UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _______________

Commission File No.: 0-28312

                    Bear State Financial, Inc.                

(Exact name of registrant as specified in its charter)

Arkansas	71-0785261
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)
900 South Shackleford Rd, Suite 401
Little Rock, Arkansas	72211
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

Large Accelerated Filer ☐	Accelerated Filer ☒	Non-accelerated Filer ☐
		(Do not check if a smaller reporting company)

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of October 27, 2017, there were issued and outstanding 37,729,837 shares of the Registrant's Common Stock, par value $.01 per share.

BEAR STATE FINANCIAL, INC.

TABLE OF CONTENTS

Part I.	Financial Information	Page
Item 1.	Financial Statements
	Condensed Consolidated Statements of Financial Condition	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statement of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
Part II.	Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	49
Signatures		50

Part I. Financial Information

Item 1. Financial Statements

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share and per share data)

(Unaudited)

	September 30, 2017		December 31, 2016
ASSETS
Cash and cash equivalents	$	80,571	$	78,789
Interest-bearing time deposits in banks		4,075		4,571
Available for sale securities, at fair value		205,392		188,476
Held to maturity securities, at amortized cost (fair value of $42,446 and $25,090, respectively)		42,879		26,977
Other investment securities, at cost		24,802		13,759
Loans receivable, net of allowance of $18,682 and $15,584, respectively		1,692,463		1,540,805
Loans held for sale		7,258		8,954
Accrued interest receivable		8,027		7,006
Real estate owned, net		1,461		1,945
Office properties and equipment, net		51,353		54,049
Office properties and equipment held for sale		4,669		5,337
Cash surrender value of life insurance		57,794		57,267
Goodwill		40,196		40,196
Core deposit intangibles, net		9,587		10,353
Deferred tax asset, net		7,277		11,619
Prepaid expenses and other assets		3,655		3,072
TOTAL	$	2,241,459	$	2,053,175
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest bearing deposits	$	232,004	$	223,038
Interest bearing deposits		1,357,132		1,421,042
Total deposits		1,589,136		1,644,080
Securities sold under agreement to repurchase		21,629		19,114
Other borrowings		372,316		152,004
Other liabilities		9,169		4,550
Total liabilities		1,992,250		1,819,748
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value—5,000,000 shares authorized; none issued at September 30, 2017 or December 31, 2016		--		--
Common stock, $0.01 par value—100,000,000 shares authorized; 37,729,837and 37,618,597 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		377		376
Additional paid-in capital		210,049		209,274
Accumulated other comprehensive income (loss)		256		(1,436	)
Retained earnings		38,527		25,213
Total stockholders’ equity		249,209		233,427
TOTAL	$	2,241,459	$	2,053,175

See notes to unaudited condensed consolidated financial statements.

1

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except earnings per share)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
INTEREST INCOME:
Loans receivable	$	20,184		$	17,808		$	59,055		$	53,012
Investment securities:
Taxable		726			467			2,015			1,477
Nontaxable		950			508			2,773			1,456
Other		234			66			452			230
Total interest income		22,094			18,849			64,295			56,175
INTEREST EXPENSE:
Deposits		1,855			1,662			5,272			4,785
Other borrowings		1,103			352			2,396			1,027
Total interest expense		2,958			2,014			7,668			5,812
NET INTEREST INCOME		19,136			16,835			56,627			50,363
PROVISION FOR LOAN LOSSES		1,863			643			4,034			1,665
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		17,273			16,192			52,593			48,698
NONINTEREST INCOME:
Net gain on sales of investment securities		--			21			48			19
Deposit fee income		2,519			2,253			7,509			6,639
Earnings on life insurance policies		406			414			1,625			1,247
Gain on sales of loans		1,003			1,368			3,071			3,454
Other		263			277			808			960
Total noninterest income		4,191			4,333			13,061			12,319
NONINTEREST EXPENSES:
Salaries and employee benefits		6,913			7,618			21,767			23,725
Net occupancy expense		1,681			1,826			5,255			5,652
Real estate owned, net		(38	)		(381	)		(31	)		(379	)
FDIC insurance		248			224			774			870
Amortization of intangible assets		255			255			766			766
Data processing		1,415			1,341			4,307			4,180
Professional fees		408			545			1,431			1,700
Advertising and public relations		342			419			893			1,284
Postage and supplies		207			273			631			889
Other		2,829			1,280			5,705			5,036
Total noninterest expenses		14,260			13,400			41,498			43,723
INCOME BEFORE INCOME TAXES		7,204			7,125			24,156			17,294
INCOME TAX PROVISION		2,072			2,384			7,450			4,668
NET INCOME	$	5,132		$	4,741		$	16,706		$	12,626
Basic earnings per common share	$	0.14		$	0.13		$	0.44		$	0.34
Diluted earnings per common share	$	0.14		$	0.13		$	0.44		$	0.33

See notes to unaudited condensed consolidated financial statements.

2

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	5,132		$	4,741		$	16,706		$	12,626
Other comprehensive income:
Unrealized holding gains (losses) on investment securities arising during the period		585			(359	)		2,789			1,946
Less: reclassification adjustments for realized loss (gain) included in net income		--			(21	)		(48	)		(19	)
Other comprehensive income, before tax effect		585			(380	)		2,741			1,927
Tax effect		(224	)		146			(1,049	)		(738	)
Other comprehensive income (loss)		361			(234	)		1,692			1,189
COMPREHENSIVE INCOME	$	5,493		$	4,507		$	18,398		$	13,815

See notes to unaudited condensed consolidated financial statements.

