities of the bank or bank holding company,

● the acquisition by a bank holding company or by a subsidiary thereof, other than a bank, of all or substantially all of the assets of a bank, and

● the merger or consolidation of bank holding companies.

Restrictions on Transactions with Affiliates.   Transactions between an insured depository institution and its "affiliates" are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates generally include, among other entities, the institution’s holding company and companies that are controlled by or under common control with the institution. Generally, Section 23A (i) limits the extent to which the insured depository institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such association’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least favorable, to the association or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also apply to the provision of services and the sale of assets by an insured depository institution to an affiliate.

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In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of an institution (“a principal stockholder”), and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the institution. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by an institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2016, the Bank was in compliance with the above restrictions.

Incentive Compensation.During the second quarter of 2016, the U.S. financial regulators, including the Federal Reserve Board and the SEC, proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets (including the Company and the Bank). The proposed revised rules would establish general qualitative requirements applicable to all covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping. Under the proposed rule, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions’ “senior executive officers” and “significant risk-takers.” These additional requirements would not be applicable to the Company or the Bank, each of which currently have less than $50 billion in total consolidated assets.

The Bank

General. The Bank is chartered as an Arkansas state bank and is a member of the Federal Reserve System, making it primarily subject to regulation and supervision by both the Federal Reserve Board and the Arkansas State Bank Department. In addition, the Bank is subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged, and limitations on the types of investments that may be made and on the types of services that may be offered. Various consumer laws and regulations also affect the operations of the bank.

State Regulation.The Bank is subject to examination and regulation by the Arkansas State Bank Department. The Arkansas State Bank Department may also examine the activities of the bank holding company in conjunction with its examination of the bank subsidiary or in conjunction with the FRB’s examination of the bank holding company. The extent of such examination will depend upon the complexity and level of debt owed by the bank holding company, and other various criteria as determined by the Arkansas State Bank Department. The Bank is also required to submit certain reports filed with the FRB to the Arkansas State Bank Department.

Under the Arkansas Banking Code of 1997, the acquisition of more than 25% of any class of the outstanding capital stock of any bank located in Arkansas requires approval of the Arkansas State Bank Commissioner (the “Bank Commissioner”). Additionally, a bank holding company may not acquire any bank if after such acquisition the holding company would control, directly or indirectly, banks having 25% of the total bank deposits (excluding deposits from other banks and public funds) in the State of Arkansas. A bank holding company also cannot own more than one bank subsidiary if any of its bank subsidiaries has been chartered for less than five years.

The Bank Commissioner has the authority, with the consent of the Governor of the State of Arkansas, to declare a state of emergency and temporarily modify or suspend banking laws and regulations in communities where such a state of emergency exists. The Bank Commissioner may also authorize a bank to close its offices and any day when such bank offices are closed will be treated as a legal holiday, and any director, officer or employee of such bank shall not incur any liability related to such emergency closing. To date no such state of emergency has been declared to exist by the Bank Commissioner. 

Restrictions on Bank Subsidiary.

Lending Limits.The lending and investment authority of the Bank is derived from Arkansas law. The lending power is generally subject to certain restrictions, including the amount which may be lent to a single borrower. Under Arkansas law, the obligations of one borrower to a bank may not exceed 20% of the bank’s capital base.

Reserve Requirements. Arkansas law requires state chartered banks to maintain such reserves as are required by the applicable federal regulatory agency. Federal banking laws require all insured banks to maintain reserves against their checking and transaction accounts (primarily checking accounts, NOW and Super NOW checking accounts). Because reserves must generally be maintained in cash, non-interest bearing accounts or in accounts that earn only a nominal amount of interest, the effect of the reserve requirements is to increase our cost of funds.

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Payment of Dividends. Regulations of the FRB and the Arkansas State Bank Department limit the ability of the Bank to pay dividends to the Company without the prior approval of such agencies. Pursuant to FRB regulations, the maximum dividend that the Bank may pay without prior approval from the FRB is the Bank’s year-to-date net profits plus retained net profits from the preceding two years. The Arkansas State Bank Department currently limits the amount of dividends that the Bank can pay the Company to 75% of its net profits after taxes for the current year plus 75% of its retained net profits after taxes for the immediately preceding year.

Insurance of Accounts. FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit. FDIC insurance does not cover other financial products and services that banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or securities. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that would result in termination of the Bank's deposit insurance.

Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating.

A bank’s assessment is calculated by multiplying its assessment rate by its assessment base. A bank’s assessment base and assessment rate are determined each quarter. The deposit insurance assessment base is defined as average consolidated total assets for the assessment period less average tangible equity capital with potential adjustments for unsecured debt, brokered deposits and depository institution debts.  Beginning in the third quarter of 2016, the FDIC issued revised pricing models for assessment rate. Under the revised assessment system for small banks (defined by the FDIC as less than $10 billion in assets), the FDIC will determine assessment rates using financial measures and supervisory ratings derived from a statistical model estimating the probability of failure over three years. The new pricing system eliminates risk categories but established minimum and maximum assessment rates based on a bank’s CAMELs composite ratings.

FDIC insurance expense totaled $1.1 million, $960,000 and $753,000 for the years ended December 31, 2016, 2015 and 2014, respectively. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds.

Financial Regulatory Reform

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act represented a sweeping reform of the U.S. supervisory and regulatory framework applicable to financial institutions and capital markets in the wake of the global financial crisis, certain aspects of which are described below in more detail. In particular, and among other things, the Dodd-Frank Act: created the Consumer Financial Protection Bureau (the “CFPB”), which is authorized to regulate providers of consumer credit, savings, payment and other consumer financial products and services; narrowed the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations and expanded the authority of state attorneys general to bring actions to enforce federal consumer protection legislation; imposed more stringent capital requirements on bank holding companies and subjected certain activities, including interstate mergers and acquisitions, to heightened capital conditions; with respect to mortgage lending, (i) significantly expanded requirements applicable to loans secured by one-to-four family residential real property, (ii) imposed strict rules on mortgage servicing, and (iii) required the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards; repealed the prohibition on the payment of interest on business checking accounts; restricted the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater; in the so-called “Volcker Rule,” subject to numerous exceptions, prohibited depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading; enhanced oversight of credit rating agencies; and prohibited banking agency requirements tied to credit ratings. These statutory changes shifted the regulatory framework for financial institutions, impacted the way in which they do business and have the potential to constrain revenues of financial institutions.

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Numerous provisions of the Dodd-Frank Act were required to be implemented through rulemaking by the appropriate federal regulatory agencies. Many of the required regulations have been issued and others have been released for public comment, but are not yet final. Although the reforms primarily targeted systemically important financial service providers, their influence has and is expected to continue to filter down in varying degrees to smaller institutions over time. Our management will continue to evaluate the effect of the Dodd-Frank Act on the business and operations of the Company and the Bank.

Consumer Laws and Regulations. Banks are subject to certain laws and regulations that are designed to protect consumers. Among the more prominent of such laws and regulations are the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act and consumer privacy protection provisions of the Gramm-Leach-Bliley Act and comparable state laws. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions deal with consumers. With respect to consumer privacy, the Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually.

The Dodd-Frank Act created the CFPB within the Federal Reserve System. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the CFPB and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against state-chartered institutions. The CFPB has examination and primary enforcement authority with respect to consumer protection laws and regulations for depository institutions with $10 billion or more in assets. Depository institutions with less than $10 billion in assets are subject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulatory agencies for consumer compliance purposes.

During 2013, the CFPB issued a series of proposed and final rules related to mortgage loan origination and mortgage loan servicing. In particular, in January 2013, the CFPB issued its final rule, which was effective January 10, 2014, on ability to repay and qualified mortgage standards to implement various requirements of the Dodd-Frank Act amending the Truth in Lending Act. The final rule requires mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a borrower will have the ability to repay a mortgage loan according to its terms before making the loan. The final rule also includes a definition of a “qualified mortgage,” which provides the lender with a presumption that the ability to repay requirements has been met. This presumption is conclusive (i.e. a safe harbor) if the loan is a “prime” loan and rebuttable if the loan is a higher-priced, or subprime, loan. The ability-to-repay rule has the potential to significantly affect our business, as a borrower can challenge a loan’s status as a qualified mortgage or that the lender otherwise established the borrower’s ability to repay in a direct cause of action for three years from the origination date, or as a defense to foreclosure at any time. In addition, the value and marketability of non-qualified mortgages may be adversely affected.

Interchange Fees. The Dodd-Frank Act also amended the Electronic Fund Transfer Act to require that the amount of any interchange fee charged for electronic debit transactions by debit card issuers having assets over $10 billion must be reasonable and proportional to the actual cost of a transaction to the issuer, commonly referred to as the “Durbin Amendment”. The FRB has adopted final rules which limit the maximum permissible interchange fees that such issuers can receive for an electronic debit transaction. Although the restrictions on interchange fees do not apply to institutions with less than $10 billion in assets, the price controls could negatively impact bankcard services income for smaller banks if the reductions that are required of larger banks cause industry-wide reduction of swipe fees.

Volcker Rule. The Dodd-Frank Act amended the BHCA to require the federal banking regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring a covered fund (such as a hedge fund and/or private equity fund), commonly referred to as the “Volcker Rule.” In December 2013, the federal banking regulatory agencies adopted a final rule construing the Volcker Rule, which became effective April 1, 2014. While banking entities had until July 21, 2016 to conform their activities to the requirements of the rule, the FRB has granted an extension until July 21, 2017.

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The Increasing Regulatory Emphasis on Capital

Regulatory capital represents the net assets of a financial institution available to absorb losses. Because of the risks attendant to their business, depository institutions are generally required to hold more capital than other businesses, which directly affects earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish strengthened capital standards for banks and bank holding companies, require more capital to be held in the form of common stock and disallow certain funds from being included in capital determinations. Once fully implemented, these standards will represent regulatory capital requirements that are significantly more stringent than those in place previously.

Required Capital Levels. In July of 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to previous capital requirements, which were merely guidelines, Basel III was released in the form of regulations by each of the federal regulatory agencies. The Basel III Rule is applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion).

The minimum capital standards effective for the year ended December 31, 2016 were:

● A minimum ratio of Common Equity Tier 1 Capital to risk-weighted assets of 4.5%;

● A minimum required amount of Tier 1 Capital to risk-weighted assets of 6%;

● A minimum required amount of Total Capital (Tier 1 plus Tier 2) to risk-weighted assets of 8%; and

● A minimum leverage ratio of Tier 1 Capital to total assets equal to 4% in all circumstances.

For these purposes, “Common Equity Tier 1 Capital,” consists primarily of common stock, related surplus (net of treasury stock), retained earnings, and Common Equity Tier 1 minority interests, subject to certain regulatory adjustments. “Tier 1 Capital” consists primarily of common stock and related surplus less intangible assets (other than certain loan servicing rights and purchased credit card relationships). “Total Capital” consists primarily of Tier 1 Capital plus “Tier 2 Capital,” which includes other non-permanent capital items, such as certain other debt and equity instruments that do not qualify as Tier 1 Capital, and a portion of a bank’s allowance for loan and lease losses. Further, risk-weighted assets for the purpose of the risk-weighted ratio calculations consist of balance sheet assets and off-balance sheet exposures to which required risk weightings of 0% to 1250% are applied.

The Basel III Rules also established a fully-phased “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, results in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.

The capital standards described above are minimum requirements under Basel III. Bank regulatory agencies uniformly encourage banks and bank holding companies to be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is “well-capitalized” may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Under the capital regulations of the FDIC and FRB, in order to be “well-capitalized,” a banking organization, for the year ended December 31, 2016, must have maintained:

● A ratio of Common Equity Tier 1 Capital to total risk-weighted assets of 6.5% or greater,

● A ratio of Tier 1 Capital to total risk-weighted assets of 8% or greater,

● A ratio of Total Capital to total risk-weighted assets of 10% or greater, and

● A leverage ratio of Tier 1 Capital to total assets of 5% or greater.

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The FDIC and FRB guidelines also provide that banks and bank holding companies experiencing internal growth or making acquisitions would be expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the agencies will continue to consider a “tangible Tier 1 leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or to engage in new activities.

Higher capital levels could also be required if warranted by the particular circumstances or risk profile of individual banking organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Prompt Corrective Action. A banking organization’s capital plays an important role in connection with regulatory enforcement as well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Other Financial Regulatory Matters

Federal Home Loan Bank System.The Bank is a member of the Federal Home Loan Bank of Dallas, which is one of 11 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. At December 31, 2016, the Bank had $130.0 million of outstanding FHLB advances.

As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the sum of 0.04% of total assets as of the previous December 31 and 4.10% of outstanding advances. At December 31, 2016, the Bank had $5.9 million in FHLB stock, which was in compliance with this requirement. No ready market exists for such stock and it has no quoted market value.

Federal Reserve System.The FRB requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits (primarily NOW and regular checking accounts). For 2016: the first $15.2 million of otherwise reservable balances are exempt from the reserve requirements; for transaction accounts aggregating more than $15.2 million to $110.2 million, the reserve requirement is 3% of total transaction accounts; and for net transaction accounts in excess of $110.2 million, the reserve requirement is $2.9 million plus 10% of the aggregate amount of total transaction accounts in excess of $110.2 million. These reserve requirements are subject to annual adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or a noninterest bearing account at an FRB, the effect of this reserve requirement is to reduce an institution's earning assets.

Additionally, each member bank is required to hold stock in its regional federal reserve bank. The stock cannot be sold, traded, or pledged as collateral for loans. At December 31, 2016, the Bank had $7.5 million in FRB stock. As specified by law, member banks receive a six percent annual dividend on their FRB stock.

Concentrated Commercial Real Estate Lending Regulations. Federal banking regulators promulgated guidance governing financial institutions with concentrations in commercial real estate lending, which guidance is applicable to both federal and state chartered financial institutions. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm nonresidential properties (excluding loans secured by owner-occupied properties) and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address the following key elements, including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. As of December 31, 2016, the Company did not exceed the levels to be considered to have a concentration in commercial real estate lending.

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Community Reinvestment Act Requirements.The Community Reinvestment Act imposes a continuing and affirmative obligation on the Bank to, in a safe and sound manner, help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for acquisitions are affected by the evaluation of a bank’s effectiveness in meeting its Community Reinvestment Act requirements.

Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the ���Patriot Act”) is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities.

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain forward-looking statements and information relating to the Company and the Bank that are based on the beliefs of management as well as assumptions made by and information currently available to management. As used in this document, the words "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.

The statements presented herein with respect to, among other things, the Company’s or the Bank’s plans, objectives, expectations and intentions, anticipated changes in noninterest expenses in future periods, changes in earnings, impact of outstanding off-balance sheet commitments, sources of liquidity and that we have sufficient liquidity, the sufficiency of the allowance for loan losses, expected loan, asset, and earnings growth, growth in new and existing customer relationships, our intentions with respect to our investment securities, regulatory developments and outlook, the Company’s plans to close underperforming branches and financial and other goals and plans are forward looking.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

● Local, regional and national economic and financial conditions, including volatility in interest rates, equity prices and the value of financial assets;

● Volatility in the capital or credit markets;

● The impact of conditions in the real estate market in the areas in which we do business;

● The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the Internet;

● Strategic actions, including mergers and acquisitions and our success in integrating acquired businesses;

● The failure of assumptions underlying the establishment of our allowance for loan and lease losses;

● The occurrence of hostilities, political instability or catastrophic events;

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● Developments and changes in laws and regulations, revised rules and standards applied by the FRB, the FDIC and other federal and state banking regulators;

● Disruptions to our technology network including computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment; and

● Such other factors as discussed in Part I, Item 1A. Risk Factors and in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.

Item 1A.      Risk Factors

You should carefully read and consider the risk factors described below as well as other information included in this Annual Report on Form 10-K and the information contained in other filings with the SEC. Any of these risks, if they actually occur, could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations and prospects. Additional risks and uncertainties not presently known by us or that we currently deem to be immaterial may materially and adversely affect us.

Risks Related to Our Business: 

Our profitability is dependent on our banking activities.

Because we are a bank holding company, our profitability is directly attributable to the success of our bank subsidiary. Our banking activities compete with other banking institutions on the basis of service, convenience and price. Due in part to regulatory changes and consumer demands, banks have experienced increased competition from other entities offering similar products and services. We rely on the profitability of our bank subsidiary and dividends received from our bank subsidiary for payment of our operating expenses and satisfaction of our obligations. As is the case with other similarly situated financial institutions, our profitability will be subject to the fluctuating cost and availability of funds, changes in the prime lending rate and other interest rates, changes in economic conditions in general and, because of the location of our banking offices, changes in economic conditions in Arkansas, Missouri and Oklahoma in particular.

Changes in interest rates could have a material adverse effect on the Bank’s profitability and asset values.

The operations of financial institutions such as the Bank are dependent to a large extent on net interest income, which is the difference between the interest income earned on interest earning assets such as loans and investment securities and the interest expense paid on interest bearing liabilities such as deposits and borrowings. Changes in the general level of interest rates can affect net interest income by affecting the difference between the weighted average yield earned on interest earning assets and the weighted average rate paid on interest bearing liabilities, or interest rate spread, and the average life of interest earning assets and interest bearing liabilities. Changes in interest rates also can affect our ability to originate loans; the value of our interest earning assets; our ability to obtain and retain deposits in competition with other available investment alternatives; and the ability of borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. As of December 31, 2016, the Bank’s model simulations projected that 100, 200 and 300 basis point increases in interest rates would result in variances in net interest income of less than 2%, 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 approximately 7% relative to the base case over the next twelve months. Based on these measures, the Bank estimates a limited impact on earnings for various interest rate change scenarios. Significant changes in the composition of our rate sensitive assets or liabilities could result in a more unbalanced position possibly causing interest rate changes to have a material impact on our earnings. In addition, earnings may be adversely affected during any period of changes in interest rates due to a number of factors including among other items, call features and interest rate caps and floors on various assets and liabilities, prepayments, the current interest rates on assets and liabilities to be repriced in each period, and the relative changes in interest rates on different types of assets and liabilities.

In addition, a significant and prolonged increase in interest rates could have a material adverse effect on the fair value of the investment securities portfolio classified as available for sale and, accordingly, stockholders’ equity. At December 31, 2016 the Bank had investment securities classified as available for sale with a fair value of $188.5 million with a net unrealized loss of $2.3 million. The impact on equity at December 31, 2016, net of tax, was an unrealized loss of $1.4 million.

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The Company and the Bank face strong competition that may adversely affect profitability.

The Company and the Bank are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions, including commercial banks, savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies, and with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers. Many of our competitors are larger financial institutions with substantially greater resources, lending limits, and larger branch systems. These competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services. Competition from both bank and non-bank organizations will continue. Our inability to compete successfully could adversely affect profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We could experience deficiencies in our allowance for loan and lease losses.

Management maintains an allowance for loan and lease losses based upon, among other things:

• historical experience;

• repayment capacity of borrowers;

• an evaluation of local, regional and national economic conditions;

• regular reviews of delinquencies and loan portfolio quality;

• collateral evaluations;

• current trends regarding the volume and severity of problem loans;

• the existence and effect of concentrations of credit; and

• results of regulatory examinations.

Based on these factors, management makes various assumptions and judgments about the ultimate collectability of the loans in the portfolio. The determination of the appropriate level of the allowance for loan and lease losses inherently involves a high degree of subjectivity and management must make significant estimates of current credit risks and future trends, all of which may undergo material changes. In addition, the board of directors and the regulatory authorities periodically review the allowance for loan and lease losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs. Regulators’ judgments may differ from management. While management believes that the allowance for loan and lease losses is appropriate based on our evaluation, management may determine that an increase in the allowance for loan and lease losses is needed or regulators may require an increase in the allowance. Either of these occurrences could materially and adversely affect the Company’s financial condition and results of operations.

A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Company and the Bank for our fiscal year beginning after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

We depend on key personnel for our success.

Our operating results and ability to adequately manage our growth and minimize loan and lease losses are highly dependent on the services, managerial abilities and performance of our current executive officers and other key personnel. While we have an experienced management team that the Board believes is capable of managing and growing our business, recent executive departures and restructuring of senior management have resulted in the transition of many management positions within the Company and the Bank. Additional losses of or changes in our current executive officers or other key personnel and their responsibilities may disrupt our business and could adversely affect our financial condition, results of operations and liquidity. There can be no assurance that we will be successful in retaining our current executive officers or other key personnel, or hiring additional key personnel to assist in executing our growth strategy.

16

Further, the process of identifying management successors creates uncertainty and could become a distraction to our senior management and the Board. We may not be successful in attracting qualified candidates to replace key positions when necessary. As a result, the transition process and the identification and recruitment of candidates to fill senior management positions may be disruptive to our business or operations.