3

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(In thousands, except share data)

(Unaudited)

	Issued							Accumulated Other						Total
	Common Stock				Additional Paid-			Comprehensive			Retained			Stockholders’
	Shares		Amount		In Capital			Income (Loss)			Earnings			Equity
BALANCE – January 1, 2017		37,618,597	$	376	$	209,274		$	(1,436	)	$	25,213		$	233,427
Net income		--		--		--			--			16,706			16,706
Other comprehensive income		--		--		--			1,692			--			1,692
Shares issued – restricted stock unit vesting, net of shares withheld for employee taxes		55,798		--		(276	)		--			--			(276	)
Shares issued – stock options exercised		55,442		1		306			--			--			307
Stock compensation		--		--		745			--			--			745
Dividends distributed - $0.09 per common share		--		--		--			--			(3,392	)		(3,392	)
BALANCE – September 30, 2017		37,729,837	$	377	$	210,049		$	256		$	38,527		$	249,209

See notes to unaudited condensed consolidated financial statements.

4

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2017			2016
OPERATING ACTIVITIES:
Net income	$	16,706		$	12,626
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,034			1,665
Provision for real estate losses		117			302
Deferred tax provision		3,291			5,115
Deferred tax valuation allowance		--			(897	)
Net amortization of premiums on investment securities		1,410			950
Federal Home Loan Bank stock dividends		(112	)		(26	)
Loss (gain) on sales of fixed assets, net		4			(970	)
Impairment on office properties held for sale		634			987
Gain on sales of real estate owned and repossessed assets, net		(267	)		(862	)
Gain on sales of investment securities, net		(48	)		(19	)
Originations of loans held for sale		(98,657	)		(124,450	)
Proceeds from sales of loans originated for sale		103,424			121,235
Gain on sales of loans originated to sell		(3,071	)		(3,454	)
Depreciation		2,566			2,842
Amortization of deferred loan costs, net		407			824
Accretion of purchased loans, net		(3,561	)		(3,837	)
Amortization of other intangible assets		766			766
Stock compensation		745			1,032
Earnings on life insurance policies		(1,625	)		(1,247	)
Changes in operating assets and liabilities:
Accrued interest receivable		(1,021	)		(537	)
Prepaid expenses and other assets		(562	)		(1,062	)
Other liabilities		4,619			(48	)
Net cash provided by operating activities		29,799			10,935
INVESTING ACTIVITIES:
Net decrease in federal funds sold		--			18
Purchases of interest bearing time deposits in banks		(1,485	)		(2,341	)
Redemptions of interest bearing time deposits in banks		1,981			8,451
Purchases of held to maturity (“HTM”) securities		(16,093	)		(10,383	)
Purchases of available for sale (“AFS”) securities		(40,447	)		(64,964	)
Proceeds from sales of AFS securities		2,069			30,386
Proceeds from maturities/calls/paydowns of AFS securities		23,032			47,844
Purchases of other investments		(10,931	)		(4,244	)
Redemptions of other investments		--			1,995
Net loan disbursements		(144,134	)		(41,260	)
Loan participations purchased		(12,036	)		(23,631	)
Loan participations sold		2,245			9,044
Proceeds from sales of real estate owned and repossessed assets		2,209			3,779
Proceeds from sales of office properties and equipment		1,251			1,899
Purchases of office properties and equipment		(1,298	)		(1,723	)
Purchases of bank owned life insurance		--			(3,000	)
Proceeds from settlement of bank owned life insurance		1,098			--
Net cash used in investing activities		(192,539	)		(48,130	)

(Continued)

5

BEAR STATE FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2017			2016
FINANCING ACTIVITIES:
Net (decrease) increase in deposits	$	(54,944	)	$	45,840
Proceeds from long term Federal Home Loan Bank (“FHLB”) advances		85,223			40,245
Repayment of long term FHLB advances		(85,424	)		(20,425	)
Net change in short term FHLB advances		230,000			6,800
Proceeds from other borrowings		2,400			4,800
Repayment of other borrowings		(11,887	)		(1,144	)
Net increase in securities sold under agreement to repurchase		2,515			1,436
Proceeds from exercise of stock options		307			130
Shares withheld for payment of employee payroll taxes		(276	)		(180	)
Repurchase of common stock		--			(3,672	)
Dividends distributed		(3,392	)		(1,879	)
Net cash provided by financing activities		164,522			71,951
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,782			34,756
CASH AND CASH EQUIVALENTS:
Beginning of period		78,789			52,131
End of period	$	80,571		$	86,887
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	7,342		$	5,834
Cash paid for income taxes	$	1,206		$	892
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate and other assets acquired in settlement of loans	$	1,411		$	1,389
Sales of real estate owned financed by the Bank	$	24		$	146
Investment securities traded—not settled	$	--		$	972
Office properties transferred to office properties held for sale	$	1,428		$	7,364

See notes to unaudited condensed consolidated financial statements. (Concluded)

6

BEAR STATE FINANCIAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations — Bear State Financial, Inc. (the “Company”) is a bank holding company headquartered in Little Rock, Arkansas.  Its subsidiary bank, Bear State Bank (the “Bank”), is a community oriented bank providing a broad line of financial products to individuals and business customers.  As of September 30, 2017, the Bank operates 42 branches, three personalized technology centers equipped with interactive teller machines (“ITMs”) and three loan production offices throughout Arkansas, Missouri and Southeast Oklahoma. On June 28, 2016, the Bank converted from a national bank to an Arkansas state-chartered bank.

On August 22, 2017, the Company and the Bank entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Arvest Bank, an Arkansas banking corporation (“Arvest”), and Arvest Acquisition Sub, Inc., an Arkansas corporation and a wholly-owned subsidiary of Arvest (“Acquisition Sub”), pursuant to which Arvest will acquire the Company by merging Acquisition Sub with and into the Company with the Company surviving as a wholly-owned subsidiary of Arvest (the “Merger”).

Pursuant to the Merger Agreement, each share of the Company’s common stock issued and outstanding as of the effective time of the Merger will be converted into a right to receive $10.28 per share, payable in cash. The Merger is expected to close in the fourth quarter of 2017 or first quarter of 2018 and is subject to customary closing conditions, including both regulatory approval and approval by the Company’s shareholders.

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

Operating Segments— The Company’s 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.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. However, such information reflects all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Those adjusting entries consist only of normal recurring adjustments.

Certain reclassifications of prior period amounts have been made to conform with the current period presentation. These reclassifications had no impact on previously reported net income.

The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017. The unaudited condensed consolidated financial statements of the Company and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016, contained in the Company’s 2016 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet of the Company as of December 31, 2016, included herein has been derived from the audited consolidated balance sheet of the Company as of that date.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 requires 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 likewise changes the calculation of assumed proceeds in applying the treasury stock method for calculating diluted earnings per share. It also allows 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. The Company adopted the amendments beginning January 1, 2017. The Company’s adoption of the ASU primarily resulted in a change in presentation in the statement of cash flows of employee taxes withheld in shares of Company stock from operating activities to financing activities. The other provisions either were not applicable or did not have a material impact on the Company’s financial statements. 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.

7

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 with early adoption permitted. The Company adopted the guidance as of January 1, 2017 and there was no impact on the Company’s financial statements at the date of adoption.

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 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 elected to adopt this ASU effective with its September 30, 2017 annual impairment testing. The Company concluded that its goodwill is not impaired as of September 30, 2017. The adoption of this ASU did not have an impact on the Company’s financial position or results of operations.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs. This amendment updates the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount and can continue to be amortized to maturity. ASU 2017-08 will be effective for the Company in the fiscal year beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including interim periods within those years. The Company has elected to early adopt ASU 2017-08 and the effect was not material.

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 FASB also issued the following amendments to ASU No. 2014-09 to provide clarification on the guidance: ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross Versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients. 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 ASU become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.

In February 2017, the FASB issued ASU 2017-05 to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. Sales and partial sales of real estate assets will now be accounted for similar to all other sales of nonfinancial and in substance nonfinancial assets. The amendments in this ASU are effective at the same time as the amendments in ASU 2014-09. This ASU is to be adopted concurrently with ASU 2014-09.

The Company is currently evaluating the impact, if any, of the new revenue recognition ASUs on its financial position, results of operations and financial statement disclosures.

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.

8

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

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 has formed 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 May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU gives clarity and reduces diversity in practice by providing guidance about which changes to terms or conditions of a shared-based payment award require an entity to apply modification accounting in Topic 718. For public entities, ASU 2017-09 is effective for interim and annual periods beginning after December 15, 2017; however, early adoption is permitted. The adoption of this ASU is not expected to have an impact on the Company’s financial statements as the Company has not historically changed the terms or conditions of share-based payment awards.

In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in the ASU change the classification of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part II of this ASU recharacterize the indefinite deferral of certain provisions of Topic 480, Distinguishing Liabilities from Equity, that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public entities, ASU 2017-11 Part I is effective for interim and annual periods beginning after December 15, 2018; however, early adoption is permitted. The amendments in Part II of this ASU do not require any transition guidance because those amendments do not have an accounting effect. The adoption of this ASU is not expected to have an impact on the Company’s financial statements as the Company has not historically issued financial instruments that include down round features.

9

In August 2017, the FASB issued ASU 2017-12—Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this ASU also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. For public entities, ASU 2017-12 is effective for interim and annual periods beginning after December 15, 2018; however, early adoption is permitted. The adoption of this ASU is not expected to have an impact on the Company’s financial statements as the Company does not currently have any hedging relationships.

3. INVESTMENT SECURITIES

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

	September 30, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale
U.S. Treasuries and government agencies	$	4,999	$	--	$	(26	)	$	4,973
Municipal securities		94,028		900		(456	)		94,472
Residential mortgage-backed securities		100,952		485		(710	)		100,727
Corporate debt securities		5,000		220		--			5,220
Total available for sale	$	204,979	$	1,605	$	(1,192	)	$	205,392
Held to maturity
Municipal securities	$	42,879	$	234	$	(667	)	$	42,446
Total held to maturity	$	42,879	$	234	$	(667	)	$	42,446

	December 31, 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

10

The mortgage-backed portfolios at September 30, 2017 and December 31, 2016 were composed entirely of residential mortgage-backed securities issued or guaranteed by GNMA, FNMA or FHLMC.

The following tables summarize the gross unrealized losses and fair value of the Company's investments classified as available for sale and held to maturity with unrealized losses that are not deemed to be other-than-temporarily impaired (“OTTI”), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	September 30, 2017
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Treasuries and government agencies	$	2,498	$	3	$	1,977	$	23	$	4,475	$	26
Municipal securities		33,349		491		14,814		632		48,163		1,123
Residential mortgage-backed securities		33,989		202		25,884		508		59,873		710
Total	$	69,836	$	696	$	42,675	$	1,163	$	112,511	$	1,859

	December 31, 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 and government 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

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 fair values of approximately $120.7 million at September 30, 2017 and $140.6 million at December 31, 2016, as collateral for certain deposits in excess of $250,000 and for other purposes, including investment securities with carrying values of approximately $21.6 million at September 30, 2017 and $19.1 million at December 31, 2016, for securities sold under agreements to repurchase.

The following table sets forth the amount (dollars in thousands) of investment securities that contractually mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2017. 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.