Our business depends on the condition of the local and regional economies where we operate.

All of our banking offices are located in Arkansas, Missouri and Southeast Oklahoma. As a result, our financial condition and results of operations may be significantly impacted by changes in the Arkansas, Missouri and Oklahoma economies. Slowdown in economic activity, deterioration in housing markets or increases in unemployment and under-employment in these areas may have a significant and disproportionate impact on consumer and business confidence and the demand for our products and services, result in an increase in non-payment of loans and leases and a decrease in collateral value, and significantly impact our deposit funding sources. Any of these events could have an adverse impact on our financial position, results of operations and liquidity.

A portion of the loan portfolio is related to commercial real estate and construction activities. Unexpected declines in real estate values and other market uncertainties may negatively impact these loans and could adversely impact results of operations.

As of December 31, 2016, approximately 46% of loans consisted of commercial real estate or construction project loans. Commercial real estate and construction lending are generally considered to involve a higher degree of risk due to a variety of factors, including generally larger loan balances, the dependency on successful completion or operation of the project for repayment, a need for a general stability of interest rates and loan terms that often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity. In recent years, commercial real estate markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values. Commercial real estate prices, according to many U.S. commercial real estate indices, are currently above the 2007 peak levels that contributed to the recent financial crisis. Accordingly, federal bank regulatory agencies have expressed concerns about weaknesses in the current commercial real estate market. Our failure to adequately implement and execute effective underwriting and risk management policies, procedures and controls with respect to commercial real estate lending could adversely affect our ability to increase this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses, from this portfolio.

The Company and the Bank could be materially and adversely affected if any of our officers or directors fails to comply with bank and other laws and regulations.

Like any business, we are subject to risk arising from potential employee misconduct, including non-compliance with policies. Any interventions by regulatory authorities following such employee misconduct may result in adverse judgments, settlements, fines, penalties, injunctions, suspension or expulsion of our officers or directors from the banking industry. In addition to the monetary consequences, these measures could, for example, impact our ability to engage in, or impose limitations on, certain business activities. Significant regulatory action against the Company or the Bank or its officers or directors could materially and adversely affect the Company and the Bank’s business, financial condition or results of operations or cause significant reputational harm.

The Bank may incur increased employee benefit costs which could have a material adverse effect on its financial condition and results of operations.

The Company is a participant in the multiemployer Pentegra Defined Benefit Plan (the “Pentegra DB Plan”). Since the Pentegra DB Plan is a multiemployer plan, contributions of participating employers are commingled and invested on a pooled basis without allocation to specific employers or employees. Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. In addition, if a participating employer stops contributing to the plan, the unfunded obligations of the multiemployer plan may be borne by the remaining participating employers.

Although the Pentegra DB Plan has been frozen since July 1, 2010, the Company has continued to incur costs consisting of administration and Pension Benefit Guaranty Corporation insurance expenses as well as amortization charges based on the funding level of the Pentegra DB Plan.  The level of amortization charges is determined by the Pentegra DB Plan's funding shortfall, which is determined by comparing the Pentegra DB Plan’s liabilities to the Pentegra DB Plan’s assets.  Net pension expense was approximately $156,000, $138,000 and $3.3 million for the years ended December 31, 2016, 2015 and 2014, respectively, and contributions to the Pentegra DB Plan totaled $162,000, $148,000 and $3.0 million for the years ended December 31, 2016, 2015 and 2014, respectively. In the second quarter of 2014, the Company elected to retire certain pension liabilities of the Pentegra DB Plan which resulted in a charge of $2.9 million. Although this election improved the funding status, material increases to the estimated amount of the Bank’s required contribution may occur. Additionally, if the Bank were to terminate its participation in the Pentegra DB Plan, the Bank could incur a significant withdrawal liability. Any of these events could have a material adverse effect on our financial condition, results of operations and liquidity.

17

An inability to make technological advances may reduce the Company and the Bank’s ability to successfully compete.

The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. As a result, the Company and the Bank’s future success will depend in part on the ability to address customers’ needs by using technology. The Company and the Bank may be unable to effectively develop new technology-driven products and services and may be unsuccessful in marketing these products to our customers. Many competitors have greater resources to invest in technology. Any failure to keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company and the Bank’s business, financial condition and results of operations.

Risks associated with cyber-security could negatively affect our earnings.

The financial services industry has experienced an increase in both the number and severity of reported cyber-attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions.

We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.

We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers' transaction data may put us at risk for possible losses due to fraud or operational disruption.

Our customers are also the target of cyber-attacks and identity theft. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.

The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

We are subject to environmental liability risks.

A significant portion of our loan and lease portfolio is secured by real property. In the ordinary course of business, we may foreclose on and take title to real properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. Additionally, we have acquired a number of retail banking facilities and other real properties as a result of the FNSC and Metropolitan acquisitions, any of which may contain hazardous or toxic substances. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. We have policies and procedures that require either formal or informal evaluation of environmental risks and liabilities on real property (i) before originating any loan or foreclosure action, except for (a) loans originated for sale in the secondary market secured by one-to-four family residential properties and (b) certain loans where the real estate collateral is second lien collateral. These policies, procedures and evaluations may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have an adverse effect on our financial condition, results of operations and liquidity.

If we do not properly manage our credit risk, our business could be seriously harmed.

There are substantial risks inherent in making any loan or lease, including, but not limited to the following:

■ risks resulting from changes in economic and industry conditions;

18

■ risks inherent in dealing with individual borrowers;

■ risks inherent from uncertainties as to the future value of collateral; and

■ the risk of non-payment of loans and leases.

Although we attempt to minimize our credit risk through prudent loan and lease underwriting procedures and by monitoring concentrations of our loans and leases, there can be no assurance that these underwriting and monitoring procedures will reduce these risks. Moreover, as we expand into new markets, credit administration and loan and lease underwriting policies and procedures may need to be adapted to local conditions. The inability to properly manage our credit risk or appropriately adapt our credit administration and loan and lease underwriting policies and procedures to local market conditions or changing economic circumstances could have an adverse impact on our provision for loan and lease losses and our financial condition, results of operations and liquidity.

We rely on certain external vendors.

We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable contractual arrangements or service level agreements. We maintain a system of policies and procedures designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure, (ii) changes in the vendor’s financial condition and (iii) changes in the vendor’s support for existing products and services. While we believe these policies and procedures help to mitigate risk, the failure of an external vendor to perform in accordance with applicable contractual arrangements or the service level agreements could be disruptive to our operations, which could have a material adverse impact on our business and our financial condition and results of operations.

We may be adversely affected by risks associated with completed and potential acquisitions.

We have pursued and expect to pursue additional acquisition opportunities that we believe support our business strategy and may enhance our profitability. Acquisitions involve numerous risks, including but not limited to the following:

● incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;

● using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

● the risk that the acquired business will not perform to our expectations;

● difficulties, inefficiencies or cost overruns in integrating and assimilating the organizational cultures, operations, technologies, services and products of the acquired business with ours;

● the risk of key vendors not fulfilling our expectations or not accurately converting data;

● entering geographic and product markets in which we have limited or no direct prior experience;

● the potential loss of key employees, customers and deposits of acquired banks;

● the potential for liabilities and claims arising out of the acquired businesses; and

● the risk of not receiving required regulatory approvals or such approvals being restrictively conditional.

Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have unknown or contingent liabilities with no corresponding accounting allowance, exposure to unexpected asset quality problems that require writedowns or write-offs (as well as restructuring and impairment or other charges), difficulty retaining key employees and customers and other issues that could negatively affect our business. We may not be able to realize any projected cost savings, synergies or other benefits associated with any such acquisition we complete. Acquisitions may involve the payment of a premium over book and market values and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Failure to successfully integrate the entities we acquire into our existing operations could increase our operating costs significantly and have a material adverse effect on our business, financial condition and results of operations.

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We must generally satisfy a number of meaningful conditions prior to completing any acquisition, including, in certain cases, federal and state regulatory approval. Bank regulators consider a number of factors when determining whether to approve a proposed transaction, including the effect of the transaction on financial stability and the ratings and compliance history of all institutions involved, including Community Reinvestment Act compliance, examination results and anti-money laundering and Bank Secrecy Act compliance records of all institutions involved. The process for obtaining required regulatory approvals has become substantially more difficult as a result of the recent financial crisis, which could affect our future business. We may fail to pursue, evaluate or complete strategic and competitively significant business opportunities as a result of our inability, or our perceived inability, to obtain any required regulatory approvals in a timely manner or at all.

In addition, we face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. There can be no assurance that we will be successful in identifying or completing any future acquisitions.

Risks Related to Our Industry:

The Company and the Bank operate in a heavily regulated environment, and that regulation could limit or restrict our activities and adversely affect the Company’s financial condition.

The financial services industry is highly regulated and we are subject to examination, supervision, and comprehensive regulation by various federal and state agencies, including the ASBD, the FRB and the FDIC. Compliance with these regulations is costly and may restrict some of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates and locations of offices. The regulators’ interpretation and application of relevant regulations are beyond our control and may change rapidly and unpredictably. Banking regulations are primarily intended to protect depositors and not stockholders.

In response to the financial crisis, the banking and financial services industry has been the subject of increased legislation and regulation. While recent trends may have shown a likelihood of continued expansion of financial services regulation, at this time, it is difficult to predict future legislative and regulatory changes that will result from the combination of a new President of the United States and the first year since 2010 in which both Houses of Congress have majority memberships from the same political party as the President. In recent years, however, both the new President and senior members of the House of Representatives have advocated for significant reduction of financial services regulation, to include amendments to the Dodd-Frank Act and structural changes to the CFPB. The new Administration and Congress also may cause broader economic changes due to changes in governing ideology and governing style. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings.

The FRB regulates the supply of money and credit in the U.S. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which may affect our net interest income and net interest margin. Changes in the supply of money and credit can also materially decrease the value of financial assets we hold, such as debt securities. The FRB’s policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans and leases. Changes in such policies are beyond our control and difficult to predict; consequently, the impact of these changes on our activities and results of operations is difficult to predict.

Reductions in interchange fees would reduce our non-interest income.

An interchange fee is a fee merchants pay to the interchange network in exchange for the use of the network’s infrastructure and payment facilitation, and which is paid to debit, credit and prepaid card issuers to compensate them for the costs associated with card issuance and operation. In the case of credit cards, this includes the risk associated with lending money to customers. We earn interchange fees on these card transactions. Merchants, trying to decrease their operating expenses, have sought to, and have had some success at, lowering interchange rates. In particular, the Durbin Amendment to the Dodd-Frank Act limited the amount of interchange fees that may be charged for debit and prepaid card transactions for those card issuers with $10 billion or more in total assets. Several recent events and actions indicate a continuing focus on interchange fees by both regulators and merchants. Beyond pursuing litigation, legislation and regulation, merchants are also pursuing alternate payment platforms as a means to lower payment processing costs. To the extent interchange fees are further reduced, our non-interest income from those fees will be reduced, which could have a material adverse effect on our business and results of operations. In addition, the payment card industry is subject to the operating regulations and procedures set forth by payment card networks, and our failure to comply with these operating regulations, which may change from time to time, could subject us to various penalties or fees or the termination of our license to use the payment card networks, all of which could have a material adverse effect on our business, financial condition or results of operations.

20

Risks Related to Our Common Stock:

The trading volume of the Company’s common stock is lower than that of other financial services companies and the market price of our common stock may fluctuate significantly, which can make it difficult to sell shares of the Company’s common stock at times, volumes and prices attractive to our stockholders.

The Company’s common stock is listed on the NASDAQ Global Market under the symbol “BSF.” The average daily trading volume for shares of our common stock is lower than larger financial institutions.  Because the trading volume of our common stock is lower, and thus has substantially less liquidity than the average trading market for many other publicly traded companies, sales of our common stock may place significant downward pressure on the market price of our common stock.  In addition, market value of thinly traded stocks can be more volatile than stocks trading in an active public market.

The market price of our common stock has been volatile in the past and may fluctuate significantly as a result of a variety of factors, many of which are beyond our control.  These factors include, in addition to those described elsewhere in this Annual Report on Form 10-K:

● actual or anticipated quarterly or annual fluctuations in our operating results, cash flows and financial condition;

● changes in earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;

● speculation in the press or investment community generally or relating to our reputation or the financial services industry;

● strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, financings or stock repurchases;

● fluctuations in the stock price and operating results of our competitors;

● abnormally high trading volumes in our common stock;

● future issuances or re-sales of our equity or equity-related securities, or the perception that they may occur;

● proposed or adopted regulatory changes or developments;

● anticipated or pending investigations, proceedings, or litigation or accounting matters that involve or affect us;

● domestic and international economic factors unrelated to our performance; and

● general market conditions and, in particular, developments related to market conditions for the financial services industry.

In addition, in recent years, the stock markets in general have experienced extreme price and volume fluctuations, and market prices for the stock of many companies, including those in the financial services sector, have experienced wide price fluctuations that have not necessarily been related to operating performance.  This is due, in part, to investors’ shifting perceptions of the effect of changes and potential changes in the economy on various industry sectors.  This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their performance or prospects.  These broad market fluctuations may adversely affect the market price of our common stock, notwithstanding our actual or anticipated operating results, cash flows and financial condition.  The Company expects that the market price of our common stock will continue to fluctuate due to many factors, including prevailing interest rates, other economic conditions, our operating performance and investor perceptions of the outlook for the Company and the Bank specifically and the banking industry in general.

As a result of the lower trading volume of the Company’s common stock and its susceptibility to market price volatility, stockholders may not be able to resell their shares at times, volumes or prices they find attractive.

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Bear State Financial Holdings, LLC holds a significant interest in the Company’s common stock and may have interests that differ from the interests of other stockholders.

Bear State Financial Holdings, LLC (“BSF Holdings”) currently owns approximately 40% of the outstanding shares of Company common stock. As a result, BSF Holdings is able to significantly influence corporate and management policies and the outcome of any corporate transaction or other matter submitted to Company stockholders for approval. Such transactions may include mergers and acquisitions, sales of all or some of the Company’s assets or purchases of assets, and other significant corporate transactions.

The interests of BSF Holdings may differ from those of the Company’s other stockholders, and it may take actions that advance its interests to the detriment of other stockholders.

This concentration of ownership could also have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination that could be favorable to the other holders of the Company’s common stock, and the market price of the Company’s common stock may be adversely affected by the absence or reduction of a takeover premium in the trading price.

Shares of Company common stock are not an insured deposit and are subject to substantial investment risk.

Investments in Company common stock are not a savings or deposit account or other obligation of the Bank and are not insured or guaranteed by the FDIC or any other governmental agency. Investment in Company common stock is inherently risky for the reasons described in this "RISK FACTORS" section, and is subject to the same market forces that affect the market price of the common stock of any company. As a result, you may lose some or all of your investment.

Future issuances of additional equity securities could result in dilution of existing stockholders’ equity ownership.

We may determine from time to time to issue additional equity securities to raise additional capital, support growth, or, as we have in recent years, to make acquisitions. Further, we may issue stock options, grant restricted stock awards or other equity awards to retain, compensate and/or motivate our employees and directors. These issuances of our securities could dilute the voting and economic interests of existing stockholders.

Item 1B. Unresolved Staff Comments.

None

Item 2. Properties.

The executive offices of the Company are located at 900 S Shackleford Road, Suite 605, Little Rock, Arkansas, and are leased from an unaffiliated third party. As of December 31, 2016, the Company conducted business through 48 banking locations and three loan production offices which are owned or leased in various communities throughout Arkansas, Missouri and Southeast Oklahoma. Approximately 76% of the Company's banking locations are owned and 24% are leased.

The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. Additional information with respect to premises and lease commitments is presented in Note 8 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Item 3. Legal Proceedings.

Neither the Company nor the Bank is involved in any pending legal proceedings other than nonmaterial legal proceedings occurring in the ordinary course of business.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Shares of the Company's common stock are traded under the symbol "BSF" on the NASDAQ Global Market. At March 2, 2017, the Company had 37,689,636 shares of common stock outstanding and had approximately 622 holders of record.

The following table sets forth the reported high and low sales prices of a share of the Company's common stock and the cash dividends declared per share as reported by NASDAQ for the periods indicated.

Quarter Ended	Year Ended December 31, 2016						Year Ended December 31, 2015
	High		Low		Dividends		High		Low		Dividends
March 31	$	10.75	$	7.61	$	--	$	11.05	$	9.75	$	--
June 30	$	10.90	$	8.67	$	0.025	$	10.02	$	8.11	$	--
September 30	$	10.22	$	8.81	$	0.025	$	9.90	$	8.08	$	--
December 31	$	10.95	$	8.65	$	0.025	$	11.39	$	8.54	$	--

Our principal business operations are conducted through our bank subsidiary. Cash available to pay dividends to our common shareholders is derived primarily, if not entirely, from dividends paid by our bank subsidiary. The ability of our bank subsidiary to pay dividends, as well as our ability to pay dividends to our common shareholders, will continue to be subject to and limited by the results of operations of our bank subsidiary and by certain legal and regulatory restrictions. Further, any lenders making loans to us may impose financial covenants that may be more restrictive than regulatory requirements with respect to the payment of dividends to common shareholders. Accordingly, there can be no assurance that we will continue to pay dividends to our common shareholders in the future. See Note 21 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and the Regulation discussion included in Item 1 of this Annual Report on Form 10-K for further discussion of dividend restrictions.

Issuer Purchases of Equity Securities

The Company did not purchase any of its equity securities during the fourth quarter of 2016.

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Performance Graph

Below is a graph which summarizes the cumulative return earned by the Company’s stockholders since December 31, 2011, compared with the cumulative total return on the S&P 500 Index and SNL Small Cap Bank Index. This presentation assumes that the value of the investment in the Company’s common stock and each index was $100.00 on December 31, 2011 and that subsequent cash dividends were reinvested.

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Item 6. Selected Financial Data.

The selected consolidated financial and other data of the Company set forth below and on the following page is not complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere herein and incorporated by reference herein.

	At or For the Year Ended December 31,
	2016		2015		2014			2013		2012
	(In Thousands, Except Per Share Data)
Selected Financial Condition Data:
Total assets	$	2,053,175	$	1,920,216	$	1,514,595		$	548,872	$	530,395
Cash and cash equivalents		78,789		52,131		113,086			23,970		42,607
Interest bearing time deposits in banks		4,571		10,930		12,421			24,118		29,592
Investment securities–held to maturity atamortized cost		26,977		--		--			--		--
Investment securities–available for sale at fair value		188,476		198,585		174,218			70,828		53,325
Loans receivable, net		1,540,805		1,444,102		1,041,222			371,149		337,328
Loans held for sale		8,954		7,326		6,409			4,205		4,435
Allowance for loan and lease losses		15,584		14,550		13,660			12,711		15,676
Real estate owned, net		1,945		3,642		4,792			8,627		16,658
Deposits		1,644,080		1,607,683		1,263,797			469,725		455,051
Other borrowings		152,004		72,380		61,258			5,941		3,109
Stockholders' equity		233,427		223,157		170,454			71,187		69,660
Selected Operating Data:
Interest income	$	75,386	$	60,846	$	42,491		$	18,365	$	19,799
Interest expense		7,918		6,364		5,138			3,392		4,422
Net interest income		67,468		54,482		37,353			14,973		15,377
Provision for loan losses		2,516		1,797		1,588			--		22
Net interest income afterprovision for loan losses		64,952		52,685		35,765			14,973		15,355
Noninterest income		16,711		13,547		10,039			5,426		6,587
Noninterest expense		57,345		51,019		42,068			19,659		21,187
Income before income taxes		24,318		15,213		3,736			740		755
Income tax provision (benefit)		6,859		4,639		(20,570	)		11		--
Net income available to common stockholders	$	17,459	$	10,574	$	24,306		$	729	$	755
Earnings perCommonShare(1):
Basic	$	0.46	$	0.31	$	0.86		$	0.03	$	0.04
Diluted		0.46		0.30		0.84			0.03		0.03
Cash Dividends Declared per CommonShare	$	0.075	$	--	$	--		$	--	$	--

(1) Per share amounts prior to 2015 have been adjusted to give effect to the 11% stock dividend paid in December 2014.

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	At or For the Year Ended December 31,
	2016			2015			2014			2013			2012
Selected Operating Ratios(1):
Return on average assets		0.89	%		0.67	%		2.24	%		0.14	%		0.14	%
Return on average equity		7.61			5.65			20.64			1.02			1.08
Average equity to average assets		11.67			11.77			10.86			13.32			12.59
Interest rate spread(2)		3.77			3.81			3.77			3.02			3.03
Net interest margin(2)		3.85			3.88			3.84			3.09			3.09
Net interest income after provision forloan losses to noninterest expense		113.27			103.27			85.02			76.16			72.47
Noninterest expense to average assets		2.92			3.21			3.88			3.68			3.82
Average interest earning assets toaverage interest bearing liabilities		116.36			116.19			113.61			110.21			108.26
Operating efficiency(3)		68.12			75.00			88.77			96.37			96.46
Asset Quality Ratios(4):
Nonaccrual loans to total assets		0.85			1.01			0.65			2.18			3.55
Nonperforming assets to total assets(5)		0.94			1.22			0.98			3.75			6.69
Allowance for loan and lease lossesto classified loans(6)		29.48			29.22			38.81			86.09			45.41
Allowance for loan and lease lossesto total loans		1.00			1.00			1.29			3.31			4.44
Capital Ratios(7):
Tier 1 leverage ratio		9.47			9.15			8.29			12.90			12.73
Common equity tier 1 to risk-weighted assets		11.04			10.62			N/A			N/A			N/A
Tier 1 capital to risk-weighted assets		11.04			10.62			10.89			17.40			18.49
Total capital to risk-weighted assets		11.96			11.52			12.11			18.68			19.77
Other Data:
Dividend payout ratio(8)		16.15			--	(9)		--	(9)		--	(9)		--	(9)

(1) Ratios are based on average daily balances.

(2) 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, and net interest margin represents net interest income as a percentage of average interest earning assets.

(3) Noninterest expense to net interest income plus noninterest income.

(4) Asset quality ratios are end of period ratios.

(5) Nonperforming assets consist of nonperforming loans and real estate owned. Nonperforming loans consist of nonaccrual loans and accruing loans 90 days or more past due.

(6) Classified loans consist of loans graded substandard, doubtful or loss.

(7) Capital ratios are end of period ratios for the Company at December 31, 2016, 2015 and 2014 and for First Federal Bank for December 31, 2013 and prior.

(8) Dividend payout ratio is the total common stock cash dividends declared divided by net income available to common stockholders.

(9) No cash dividends were paid in 2012, 2013, 2014 or 2015. However, in 2014 an 11% stock dividend was paid.

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Item 7. 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 Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements and the other sections contained herein. Certain references to the Company and the Bank throughout MD&A are made using the first person notations of “we”, “us” or “our”.

2016 OVERVIEW

During 2016 the Company:

● Earned net income of $17.5 million, or $0.46 per diluted common share, compared to $10.5 million or $0.30 per diluted common share in 2015;

● Achieved a return on average assets of 0.89% in 2016 compared to 0.67% in 2015;

● Grew the loan portfolio to $1.6 billion in 2016 compared to $1.5 billion at December 31, 2015 or a 7% increase;

● Successfully integrated the operations of Metropolitan and merged it into the charter of Bear State Bank in February 2016;

● Converted Bear State Bank from a national bank charter regulated by the Office of the Comptroller of the Currency to a state charter regulated by the Arkansas State Bank Department in June 2016;

● Improved its operating efficiency ratio from 75% for the year ended December 31, 2015 to 68% for the year ended December 31, 2016;

● Improved the efficiency and cost-effectiveness of our operations by consolidating seven branch locations;

● Increased secondary market loan originations and sales resulting in an increase in gain on sales of loans in the secondary market of $1.7 million in 2016 compared to 2015; and

● 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 BSF Holdings. 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.

ACQUISITIONS

Metropolitan National Bank

On October 1, 2015, the Company completed its acquisition of Metropolitan from Marshfield Investment Company (“Marshfield”). On February 19, 2016, Metropolitan was merged with the charter of Bear State Bank, N.A. The benefits of these operational and organizational efficiencies began to be realized in the second quarter of 2016. The Company’s results of operations for the year ended December 31, 2016, includes the results of operations of Metropolitan for the entire year. The Company’s results of operations for the year ended December 31, 2015 includes the results of operations of Metropolitan after the acquisition date of October 1, 2015.

First National Security Company

The Company completed its merger with FNSC and its accompanying acquisition of FNSC’s subsidiaries, including First National and Heritage Bank, on June 13, 2014. On February 13, 2015, First Federal Bank, First National and Heritage Bank were consolidated into a single charter forming Bear State Bank, N.A. The Company has achieved significant operational and organizational improvements as a result of the charter consolidation and technology integration, the benefits of which the Company began to realize in the second quarter of 2015. The Company’s results of operations for the years ended December 31, 2016 and 2015, include the results of operations of First National and Heritage Bank for the entire year. The Company’s results of operations for the year ended December 31, 2014 includes the results of operations of First National and Heritage Bank after the acquisition date of June 13, 2014.

RECENT DEVELOPMENTS

As part of its continual review and evaluation of its branch network, the Company intends to consolidate three of its retail branch locations and transition two limited service branch locations to operate using personalized technology with Interactive ATMs (“ITMs”) only. The Company anticipates these branch consolidations and transitions to be substantially completed in the first quarter of 2017. In addition, another retail branch location will transition to operate solely with ITMs in the second quarter of 2017.

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CRITICAL ACCOUNTING POLICIES

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

Determination of the adequacy of the allowance for loan and lease losses (“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.

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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

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 2016 was $67.5 million compared to $54.5 million in 2015 and $37.4 million in 2014. The increases in net interest income resulted from changes in interest income and interest expense discussed below.

Interest Income.

Interest income for 2016 was $75.4 million compared to $60.8 million in 2015. The increase in interest income in 2016 compared to 2015 was primarily due to increases in the average balances of loans receivable and investment securities and an increase in the yield earned on investment securities, partially offset by a decrease in the average yield earned on loans receivable. The increases in average interest earning asset balances were due to the Metropolitan acquisition as well as loan originations and investment purchases. The increase in the average yield earned on investment securities is primarily related to an increase in the average yield earned on municipal securities to 2.85% at December 31, 2016 compared to 2.70% at December 31, 2015. The decrease in the average yield on loans receivable is primarily due to loan repayments and prepayments at average yields higher than the average yield of the loan portfolio as well as a decrease in accretion income as a percentage of average loans.

Interest income for 2015 was $60.8 million compared to $42.5 million in 2014. The increase in interest income in 2015 compared to 2014 was primarily due to increases in the average balances of loans receivable and investment securities as a result of the FNSC and Metropolitan acquisitions, partially offset by a decrease in the average yield earned on loans receivable.

Interest Expense. 

Interest expense for 2016 was $7.9 million compared to $6.4 million in 2015. The increase in interest expense in 2016 compared to 2015 was primarily due to an increase in the average balances of deposit accounts and borrowings, partially offset by decreases in the average rates paid on deposits and borrowings. The increase in average interest bearing liabilities was due to the Metropolitan acquisition as well as an increase in borrowings in 2016 related to the Company’s asset and liability management strategy.

Interest expense for 2015 was $6.4 million compared to $5.1 million in 2014. The increase in interest expense in 2015 compared to 2014 was primarily due to an increase in the average balances of deposit accounts and borrowings due to the acquisitions of FNSC and Metropolitan, partially offset by a decrease in the average rate paid on deposits.

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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.

	Year Ended December 31,
	2016 vs. 2015
	Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	16,987		$	(2,381	)	$	(709	)	$	13,897
Investment securities		238			383			26			647
Other interest earning assets		(60	)		69			(13	)		(4	)
Total interest earning assets		17,165			(1,929	)		(696	)		14,540
Interest expense:
Deposits		1,237			(50	)		(11	)		1,176
Other borrowings		461			(57	)		(26	)		378
Total interest bearing liabilities		1,698			(107	)		(37	)		1,554
Net change in net interest income	$	15,467		$	(1,822	)	$	(659	)	$	12,986

	Year Ended December 31,
	2015 vs. 2014
	Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	20,994		$	(2,233	)	$	(1,187	)	$	17,574
Investment securities		833			50			17			900
Other interest earning assets		(104	)		(20	)		5			(119	)
Total interest earning assets		21,723			(2,203	)		(1,165	)		18,355
Interest expense:
Deposits		1,770			(697	)		(272	)		801
Other borrowings		494			(38	)		(31	)		425
Total interest bearing liabilities		2,264			(735	)		(303	)		1,226
Net change in net interest income	$	19,459		$	(1,468	)	$	(862	)	$	17,129

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Average Balance Sheets.The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average 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. Average balances are based on daily balances during the periods.

	Year Ended December 31,
	2016							2015							2014
	Average Balance		Interest		Average Yield/ Cost			Average Balance		Interest		Average Yield/ Cost			Average Balance		Interest		Average Yield/ Cost
	(Dollars in Thousands)
Interest earning assets:
Loans receivable(1)	$	1,503,245	$	70,936		4.72	%	$	1,158,288	$	57,039		4.92	%	$	756,078	$	39,465		5.22	%
Investment securities(2)		203,899		4,137		2.03			190,870		3,490		1.83			144,410		2,590		1.79
Other interest earning assets		44,814		313		0.70			55,258		317		0.57			72,535		436		0.60
Total interest earning assets		1,751,958		75,386		4.30			1,404,416		60,846		4.33			973,023		42,491		4.37
Noninterest earning assets		213,221							185,470							111,447
Total assets	$	1,965,179						$	1,589,886						$	1,084,470
Interest bearing liabilities:
Deposits	$	1,394,194		6,515		0.47		$	1,131,870		5,339		0.47		$	814,251		4,538		0.56
Other borrowings		111,484		1,403		1.26			76,905		1,025		1.33			42,176		600		1.42
Total interest bearing liabilities		1,505,678		7,918		0.53			1,208,775		6,364		0.53			856,427		5,138		0.60
Noninterest bearing deposits		226,758							189,826							107,066
Noninterest bearing liabilities		3,447							4,096							3,224
Total liabilities		1,735,883							1,402,697							966,717
Stockholders' equity		229,296							187,189							117,753
Total liabilities andstockholders' equity	$	1,965,179						$	1,589,886						$	1,084,470
Net interest income			$	67,468						$	54,482						$	37,353
Net earning assets	$	246,280						$	195,641						$	116,596
Interest rate spread						3.77	%						3.80	%						3.77	%
Net interest margin						3.85	%						3.88	%						3.84	%
Ratio of interest earning assets tointerest bearing liabilities						116.36	%						116.19	%						113.61	%

________________

(1) Includes nonaccrual loans. 

(2) Includes FRB and FHLB stock.

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 provisions for loan losses of $2.5 million and $1.8 million were required for the years ended December 31, 2016 and 2015 to maintain the ALLL at an adequate level. Management determined the necessity of the provision and the amount thereof taking into consideration (i) loans originated by the Bank during the 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 December 31, 2016 and 2015. The ALLL plus the discount on acquired loans as a percentage of total loans receivable gross of the acquired loan discount was 1.7% at December 31, 2016 compared to 2.1% at December 31, 2015. The ALLL as a percentage of nonaccrual loans was 89.7% at December 31, 2016 compared to 75.2% at December 31, 2015. The ALLL as a percentage of classified loans was 29.5% at December 31, 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.

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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 increased $3.2 million to $16.7 million for 2016 compared to $13.5 million in 2015. The increase in 2016 was primarily due to increases in deposit fee income and gain on sales of loans. The increase in deposit fee income was primarily 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 as well as an increase in the average net profit per loan.

Total noninterest income increased $3.5 million to $13.5 million for 2015 compared to $10.0 million in 2014. The increase in 2015 was primarily due to increases in deposit fee income and earnings on life insurance policies attributable to the acquisitions of FNSC and Metropolitan.

Noninterest Expense.Noninterest expense consists primarily of employee compensation and benefits, office occupancy expense, data processing expense and other operating expense. Total noninterest expense increased $6.3 million to $57.3 million in 2016 compared to $51.0 million in 2015 and increased $8.9 million to $51.0 million in 2015 compared to $42.1 million in 2014. The variances in certain noninterest expense items are further explained in the following paragraphs, with the aggregate expense increase being primarily related to the increase in employee compensation expense, net occupancy expense and other expenses related to the acquisitions and integration of FNSC and Metropolitan.

Salaries and Employee Benefits. Salaries and employee benefits increased $5.4 million for the year ended December 31, 2016 compared to 2015 and $3.9 million for the year ended December 31, 2015 compared to 2014. The increases in salaries and employee benefits were primarily due to an increase in personnel attributable to the acquisitions of FNSC and Metropolitan, partially offset by a decrease in defined benefit pension expense in 2015. The decrease in defined benefit pension expense was primarily due to a non-recurring charge of $2.9 million in the second quarter of 2014 due to the Company’s election to retire certain pension liabilities of the Company’s multiemployer defined benefit plan. The changes in the composition of this line item are presented below (in thousands):

	December 31,						Change
	2016		2015		2014		2016 vs 2015			2015 vs. 2014
Salaries	$	24,978	$	20,927	$	15,510	$	4,051		$	5,417
Payroll taxes		2,060		1,684		1,221		376			463
Insurance		2,264		1,845		1,092		419			753
401(k) plan expenses		416		316		271		100			45
Other retirement plans		179		166		3,272		13			(3,106	)
Stock compensation		1,265		791		478		474			313
Other		6		13		45		(7	)		(32	)
Total	$	31,168	$	25,742	$	21,889	$	5,426		$	3,853

Net Occupancy Expense.The increases in net occupancy expense of $1.0 million for the year ended December 31, 2016 compared to 2015 and $2.0 million for the year ended December 31, 2015 compared to 2014, were primarily related to the acquisitions of FNSC and Metropolitan.

Advertising and Public Relations.The decrease in advertising and public relations expense during the year ended December 31, 2016 of $0.9 million compared to 2015 was primarily due to a decrease in rebranding expenses. The increase in advertising and public relations expense during the year ended December 31, 2015 compared to 2014 of $1.2 million was primarily due to expenses related to the acquisition and integration of FNSC, rebranding expenses associated with the name change of the combined bank during the first quarter of 2015, and the acquisition of Metropolitan in the fourth quarter of 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 forming Bear State Bank, N.A.

Income Taxes.The provision for income taxes was $6.9 million for the year ended December 31, 2016, compared to $4.6 million for 2015. Income tax provisions increased compared to 2015 as a result of increases in taxable income, which was partially offset by the reversal in the second quarter of 2016 of the valuation allowance on the deferred tax asset. The effective tax rate for 2016 was 28.2% compared to 30.5% for 2015. The effective tax rate for 2016 without the impact of the $897,000 reversal of the valuation allowance on the deferred tax asset was 31.9%

The provision for income taxes was $4.6 million for the year ended December 31, 2015, compared to a tax benefit of $20.6 million for the year ended December 31, 2014. During 2014, the Company recorded a valuation allowance reversal of $21.1 million on the basis of management’s assessment of the amount of its deferred tax assets that are more likely than not to be realized. The effective tax rate for 2015 was 30.5% compared to (550.6)% for 2014. The effective tax rate for 2014 without the impact of the $21.1 million reversal of the valuation allowance on the deferred tax asset was 13.1%.

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The difference in the effective tax rate compared to the statutory rate for each year presented is primarily due to interest income from non-taxable investments and earnings on life insurance policies. The differences in the adjusted effective tax rates of 31.9%, 30.5% and 13.1% for 2016, 2015 and 2014, respectively, are due to the relationship of the amount of the tax exempt items to the overall amount of pre-tax income in each of the years.

Lending Activities

Loan Composition.The following table sets forth certain data relating to the composition of the Bank’s loan portfolio by type of loan at the dates indicated.

	December 31,
	2016						2015						2014						2013						2012
	Amount			Percentage of Loans			Amount			Percentage of Loans			Amount			Percentage of Loans			Amount			Percentage of Loans			Amount			Percentage of Loans
	(Dollars in Thousands)
Mortgage loans:
One-to four-family residential	$	389,107			25.01	%	$	401,036			27.50	%	$	320,489			30.38	%	$	129,308			33.68	%	$	157,936			44.71	%
Multifamily residential		92,460			5.94			74,226			5.09			45,181			4.28			25,773			6.71			20,790			5.89
Nonfarm nonresidential		495,173			31.83			487,684			33.45			369,974			35.07			168,902			43.99			138,014			39.08
Farmland		94,018			6.04			94,235			6.46			47,199			4.47			2,663			0.69			1,426			0.40
Construction and land development		125,785			8.08			116,015			7.96			98,594			9.34			23,891			6.23			13,125			3.72
Total real estate loans		1,196,543			76.90			1,173,196			80.46			881,437			83.54			350,537			91.30			331,291			93.80
Commercial loans		323,096			20.77			246,304			16.89			139,871			13.26			29,033			7.56			16,083			4.55
Consumer loans		36,265			2.33			38,594			2.65			33,809			3.20			4,368			1.14			5,818			1.65
Total loans receivable		1,555,904			100.00	%		1,458,094			100.00	%		1,055,117			100.00	%		383,938			100.00	%		353,192			100.00	%
Less:
Unearned discounts and netdeferred loan costs (fees)		485						558						(235	)					(78	)					(188	)
Allowance for loan and lease losses		(15,584	)					(14,550	)					(13,660	)					(12,711	)					(15,676	)
Total loans receivable, net	$	1,540,805					$	1,444,102					$	1,041,222					$	371,149					$	337,328

Total loans receivable increased $97.8 million to $1.6 billion at December 31, 2016, compared to $1.5 billion at December 31, 2015. The change in the Bank’s loan portfolio was primarily due to an increase in commercial loans as a result of a greater emphasis on this line of business partially offset by loans paid off and principal payments made during the year.

Loan Concentrations.Loan concentrations are defined as loans to borrowers engaged in similar business-related activities, which would cause them to be similarly impacted by economic or other conditions. We regularly monitor these concentrations in order to consider adjustments in our lending practices. As of December 31, 2016 and 2015, there was no concentration of loans within any portfolio category to any group of borrowers engaged in similar activities or in a similar business that exceeded 10% of total loans.

Loan Maturity and Interest Rates.The following table sets forth certain information at December 31, 2016, regarding the dollar amount of loans maturing in the Bank’s loan portfolios based on their contractual terms to maturity. Demand loans and loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. All other loans are included in the period in which the final contractual repayment is due.

	Within One Year		AfterOne Year Through Five Years		After Five Years		Total
	(In Thousands)
Real estate loans:
One- to four-family residential	$	54,523	$	161,652	$	172,932	$	389,107
Multifamily residential		4,079		74,586		13,795		92,460
Nonfarm nonresidential		61,810		260,867		172,496		495,173
Farmland		11,359		58,603		24,056		94,018
Construction and land development		23,555		65,864		36,366		125,785
Commercial loans		93,824		198,098		31,174		323,096
Consumer loans		7,592		24,978		3,695		36,265
Total(1)	$	256,742	$	844,648	$	454,514	$	1,555,904

(1)   Gross of unearned discounts and net deferred loan costs and the ALLL.

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The following table sets forth the dollar amount of the Bank’s loans at December 31, 2016, due after one year from such date which have fixed interest rates or which have floating or adjustable interest rates.

	Fixed Rates		Floating or Adjustable Rates		Total
	(In Thousands)
Real estate loans:
One- to four-family residential	$	205,007	$	129,577	$	334,584
Multifamily residential		79,516		8,865		88,381
Nonfarm nonresidential		348,751		84,612		433,363
Farmland		63,643		19,016		82,659
Construction and land development		68,086		34,144		102,230
Commercial loans		69,359		159,913		229,272
Consumer loans		28,263		410		28,673
Total (1)	$	862,625	$	436,537	$	1,299,162

(1) Gross of unearned discounts and net deferred loan costs and the ALLL.

Scheduled contractual maturities of loans do not necessarily reflect the actual term of the Bank’s loan portfolios. The average life of mortgage loans is substantially less than their average contractual terms because of loan prepayments.

ASSET QUALITY

Loans are generally placed on nonaccrual status when the loan is 90 days past due or, in the judgment of management, the probability of the full collection of principal and interest is deemed to be sufficiently uncertain to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. Loans may be reinstated to accrual status when payments are made to bring the loan current and, in the opinion of management, full collection of the remaining principal and interest can be reasonably expected. The Bank may continue to accrue interest on certain loans that are 90 days past due or more if such loans are well secured and in the process of collection.

Real estate properties acquired through foreclosure are initially recorded at fair value less estimated selling costs. Fair value is typically determined based on the lower of a current appraised value or management’s estimate of the net realizable value based on the listing price of the property. Valuations of real estate owned are generally performed at least annually.