11

	September 30, 2017
	Available for Sale							Held to Maturity
					Weighted							Weighted
	Amortized Cost		Fair Value		Average Rate			Amortized Cost		Fair Value		Average Rate
Within one year	$	5,857	$	5,860		1.65	%	$	--	$	--		--
Due from one year to five years		15,912		15,938		2.21	%		--		--		--
Due from five years to ten years		20,368		20,810		3.50	%		6,532		6,602		2.20	%
Due after ten years		61,890		62,057		2.90	%		36,347		35,844		2.80	%
		104,027		104,665		2.85	%		42,879		42,446		2.71	%
Residential mortgage-backed securities		100,952		100,727		2.35	%		--		--		--
Total	$	204,979	$	205,392		2.60	%	$	42,879	$	42,446		2.71	%

As of September 30, 2017 and December 31, 2016, investment securities with an amortized cost totaling approximately $136.6 million and $93.8 million, respectively, have call options held by the issuer, of which approximately $24.9 million and $27.4 million, respectively, are or were callable within one year.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017		2016
Sales proceeds	$	--	$	22,297		$	2,069	$	30,386
Gross realized gains	$	--	$	97		$	48	$	195
Gross realized losses		--		(76	)		--		(176	)
Net gains on sales of investment securities	$	--	$	21		$	48	$	19

4. LOANS RECEIVABLE

Loans receivable consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):

	September 30, 2017			December 31, 2016
Real estate:
One- to four-family residential	$	393,082		$	389,107
Multifamily residential		92,837			92,460
Nonfarm nonresidential		568,318			495,173
Farmland		99,189			94,018
Construction and land development		147,071			125,785
Commercial		373,464			323,096
Consumer		36,859			36,265
Total loans receivable		1,710,820			1,555,904
Unearned discounts and net deferred loan costs		325			485
Allowance for loan and lease losses		(18,682	)		(15,584	)
Loans receivable—net	$	1,692,463		$	1,540,805

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.

12

Real Estate Loans – The real estate loan portfolio consists primarily of single family residential, commercial real estate and construction loans. Loans in this category are differentiated by whether the property owner or parties unrelated to the borrower occupy the property. This difference can directly affect the sensitivity of the source of loan repayment to changes in interest rates and market conditions, which can impact the underlying collateral value. Therefore, the analysis of these credits focuses on current and forecasted economic trends in certain sub-markets, including residential, industrial, retail, office and multi-family segments. Changes in these segments are influenced by both local and national cycles, which may fluctuate in both similar and opposing directions and sustain for varying durations. These differences provide the Bank with opportunities for diversification of loans by property type, geography and other factors.

Commercial Loans – This portfolio includes loans with funds used for commercial purposes including loans to finance enterprise, including agricultural, working capital needs; equipment purchases; accounts receivable and inventory and other similar business needs. The risk of loans in this category is driven by the cash flow and creditworthiness of the borrowers, the monitoring of which occurs through the ongoing analysis of interim financial information. Also, the terms of these loans are generally shorter than credits secured by real estate, helping to reduce the impact of changes in interest rates on the Bank’s interest rate sensitivity position.

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

Loans sold with servicing retained are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of such loans at September 30, 2017 and December 31, 2016 were $4.2 million and $14.7 million, respectively. Servicing loans for others generally consists of collecting payments and disbursing payments to investors. Servicing income for the periods ended September 30, 2017 and 2016 was not significant.

As of September 30, 2017 and December 31, 2016, qualifying loans collateralized by first lien one- to four-family mortgages with balances totaling approximately $22.6 million and $26.4 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 a significant portion of its remaining loans at September 30, 2017 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 First National Security Company (“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 National Bank (“Metropolitan”) in 2015 in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method.

The Company evaluated $21.1 million of net loans ($26.9 million gross loans less $5.8 million discount) purchased in conjunction with the acquisition of FNSC in 2014 in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The following table reflects the carrying amount of purchased credit impaired (“PCI”) loans, which are included in the loan categories above (in thousands):

	September 30, 2017		December 31, 2016		September 30, 2016
One- to four-family residential	$	2,265	$	2,714	$	2,833
Nonfarm nonresidential		1,858		7,576		8,353
Farmland		29		53		58
Construction and land development		1,445		1,432		1,419
Commercial		524		556		570
Consumer		43		53		55
Total carrying value of PCI loans	$	6,164	$	12,384	$	13,288
Outstanding principal balance of PCI loans	$	8,652	$	15,468	$	17,676

13

The following table documents changes for the nine months ended September 30, 2017 and 2016 to the amount of accretable yield on loans evaluated in accordance with the provisions of FASB ASC Topic 310-30 (in thousands).

	2017			2016
Balance at January 1	$	890		$	1,370
Accretion		(972	)		(622	)
Adjustments to accretable differences due to:
Reclassification from nonaccretable difference		2,082			1,328
Changes in expected cash flows that do not affect nonaccretable differences		(695	)		(868	)
Transfers to real estate owned		10			5
Balance at September 30	$	1,315		$	1,213

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

September 30, 2017	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	2,801	$	2,638	$	387,643	$	393,082
Multifamily residential		--		--		92,837		92,837
Nonfarm nonresidential		1,835		5,566		560,917		568,318
Farmland		416		550		98,223		99,189
Construction and land development		146		197		146,728		147,071
Commercial		1,276		1,137		371,051		373,464
Consumer		352		116		36,391		36,859
Total	$	6,826	$	10,204	$	1,693,790	$	1,710,820

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

As of September 30, 2017 and December 31, 2016, there were $0.5 million and $0.8 million, respectively, of PCI loans acquired in the merger with FNSC that were 90 days or more past due and accruing. Restructured loans totaled $5.6 million as of September 30, 2017 and $6.0 million as of December 31, 2016, with $4.4 million and $1.2 million of such restructured loans on nonaccrual status at September 30, 2017 and December 31, 2016, respectively.

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

September 30, 2017	30-89 Days Past Due		90 Days or More Past Due		Current		Total
One- to four-family residential	$	683	$	2,460	$	3,748	$	6,891
Nonfarm nonresidential		1,186		5,421		1,521		8,128
Farmland		240		550		384		1,174
Construction and land development		--		128		79		207
Commercial		42		1,008		250		1,300
Consumer		12		116		39		167
Total	$	2,163	$	9,683	$	6,021	$	17,867

14

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

As of September 30, 2017 and December 31, 2016, there were $3.0 million and $1.0 million, respectively, of loans in the process of foreclosure, of which $0.9 million and $0.5 million were one- to four-family residential mortgage loans at September 30, 2017 and December 31, 2016, respectively.

The following tables summarize information pertaining to impaired loans as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016 (in thousands). The tables below do not include ASC 310-30 PCI loans which are disclosed separately above.