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

	December 31,
	2016					2015					2014					2013					2012
Nonaccrual Loans:	Net (2)		% Assets			Net (2)		% Assets			Net (2)		% Assets			Net (2)		% Assets			Net (2)		% Assets
One- to four-family residential	$	6,709		0.33	%	$	6,455		0.34	%	$	4,959		0.33	%	$	4,258		0.77	%	$	7,027		1.32	%
Multifamily residential		--		--			230		0.01	%		--		--			--		--			--		--
Nonfarm nonresidential		5,177		0.25	%		6,638		0.35	%		3,113		0.21	%		4,057		0.75	%		7,236		1.37	%
Farmland		783		0.04	%		973		0.05	%		734		0.05	%		782		0.15	%		868		0.16	%
Construction and land development		463		0.02	%		622		0.03	%		624		0.04	%		2,467		0.44	%		3,265		0.61	%
Commercial		4,071		0.20	%		4,235		0.22	%		306		0.02	%		350		0.06	%		402		0.08	%
Consumer		173		0.01	%		187		0.01	%		34		--			24		0.01	%		26		0.01	%
Total nonaccrual loans		17,376		0.85	%		19,340		1.01	%		9,770		0.65	%		11,938		2.18	%		18,824		3.55	%
Accruing loans 90 days or more past due		--		--			451		0.02	%		353		0.02	%		--		--			--		--
Real estate owned		1,945		0.09	%		3,642		0.19	%		4,792		0.31	%		8,627		1.57	%		16,658		3.14	%
Total nonperforming assets		19,321		0.94	%		23,433		1.22	%		14,915		0.98	%		20,565		3.75	%		35,482		6.69	%
Performing restructured loans		4,804		0.23	%		284		0.01	%		566		0.04	%		494		0.09	%		5,816		1.10	%
Total nonperforming assets and performing restructured loans (1)	$	24,125		1.17	%	$	23,717		1.23	%	$	15,481		1.02	%	$	21,059		3.84	%	$	41,298		7.79	%

(1) The table above does not include substandard loans which were judged not to be impaired totaling $30.7 million, $30.2 million, $24.9 million, $2.9 million and $12.1 million at December 31, 2016, 2015, 2014, 2013 and 2012, respectively, or ASC 310-30 purchased credit impaired loans which are considered to be performing at December 31,2016, 2015 and 2014.

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

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Interest income recorded during the years ended December 31, 2016, 2015, 2014, 2013 and 2012 for loans in the above table was $13,000, $14,000, $29,000, $21,000 and $518,000, respectively. Under their original terms, these loans would have reported approximately $1.4 million, $1.2 million, $745,000, $873,000 and $1.5 million of interest income for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

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

	December 31, 2016					December 31, 2015					Increase (Decrease)
	Balance		Percentage of Total			Balance		Percentage of Total			Balance			Percentage of Total
Bankruptcy or foreclosure	$	1,442		8.3	%	$	2,154		11.1	%	$	(712	)		(2.8	)%
Over 90 days past due		5,784		33.3			4,382		22.7			1,402			10.6
30-89 days past due		1,027		5.9			1,527		7.9			(500	)		(2.0	)
Not past due		9,123		52.5			11,277		58.3			(2,154	)		(5.8	)
	$	17,376		100.0	%	$	19,340		100.0	%	$	(1,964	)		--

The following table presents nonaccrual loan activity for the year ended December 31, 2016 (in thousands):

Balance of nonaccrual loans—January 1, 2016	$	19,340
Loans added to nonaccrual status		7,057
Net cash payments		(4,855	)
Loans returned to accrual status		(2,378	)
Charge-offs to the ALLL		(417	)
Transfers to REO and repossessed assets, net		(1,371	)
Balance of nonaccrual loans—December 31, 2016	$	17,376

Real Estate Owned. Changes in the composition of real estate owned during the year ended December 31, 2016 are presented in the following table (dollars in thousands).

	January 1, 2016		Additions		Fair Value Adjustments			Net Sales Proceeds(1)			Net Gain (Loss)		December 31, 2016
One- to four-family residential	$	1,125	$	1,139	$	(101	)	$	(1,351	)	$	92	$	904
Multifamily		316		--		--			(356	)		40		--
Land		1,677		--		(173	)		(1,935	)		799		368
Nonfarm nonresidential		524		731		(37	)		(578	)		33		673
Total	$	3,642	$	1,870	$	(311	)	$	(4,220	)	$	964	$	1,945

(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 December 31, 2016 and 2015,the Bank did not have any assets classified as doubtful or loss. 

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

	December 31,
	2016			2015
Nonaccrual loans	$	17,376		$	19,340
Accruing classified loans		35,495			30,448
Classified loans		52,871			49,788
Real estate owned		1,945			3,642
Total classified assets	$	54,816		$	53,430
Texas Ratio (1)		8.8	%		11.6	%
Classified Assets Ratio (2)		24.9	%		26.5	%

(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. 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.

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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 $15.6 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 December 31, 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.

The following table summarizes changes in the ALLL and other selected statistics for the periods indicated.

	Year Ended December 31,
	2016			2015			2014			2013			2012
	(Dollars in Thousands)
Total loans outstanding at end of period	$	1,555,904		$	1,458,094		$	1,055,117		$	383,938		$	353,192
Average loans outstanding	$	1,503,245		$	1,158,288		$	756,078		$	361,094		$	357,337
Allowance at beginning of period	$	14,550		$	13,660		$	12,711		$	15,676		$	20,818
Charge-offs:
One- to four-family residential		(455	)		(661	)		(116	)		(1,249	)		(1,843	)
Multifamily residential		(1	)		--			--			(876	)		(997	)
Nonfarm nonresidential		--			(17	)		(114	)		(1,177	)		(2,517	)
Construction and land development		--			(10	)		(444	)		(115	)		(407	)
Commercial		(83	)		(32	)		(29	)		(386	)		(237	)
Consumer (1)		(447	)		(354	)		(186	)		(142	)		(269	)
Purchased credit impaired		(801	)		(319	)		--			--			--
Total charge-offs		(1,787	)		(1,393	)		(889	)		(3,945	)		(6,270	)
Recoveries:
One- to four-family residential		38			120			90			221			225
Multifamily residential		--			--			--			--			17
Nonfarm nonresidential		11			61			14			500			9
Construction and land development		62			164			76			123			722
Commercial		11			23			4			81			59
Consumer (1)		83			118			66			55			74
Purchased credit impaired		100			--			--			--			--
Total recoveries		305			486			250			980			1,106
Net charge-offs		(1,482	)		(907	)		(639	)		(2,965	)		(5,164	)
Total provisions for losses		2,516			1,797			1,588			--			22
Allowance at end of period	$	15,584		$	14,550		$	13,660		$	12,711		$	15,676
ALLL as a percentage of total loansoutstanding at end of period (2)		1.00	%		1.00	%		1.29	%		3.31	%		4.44	%
Net loans charged-off as a percentageof average loans outstanding		0.10	%		0.08	%		0.08	%		0.82	%		1.45	%
ALLL as a percentage of nonaccrual loans		89.7	%		75.2	%		139.8	%		106.5	%		83.3	%

(1) Consumer loan charge-offs include overdraft charge-offs of $365,000, $316,000, $148,000, $125,000 and $189,000, for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively. Consumer loan recoveries include recoveries of overdraft charge-offs of $79,000, $75,000, $47,000, $52,000 and $67,000, for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, 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 1.68%, 2.07% and 2.38% at December 31, 2016, 2015 and 2014, respectively. There were no acquired loans for the years ended December 2013 and 2012.

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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.

	December 31,
	2016					2015					2014					2013					2012
	Amount		Percentage of Loans			Amount		Percentage of Loans			Amount		Percentage of Loans			Amount		Percentage of Loans			Amount		Percentage of Loans
	(Dollars in Thousands)
One- to four-family residential	$	3,896		24.83	%	$	3,870		27.29	%	$	4,488		29.96	%	$	4,549		33.68	%	$	5,099		44.71	%
Multifamily residential		962		5.94			665		5.09			791		4.28			1,001		6.71			1,319		5.89
Nonfarm nonresidential		3,210		31.34			3,599		32.77			4,243		34.15			4,271		43.99			6,949		39.08
Farmland		863		6.04			714		6.46			342		4.47			158		0.69			251		0.40
Construction and land development		1,791		7.99			1,456		7.81			1,023		9.03			1,383		6.23			879		3.72
Commercial		3,909		20.73			2,565		16.82			2,315		13.14			1,268		7.56			956		4.55
Consumer		360		2.33			166		2.64			101		3.19			81		1.14			223		1.65
Purchased credit impaired		593		0.80			1,515		1.12			357		1.78			--		--			--		--
Total	$	15,584		100.00	%	$	14,550		100.00	%	$	13,660		100.00	%	$	12,711		100.00	%	$	15,676		100.00	%

Investment Securities

The investment portfolio of the Company is designed primarily to provide and maintain liquidity, to provide collateral for pledging requirements, to complement the Company’s interest rate risk strategy and to generate a favorable return. The Company’s investment policy, as established by the Board of Directors, is currently implemented within the parameters set by the asset/liability management committee. The Company is authorized to invest in obligations issued or fully guaranteed by the U.S. Government, certain federal agency obligations, certain time deposits, negotiable certificates of deposit issued by commercial banks and other insured financial institutions, municipal securities, corporate debt securities, and other specified investments.

Investment securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. Investment securities classified as available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of tax in other comprehensive income. At December 31, 2016, investment securities with a carrying value of approximately $140.6 million were pledged as collateral for certain deposits in excess of $250,000 and for other purposes, including investment securities with carrying values of approximately $19.1 million and $12.1 million at December 31, 2016 and 2015, respectively, for securities sold under agreements to repurchase. At December 31, 2016, investments in the debt and/or equity securities of any one issuer did not exceed more than 10% of the Company's stockholders' equity.

The following table sets forth the amortized cost (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 December 31, 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.

	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for Sale
U.S. Treasuries andgovernment agencies	$	3,160		0.88	%	$	2,497		1.19	%	$	--		--		$	--		--		$	5,657		1.02	%
Municipal securities		3,784		1.74	%		17,189		2.40	%		14,463		2.86	%		52,840		3.07	%		88,276		2.85	%
Residential mortgage-backed securities		--		--			--		--			--		--			96,870		2.31	%		96,870		2.31	%
Total	$	6,944		1.35	%	$	19,686		2.25	%	$	14,463		2.86	%	$	149,710		2.58	%	$	190,803		2.52	%
Held to Maturity
Municipal securities	$	--		--		$	--		--		$	--		--		$	26,977		2.92	%	$	26,977		2.92	%
Total	$	--		--		$	--		--		$	--		--		$	26,977		2.92	%	$	26,977		2.92	%

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As of December 31, 2016, the Company held approximately $93.8 million of investment securities with issuer call options, of which approximately $27.4 million are callable within one year.

The following table sets forth the carrying value of the Company's investment securities as of the dates indicated.

	December 31,
	2016		2015		2014
Available for Sale	(In Thousands)
U.S. Treasuries and government agencies	$	5,631	$	49,500	$	77,332
Municipal securities		87,050		63,933		59,080
Residential mortgage-backed securities		95,795		85,152		37,806
Total	$	188,476	$	198,585	$	174,218
Held to Maturity
Municipal securities	$	26,977	$	--	$	--
Total	$	26,977	$	--	$	--

The decrease in U.S. Treasury and government agency securities was primarily due to calls and maturities during the year ended December 31, 2016.  The increases in municipal securities and residential mortgage backed securities during the year ended December 31, 2016 were due to reinvestment of proceeds from sales, calls and maturities of investment securities to provide a better risk adjusted return.  The overall yield of the available for sale investment portfolio improved to 2.52% at December 31, 2016 compared to 2.06% at December 31, 2015.

DEPOSITS AND BORROWINGS

Deposits.Changes in the composition of deposits between December 31, 2016 and 2015 are presented in the following table (dollars in thousands).

	December 31,		December 31,		Increase
	2016		2015		(Decrease)			% Change
Checking accounts	$	724,137	$	713,546	$	10,591			1.48	%
Money market accounts		206,388		220,589		(14,201	)		(6.44	)
Savings accounts		164,653		160,307		4,346			2.71
Certificates of deposit		548,902		513,241		35,661			6.95
Total deposits	$	1,644,080	$	1,607,683	$	36,397			2.26	%

The increase in certificates of deposit was primarily related to increases in public funds and brokered certificates of deposit. 

The following table presents the average balance of each type of deposit and the average rate paid on each type of deposit and/or total deposits for the periods indicated.

	Year Ended December 31,
	2016					2015					2014
	Average Balance		Average Rate Paid			Average Balance		Average Rate Paid			Average Balance		Average Rate Paid
	(Dollars in Thousands)
Savings accounts	$	164,773		0.12	%	$	129,556		0.13	%	$	77,746		0.12	%
Money market accounts		213,780		0.37			134,606		0.33			85,614		0.38
Checking accounts – interest		480,206		0.18			401,156		0.19			264,780		0.18
Checking accounts - noninterest		226,758		--			189,827		--			107,066		--
Certificates of deposit		535,435		0.89			466,551		0.87			386,111		0.96
Total deposits	$	1,620,952		0.40	%	$	1,321,696		0.40	%	$	921,317		0.49	%

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The following table sets forth maturities of the Bank’s certificates of deposit of $100,000 or more at December 31, 2016 by time remaining to maturity.

	Amount
Quarter Ending:	(In Thousands)
March 31, 2017	$	44,558
June 30, 2017		59,645
September 30, 2017		51,882
December 31, 2017		37,301
After December 31, 2017		104,895
Total certificates of deposit withbalances of $100,000 or more	$	298,281

Short Term and Other Borrowings. FHLB advances increased by $76.5 million in 2016 primarily due to new short term advances. Other borrowings also increased by $3.2 million during the year ended December 31, 2016 as a result of draws of $4.8 million on the Company’s line of credit with an unaffiliated bank, partially offset by repayments of $1.7 million on the Company’s notes payable with an unaffiliated bank. The Company also converted $5 million of the outstanding balance on the line of credit to a term note payable with the same terms as its other term notes. On January 20, 2017, the Company paid down the outstanding balance of $4.95 million related to its line of credit. The available credit line remains $14.75 million. On January 20, 2017 and March 1, 2017, the Company also paid a total of $3.1 million towards reducing the principal balance of the term note due May 2019.

The following table sets forth information with respect to the Company’s consolidated borrowings at and during the periods indicated.

	At or For the Year Ended December 31,
	2016			2015			2014
	(Dollars in Thousands)
Maximum month end balance	$	171,118		$	91,586		$	81,384
Average balance		111,484			76,905			42,176
Year end balance		171,118			84,455			73,341
Weighted average interest rate:
At end of year		1.00	%		1.26	%		1.07	%
During the year		1.26	%		1.33	%		1.42	%

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. See “Regulation” included in Item 1 of this Annual Report on Form 10-K.

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. The bank utilizes FHLB advances and brokered deposits as part of its asset and liability management strategy primarily when funds from the primary sources are insufficient to meet funding needs and/or when the pricing and terms from these secondary sources are more favorable to our strategy.

At December 31, 2016, the Bank’s unused borrowing availability primarily consisted of (1) $456.0 million of available borrowing capacity with the FHLB, (2) $47.9 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 December 31, 2016, the Company had available borrowing capacity of $9.8 million with an unaffiliated bank.

40

At December 31, 2016, the Company’s consolidated liquidity ratio was approximately 9.2% 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 41.6%, 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 and brokered deposits 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 December 31, 2016, the Company’s leverage, common equity tier 1, tier 1 risk-based and total risk-based capital ratios were 9.47%, 11.04%, 11.04% and 11.96%, respectively, compared to capital adequacy requirements of 4%, 4.5%, 6% and 8%, respectively. See Note 21 to the 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 December 31, 2016, the Company was in compliance with the applicable covenants imposed by the loan agreement.

OFF-BALANCE SHEET ARRANGEMENTS and CONTRACTUAL OBLIGATIONS

At December 31, 2016, the Bank was contractually obligated to make future minimum payments as follows (in thousands):

	Less Than						More Than
	1 Year		1-3 Years		3 - 5 Years		5 Years		Total
Certificates of deposit maturities	$	363,338	$	140,800	$	36,544	$	8,220	$	548,902
Other borrowings		77,523		66,938		1,065		6,478		152,004
Lease obligations		836		1,305		1,007		6,862		10,010

At December 31, 2016, the Bank was contractually obligated to fund future obligations as follows (in thousands):

	Less Than						More Than
	1 Year		1-3 Years		3 - 5 Years		5 Years		Total
Unused lines of credit	$	64,442	$	37,390	$	22,716	$	8,248	$	132,796
Unadvanced portion of construction loans		19,847		7,478		20,731		27,309		75,365
Standby letters of credit		466		739		71		1,594		2,870
Loan origination commitments		80,265		--		--		--		80,265

The Bank’s primary off-balance sheet commitments include unused lines of credit, the unadvanced portion of construction loans, and commercial and standby letters of credit, which have maturity dates rather than payment due dates. These commitments are not required to be recorded on the Company’s balance sheet. Since commitments associated with letters of credit and lending and financing arrangements may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. See Note 17 to the Consolidated Financial Statements-“Off-Balance Sheet Arrangements and Commitments” for further discussion on these arrangements.

DIVIDENDS

During the year ended December 31, 2016, $0.075 per share cash dividends were distributed by the Company. No dividends were distributed during the year ended December 31, 2015. 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 December 31, 2016, the Bank had approximately $10.5 million available for payment of dividends to the Company without prior regulatory approval from the ASBD and approximately $13.9 million available for payment of dividends to the Company without prior regulatory approval from the FRB.

41

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.

Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does the effect of inflation.

Impact of new accounting standards

See Note 1 to the Consolidated Financial Statements - “Summary of Significant Accounting Policies.”

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

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 and interest rate sensitivity, including an earnings simulation model and interest sensitivity gap analysis.  

Management recommends and the Board of Directors sets the asset and liability policies which are implemented by the Asset and Liability Management Committee (ALCO). The purpose of the ALCO is to communicate, coordinate and control asset/liability management consistent with the Company’s business plan and board-approved policies. The ALCO establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, we may determine to increase our interest rate risk position somewhat in order to maintain or increase our net interest margin.

The ALCO meets at least quarterly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital positions and anticipated changes in the volume and mix of assets and liabilities. At each meeting, the ALCO recommends appropriate strategy changes based on this review. The Chief Financial Officer is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Board of Directors on a quarterly basis. ALCO regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution's existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the Board of Directors.

The earnings simulation modeling process, management’s primary analytical tool, projects a baseline net interest income (assuming no changes in interest rate levels) and estimates changes in that baseline net interest income resulting from changes in interest rate levels. The model assumes the balance sheet remains static and that its structure does not change over the course of the year. This model incorporates 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 interest income.  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.

42

The following table presents the earnings simulation model’s projected impact of a change in interest rates on the projected baseline net interest income for the twelve month period commencing January 1, 2017. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at 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.

Changes in Interest Rates (in bps)	% Change in Projected Baseline Net Interest Income
+400	1.7%
+300	1.7%
+200	1.6%
+100	1.3%
-100	-6.7%
-200	Not meaningful
-300	Not meaningful
-400	Not meaningful

This earnings simulation 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.

43

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Bear State Financial, Inc.

Little Rock, Arkansas

We have audited the accompanying consolidated statements of financial position of Bear State Financial, Inc. (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2016. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bear State Financial, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bear State Financial, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 10, 2017, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ BKD, LLP

Little Rock, Arkansas

March 10, 2017

44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Audit Committee, Board of Directors and Stockholders

Bear State Financial, Inc.

Little Rock, Arkansas

We have audited Bear State Financial, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our examination of Bear State Financial, Inc.’s internal control over financial reporting included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Bear State Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Bear State Financial, Inc. and our report dated March 10, 2017, expressed an unqualified opinion thereon.

/s/BKD, LLP

Little Rock, Arkansas

March 10, 2017

45

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Bear State Financial, Inc. and its subsidiary Bear State Bank, (collectively referred to as the “Company”) is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and, as such, include amounts based on informed judgments and estimates made by management.

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the Company’s financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has evaluated the effectiveness of its internal control over financial reporting for financial presentations in conformity with GAAP as of December 31, 2016 based on the control criteria established in a report entitledInternal Control—Integrated Framework (2013 edition), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment and the application of the specified criteria, management has concluded that the Company’s internal control over financial reporting is effective as of December 31, 2016.

BKD, LLP, the independent registered public accounting firm that audited our Consolidated Financial Statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2016 which is included in Item 8. Financial Statements and Supplementary Data.

/s/ Matt Machen	/s/ Sherri Billings
Matt Machen Chief Executive Officer	Sherri Billings Chief Financial Officer

46

BEAR STATE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2016 AND 2015

(In thousands, except share data)

	2016			2015
ASSETS
Cash and cash equivalents:
Cash and collection items	$	33,869		$	36,535
Interest bearing deposits with banks		44,920			15,596
Total cash and cash equivalents		78,789			52,131
Interest bearing time deposits in banks		4,571			10,930
Federal funds sold		--			18
Available for sale securities, at fair value		188,476			198,585
Held to maturity securities, at amortized cost (fair value of $25,090 atDecember 31, 2016)		26,977			--
Other investment securities, at cost		13,759			9,563
Loans receivable, net of allowance at December 31, 2016and 2015, of $15,584 and $14,550, respectively		1,540,805			1,444,102
Loans held for sale		8,954			7,326
Accrued interest receivable		7,006			6,157
Real estate owned, net		1,945			3,642
Office properties and equipment, net		54,049			63,641
Office properties and equipment held for sale		5,337			--
Cash surrender value of life insurance		57,267			52,602
Goodwill		40,196			40,196
Core deposit intangibles, net		10,353			11,374
Deferred tax asset, net		11,619			16,713
Prepaid expenses and other assets		3,072			3,236
TOTAL	$	2,053,175		$	1,920,216
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing	$	223,038		$	234,879
Interest bearing		1,421,042			1,372,804
Total deposits		1,644,080			1,607,683
Securities sold under agreement to repurchase		19,114			12,075
Other borrowings		152,004			72,380
Other liabilities		4,550			4,921
Total liabilities		1,819,748			1,697,059
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares authorized;none issued at December 31, 2016 and 2015		--			--
Common stock, $.01 par value—100,000,000 shares authorized; 37,618,597and 37,987,722shares issued and outstanding at December 31, 2016 and 2015, respectively		376			380
Additional paid-in capital		209,274			211,817
Accumulated other comprehensive income (loss)		(1,436	)		386
Retained earnings		25,213			10,574
Total stockholders’ equity		233,427			223,157
TOTAL	$	2,053,175		$	1,920,216

See notes to consolidated financial statements.

47

BEAR STATE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands, except earnings per share data)

	2016			2015			2014
INTEREST INCOME:
Loans receivable	$	70,936		$	57,039		$	39,465
Investment securities:
Taxable		1,952			1,535			1,076
Nontaxable		2,185			1,955			1,514
Other		313			317			436
Total interest income		75,386			60,846			42,491
INTEREST EXPENSE:
Deposits		6,515			5,339			4,538
Other borrowings		1,403			1,025			600
Total interest expense		7,918			6,364			5,138
NET INTEREST INCOME		67,468			54,482			37,353
PROVISION FOR LOAN LOSSES		2,516			1,797			1,588
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		64,952			52,685			35,765
NONINTEREST INCOME:
Net gain on sales of investment securities		19			20			31
Deposit fee income		8,994			7,907			5,349
Earnings on life insurance policies		1,665			1,510			1,126
Gain on sales of loans		4,796			3,084			2,774
Other		1,237			1,026			759
Total noninterest income		16,711			13,547			10,039
NONINTEREST EXPENSES:
Salaries and employee benefits		31,168			25,742			21,889
Net occupancy expense		7,414			6,411			4,391
Real estate owned, net		(377	)		(369	)		1,387
FDIC insurance		1,099			960			753
Amortization of intangible assets		1,021			724			339
Data processing		5,520			6,411			6,254
Professional fees		2,212			1,923			1,481
Advertising and public relations		1,600			2,520			1,354
Postage and supplies		1,121			1,113			712
Other		6,567			5,584			3,508
Total noninterest expenses		57,345			51,019			42,068
INCOME BEFORE INCOME TAXES		24,318			15,213			3,736
INCOME TAX PROVISION (BENEFIT)		6,859			4,639			(20,570	)
NET INCOME	$	17,459		$	10,574		$	24,306
Basic earnings per common share	$	0.46		$	0.31		$	0.86
Diluted earnings per common share	$	0.46		$	0.30		$	0.84

See notes to consolidated financial statements.

48

BEAR STATE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands)

	2016			2015			2014
Net income	$	17,459		$	10,574		$	24,306
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities AFS		(2,933	)		(290	)		1,434
Less: reclassification adjustments for realized gainincluded in net income		(19	)		(20	)		(31	)
Other comprehensive income (loss), before tax effect		(2,952	)		(310	)		1,403
Tax effect		1,130			119			(359	)
Other comprehensive income (loss)		(1,822	)		(191	)		1,044
COMPREHENSIVE INCOME	$	15,637		$	10,383		$	25,350

See notes to consolidated financial statements.

49

BEAR STATE FINANCIAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands, except share and per share data)

	Issued Common Stock						Additional  Paid-In			Accumulated Other Comprehensive			Accumulated Deficit/ Retained			Total Stockholders’
	Shares			Amount			Capital			Income (Loss)			Earnings			Equity
BALANCE – January 1, 2014		20,041,497		$	200		$	92,740		$	(467	)	$	(21,286	)	$	71,187
Net income		--			--			--			--			24,306			24,306
Other comprehensive income		--			--			--			1,044			--			1,044
Shares issued – merger withFNSC, net of issuance costs of approximately $542		6,252,400			63			49,789			--			--			49,852
Shares issued – private placement		2,531,646			25			19,975			--			--			20,000
Shares issued – warrant exercises		1,196,667			12			3,578			--			--			3,590
Shares issued – stock optionexercises		3,600			--			24			--			--			24
Shares issued – restricted stockunit vesting		4,534			--			--			--			--			--
1 for 9 stock dividend		3,336,001			34			2,986			--			(3,020	)		--
Cash in lieu of fractional shares		--			--			(7	)		--			--			(7	)
Stock compensation		--			--			463			--			--			463
Repurchase of common stock		(500	)		--			(5	)		--			--			(5	)
BALANCE – December 31, 2014		33,365,845			334			169,543			577			--			170,454
Net income		--			--			--			--			10,574			10,574
Other comprehensive loss		--			--			--			(191	)		--			(191	)
Shares issued – acquisition ofMetropolitan		4,610,317			46			41,954			--			--			42,000
Shares issued – stock optionexercises		6,200			--			37			--			--			37
Shares issued – restricted stockunit vesting		34,038			--			--			--			--			--
Stock compensation		--			--			539			--			--			539
Repurchase of common stock		(28,678	)		--			(256	)		--			--			(256	)
BALANCE – December 31, 2015		37,987,722			380			211,817			386			10,574			223,157
Net income		--			--			--			--			17,459			17,459
Other comprehensive loss		--			--			--			(1,822	)		--			(1,822	)
Shares issued – stock optionexercises		21,664			--			141			--			--			141
Shares issued – restricted stockunit vesting		62,393			--			--			--			--			--
Stock compensation		--			--			984			--			--			984
Dividends distributed - $0.075 percommon share		--			--			--			--			(2,820	)		(2,820	)
Repurchase of common stock		(453,182	)		(4	)		(3,668	)		--			--			(3,672	)
BALANCE – December 31, 2016		37,618,597		$	376		$	209,274		$	(1,436	)	$	25,213		$	233,427

See notes to consolidated financial statements.

50

BEAR STATE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands)

	2016			2015			2014
OPERATING ACTIVITIES:
Net income	$	17,459		$	10,574		$	24,306
Adjustments to reconcile net income to net cashprovided by operating activities:
Provision for loan losses		2,516			1,797			1,588
Provision for real estate losses		311			47			1,513
Deferred tax provision		7,116			4,371			1,286
Deferred tax valuation allowance		(897	)		(120	)		(21,856	)
Net amortization of premiums on investment securities		1,309			626			147
Federal Home Loan Bank stock dividends		(39	)		(8	)		(9	)
Gain on sales of fixed assets, net		(1,019	)		(85	)		(24	)
Impairment on office properties held for sale		1,076			--			--
Gain on sales of real estate owned and repossessed assets, net		(943	)		(587	)		(338	)
Gain on sales of investment securities, net		(19	)		(20	)		(31	)
Originations of loans held for sale		(163,727	)		(109,239	)		(98,853	)
Proceeds from sales of loans originated for sale		166,895			113,454			101,093
Gain on sales of loans originated to sell		(4,796	)		(3,084	)		(2,774	)
Depreciation		3,706			3,293			2,171
Amortization of deferred loan costs, net		1,138			254			85
Accretion of purchased loans, net		(4,972	)		(4,764	)		(4,375	)
Amortization of other intangible assets		1,021			724			339
Stock compensation		984			539			468
Earnings on life insurance policies		(1,665	)		(1,498	)		(1,126	)
Changes in operating assets and liabilities:
Accrued interest receivable		(849	)		(188	)		(58	)
Prepaid expenses and other assets		218			1,276			300
Other liabilities		(371	)		(3,621	)		1,674
Net cash provided by operating activities		24,452			13,741			5,526
INVESTING ACTIVITIES:
Cash paid for acquisition, net of cash received		--			(13,931	)		(8,985	)
Net decrease in federal funds sold		18			33			43,025
Purchases of interest bearing time deposits in banks		(2,590	)		--			--
Redemptions of interest bearing time deposits in banks		8,949			1,491			11,697
Purchases of held to maturity (“HTM”) securities		(26,992	)		--			--
Purchases of available for sale (“AFS”) securities		(99,001	)		(55,951	)		(54,115	)
Proceeds from sales of AFS securities		30,386			21,099			4,374
Proceeds from maturities/calls/paydowns of AFS securities		74,497			50,724			87,286
Purchases in other investments		(6,152	)		(5,205	)		(657	)
Redemptions of other investments		1,995			3,515			2,739
Loan disbursements, net of repayments		(78,047	)		934			(40,596	)
Loan participations purchased		(29,094	)		(40,937	)		(27,491	)
Loan participations sold		9,721			640			2,710
Proceeds from sales of real estate owned and repossessed assets		4,340			4,370			4,529
Proceeds from sales of office properties held for sale		2,530			--			--
Proceeds from sales of office properties and equipment		6			951			409
Purchases of office properties and equipment		(2,069	)		(4,652	)		(3,820	)
Purchases of bank owned life insurance		(3,000	)		(772	)		(17,258	)
Net cash provided by (used in) investing activities		(114,503	)		(37,691	)		3,847
							(Continued)

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BEAR STATE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands)

	2016			2015			2014
FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	36,397		$	(26,763	)	$	30,534
Proceeds from long term advances from Federal Home Loan Bank		40,245			20,551			12,000
Repayments of long term advances from Federal Home Loan Bank		(25,571	)		(14,328	)		(1,094	)
Net change in short term advances from Federal Home Loan Bank		61,800			4,200			4,000
Proceeds from other borrowings		4,800			1,850			18,163
Repayments of other borrowings		(1,650	)		(1,151	)		(5,250	)
Net increase (decrease) in short term borrowings		7,039			(21,145	)		(2,212	)
Proceeds from private placement		--			--			20,000
Proceeds from exercise of warrants		--			--			3,590
Proceeds from exercise of stock options		141			37			24
Repurchase of common stock		(3,672	)		(256	)		(5	)
Dividends distributed		(2,820	)		--			--
Payment for fractional shares, stock dividend		--			--			(7	)
Net cash provided by (used in) financing activities		116,709			(37,005	)		79,743
NET INCREASE (DECREASE) IN CASH ANDCASH EQUIVALENTS		26,658			(60,955	)		89,116
CASH AND CASH EQUIVALENTS:
Beginning of period		52,131			113,086			23,970
End of period	$	78,789		$	52,131		$	113,086
SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION:
Cash paid for interest	$	7,896		$	6,438		$	5,050
Cash received for income tax refunds	$	--		$	2,135		$	--
Cash paid for income tax	$	892		$	--		$	--
SUPPLEMENTAL SCHEDULE OF NONCASHINVESTING AND FINANCING ACTIVITIES:
Real estate and other assets acquired in settlement of loans	$	2,240		$	2,384		$	1,915
Sales of real estate owned financed by the Bank	$	146		$	282		$	115
Investment securities purchased—not settled	$	--		$	--		$	1,608
Common stock issued for acquisitions	$	--		$	42,000		$	49,852
Office properties transferred to real estate owned	$	--		$	464		$	--
Office properties transferred to office properties held for sale	$	7,925		$	--		$	--
							(Concluded)

See notes to consolidated financial statements.

52

BEAR STATE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

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 December 31, 2016, the Bank operates 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”). Except as the context otherwise requires, any reference in this Annual Report on Form 10-K to the “Bank” means (i) with respect to the period between January 1, 2014 through June 12, 2014, First Federal Bank; (ii) with respect to the period from June 13, 2014 through February 12, 2015, First Federal Bank, First National and Heritage Bank, collectively; (iii) with respect to the period from February 13, 2015 through September 30, 2015 or as of the date hereof, Bear State Bank, N.A.; and (iv) with respect to the period from October 1, 2015 through February 18, 2016, Bear State Bank, N.A. and Metropolitan, collectively. On February 19, 2016, Metropolitan was merged into the Bear State Bank, N.A. charter and on June 28, 2016, Bear State Bank, N.A. converted from a national bank to an Arkansas state-chartered bank, Bear State Bank.

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries described above. Intercompany transactions and balances have been eliminated in consolidation.

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. While the chief decision-makers monitor revenue streams of various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. 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.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be significant. Valuation of assets acquired and liabilities assumed in business combinations, valuation of real estate owned, fair value of financial instruments, valuation of deferred tax assets and the allowance for loan and lease losses are material estimates that are particularly susceptible to significant change in the near term.

Cash Flow Reporting—For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents includes cash on hand and amounts due from depository institutions, which includes interest bearing amounts available upon demand. Net cash flows are reported for customer loan and deposit transactions and short term borrowings with original maturities of three months or less.

Investment Securities—The Company classifies investment securities into one of two categories: held to maturity or available for sale. The Company does not engage in trading activities. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at cost, adjusted for the amortization of premiums and the accretion of discounts.

Investment securities that the Company intends to hold for indefinite periods of time are classified as available for sale and are recorded at fair value. Unrealized holding gains and losses are excluded from earnings and reported net of tax in other comprehensive income. Investment securities in the available for sale portfolio may be used as part of the Company’s asset and liability management practices and may be sold in response to changes in interest rate risk, prepayment risk, or other economic factors.

Premiums are amortized into interest income using the interest method to the earlier of maturity or call date, or in the case of mortgage-backed securities, over the estimated life of the security. Discounts are accreted into interest income using the interest method over the period to maturity. The specific identification method of accounting is used to compute gains or losses on the sales of investment securities.

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Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. In evaluating whether impairment is other than temporary, management primarily considers the length of time and the extent to which the fair value has been less than the amortized cost basis, the nature of the investment, the cause of the impairment, whether any periodic coupon payments have been missed, whether the security has been downgraded by rating agencies, and whether the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. Management has determined that no OTTI charges were necessary during the years ended December 31, 2016, 2015 or 2014.

Other Investments—The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. The Bank is a member of and owns stock in the Federal Reserve Bank (“FRB”) as well as First National Bankers Bank and Midwest Independent Bank, both institutions that provide correspondent banking services to community banks. Stock in these institutions is classified as other investments and is recorded at redemption value which approximates fair value. The Bank periodically evaluates the restricted stock for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Receivable—The Bank originates and maintains loans receivable that are substantially concentrated in its lending markets of Arkansas, Missouri and Southeast Oklahoma. The majority of the Bank’s loans are residential mortgage loans, nonfarm nonresidential loans, and commercial and industrial loans. The Bank’s policies generally call for collateral or other forms of security to be received from the borrower at the time of loan origination. Such collateral or other form of security is subject to changes in economic value due to various factors beyond the control of the Bank.

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at unpaid principal balances, net of purchase premiums and discounts, charge-offs, the allowance for loan and lease losses, and deferred loan fees or costs. Interest income is accrued on the unpaid principal balance. Deferred loan fees or costs on loans are amortized or accreted to income using the level-yield method over the remaining period to contractual maturity without anticipating prepayments.

Mortgage loans originated and committed for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Such loans are generally carried at cost due to the short period of time between funding and sale, generally within thirty days.

Loans are considered past due when the contractual amounts due with respect to principal and/or interest are notreceived within 30 days of the contractual due date. The accrual of interest on loans is generally discontinued when the loan becomes 90 days past due, or, in management’s opinion, the borrower is judged to be unable to meet payments as they become due. Nonaccrual loans and loans past due 90 days and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual, except when doubt exists as to ultimate collectability of principal and interest. Under the cost recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash basis method, interest income is recorded when the payment is received in cash. A loan is generally returned to accrual status when the loan is no longer past due and, in the opinion of management, collection of the remaining balance can be reasonably expected. The Company may continue to accrue interest on certain loans that are 90 days past due or more if such loans are well-secured and in the process of collection.

Acquisition Accounting and Acquired Loans—The Company accounts for its acquisitions under ASC Topic 805,Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. Acquired loans and leases are recorded at fair value at the date of acquisition. No allowance for loan and lease losses (“ALLL”) 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 are accreted into earnings as a yield adjustment using the effective yield method over the remaining life of the loan.

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Purchased Credit Impaired Loans –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 the level yield method.

Acquired loan amounts deemed uncollectible at acquisition date become part of the fair value calculation and are excluded from the ALLL. Following acquisition, a regular review is 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 to 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.

Allowance for Loan and Lease Losses—The ALLL is a valuation allowance for probable incurred credit losses. The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the ALLL when management believes it is likely that a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the ALLL.

The ALLL represents management’s estimate of incurred credit losses inherent in the Company’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 profiles of the Company’s borrowers, adverse situations that have occurred that may affect borrowers’ ability to repay, the estimated value of underlying collateral, and general economic conditions. 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.

The ALLL consists of (1) an allocated allowance on identified impaired loans and leases (sometimes referred to as a specific allowance) and (2) a general allowance on the remainder of the loan and lease portfolio. Although the Bank determines the amount of each component of the ALLL separately, the entire allowance is available to absorb losses in the loan portfolio.

Allocated (Specific) Allowance

Allocated, or specific, allowances represent impairment measurements on certain impaired loans as further described below. 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.

55

General Allowance

The general component covers loans that are collectively evaluated for impairment and is based on historical loss experience adjusted for current qualitative environmental factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class as well as the loan risk grade assignment. At December 31, 2016, an average of four quarterly migration periods of eight quarters each was generally used to calculate historical loss experience. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative environmental factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, competition, increasing interest rates, external factors and other considerations. The general component also includes impaired loans that are not individually measured for impairment based on the Bank’s threshold described above as well as loans that are individually evaluated but not considered impaired.

Rate Lock Commitments—The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments) as well as corresponding commitments to sell such loans to investors. Rate lock commitments as well as the related sales commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed rate commitments also considers the difference between current levels of interest rates and the committed rates.

Real Estate Owned, Net—Real estate owned represents foreclosed assets held for sale and is initially recorded at estimated fair value less estimated costs to sell, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs and expenses related to major additions and improvements are capitalized while maintenance and repairs that do not extend the lives of the respective assets are expensed. At December 31, 2016, the Bank had approximately $473,000 one- to four-family loans in the process of foreclosure.

Office Properties and Equipment, Net—Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation and amortization. The Company computes depreciation using the straight-line method over the estimated useful lives of the individual assets, which range from 3 to 40 years. Leasehold improvements are amortized on the straight-line method over the terms of the related leases, including expected renewals, or over the useful lives of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

Cash Surrender Value of Life Insurance—Cash surrender value of life insurance represents life insurance purchased by the Bank on a qualifying group of officers with the Bank designated as owner and beneficiary of the policies. The yield on these policies is used to offset a portion of employment benefit costs. The policies are recorded on the consolidated statements of financial condition at their cash surrender values with changes in cash surrender values reported in noninterest income. Death benefits in excess of the cash surrender value are recorded in noninterest income at the time of death.

Long-Lived Assets – Premises and equipment and other long-lived assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Goodwill and Other IntangibleAssets-The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest of an acquired business are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.

Goodwill is not amortized but is evaluated for impairment annually, or more often if events or circumstances indicate it may be impaired. Finite-lived intangible assets, which consist primarily of core deposit intangibles (long-term customer-relationship intangible assets) are amortized on a straight-line basis over their weighted-average estimated useful lives, ranging from twelve to thirteen years, and are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset with a finite useful life is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the fair value of the asset.

56

Goodwill is evaluated for impairment by comparing the estimated fair value of each reporting unit to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired, and no impairment loss is recognized. However, if the carrying amount of the reporting unit exceeds its fair value, step two, which involves comparing the implied fair value of goodwill to its carrying value, is completed and to the extent that the carrying value of goodwill exceeds its implied fair value, an impairment loss is recognized.

Loan Commitments and Related Financial Instruments –Financial instruments include off-balance sheet credit instruments, such as commitments to originate loans and letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Stock Based Compensation—Compensation cost for stock based compensation is recognized based on the fair value of these awards at the date of grant over the requisite service period. In most cases the requisite service period is the same as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Income Taxes— The Company estimates its income taxes payable based on the amounts it expects to owe to the various taxing authorities (i.e. federal, state and local). In estimating income taxes, management assesses the relative merits and risks of the tax treatment of transactions, taking into account statutory, judicial and regulatory guidance in the context of the Company’s tax position. Management also relies on tax opinions, recent audits, and historical experience.