	September 30, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Unpaid Principal Balance		Recorded Investment		Valuation Allowance
Impaired loans with a valuation allowance:
One- to four-family residential	$	242	$	220	$	68	$	244	$	229	$	74
Multifamily		--		--		--		--		--		--
Nonfarm nonresidential		--		--		--		--		--		--
Farmland		--		--		--		--		--		--
Construction and land development		--		--		--		--		--		--
Commercial		434		434		333		1,865		1,788		488
Consumer		5		5		5		5		5		5
		681		659		406		2,114		2,022		567
Impaired loans without a valuation allowance:
One- to four-family residential		9,060		6,862		--		8,704		6,677		--
Multifamily		--		--		--		--		--		--
Nonfarm nonresidential		10,179		8,760		--		11,022		9,421		--
Farmland		1,214		1,174		--		1,226		783		--
Construction and land development		370		278		--		728		539		--
Commercial		1,409		1,152		--		2,893		2,570		--
Consumer		174		162		--		184		168		--
		22,406		18,388		--		24,757		20,158		--
Total impaired loans	$	23,087	$	19,047	$	406	$	26,871	$	22,180	$	567

15

	Three Months Ended September 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	222	$	2	$	233	$	2
Nonfarm nonresidential		--		--		698		--
Farmland		--		--		--		--
Construction and land development		--		--		--		--
Commercial		217		--		3,209		--
Consumer		5		--		5		--
		444		2		4,145		2
Impaired loans without a valuation allowance:
One- to four-family residential		6,849		--		7,177		--
Multifamily		60		--		75		--
Nonfarm nonresidential		8,287		9		4,842		--
Farmland		1,099		--		802		--
Construction and land development		282		1		576		1
Commercial		1,141		4		860		--
Consumer		174		--		198		--
		17,892		14		14,530		1
Total impaired loans	$	18,336	$	16	$	18,675	$	3
Interest based on original terms			$	255			$	277
Interest income recognized on a cash basis on impaired loans			$	--			$	--

	Nine Months Ended September 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	225	$	5	$	357	$	5
Nonfarm nonresidential		--		--		1,129		--
Farmland		95		--		118		--
Construction and land development		--		--		94		--
Commercial		997		--		2,707		--
Consumer		5		--		5		--
		1,322		5		4,410		5
Impaired loans without a valuation allowance:
One- to four-family residential		6,777		--		7,173		1
Multifamily		60		--		134		--
Nonfarm nonresidential		8,861		9		4,715		--
Farmland		971		--		730		--
Construction and land development		404		4		606		4
Commercial		1,803		13		1,438		--
Consumer		180		--		209		--
		19,056		26		15,005		5
Total impaired loans	$	20,378	$	31	$	19,415	$	10
Interest based on original terms			$	862			$	832
Interest income recognized on a cash basis on impaired loans			$	--			$	--

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, the Bank categorizes loans into risk categories based on available and relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by assigning a credit risk rating to loans on at least an annual basis for non-homogeneous loans over $1.0 million. The Bank uses the following definitions for risk ratings:

16

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

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

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

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

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

Based on analyses performed at September 30, 2017 and December 31, 2016, the risk categories of loans are as follows (in thousands):

	September 30, 2017
	Pass/ Not Rated		Special Mention		Substandard		Total
One- to four-family residential	$	381,310	$	153	$	11,619	$	393,082
Multifamily residential		92,837		--		--		92,837
Nonfarm nonresidential		553,832		295		14,191		568,318
Farmland		96,981		--		2,208		99,189
Construction and land development		138,483		--		8,588		147,071
Commercial		369,750		--		3,714		373,464
Consumer		36,549		--		310		36,859
Total	$	1,669,742	$	448	$	40,630	$	1,710,820

	December 31, 2016
	Pass/ Not Rated		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

As of September 30, 2017 and December 31, 2016, 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.

17

The following table summarizes TDRs as of September 30, 2017 and December 31, 2016 (dollars in thousands):

September 30, 2017	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	$	191		3	$	93		5	$	284
Nonfarm nonresidential		1		632		2		4,323		3		4,955
Construction and land development		1		71		1		--		2		71
Commercial		1		286		--		--		1		286
Consumer		--		--		1		5		1		5
Total		5	$	1,180		7	$	4,421		12	$	5,601

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

No loans were restructured as TDRs during the three months ended September 30, 2017 or 2016. Loans receivable that were restructured as TDRs during the nine months ended September 30, 2017 and 2016 were as follows (dollars in thousands):

	Nine Months Ended September 30, 2017
			Balance		Balance at		Nature of Modification
	Number of Loans		Prior to TDR		September 30, 2017		Payment Term (1)		Other
Nonfarm nonresidential		1	$	642	$	632	$	642	$	--
Total		1	$	642	$	632	$	642	$	--

_________________________

(1) The borrower’s payment was lowered for the remainder of the term resulting in an extended amortization term.

	Nine Months Ended September 30, 2016
			Balance		Balance at		Nature of Modification
	Number of Loans		Prior to TDR		September 30, 2016		Payment Term (2)		Other
Commercial		1	$	35	$	--	$	35	$	--
Total		1	$	35	$	--	$	35	$	--

_________________________

(2) Concessions represent skipped payments, maturity date extensions or amortization term extensions.

The Bank had one loan totaling $4.2 million for which a payment default occurred during the nine months ended September 30, 2017 that had been modified as a TDR within 12 months or less of the payment default. There were no loans receivable for which a payment default occurred during the three months ended September 30, 2017 or 2016 or during the nine months ended September 30, 2016 that had been modified as a TDR within 12 months or less of the payment default.

As of September 30, 2017 and December 31, 2016, the Bank was not committed to lend additional funds to any customer whose loan was classified as a TDR.