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various statement of financial condition assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred tax assets and liabilities are recognized for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. Deferred tax assets are evaluated 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. A valuation allowance for deferred tax assets is established if, 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, future taxable income is estimated 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 projected operating performance, actual results and other factors.

The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company has no uncertain tax positions.

Penalties and interest are classified as income tax expense when incurred.

Interest Rate Risk—The Company’s asset base is exposed to risk including the risk resulting from changes in interest rates and changes in the timing of cash flows. The Company monitors the effect of such risks by considering the mismatch of the maturities of its assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates. The Company’s management has considered the effect of significant increases and decreases in interest rates and believes such changes, if they occurred, would be manageable and would not affect the ability of the Company to hold its assets as planned.

Earnings Per Common Share—Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company include shares underlying outstanding stock options, restricted stock units and warrants and are determined using the treasury stock method. The shares used in the calculation of basic and diluted earnings per share have been adjusted to give effect to the 11% common stock dividend paid by the Company in December 2014.

57

Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Recently Adopted Accounting Standards—

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.

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.

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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.

New Accounting Standards Not Yet Effective—

In May 2014, the FASB issued ASU 2014-09, creating FASB Topic 606,Revenue from Contracts with Customers. The guidance in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We do not expect the new standard to result in a material change from our current accounting for revenue because the majority of the Company’s financial instruments are not within the scope of Topic 606, but it will result in new disclosure requirements.

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 since it does not have any marketable equity securities and there are no indications that its nonmarketable equity securities are impaired.

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 and will subsequently implement new processes and update current accounting policies to comply with the amendments of this Update.

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. This ASU will require all excess income tax benefits and tax deficiencies on share based payment awards to be recognized in the income statement when the awards vest or are settled and will likewise change the calculation of assumed proceeds in applying the treasury stock method for calculating diluted earnings per share. It also will allow an employer to make a policy election to account for forfeitures as they occur. 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 will adopt the amendments as of January 1, 2017 and does not anticipate a material impact at the date of adoption. The Company’s stock based compensation plan has not historically generated material amounts of excess tax benefits or deficiencies. However, the magnitude of any income tax benefits or deficiencies in the future will depend on the Company’s stock price at the dates awards vest or are settled. The Company will adopt the amendments as of January 1, 2017 and does not anticipate a material impact at the date of adoption.

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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. Existing purchased credit impaired assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. ASU 2016-13 will be effective for the Company in the fiscal year beginning after December 15, 2019, including interim periods within that fiscal year. 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 forming a committee to evaluate the impact this ASU will have on its financial statements and to begin developing and implementing processes and procedures during the next two years to ensure the Company is compliant with the amendments by the adoption date.

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.

In January 2017, the FASB issued ASU 2017-04,Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The objective of the ASU is to expand the simplification of the subsequent measurement of goodwill to include public business entities and not-for-profit entities. The simplification eliminates Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. For public companies that are U.S. Securities and Exchange Commission (SEC) filers, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has goodwill from prior acquisitions and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During 2016, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis. For additional information regarding goodwill impairment testing, see Note 9.

Reclassifications— Various items within the accompanying consolidated financial statements for the previous years have been reclassified to conform to the classifications used for reporting in 2016. These reclassifications had no effect on net earnings.

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2. ACQUISITIONS

Metropolitan National Bank

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. Metropolitan conducted business from twelve full service locations throughout Southwest Missouri and one loan production office in Joplin, Missouri. The acquisition expanded the Company’s market into Southern Missouri and further diversified the Company’s loan, customer and deposit base.

The following table provides a summary of the assets acquired and liabilities assumed as recorded by Metropolitan, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company. Goodwill of $14.5 million, which is the excess of the merger consideration over the estimated fair value of net assets acquired, was recorded in the Metropolitan acquisition and is the result of expected operational synergies, expansion of banking services in Southern Missouri, and other factors. The goodwill recognized by the Company is deductible for income tax purposes.

	October 1, 2015
	As Recorded by Metropolitan			Fair Value Adjustments			As Recorded by the Company
	(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	14,069		$	--		$	14,069
Federal funds sold		51			--			51
Investment securities available for sale		42,677			88			42,765
Other investment securities, at cost		2,001			--			2,001
Loans receivable		375,521			(10,517	)		365,004
Allowance for loan losses		(5,839	)		5,839			--
Loans receivable, net		369,682			(4,678	)		365,004
Accrued interest receivable		1,484			--			1,484
Real estate owned - net		97			--			97
Office properties and equipment, net		11,484			1,796			13,280
Cash surrender value of life insurance		6,202			--			6,202
Core deposit intangible		--			4,760			4,760
Deferred tax asset, net		--			144			144
Prepaid expenses and other assets		597			--			597
Total assets acquired		448,344			2,110			450,454
Liabilities assumed:
Deposits – noninterest bearing		56,187			--			56,187
Deposits – interest bearing		314,275			187			314,462
Total deposits		370,462			187			370,649
Short term borrowings		21,137			--			21,137
Other borrowings		--			--			--
Other liabilities		20,190			857			21,047
Total liabilities assumed		411,789			1,044			412,833
Net assets acquired	$	36,555		$	1,066			37,621
Consideration paid:
Cash								10,100
Common stock								42,000
Total consideration paid								52,100
Goodwill							$	14,479

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

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

Office properties and equipment – Office properties and equipment were acquired from Metropolitan with a $1.8 million adjustment to market value. This represents the difference between current appraisal value completed in connection with the acquisition and Metropolitan’s book value at the time of acquisition.

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

Core deposit intangible – This intangible asset represents the value of the relationships that Metropolitan had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded a $4.8 million core deposit intangible with a weighted average life of 12 years.

Deposits – The weighted average interest rate of Metropolitan’s time deposits was estimated to be slightly above the current market rates, resulting in a fair value adjustment for time deposits of $187,000.

Other liabilities – The adjustment to other liabilities primarily represents the accrual of change in control agreements and an unfavorable lease liability.

Beginning October 1, 2015, the operations of Metropolitan are included in the Company’s consolidated results of operations and contributed $5.6 million of net interest income and $1.0 million of net income for the year ended December 31, 2015. The following pro-forma combined consolidated financial information presents how the combined financial information of the Company and Metropolitan might have appeared had the businesses actually been combined as of the beginning of the reporting period. The following schedule represents the pro-forma combined financial information as of the comparative periods ended December 31, 2015 and 2014, assuming the acquisition was completed as of January 1, 2014, (in thousands, except per share data):

	2015		2014
Net interest income	$	67,834	$	67,977
Total noninterest income		15,698		15,714
Net income		13,466		29,888
Basic earnings per common share	$	0.34	$	0.79
Diluted earnings per common share	$	0.34	$	0.78

The pro-forma consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented and had the impact of possible revenue enhancements and expense efficiencies, among other factors, been considered and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period.

First National Security Company

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

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The following table provides a summary of the assets acquired and liabilities assumed as recorded by FNSC, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company. Goodwill of $25.7 million, which is the excess of the merger consideration over the estimated fair value of net assets acquired, was recorded in the FNSC acquisition and is the result of expected operational synergies, expansion of banking services in Northeast and Southwest Arkansas, and other factors. The goodwill recognized by the Company will not be deductible for income tax purposes.

	June 13, 2014
	As Recorded by FNSC			Fair Value Adjustments			As Recorded by the Company
	(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	41,015		$	--		$	41,015
Federal funds sold		43,025			--			43,025
Investment securities available for sale		138,140			--			138,140
Other investment securities, at cost		7,480			--			7,480
Loans receivable		622,758			(17,294	)		605,464
Allowance for loan losses		(13,179	)		13,179			--
Loans receivable, net		609,579			(4,115	)		605,464
Accrued interest receivable		2,954			--			2,954
Real estate owned - net		69			--			69
Office properties and equipment, net		33,074			(2,775	)		30,299
Cash surrender value of life insurance		1,935			--			1,935
Core deposit intangible		568			7,109			7,677
Deferred tax asset, net		542			(51	)		491
Prepaid expenses and other assets		2,899			362			3,261
Total assets acquired		881,280			530			881,810
Liabilities assumed:
Deposits – noninterest bearing		151,331			--			151,331
Deposits – interest bearing		611,841			366			612,207
Total deposits		763,172			366			763,538
Short term borrowings		14,295			--			14,295
Other borrowings		27,434			64			27,498
Other liabilities		1,802			--			1,802
Total liabilities assumed		806,703			430			807,133
Net assets acquired	$	74,577		$	100			74,677
Consideration paid:
Cash								50,000
Common stock								50,394
Total consideration paid								100,394
Goodwill							$	25,717

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

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

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

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

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

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

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

Beginning June 14, 2014, the operations of FNSC are included in the Company’s consolidated results of operations and contributed $21.2 million of net interest income and $6.2 million of net income for the year ended December 31, 2014. The following pro-forma combined consolidated financial information presents how the combined financial information of the Company and FNSC might have appeared had the businesses actually been combined as of the beginning of the reporting period. The following schedule represents the pro-forma combined financial information as of the period ended December 31, 2014, assuming the acquisition was completed as of January 1, 2014, (in thousands, except per share data):

	2014
Net interest income	$	49,218
Total noninterest income		12,785
Net income		26,118
Basic earnings per common share	$	0.80
Diluted earnings per common share	$	0.79

The pro-forma consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented and had the impact of possible revenue enhancements and expense efficiencies, among other factors, been considered and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period.

3. INTEREST BEARING TIME DEPOSITS IN BANKS

Interest bearing time deposits in banks mature within one to five years and are carried at cost. The scheduled maturities of these deposits at December 31, 2016, by contractual maturity are shown below (in thousands):

	Weighted
Years ending December 31:	Average Rate			Amount
2017		1.43	%	$	1,981
2019		0.48			100
2021		1.84			2,490
Total		1.63	%	$	4,571

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4. INVESTMENT SECURITIES

Investment securities consisted of the following at December 31 (in thousands):

	2016
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale
U.S. Treasuries and government agencies	$	5,657	$	5	$	(31	)	$	5,631
Municipal securities		88,276		343		(1,569	)		87,050
Residential mortgage-backed securities		96,870		348		(1,423	)		95,795
Total available for sale	$	190,803	$	696	$	(3,023	)	$	188,476
Held to maturity
Municipal securities	$	26,977	$	16	$	(1,903	)	$	25,090
Total held to maturity	$	26,977	$	16	$	(1,903	)	$	25,090

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

The mortgage-backed portfolios at December 31, 2016 and 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 at December 31 (in thousands):

	2016
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Treasuries andgovernment agencies	$	1,969	$	31	$	--	$	--	$	1,969	$	31
Municipal securities		73,194		3,472		--		--		73,194		3,472
Residential mortgage-backed securities		78,725		1,423		--		--		78,725		1,423
Total	$	153,888	$	4,926	$	--	$	--	$	153,888	$	4,926

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	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 andgovernment 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.

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 $140.6 million at December 31, 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 $19.1 million at December 31, 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 December 31, 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.

	December 31, 2016
	Available for Sale							Held to Maturity
	Amortized		Fair		Weighted			Amortized		Fair		Weighted
	Cost		Value		Average Rate			Cost		Value		Average Rate
Within one year	$	6,944	$	6,950		1.35	%	$	--	$	--		--
Due from one year to five years		19,686		19,736		2.25	%		--		--		--
Due from five years to ten years		14,463		14,585		2.86	%		--		--		--
Due after ten years		52,840		51,410		3.07	%		26,977		25,090		2.92	%
		93,933		92,681		2.74	%		26,977		25,090		2.92	%
Residential mortgage-backed securities		96,870		95,795		2.31	%		--		--		--
Total	$	190,803	$	188,476		2.52	%	$	26,977	$	25,090		2.92	%

As of December 31, 2016 and 2015, investment securities with an amortized cost totaling approximately $93.8 million and $68.4 million, respectively, have call options held by the issuer, of which approximately $27.4 million and $26.1 million, respectively, are or were callable within one year.

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Information regarding sales of the Company’s investment securities available for sale for the years ended December 31 is summarized below (in thousands):

	2016			2015			2014
Sales proceeds	$	30,386		$	21,099		$	4,374
Gross realized gains	$	195		$	92		$	31
Gross realized losses		(176	)		(72	)		--
Net gains on sales of investment securities	$	19		$	20		$	31

At December 31, 2016 and 2015, the Company included the following securities in other investments, at cost, in the accompanying consolidated balance sheets (in thousands):

	2016		2015
FRB Stock	$	7,501	$	6,249
FHLB Stock		5,927		2,977
Other investments		331		337
Total	$	13,759	$	9,563

5. LOANS RECEIVABLE

Loans receivable consisted of the following at December 31 (in thousands):

	2016			2015
Real estate:
One- to four-family residential	$	389,107		$	401,036
Multifamily residential		92,460			74,226
Nonfarm nonresidential		495,173			487,684
Farmland		94,018			94,235
Construction and land development		125,785			116,015
Commercial		323,096			246,304
Consumer		36,265			38,594
Total loans receivable		1,555,904			1,458,094
Unearned discounts and net deferred loan costs		485			558
Allowance for loan and lease losses		(15,584	)		(14,550	)
Loans receivable—net	$	1,540,805		$	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.

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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 December 31, 2016 and 2015 were $14.7 million and $20.4 million, respectively. Servicing loans for others generally consists of collecting payments and disbursing payments to investors. Servicing income for the years ended December 31, 2016 and 2015 was not significant.

As of December 31, 2016 and 2015, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $26.4 million and $33.1 million, respectively, were held in custody by the Federal Home Loan Bank of Dallas and were pledged for outstanding advances or available for future advances. The Bank also pledged substantially all of its remaining loans at December 31, 2016 under a blanket lien with the FHLB.  

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):

	December 31, 2016		December 31, 2015		June 13, 2014
One- to four-family residential	$	2,714	$	3,189	$	4,728
Nonfarm nonresidential		7,576		9,886		10,790
Farmland		53		70		95
Construction and land development		1,432		2,127		3,432
Commercial		556		1,012		1,882
Consumer		53		63		178
Total carrying value of PCI loans	$	12,384	$	16,347	$	21,105
Outstanding principal balance of PCI loans	$	15,468	$	20,289	$	26,942

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The following table reflects the carrying amount of the fair value adjustments for purchased loans with evidence of credit deterioration as of June 13, 2014 (in thousands).

Contractually required principal and interest	$	29,704
Nonaccretable differences		(6,293	)
Cash flows expected to be collected		23,411
Accretable differences		(2,306	)
Day 1 Fair Value	$	21,105

The following table documents changes as of December 31, 2016, 2015 and 2014 to the amount of accretable yield on loans evaluated in accordance with the provisions of FASB ASC Topic 310-30 (in thousands).

	2016			2015			2014
Balance at January 1	$	1,370		$	2,165		$	--
Accretable yield acquired		--			--			2,306
Accretion		(848	)		(1,062	)		(648	)
Adjustments to accretable differences due to:
Reclassification from nonaccretable difference		1,462			317			2,301
Changes in expected cash flows that do not affect nonaccretable differences		(1,140	)		(60	)		(1,560	)
Transfers to real estate owned		46			10			(234	)
Balance at December 31	$	890		$	1,370		$	2,165

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

December 31, 2016	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	4,472	$	2,750	$	381,885	$	389,107
Multifamily residential		119		--		92,341		92,460
Nonfarm nonresidential		1,651		1,317		492,205		495,173
Farmland		131		649		93,238		94,018
Construction and land development		20		522		125,243		125,785
Commercial		413		503		322,180		323,096
Consumer		422		81		35,762		36,265
Total	$	7,228	$	5,822	$	1,542,854	$	1,555,904

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 December 31, 2016 and 2015, there were $0.8 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. Restructured loans totaled $6.0 million and $1.7 million as of December 31, 2016 and 2015, respectively, with $1.2 million and $1.4 million of such restructured loans on nonaccrual status at December 31, 2016 and 2015, respectively.

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The following tables present age analyses of nonaccrual loans as of December 31, 2016 and 2015 (in thousands):

December 31, 2016	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	1,194	$	2,332	$	3,183	$	6,709
Nonfarm nonresidential		94		1,156		3,927		5,177
Farmland		41		650		92		783
Construction and land development		13		450		--		463
Commercial		229		386		3,456		4,071
Consumer		39		78		56		173
Total	$	1,610	$	5,052	$	10,714	$	17,376

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 residential		--		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

Impaired Loans –The following tables summarize information pertaining to impaired loans as of December 31, 2016, 2015 and 2014 and for the years then ended (in thousands). The tables below do not include ASC 310-30 purchased credit impaired loans which are disclosed separately in the loans receivable footnote.

	As of or For the Year Ended December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	244	$	229	$	74	$	332	$	7
Nonfarm nonresidential		--		--		--		903		--
Farmland		--		--		--		95		--
Construction and land development		--		--		--		75		--
Commercial		1,865		1,788		488		2,523		--
Consumer		5		5		5		5		--
		2,114		2,022		567		3,933		7
Impaired loans without a valuationallowance:
One- to four-family residential		8,704		6,677		--		7,074		--
Multifamily		--		--		--		107		--
Nonfarm nonresidential		11,022		9,421		--		5,656		--
Farmland		1,226		783		--		740		--
Construction and land development		728		539		--		593		6
Commercial		2,893		2,570		--		1,664		--
Consumer		184		168		--		200		--
		24,757		20,158		--		16,034		6
Total impaired loans	$	26,871	$	22,180	$	567	$	19,967	$	13
Interest based on original terms									$	1,360
Interest income recognized on a cashbasis on impaired loans									$	--

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	As of or For the Year Ended December 31, 2015
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	430	$	312	$	83	$	833	$	7
Nonfarm nonresidential		2,728		2,395		522		2,651		--
Farmland		616		473		112		479		--
Construction and land development		215		211		89		152		--
Commercial		1,153		1,150		250		461		--
Consumer		5		5		5		13		--
		5,147		4,546		1,061		4,589		7
Impaired loans without a valuationallowance:
One- to four-family residential		7,605		6,348		--		4,902		1
Multifamily		282		230		--		50		--
Nonfarm nonresidential		5,352		4,243		--		1,759		--
Farmland		796		499		--		303		--
Construction and land development		686		490		--		535		6
Commercial		3,293		3,085		--		1,399		--
Consumer		188		183		--		108		--
		18,202		15,078		--		9,056		7
Total impaired loans	$	23,349	$	19,624	$	1,061	$	13,645	$	14
Interest based on original terms									$	1,179
Interest income recognized on a cashbasis on impaired loans									$	--

	As of or For the Year Ended December 31, 2014
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	1,030	$	1,204	$	251	$	1,141	$	21
Nonfarm nonresidential		2,531		2,225		580		2,517		--
Farmland		620		484		123		489		--
Construction and land development		276		168		45		632		--
Commercial		--		--		--		50		--
Consumer		16		15		12		12		--
		4,473		4,096		1,011		4,841		21
Impaired loans without a valuationallowance:
One- to four-family residential		4,732		4,237		--		3,747		2
Nonfarm nonresidential		1,619		888		--		996		--
Farmland		537		250		--		265		--
Construction and land development		507		540		--		611		6
Commercial		362		306		--		327		--
Consumer		15		19		--		15		--
		7,772		6,240		--		5,961		8
Total impaired loans	$	12,245	$	10,336	$	1,011	$	10,802	$	29
Interest based on original terms									$	745
Interest income recognized on a cashbasis 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:

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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.Loansrated 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.Loansrated 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.Loansrated 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.

Based on analyses performed at December 31, 2016 and 2015, the risk categories of loans were as follows (in thousands):

	December 31, 2016
	Pass		Special Mention		Substandard		Total
One- to four-family residential	$	375,287	$	206	$	13,614	$	389,107
Multifamily residential		92,460		--		--		92,460
Nonfarm nonresidential		473,343		314		21,516		495,173
Farmland		92,131		--		1,887		94,018
Construction and land development		116,269		--		9,516		125,785
Commercial		317,069		--		6,027		323,096
Consumer		35,953		1		311		36,265
Total	$	1,502,512	$	521	$	52,871	$	1,555,904

	December 31, 2015
	Pass		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 December 31, 2016 and 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.

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The following tables summarize TDRs as of December 31, 2016 and 2015: (dollars in thousands)

December 31, 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	$	197		6	$	315		8	$	512
Nonfarm nonresidential		1		4,244		3		410		4		4,654
Farmland		--		--		1		250		1		250
Construction and land development		1		76		2		215		3		291
Commercial		1		287		--		--		1		287
Consumer		--		--		1		5		1		5
Total		5	$	4,804		13	$	1,195		18	$	5,999

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

Loans receivable that were restructured as TDRs during the years ended December 31, 2016 and 2014 were as follows. No loans receivable were restructured as TDRs during the year ended December 31, 2015. (dollars in thousands)

	Year Ended December 31, 2016
			Balance		Balance at		Nature of Modification
	Number  of Loans		Prior to  TDR		December 31,  2016		Payment Term (1)
One- to four-family residential		1	$	5	$	2	$	5
Nonfarm nonresidential		1		4,244		4,244		4,244
Commercial		2		323		288		323
Total		4	$	4,572	$	4,534	$	4,572

		Year Ended December 31, 2014
				Balance		Balance at		Nature of Modification
		Number of  Loans		Prior to  TDR		December 31,  2014		Payment Term (1)		Other (2)
One- to four-family residential			1	$	103	$	95	$	103	$	--
Construction and land development			1		85		84		--		85
Consumer			1		11		10		11		--
	��
Total			3	$	199	$	189	$	114	$	85

______________________

(1) Concessions represent skipped payments/maturity date extensions, amortization term extensions or conversion from amortizing terms to interest only.

(2) The borrower did not have the financial ability to refinance at another bank at renewal.

There were no loans receivable for which a payment default occurred during the years ended December 31, 2016, 2015 or 2014 that had been modified as a TDR within 12 months or less of the payment default.

As of December 31, 2016 and 2015, the Bank was not committed to lend additional funds to any customer whose loan was classified as a TDR.

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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 years ended December 31, 2016, 2015 and 2014 (in thousands):

	January 1, 2016		Provision (Reversals)			Charge-offs			Recoveries		December 31, 2016
One- to four-family residential	$	3,870	$	443		$	(455	)	$	38	$	3,896
Multifamily residential		665		298			(1	)		--		962
Nonfarm nonresidential		3,599		(400	)		--			11		3,210
Farmland		714		149			--			--		863
Construction and land development		1,456		273			--			62		1,791
Commercial		2,565		1,416			(83	)		11		3,909
Consumer		166		558			(447	)		83		360
Purchased credit impaired		1,515		(221	)		(801	)		100		593
Total	$	14,550	$	2,516		$	(1,787	)	$	305	$	15,584

	January 1, 2015		Provision (Reversals)			Charge-offs			Recoveries		December 31, 2015
One- to four-family residential	$	4,488	$	(77	)	$	(661	)	$	120	$	3,870
Multifamily residential		791		(126	)		--			--		665
Nonfarm nonresidential		4,243		(688	)		(17	)		61		3,599
Farmland		342		372			--			--		714
Construction and land development		1,023		279			(10	)		164		1,456
Commercial		2,315		259			(32	)		23		2,565
Consumer		101		301			(354	)		118		166
Purchased credit impaired		357		1,477			(319	)		--		1,515
Total	$	13,660	$	1,797		$	(1,393	)	$	486	$	14,550

	January 1, 2014		Provision (Reversals)			Charge-offs			Recoveries		December 31, 2014
One- to four-family residential	$	4,549	$	(35	)	$	(116	)	$	90	$	4,488
Multifamily residential		1,001		(210	)		--			--		791
Nonfarm nonresidential		4,271		72			(114	)		14		4,243
Farmland		158		184			--			--		342
Construction and land development		1,383		8			(444	)		76		1,023
Commercial		1,268		1,072			(29	)		4		2,315
Consumer		81		140			(186	)		66		101
Purchased credit impaired		--		357			--			--		357
Total	$	12,711	$	1,588		$	(889	)	$	250	$	13,660

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 December 31, 2016 and 2015 (in thousands):

	Allowance for Loan and Lease Losses						Loan Balances
December 31, 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	$	74	$	3,822	$	277	$	6,906	$	379,487	$	2,714
Multifamily residential		--		962		--		--		92,460		--
Nonfarm nonresidential		--		3,210		89		9,421		478,176		7,576
Farmland		--		863		--		783		93,182		53
Construction and land development		--		1,791		--		539		123,814		1,432
Commercial		488		3,421		227		4,358		318,182		556
Consumer		5		355		--		173		36,039		53
Total	$	567	$	14,424	$	593	$	22,180	$	1,521,340	$	12,384

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	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

Activity in the allowance for real estate losses was as follows for the years ended December 31 (in thousands):

	2016			2015			2014
Balance—beginning of year	$	4,268		$	6,575		$	8,794
Provisions for estimated losses		311			47			1,513
Losses charged off		(4,120	)		(2,354	)		(3,732	)
Balance—end of year	$	459		$	4,268		$	6,575

7. ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consisted of the following at December 31 (in thousands):

	2016		2015
Loans	$	5,846	$	5,381
Investment securities		1,148		748
Deposits in banks		12		28
Total	$	7,006	$	6,157

8. OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment consisted of the following at December 31 (in thousands):

	2016			2015
Land and land improvements	$	10,896		$	12,701
Buildings and improvements		48,059			53,742
Furniture and equipment		13,126			13,372
Automobiles and other		222			823
Total		72,303			80,638
Accumulated depreciation		(18,254	)		(16,997	)
Office properties and equipment—net	$	54,049		$	63,641

Depreciation expense for each of the years ended December 31, 2016, 2015 and 2014 was approximately $3.7 million, $3.3 million and $2.2 million, respectively.

At December 31, 2016, office properties held for sale included seven properties and an aircraft of which the Company is partial owner with aggregate carrying values totaling $5.3 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 $1.1 million were recognized for the year ended December 31, 2016. During the year ended December 31, 2016, three properties were sold resulting in a net gain of $1.0 million. Impairment charges and realized gains and losses on office properties held for sale are recorded in other noninterest expense in the consolidated statements of income.

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Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2016, pertaining to banking premises and equipment, future minimum rent commitments (in thousands) under various operating leases are as follows:

Years Ending December 31	Amount
2017	$	836
2018		688
2019		617
2020		531
2021		476
2022 and thereafter		6,862
Total	$	10,010

The leases contain options to extend for periods from one to twenty years. The cost of rentals in the renewal periods are not included above except for two leases where there are loans outstanding between the Bank and the lessors. Total future minimum lease payments for the initial term of these leases and applicable renewal periods reflected in the table total approximately $8.8 million. Total rent expense for the years ended December 31, 2016, 2015 and 2014 amounted to $874,000, $721,000 and $484,000, respectively.

The Company also leases certain of its banking premises to third parties under operating lease agreements. The following is a schedule by years of minimum future rentals receivable on noncancelable operating leases (in thousands):

Years Ending December 31	Amount
2017	$	217
2018		87
2019		18
2020		6
Total	$	328

The leases contain options to extend for periods up to five years. Such rentals are not included above. Total rental income for the years ended December 31, 2016, 2015 and 2014 amounted to $441,000, $435,000 and $285,000, respectively.

9. GOODWILL AND CORE DEPOSIT INTANGIBLE - NET

Goodwill represents the excess of the cost over the fair value of net assets acquired in a business combination. At December 31, 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. Goodwill is not amortized but is tested for impairment at least annually and updated quarterly if necessary. The Company performed its annual impairment test of goodwill in the fourth quarter with data as of September 30, 2016 and no impairment of the Company’s goodwill was indicated. 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 years ended December 31 were as follows (in thousands):

	2016			2015			2014
Balance—beginning of period	$	11,374		$	7,338		$	--
FNSC acquisition		--			--			7,677
Metropolitan acquisition		--			4,760			--
Amortization expense		(1,021	)		(724	)		(339	)
Balance—end of period	$	10,353		$	11,374		$	7,338

The Company’s projected amortization expense is approximately $1.0 million in each of the years ending December 31, 2017 through 2021, and $5.2 million thereafter.

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10. DEPOSITS

Deposits are summarized as follows at December 31 (in thousands):

	2016		2015
Checking accounts	$	724,137	$	713,546
Money market accounts		206,388		220,589
Savings accounts		164,653		160,307
Certificates of deposit		548,902		513,241
Total	$	1,644,080	$	1,607,683

Overdrafts of checking accounts of $389,000 and $620,000 at December 31, 2016 and 2015, respectively, have been reclassified for financial reporting and are reflected in net loans receivable on the consolidated statements of financial condition.

As of December 31, 2016 and 2015, the Bank had $37.1 million and $22.0 million of brokered deposits, respectively.

The aggregate amount of time deposits in denominations of $100 thousand or more was approximately $298.3 million and $254.9 million at December 31, 2016 and 2015, respectively. The aggregate amount of time deposits in denominations of $250 thousand or more was approximately $120.4 million and $87.1 million at December 31, 2016 and 2015, respectively.

At December 31, 2016, scheduled maturities of certificates of deposit were as follows (in thousands):

Years Ending December 31	Amount
2017	$	363,338
2018		100,205
2019		40,595
2020		19,047
2021		17,497
2022 and thereafter		8,220
Total	$	548,902

Interest expense on deposits consisted of the following (in thousands):

	Year Ended December 31
	2016			2015			2014
Interest bearing checking accounts	$	856		$	743		$	468
Money market accounts		790			449			324
Savings and certificate accounts		4,966			4,217			3,795
Early withdrawal penalties		(97	)		(70	)		(49	)
Total	$	6,515		$	5,339		$	4,538

11. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

Securities sold under agreements to repurchase totaled $19.1 million and $12.1 million at December 31, 2016 and 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 consolidated statements of financial condition 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.

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The remaining contractual maturity of securities sold under agreements to repurchase as of December 31, 2016 and 2015 consisted of the following (in thousands):

	December 31, 2016
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 days		Total
Securities sold under agreements to repurchase:
Municipal securities	$	3,318	$	--	$	--	$	--	$	3,318
Residential mortgage-backed securities		15,796		--		--		--		15,796
Total	$	19,114	$	--	$	--	$	--	$	19,114

	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 December 31, 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.

12. OTHER BORROWINGS

Other borrowings are summarized as follows at December 31 (in thousands):

	2016		2015
Federal Home Loan Bank advances with rates ranging from 0.42% to 5.57% maturing through July 1, 2027	$	129,992	$	53,518
Line of credit with a bank, $14.75 million total credit line, floating rate of 1.95% above the three-month LIBOR rate, reset quarterly, interest payments due quarterly, maturing May 30, 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		17,062		13,712
Total	$	152,004	$	72,380

Federal Home Loan Bank.At December 31, 2016 and 2015, FHLB advances included $70.0 million and $28.2 million, respectively, of advances with original maturities of one year or less.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 December 31, 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 secure public deposits and certain other deposits as of December 31, 2016.

Notes Payable.The line of credit and notes payable to an unaffiliated 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 December 31, 2016, the Company was in compliance with the applicable covenants imposed by the loan agreement.

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At December 31, 2016, scheduled maturities of other borrowings were as follows (dollars in thousands):

	Weighted
	Average
Years Ending December 31	Rate			Amount
2017		0.79	%	$	77,523
2018		0.75			47,492
2019		2.49			19,446
2020		2.37			444
2021		2.12			621
2022 and thereafter		2.68			6,478
Total		1.08	%	$	152,004

13.      INCOME TAXES

The provisions (benefits) for income taxes are summarized as follows at December 31 (in thousands):

	2016			2015			2014
Income tax provision (benefit):
Current:
Federal	$	403		$	252		$	--
State		237			136			--
Total current		640			388			--
Deferred:
Federal		6,064			3,551			367
State		1,052			820			919
Valuation allowance		(897	)		(120	)		(21,856	)
Total deferred		6,219			4,251			(20,570	)
Total	$	6,859		$	4,639		$	(20,570	)

The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows at December 31 (dollars in thousands):

	2016					2015					2014
Taxes at statutory federal income tax rate	$	8,504		35.0	%	$	5,324		35.0	%	$	1,270		34.0	%
Increase (decrease)resulting from:
Graduated tax rates		(243	)	(1.0	)		(94	)	(0.6	)		--		--
State income tax—net of federal benefits		865		3.6			484		3.2			42		1.1
Valuation allowance—net		(897	)	(3.7	)		--		--			(21,060	)	(563.7	)
Earnings on lifeinsurance policies		(549	)	(2.3	)		(515	)	(3.4	)		(388	)	(10.4	)
Nontaxable investments		(677	)	(2.8	)		(619	)	(4.1	)		(451	)	(12.0	)
Other—net		(144	)	(0.6	)		59		0.4			17		0.4
Total	$	6,859		28.2	%	$	4,639		30.5	%	$	(20,570	)	(550.6	)%

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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.

The Company’s net deferred tax asset account was comprised of the following at December 31 (in thousands):

	2016			2015
Deferred tax assets:
Allowance for loan and lease losses	$	8,278		$	7,580
Discount on purchased loans		2,044			2,584
Real estate owned		263			1,743
Section 382 net operating loss carryforward		1,976			2,114
Net operating loss carryforward		1,346			7,710
Nonaccrual loan interest		1,471			1,266
Unrealized loss on securities available for sale		891			--
Other		1,923			1,365
Total deferred tax assets		18,192			24,362
Valuation allowance		--			(897	)
Deferred tax asset, net of allowance		18,192			23,465
Deferred tax liabilities:
Office properties		(2,964	)		(2,990	)
Core deposit intangible		(2,293	)		(2,562	)
Unrealized gain on securities available for sale		--			(239	)
Other		(1,316	)		(961	)
Total deferred tax liabilities		(6,573	)		(6,752	)
Net deferred tax asset	$	11,619		$	16,713

For the year ended December 31, 2016, the net deferred tax asset decreased by $5.1 million or 30.5% primarily as a result of a decrease in the net operating loss ("NOL") carryforward which was utilized to offset taxable income for the year ended December 31, 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 December 31, 2016, the Company had an $8.1 million NOL for federal income tax purposes that will be carried forward. The federal NOL carryforwards, if unused, expire in calendar year 2034. The $8.1 million federal NOL includes $5.8 million of Internal Revenue Code (“IRC or the “Code””) Section 382 NOL carryforwards that have an annual limit of $405,000 that can be utilized to offset taxable income. At December 31, 2016, the Company had a $13.2 million NOL for Arkansas state income tax purposes. The state NOL carryforwards, if unused, expire in calendar years 2018 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 December 31, 2016 or 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.

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The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard as defined by generally accepted accounting principles. In accordance with ASC Topic 740-10,Income Taxes (ASC 740), a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback and carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

● Future reversals of existing temporary differences;

● Future taxable income exclusive of reversing temporary differences and carryforwards;

● Taxable income in prior carryback years; and

● Tax planning strategies

The assessment regarding whether a valuation allowance is required or should be adjusted also considers all positive and negative evidence, including but not limited to:

● Nature, frequency and severity of recent losses;

● Duration of statutory carryforward periods;

● Historical experience with tax attributes expiring unused; and

● Near- and medium-term financial outlook.

For the year ended December 31, 2014 the Company recorded a valuation allowance reversal on the basis of management’s assessment of the amount of its deferred tax assets that are more likely than not to be realized, resulting in a net tax benefit of $21.1 million for the year ended December 31, 2014.

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 no interest or penalties related to income tax matters during the years ended December 31, 2016, 2015 or 2014. The Company files consolidated income tax returns in the U.S. federal jurisdiction and the states of Arkansas and Missouri while Bear State 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.

14. STOCK BASED COMPENSATION

2011 Omnibus Incentive Plan— 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.

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A summary of the stock option activity in the Company’s 2011 Plan for the year ended December 31, 2016 is presented below:

	Shares Underlying Awards			Weighted Average Exercise Price
Outstanding— January 1, 2016		227,449		$	6.68
Granted		--		$	--
Exercised		(21,664	)	$	6.52
Forfeited		(4,111	)	$	6.06
Expired		(3,111	)	$	5.35
Outstanding—December 31, 2016		198,563		$	6.73
Exercisable—December 31, 2016		184,674		$	6.62

The weighted average remaining contractual life of the outstanding options was 2.0 years and the aggregate intrinsic value of the options was approximately $679,000 at December 31, 2016. The weighted average remaining contractual life of options exercisable was 2.0 years and the aggregate intrinsic value of those options was approximately $652,000 at December 31, 2016.

As of December 31, 2016, there was $33,000 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 0.8 years. Compensation expense attributable to option awards totaled approximately $108,000, $148,000 and $149,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

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

A summary of the restricted stock unit activity in the Company’s 2011 Plan for the year ended December 31, 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		(90,906	)	$	8.45
Forfeited		(5,078	)	$	7.73
Outstanding—December 31, 2016		262,669		$	8.41

As of December 31, 2016, there was $1.3 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 1.9 years. Compensation expense attributable to awards of RSUs totaled approximately $1.1 million, $642,000 and $329,000 for the years ended December 31, 2016, 2015 and 2014, 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.RSUs which have been granted pursuant to performance awards are reflected in the RSU table above. 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. Compensation expense recognized for the year ended December 31, 2016 was not significant.

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15. EMPLOYEE BENEFIT PLANS

401(k) Plan— The Company has established a 401(k) Plan whereby substantially all employees may participate in the Plan. Employees may contribute up to 75% of their salary subject to certain limits based on federal tax laws. The Company matches the first 2% of employee contributions. Compensation expense attributable to matching contributions totaled approximately $398,000, $309,000 and $243,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

Other Postretirement Benefits—The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions ("The Pentegra DB Plan"), a noncontributory tax-qualified defined-benefit pension plan. The Pentegra DB Plan's Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multiemployer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. No funding improvement plan or rehabilitation plan has been implemented or is pending and the Bank has not paid a surcharge to the Pentegra DB Plan.

The risks of participating in a multiemployer plan are different from single-employer plans in the following aspects:

a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.

b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

The following table presents the funded status (market value of plan assets divided by funding target) as of July 1 for the respective years:

	2016(1)			2015(1)
Plan Funded Status per valuation report		109.34	%		110.69	%

(1) Market value of plan assets reflects any contributions received through June 30, 2016.

Total contributions made to the Pentegra DB Plan by all participating employers, as reported on Form 5500, equal $163.1 million and $190.8 million for the plan years ending June 30, 2015 and June 30, 2014, respectively. The Bank’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the Pentegra DB Plan.

The Pentegra DB Plan provides a retirement benefit and a death benefit. Retirement benefits are payable in monthly installments for life and must begin not later than the first day of the month coincident with or the next month following the seventieth birthday or the participant may elect a lump-sum distribution. Death benefits are paid in a lump-sum distribution, the amount of which depends on years of service. Depending on the Pentegra DB Plan’s funded status, lump-sum distributions may have limitations. The Pentegra DB Plan was frozen effective July 1, 2010, eliminating all future benefit accruals for participants in the Pentegra DB Plan and closing the Pentegra DB Plan to new participants as of that date. The Bank will continue to incur costs consisting of administration and Pension Benefit Guaranty Corporation insurance expenses as well as amortization charges based on the funding level of the Pentegra DB Plan annually. Net pension expense was approximately $156,000, $138,000 and $3.3 million for the years ended December 31, 2016, 2015 and 2014, respectively, and contributions to the Pentegra DB Plan totaled $162,000, $148,000 and $3.0 million for the years ended December 31, 2016, 2015 and 2014, respectively. If the Bank chooses to withdraw from the Pentegra DB Plan, the Bank may be required to pay a significant withdrawal liability.

16. 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 for the years ended December 31:

	2016		2015		2014
Basic weighted average shares outstanding		37,629,975		34,526,622		28,410,579
Effect of dilutive securities		202,761		169,140		472,532
Diluted weighted average shares outstanding		37,832,736		34,695,762		28,883,111

The calculation of diluted securities for the year ended December 31, 2014 excluded antidilutive stock options representing 47,221 shares. There were no antidilutive securities for the years ended December 31, 2016 and 2015.

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17. 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 held for sale 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 December 31, 2016 and 2015, the Bank’s off-balance sheet arrangements principally included lending commitments, which are described below (in thousands).

	2016		2015
Commitments to extend or originate loans	$	80,265	$	44,153
Rate lock agreements with customers		14,079		10,893
Funded mortgage loans committed to sell		8,954		7,326
Unadvanced portion of construction loans		75,365		50,109
Unused lines of credit		132,796		131,940
Revolving credit card unused credit*		--		5,414
Standby letters of credit		2,870		3,220
Overdraft protection limits		16,585		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 of $1.8 million meet the definition of a derivative financial instrument. The related asset and liability are considered immaterial at December 31, 2016.

Historically, a very small percentage of predetermined overdraft limits have been used. At December 31, 2016, overdrafts of accounts with Bounce Protection™ represented usage of 2.3% of the limit.

At December 31, 2016, the Company had no interests in non-consolidated special purpose entities.

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18. FAIR VALUE MEASUREMENTS

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

Level 1	Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

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

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at December 31, 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 years ended December 31, 2016 and 2015.