18

5. ALLOWANCES FOR LOAN AND LEASE LOSSES AND REAL ESTATE LOSSES

The tables below provide a rollforward of the allowance for loan and lease losses (“ALLL”) by portfolio segment for the three months ended September 30, 2017 and 2016 (in thousands):

	June 30, 2017		Provision (Reversals)			Charge-offs			Recoveries		September 30, 2017
One- to four-family residential	$	4,111	$	234		$	(52	)	$	10	$	4,303
Multifamily residential		1,062		(26	)		--			--		1,036
Nonfarm nonresidential		3,991		268			--			--		4,259
Farmland		1,006		42			--			48		1,096
Construction and land development		2,011		135			--			16		2,162
Commercial		4,089		877			(59	)		23		4,930
Consumer		348		354			(265	)		14		451
Purchased credit impaired		465		(21	)		(20	)		21		445
Total	$	17,083	$	1,863		$	(396	)	$	132	$	18,682

	June 30, 2016		Provision (Reversals)			Charge-offs			Recoveries		September 30, 2016
One- to four-family residential	$	3,892	$	132		$	(171	)	$	10	$	3,863
Multifamily residential		779		168			--			--		947
Nonfarm nonresidential		3,146		(143	)		--			10		3,013
Farmland		716		76			--			--		792
Construction and land development		1,569		(65	)		--			2		1,506
Commercial		3,603		295			(5	)		3		3,896
Consumer		174		167			(108	)		17		250
Purchased credit impaired		872		13			(62	)		22		845
Total	$	14,751	$	643		$	(346	)	$	64	$	15,112

The tables below provide a rollforward of the ALLL by portfolio segment for the nine months ended September 30, 2017 and 2016 (in thousands):

	January 1, 2017		Provision (Reversals)			Charge-offs			Recoveries		September 30, 2017
One- to four-family residential	$	3,896	$	512		$	(125	)	$	20	$	4,303
Multifamily residential		962		74			--			--		1,036
Nonfarm nonresidential		3,210		1,049			--			--		4,259
Farmland		863		388			(203	)		48		1,096
Construction and land development		1,791		351			--			20		2,162
Commercial		3,909		1,279			(283	)		25		4,930
Consumer		360		530			(526	)		87		451
Purchased credit impaired		593		(149	)		(65	)		66		445
Total	$	15,584	$	4,034		$	(1,202	)	$	266	$	18,682

	January 1, 2016		Provision (Reversals)			Charge-offs			Recoveries		September 30, 2016
One- to four-family residential	$	3,870	$	301		$	(340	)	$	32	$	3,863
Multifamily residential		665		283			(1	)		--		947
Nonfarm nonresidential		3,599		(587	)		(9	)		10		3,013
Farmland		714		78			--			--		792
Construction and land development		1,456		(11	)		--			61		1,506
Commercial		2,565		1,406			(83	)		8		3,896
Consumer		166		301			(277	)		60		250
Purchased credit impaired		1,515		(106	)		(638	)		74		845
Total	$	14,550	$	1,665		$	(1,348	)	$	245	$	15,112

19

The tables below present the allocation of the ALLL and the related loans receivable balances disaggregated on the basis of impairment method by portfolio segment as of September 30, 2017 and December 31, 2016 (in thousands):

	Allowance for Loan and Lease Losses						Loan Balances
September 30, 2017	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	$	68	$	4,235	$	223	$	7,082	$	383,735	$	2,265
Multifamily residential		--		1,036		--		--		92,837		--
Nonfarm nonresidential		--		4,259		11		8,760		557,700		1,858
Farmland		--		1,096		--		1,174		97,986		29
Construction and land development		--		2,162		--		278		145,348		1,445
Commercial		333		4,597		211		1,586		371,354		524
Consumer		5		446		--		167		36,649		43
Total	$	406	$	17,831	$	445	$	19,047	$	1,685,609	$	6,164

	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

A summary of the activity in the allowance for losses on real estate owned is as follows for the three and nine months ended September 30, 2017 and 2016 (in thousands):

	Three Months Ended					Nine Months Ended
	September 30, 2017		September 30, 2016			September 30, 2017			September 30, 2016
Balance—beginning of period	$	373	$	3,825		$	459		$	4,268
Provisions for estimated losses		14		289			117			302
Losses charged off		--		(3,402	)		(189	)		(3,858	)
Balance—end of period	$	387	$	712		$	387		$	712

6. OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):

	September 30, 2017			December 31, 2016
Land and land improvements	$	10,492		$	10,896
Buildings and improvements		47,035			48,059
Furniture and equipment		13,969			13,126
Automobiles and other		222			222
Total		71,718			72,303
Accumulated depreciation		(20,365	)		(18,254	)
Office properties and equipment—net	$	51,353		$	54,049

Depreciation expense for the nine months ended September 30, 2017 and 2016 was approximately $2.6 million and $2.8 million, respectively.

20

At September 30, 2017, office properties held for sale included six properties with an aggregate carrying value totaling $4.7 million. Office properties held for sale are carried at the lower of carrying amount or fair value less estimated costs to sell. During the nine months ended September 30, 2017, five properties were sold at a net loss of $8,000. During the nine months ended September 30, 2016, two properties were sold resulting in a net gain of $1.1 million. Impairment charges of $279,000 and $640,000 were recognized for the three months ended September 30, 2017 and 2016, respectively, and $634,000 and $987,000 were recognized for the nine months ended September 30, 2017 and 2016, respectively. 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.

7. GOODWILL AND CORE DEPOSIT INTANGIBLES - NET

Goodwill represents the excess of the cost over the fair value of net assets acquired in a business combination. At September 30, 2017, 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 as of September 30, 2017 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 Bank of Hot Springs, Heritage Bank and Metropolitan. These core deposit intangibles are amortized on a straight line basis over their estimated lives ranging from 12 to 13 years.

Changes in the carrying amount and accumulated amortization of the Company’s core deposit intangible for the nine months ended September 30, 2017 and the year ended December 31, 2016, were as follows (in thousands):

	September 30, 2017			December 31, 2016
Balance—beginning of period	$	10,353		$	11,374
Amortization expense		(766	)		(1,021	)
Balance—end of period	$	9,587		$	10,353

The Company’s projected amortization expense for the remainder of 2017 is approximately $0.3 million and approximately $1.0 million in each of the years ending December 31, 2018 through 2022, and $4.3 million thereafter.