The following table presents major categories of assets measured at fair value on a recurring basis as of December 31, 2016 and 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)
December 31, 2016
Available for sale investment securities:
U.S. Treasuries and government agencies	$	5,631	$	--	$	5,631	$	--
Municipal securities		87,050		--		87,050		--
Residential mortgage-backed securities		95,795		--		95,795		--
Total	$	188,476	$	--	$	188,476	$	--
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	$	--

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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 December 31, 2016 and 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.

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 years ended December 31, 2016, 2015 and 2014 were $311,000, $47,000 and $1.5 million, respectively.

The following table presents major categories of assets measured at fair value on a nonrecurring basis for the years ended December 31, 2016 and 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 year 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)
December 31, 2016
Impaired loans	$	7,105	$	--	$	--	$	7,105
REO, net		963		--		--		963
December 31, 2015
Impaired loans	$	7,909	$	--	$	--	$	7,909
REO, net		569		--		--		569

19. 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.

86

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):

	December 31, 2016				December 31, 2015
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
FINANCIAL ASSETS:
Level 1 inputs:
Cash and cash equivalents	$	78,789	$	78,789	$	52,131	$	52,131
Federal funds sold		--		--		18		18
Level 2 inputs:
Held to maturity securities		26,977		25,090		--		--
Interest-bearing time deposits in banks		4,571		4,572		10,930		11,016
Other investment securities		13,759		13,759		9,563		9,563
Loans held for sale		8,954		8,954		7,326		7,326
Cash surrender value of life insurance		57,267		57,267		52,602		52,602
Accrued interest receivable		7,006		7,006		6,157		6,157
Level 3 inputs:
Loans receivable—net		1,540,805		1,551,099		1,444,102		1,462,669
FINANCIAL LIABILITIES:
Level 1 inputs:	��
Short term borrowings		19,114		19,114		12,075		12,075
Level 2 inputs:
Checking, money market and savings accounts		1,095,178		1,095,178		1,094,442		1,094,442
Other borrowings		152,004		151,605		72,380		73,335
Accrued interest payable		314		314		292		292
Level 3 inputs:
Certificates of deposit		548,902		548,520		513,241		512,430

For cash and cash equivalents and federal funds sold, the carrying amount approximates fair value (level 1). For investments held to maturity, the fair values 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. For other investment securities, loans held for sale, cash surrender value of life insurance and accrued interest receivable, the carrying value is a reasonable estimate of fair value, primarily because of the short-term nature of the instruments or, as to other investment securities, the ability to sell the stock back to the issuer at cost (level 2). Interest bearing time deposits in banks were valued using discounted cash flows based on current rates for similar types of deposits (level 2). Fair values of impaired loans are estimated as described in Note 18. Non-impaired loans were valued using discounted cash flows. The discount rates used to determine the present value of these loans were based on interest rates currently being charged by the Bank on comparable loans (level 3).

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

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2016 and 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. 

20. CONTINGENCIES

The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial statements of the Company.

87

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

The actual and required capital amounts (in thousands) and ratios of the Company (Consolidated) and the Bank as of December 31, 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	$	186,604		9.47	%	$	78,840		4.00	%		N/A		N/A
Bear State Bank		204,319		10.38	%		78,710		4.00	%	$	98,388		5.00	%
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated	$	186,604		11.04	%	$	76,084		4.50	%		N/A		N/A
Bear State Bank		204,319		12.10	%		76,017		4.50	%	$	109,802		6.50	%
Tier I Capital to Risk-Weighted Assets
Consolidated	$	186,604		11.04	%	$	101,445		6.00	%		N/A		N/A
Bear State Bank		204,319		12.10	%		101,355		6.00	%	$	135,141		8.00	%
Total Capital to Risk-Weighted Assets
Consolidated	$	202,188		11.96	%	$	135,261		8.00	%		N/A		N/A
Bear State Bank		219,903		13.02	%		135,141		8.00	%	$	168,926		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%.

88

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 toRisk-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	%

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 December 31, 2016, the Bank had approximately $10.5 million available for payment of dividends to the Company without prior regulatory approval from the ASBD and approximately $13.9 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 year ended December 31, 2016, the Company repurchased 5,114 shares of its common stock for an average purchase price of $8.50 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”). As of December 31, 2016, the Company had $2.0 million of remaining capacity under 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.

22. RELATED PARTY TRANSACTIONS

In the normal course of business, the Bank has made loans to its directors and officers, including their immediate families, and their related business interests. In accordance with the Bank’s policies, related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of loans outstanding to directors and officers, their immediate families, and their related business interests was approximately $6.8 million and $13.8 million at December 31, 2016 and 2015, respectively and unused lines of credit available to such persons totaled $241,000 and $3.0 million at December 31, 2016 and 2015, respectively. Deposits from related parties held by the Bank at December 31, 2016 and 2015 amounted to $16.9 million and $35.5 million, respectively.

89

For the years ended December 31, 2016 and 2015, the Company paid $160,000 and $167,000, respectively, to related parties under the terms of an aircraft time-sharing agreement and service agreements.

In 2014, the Company and its Chairman entered into an aircraft purchase agreement whereby the Company acquired a 75% undivided interest and Mr. Massey acquired a 25% undivided interest in an airplane acquired at a cost of $775,000.  The Company’s share is recorded in office properties and equipment held for sale on the consolidated statement of financial condition and had a net book value of $459,000 at December 31, 2016.  The Company and Mr. Massey also entered into an agreement pursuant to which the parties agreed to apportion the fixed costs of the aircraft on a pro rata basis with each party agreeing to pay its own variable costs associated with the use of the aircraft. Variable costs attributable to Mr. Massey's use of the aircraft in connection with Company business, and not in connection with his personal use of the aircraft, were paid by the Company.

23. SUBSEQUENT EVENTS

On January 18, 2017, the Company announced that its Board of Directors authorized a $0.03 per share cash dividend to shareholders of record at the close of business on February 1, 2017 payable on February 15, 2017.

On January 20, 2017, the Company paid down the outstanding balance of $5.0 million related to its line of credit. The available credit line remains $14.75 million. On January 20, 2017 and March 1, 2017, the Company also paid a total of $3.1 million towards reducing the principal balance of the term notes due May 2019.

The aircraft recorded in office properties and equipment held for sale with a net book value of $459,000 was sold in February 2017 for $575,000 resulting in a loss to the Company of $28,000.

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24. PARENT COMPANY ONLY FINANCIAL INFORMATION

The following condensed statements of financial condition, as of December 31, 2016 and 2015, and condensed statements of income and comprehensive income and of cash flows for each of the three years in the period ended December 31, 2016, for Bear State Financial, Inc. should be read in conjunction with the consolidated financial statements and the notes herein.

BEAR STATE FINANCIAL, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2016 AND 2015

(In thousands)

	2016		2015
ASSETS
Cash and cash equivalents (deposits in subsidiary Banks)	$	175	$	118
Office properties and equipment, net		581		668
Deferred tax asset, net		1,552		2,907
Investment in Banks		250,211		237,418
Due from Bank		3,169		1,143
Other assets		289		258
TOTAL	$	255,977	$	242,512
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other borrowings	$	22,012	$	18,862
Accrued expenses and other liabilities		538		493
Stockholders’ equity		233,427		223,157
TOTAL	$	255,977	$	242,512

91

BEAR STATE FINANCIAL, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands)

	2016			2015			2014
INCOME:
Dividend from the Bank	$	5,000		$	12,100		$	26,500
Other income		73			--			--
Management fees		2,965			3,451			2,277
Total income		8,038			15,551			28,777
EXPENSES:
Interest expense		649			407			210
Salaries and employee benefits		3,320			2,383			4,250
Net occupancy expense		226			198			97
Data processing		9			1,291			3,166
Professional fees		785			627			512
Advertising		47			359			531
Other operating expenses		941			1,585			1,273
Total expenses		5,977			6,850			10,039
INCOME BEFORE INCOME TAXESAND EQUITY IN UNDISTRIBUTEDINCOME OF BANK SUBSIDIARIES		2,061			8,701			18,738
INCOME TAX BENEFIT		(1,133	)		(1,174	)		(3,938	)
INCOME BEFORE EQUITY IN UNDISTRIBUTEDINCOME OF BANK SUBSIDIARIES		3,194			9,875			22,676
EQUITY IN UNDISTRIBUTED INCOMEOF BANK SUBSIDIARIES		14,265			699			1,630
NET INCOME	$	17,459		$	10,574		$	24,306
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) arising during the period		(2,933	)		(290	)		1,434
Less: reclassification adjustments for realized gainincluded in net income		(19	)		(20	)		(31	)
Other comprehensive income (loss), before tax effect		(2,952	)		(310	)		1,403
Tax effect		1,130			119			(359	)
Other comprehensive income (loss)		(1,822	)		(191	)		1,044
COMPREHENSIVE INCOME	$	15,637		$	10,383		$	25,350

92

BEAR STATE FINANCIAL, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands)

	2016			2015			2014
OPERATING ACTIVITIES:
Net income	$	17,459		$	10,574		$	24,306
Adjustments to reconcile net income tonet cash provided by operating activities:
Equity in undistributed net income of Bank		(14,265	)		(699	)		(1,630	)
Deferred tax benefit		(164	)		(1,174	)		(1,414	)
Deferred tax valuation allowance		--			--			(913	)
Depreciation		95			118			71
Stock compensation expense		639			539			126
Changes in operating assets and liabilities:
Other assets		(543	)		247			(2,872	)
Accrued expenses and other liabilities		45			87			2,005
Net cash provided by operating activities		3,266			9,692			19,679
INVESTING ACTIVITIES:
Purchases of office properties and equipment		(8	)		(48	)		(942	)
Merger consideration paid		--			(10,100	)		(50,000	)
Investment in Bank		--			--			(11,001	)
Net cash used in investing activities		(8	)		(10,148	)		(61,943	)
FINANCING ACTIVITIES:
Proceeds from other borrowings		4,800			1,850			18,163
Repayments of other borrowings		(1,650	)		(1,151	)		--
Proceeds from private placement		--			--			20,000
Proceeds from exercise of warrants		--			--			3,590
Proceeds from exercise of stock options		141			37			24
Repurchase of common stock		(3,672	)		(256	)		(5	)
Dividends distributed		(2,820	)		--			--
Payment for fractional shares, stock dividend		--			--			(7	)
Net cash provided by (used in) financing activities		(3,201	)		480			41,765
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		57			24			(499	)
CASH AND CASH EQUIVALENTS:
Beginning of period		118			94			593
End of period	$	175		$	118		$	94

******

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BEAR STATE FINANCIAL, INC.

SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

YEAR ENDED DECEMBER 31,2016	Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Interest income	$	19,212		$	18,849		$	18,535		$	18,790
Interest expense		2,105			2,014			1,935			1,864
Net interest income		17,107			16,835			16,600			16,926
Provision for loan losses		851			643			533			489
Net interest income after provisionfor loan losses		16,256			16,192			16,067			16,437
Net gain on sales and calls ofinvestment securities		--			21			--			(2	)
Noninterest income		4,394			4,312			4,311			3,675
Noninterest expense		13,625			13,400			14,989			15,331
Income before income taxes		7,025			7,125			5,389			4,779
Income tax provision		2,192			2,384			847			1,436
Net income	$	4,833		$	4,741		$	4,542		$	3,343
Earnings per share:
Basic	$	0.13		$	0.13		$	0.12		$	0.09
Diluted	$	0.13		$	0.13		$	0.12		$	0.09
Selected Ratios (Annualized):
Net interest margin		3.75	%		3.78	%		3.86	%		4.03	%
Return on average assets		0.95			0.95			0.94			0.71
Return on average equity		8.18			8.12			8.04			6.04

YEAR ENDED DECEMBER 31,2015	Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Interest income	$	19,468		$	13,749		$	13,523		$	14,106
Interest expense		1,744			1,529			1,563			1,528
Net interest income		17,724			12,220			11,960			12,578
Provision for loan losses		866			331			300			300
Net interest income after provisionfor loan losses		16,858			11,889			11,660			12,278
Net gain on sales and calls ofinvestment securities		(68	)		--			--			88
Noninterest income		3,789			3,318			3,397			3,023
Noninterest expense		17,044			10,465			11,273			12,237
Income before income taxes		3,535			4,742			3,784			3,152
Income tax provision		972			1,529			1,253			885
Net income	$	2,563		$	3,213		$	2,531		$	2,267
Earnings per share(1):
Basic	$	0.07		$	0.10		$	0.08		$	0.07
Diluted	$	0.07		$	0.10		$	0.08		$	0.07
Selected Ratios (Annualized):
Net interest margin		4.14	%		3.74	%		3.71	%		3.85	%
Return on average assets		0.53			0.88			0.69			0.60
Return on average equity		4.60			7.23			5.78			5.25

	Fourth Quarter		Third Quarter		Second Quarter		First Quarter
YEAR ENDED DECEMBER 31, 2016
Basic weighted - average shares		37,615,991		37,595,454		37,568,274		37,740,714
Effect of dilutive securities		217,133		211,965		204,685		174,789
Diluted weighted - average shares		37,833,124		37,807,419		37,772,959		37,915,503
YEAR ENDED DECEMBER 31, 2015
Basic weighted - average shares		37,962,801		33,358,376		33,375,753		33,371,946
Effect of dilutive securities		210,433		138,922		145,737		179,830
Diluted weighted - average shares		38,173,234		33,497,298		33,521,490		33,551,776

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

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

The Company’s management, including the Company’s Principal Executive Officer and the Principal Financial Officer, regularly review our controls and procedures and make changes intended to ensure the quality of our financial reporting. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

Not Applicable.

PART III.

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item is included in the sections titled “Election of Directors,” “Information Regarding the Board and its Committees,” “Executive Officers of the Company,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Committees and Meetings of the Board of Directors of the Company” in our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act, for our 2017 Annual Meeting of Stockholders (the “2017 Proxy Statement”), and that information is incorporated herein by reference.

The Board of Directors has adopted a code of ethics for the Company’s executive officers, including the Chief Executive Officer and the Chief Financial Officer, and other financial professionals. These officers are expected to adhere at all times to this code of ethics. Failure to comply with this code of ethics is a serious offense and will result in appropriate disciplinary action. We have posted this code of ethics in the Corporate Governance section of our website at www.bearstatefinancial.com.

We will disclose on our website at www.bearstatefinancial.com, to the extent and in the manner permitted by Item 5.05 of Form 8-K under Section 13 of the Securities Exchange Act of 1934, the nature of any amendment to this code of ethics (other than technical, administrative, or other non-substantive amendments), our approval of any material departure from a provision of this code of ethics, and our failure to take action within a reasonable period of time regarding any material departure from a provision of this code of ethics that has been made known to any of the executive officers noted above.

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference from the section titled “Executive Compensation” in the 2017 Proxy Statement.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Certain portions of the information required by this item are incorporated herein by reference from the section titled “Beneficial Ownership of Common Stock By Certain Beneficial Owners and Management and Related Shareholder Matters” in the 2017 Proxy Statement.

Equity-Based Compensation Plans

The following table contains information regarding shares of our common stock that may be issued upon the exercise of stock awards under our existing equity compensation plans as of December 31, 2016:

	Number of securities to be issued upon exercise of outstanding options			Weighted average exercise price of outstanding options		Number of securities remaining available for future issuance
Equity Compensation PlansApproved by Stockholders		461,232	(1)	$	6.73		1,502,814
Equity Compensation PlansNot Approved by Stockholders		—			—		—
Total		461,232		$	6.73		1,502,814

(1) As of December 31, 2016, there were 198,563 shares of our common stock issuable upon the exercise of options granted under the Bear State Financial, Inc. 2011 Omnibus Incentive Plan, which was approved by stockholders in 2011 (the “2011 Plan”). The weighted average exercise price of those outstanding options was $6.73. At December 31, 2016, there were 262,669 shares of our common stock issuable upon vesting of restricted stock units.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is incorporated herein by reference from the section titled “Transactions with Certain Related Persons” and “Election of Directors” in the 2017 Proxy Statement.

Item 14. Principal Accounting Fees and Services.

The information required by this item is incorporated herein by reference from the section titled “Accounting Fees and Services” in the 2017 Proxy Statement.

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PART IV.

Item 15. Exhibits, Financial Statement Schedules.

(a)Documents Filed as Part of this Report

(1) Consolidated financial statements of the Company have been included in Part II, Item 8 of this Annual Report on Form 10-K.

(2) All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements of the Company and related notes thereto.

(3) See Item 15(b) of this Annual Report on Form 10-K.

(b)Exhibit Index.

2.1 Plan of Conversion (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on July 21, 2011).

2.2 Agreement and Plan of Merger by and between the Company and First National Security Company, dated July 1, 2013 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 3, 2013).

2.3 Stock Purchase Agreement dated as of June 22, 2015 by and between the Company 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).

3.1 Amended and Restated Articles of Incorporation of the Company (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 the Company (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).     

10.1 Investment Agreement dated as of January 27, 2011, by and among the Company, First Federal Bank and Bear State Financial Holdings, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 28, 2011).

10.2 First Amendment to Investment Agreement, dated April 20, 2011, by and among the Company, First Federal Bank, and Bear State Financial Holdings, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report Form 8-K filed with the SEC on April 21, 2011).

10.3^† Bear State Financial, Inc. 2011 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 29, 2011).

10.4^† Amendment No. 1 to the Bear State Financial, Inc. 2011 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August, 5, 2016).

10.5^† Form of Notice of Performance-Based Restricted Stock Grant, including Form of Performance-Based Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2016).

10.6^† Form of Notice of Restricted Stock Grant, including Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2016).

10.7^† Form of Notice of Stock Option Grant, including Form of Stock Option Agreement (incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2016).

10.8^† Form of Notice of Restricted Stock Unit Grant, including Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2016).

10.9 Form of Common Stock Purchase Warrant of the Company (incorporated herein by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-4 (File No. 333-190845) filed with the SEC on August 27, 2013).

10.10 Form of Registration Rights Agreement by and between the Company and each of the Investors party thereto (incorporated herein by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-4 (File No. 333-190845) filed with the SEC on August 27, 2013).

10.11 Form of Registration Rights Agreement by and among the Company, Bear State Financial Holdings, LLC and each of the Investors party thereto (incorporated herein by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-4 (File No. 333-190845) filed with the SEC on August 27, 2013).

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10.12^† Employment Agreement, dated October 1, 2015, by and between the Company, Bear State Bank, N.A. and Mark McFatridge (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report Form 8-K filed with the SEC on October 1, 2015).

10.13^† Separation Agreement by and among the Company, Bear State Bank and Mark McFatridge (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 19, 2017).

10.14^†* Amended Change in Control Severance Agreement, originally effective November 18, 2015, amended effective February 15, 2017, by and among the Company, Bear State Bank and Tom Fritsche.

10.15^†* Amended Change in Control Severance Agreement, originally effective November 17, 2015, amended effective February 15, 2017, by and among the Company, Bear State Bank, and Matt Machen.

10.16^†* Amended Change in Control Severance Agreement, originally effective May 1, 2016, amended effective February 15, 2017, by and among the Company, Bear State Bank and Sherri Billings.

10.17^†* Change in Control Severance Agreement, effective February 15, 2017, by and among the Company, Bear State Bank and Yurik Paroubek.

10.18^†* Change in Control Severance Agreement, effective February 15, 2017, by and among the Company, Bear State Bank and Shelly Loftin.

10.19^†* Change in Control Severance Agreement, effective February 15, 2017, by and among the Company, Bear State Bank and Chad Rawls.

10.20^†* Change in Control Severance Agreement, effective February 15, 2017, by and among the Company, Bear State Bank and Donna Merriweather.

10.21^†* Change in Control Severance Agreement, effective February 15, 2017, by and among the Company, Bear State Bank and Paul Lowe.

21.0* Subsidiaries of the Registrant

23.0* Consent of BKD LLP

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

^† Management contract or compensatory plan or arrangement

* Filed herewith

** Furnished herewith

Item 16. Form 10-K Summary.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
By:	/s/ Matt Machen
	Matt Machen
	President and Chief Executive Officer
	March 10, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Matt Machen	March 10, 2017
Matt Machen President, Chief Executive Officer and Director
/s/ Sherri Billings	March 10, 2017
Sherri Billings Senior Executive Vice President and ChiefFinancial Officer
/s/ Jeri Pritchett	March 10, 2017
Jeri Pritchett Executive Vice President and ChiefAccounting Officer
/s/ Richard N Massey	March 10, 2017
Richard N. Massey Chairman
/s/ William Changose	March 10, 2017
William Changose Director
/s/ K. Aaron Clark	March 10, 2017
K. Aaron Clark Director
/s/ Frank Conner	March 10, 2017
Frank Conner Director
/s/ Brock Gearhart	March 10, 2017
Brock Gearhart Director
/s/ John J. Ghirardelli	March 10, 2017
John J. Ghirardelli Director
/s/ Ian Vaughan	March 10, 2017
Ian Vaughan Director

99