8. DEPOSITS

Deposits as of September 30, 2017 and December 31, 2016 are summarized as follows (in thousands):

	September 30, 2017		December 31, 2016
Checking accounts	$	722,702	$	724,137
Money market accounts		216,522		206,388
Savings accounts		163,823		164,653
Certificates of deposit		486,089		548,902
Total	$	1,589,136	$	1,644,080

Overdrafts of checking accounts of $300,000 and $389,000 at September 30, 2017 and December 31, 2016, respectively, have been reclassified for financial reporting and are reflected in net loans receivable on the consolidated statements of financial condition.

As of September 30, 2017 and December 31, 2016, the Bank had $56.1 million and $37.1 million, respectively, of brokered deposits.

The aggregate amount of time deposits in denominations of $100 thousand or more was approximately $259.1 million and $298.3 million at September 30, 2017 and December 31, 2016, respectively. The aggregate amount of time deposits in denominations of $250 thousand or more was approximately $107.9 million and $120.4 million at September 30, 2017 and December 31, 2016, respectively.

21

At September 30, 2017, scheduled maturities of certificates of deposit were as follows (in thousands):

	Amount
Within one year	$	323,813
One to two years		84,498
Two to three years		37,327
Three to four years		18,519
Four to five years		14,670
Over five years		7,262
Total	$	486,089

9. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND FEDERAL FUNDS PURCHASED

Securities sold under agreements to repurchase totaled $21.6 million and $19.1 million at September 30, 2017 and December 31, 2016, respectively. Securities sold under repurchase agreements generally have maturities of one day and are recorded based on the amount of cash received from Bank customers 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 3. The fair value of the collateral pledged to a third party is monitored and additional collateral is pledged or returned, as deemed appropriate.

The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2017 and December 31, 2016 consisted of the following (in thousands):

	September 30, 2017
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 days		Total
Securities sold under agreements to repurchase:
Municipal securities	$	7,544	$	--	$	--	$	--	$	7,544
Residential mortgage-backed securities		14,085		--		--		--		14,085
Total	$	21,629	$	--	$	--	$	--	$	21,629

	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

At September 30, 2017, 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.

10. OTHER BORROWINGS

Other borrowings are summarized as follows (in thousands):

	September 30, 2017		December 31, 2016
Federal Home Loan Bank advances with rates ranging from 1.12% to 5.57% maturing through July 1, 2027	$	359,791	$	129,992
Line of credit with a bank, $14.75 million total credit line, floating rate of 1.95% above the three-month London Interbank Offered Rate (“LIBOR”), reset quarterly, interest payments due quarterly, maturing May 30, 2019		2,400		4,950
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		10,125		17,062
Total	$	372,316	$	152,004

22

Federal Home Loan Bank. At September 30, 2017 and December 31, 2016, FHLB advances included $300.0 million and $70.0 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 residential mortgage loans and a blanket lien on substantially all remaining loans. Additionally, as of September 30, 2017, the Bank has FHLB letters of credit totaling $60.0 million, of which $25.0 million matures in the fourth quarter of 2017 and $35.0 million matures in the first quarter of 2018. The letters of credit were used to secure public deposits and certain other deposits as of September 30, 2017 and 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 50%, a maximum classified asset ratio of 50% and Tier 1 Leverage ratio of 8%. At September 30, 2017, the Company was in compliance with the applicable covenants imposed by the loan agreement.

At September 30, 2017, scheduled maturities of other borrowings were as follows (in thousands):

	Weighted
	Average
	Rate		Amount
Within one year	1.18	%	$	346,997
One to two years	2.73			17,465
Two to three years	2.37			451
Three to four years	2.11			631
Four to five years	2.51			1,336
Over five years	2.71			5,436
Total	1.28	%	$	372,316

11. INCOME TAXES

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

	Nine Months Ended September 30,
	2017		2016
Income tax provision:
Current:
Federal	$	3,935	$	254
State		224		196
Total current		4,159		450
Deferred:
Federal		2,234		4,351
State		1,057		764
Valuation allowance		--		(897	)
Total deferred		3,291		4,218
Total	$	7,450	$	4,668

23

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

	Nine Months Ended September 30,
	2017					2016
Taxes at statutory federal income tax rate	$	8,455		35.0	%	$	6,053		35.0	%
Increase (decrease) resulting from:
Graduated tax rates		--		--			(31	)	(0.2	)
State income tax—net of federal benefits		832		3.4			619		3.6
Valuation allowance—net		--		--			(897	)	(5.2	)
Earnings on life insurance policies		(543	)	(2.2	)		(411	)	(2.4	)
Nontaxable investments		(903	)	(3.7	)		(436	)	(2.5	)
Other—net		(391	)	(1.7	)		(229	)	(1.3	)
Total	$	7,450		30.8	%	$	4,668		27.0	%

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 temporary differences and carryforwards that give rise to deferred tax assets and liabilities are comprised of the following (in thousands):

	September 30, 2017			December 31, 2016
Deferred tax assets:
Allowance for loan and lease losses	$	7,328		$	8,278
Discount on purchased loans		1,395			2,044
Real estate owned		719			263
Section 382 net operating loss carryforward		1,928			1,976
Net operating loss carryforward		--			1,346
Nonaccrual loan interest		1,269			1,471
Unrealized loss on securities available for sale		--			891
Other		1,460			1,923
Total deferred tax assets		14,099			18,192
Deferred tax liabilities:
Office properties		(2,741	)		(2,964	)
Core deposit intangibles		(2,142	)		(2,293	)
Prepaid expenses and other		(1,939	)		(1,316	)
Total deferred tax liabilities		(6,822	)		(6,573	)
Net deferred tax asset	$	7,277		$	11,619

24

A financial institution may, for federal income tax purposes, carryback net operating losses (“NOL”) to the preceding two taxable years and forward to the succeeding 20 taxable years. At September 30, 2017, the Company had a $5.5 million NOL for federal income tax purposes that will be carried forward, comprised 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. The Company does not have any remaining non-Section 382 federal NOL carryforwards. At September 30, 2017, the Company does not have any remaining unused NOL for Arkansas state income tax purposes.

Specifically exempted from deferred tax recognition requirements are bad debt reserves for tax purposes of U.S. savings and loans in the institution’s base year, as defined under Code Section 593(g)(2)(A)(ii). Base year reserves totaled approximately $4.2 million. Consequently, a deferred tax liability of approximately $1.6 million related to such reserves was not provided for in the consolidated statements of financial condition at September 30, 2017 or December 31, 2016. Payment of dividends to stockholders out of retained earnings deemed to have been made out of earnings previously set aside as bad debt reserves may create taxable income to the Bank. No provision has been made for income tax on such a distribution as the Bank does not anticipate making such distributions.

Prior to the quarter ended June 30, 2016, the Company had certain deferred tax assets related to net unrealized built-in losses (“NUBILs”) established under Code 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 (“BSF Holdings”). 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 periods ended September 30, 2017 or 2016. The Company files consolidated income tax returns in the U.S. federal jurisdiction and the states of Arkansas and Missouri while the Bank files in the state of Oklahoma. The Company is subject to U.S. federal and state income tax examinations by tax authorities for tax years ended December 31, 2014 and forward.

12. STOCK BASED COMPENSATION

The Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) was approved by the Company’s stockholders on April 29, 2011 and became effective May 3, 2011. An amendment of the 2011 Plan was approved by the Company’s stockholders on May 25, 2016. The objectives of the 2011 Plan are to optimize the profitability and growth of the Company through incentives that are consistent with the Company’s goals and that align the personal interests of participants with 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.

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

A summary of the stock option activity in the Company’s 2011 Plan for the nine months ended September 30, 2017, is presented below. No options have been granted since 2012.

	Shares Underlying Awards		Weighted Average Exercise Price
Outstanding—January 1, 2017		198,563	$	6.73
Granted		--	$	--
Exercised		55,442	$	5.54
Forfeited		--	$	--
Outstanding— September 30, 2017		143,121	$	7.19
Exercisable— September 30, 2017		135,899	$	7.09

25

The weighted average remaining contractual life of the outstanding options was 1.3 years and the aggregate intrinsic value of the options was approximately $440,000 at September 30, 2017. The weighted average remaining contractual life of options exercisable was 1.3 years and the aggregate intrinsic value of the exercisable options was approximately $431,000 at September 30, 2017.

As of September 30, 2017, there was $5,000 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 0.2 years. Compensation expense attributable to option awards totaled approximately $7,000 and $24,000 for the three month periods ended September 30, 2017 and 2016, respectively, and approximately $28,000 and $92,000 for the nine month periods ended September 30, 2017 and 2016, 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 RSU activity in the Company’s 2011 Plan for the nine months ended September 30, 2017, is presented below:

	Restricted Stock Units			Weighted Average Grant Date Fair Value
Outstanding—January 1, 2017		262,669		$	8.41
Granted		47,766		$	10.09
Vested		(83,470	)	$	8.20
Forfeited		(6,440	)	$	8.75
Outstanding— September 30, 2017		220,525		$	8.85

As of September 30, 2017, there was $968,000 of total unrecognized compensation costs related to nonvested RSUs under the 2011 Plan. The cost is expected to be recognized over a weighted-average period of 1.4 years. Compensation expense attributable to awards of RSUs totaled approximately $210,000 and $254,000 for the three month periods ended September 30, 2017 and 2016, respectively, and approximately $717,000 and $940,000 for the nine months ended September 30, 2017 and 2016, respectively.

Change in Control. Pursuant to the 2011 Plan, all unvested stock options and restricted stock units will vest in full upon the occurrence of a change in control transaction. In accordance with the terms of the Merger Agreement, all equity awards outstanding under the 2011 Plan at the effective time of the Merger, whether or not vested, will be cancelled and automatically converted into the right to receive a cash amount equal to (i) in the case of options, the aggregate number of shares of Company common stock subject to such option multiplied by the difference of $10.28 and the exercise price of such option and (ii) in the case of restricted stock units, $10.28 per unit.

Performance Awards. In January 2017, 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 Plan for performance year 2017. PSUs are subject to the Company’s achievement of specified performance criteria for the year ended December 31, 2017. The value of the incentive can range from zero to 40% of the grantee’s base pay and will be paid 25% in cash and 75% in RSUs after the Compensation Committee or the Board 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 past performance awards are reflected in the RSU table above. The Company began accruing estimated compensation cost for performance awards as of the date of the Board’s action, which was determined to be the service inception date. Compensation expense recognized on the stock portion of performance awards totaled approximately $61,000 and $8,000 for the three month periods ended September 30, 2017 and 2016, respectively, and approximately $91,000 and $23,000 for the nine month periods ended September 30, 2017 and 2016, respectively.

The terms of the 2017 performance-based incentive awards provide that, if a change in control occurs during 2017, the 2017 performance-based incentive awards will become payable 100% in cash based on the Company’s core earnings per share through the last day of the calendar month ending prior to the change in control, with the performance measures of core earnings per share and cash payouts applicable to the awards prorated through that date.

26

13. EARNINGS PER SHARE

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Basic weighted average shares outstanding		37,718,303		37,595,454		37,693,009		37,634,670
Effect of dilutive securities		202,713		211,965		201,899		197,558
Diluted weighted average shares outstanding		37,921,016		37,807,419		37,894,908		37,832,228

There were no antidilutive shares for the three or nine months ended September 30, 2017 or 2016.

14. 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 September 30, 2017 and December 31, 2016, 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. government agency securities, residential mortgage-backed securities, municipal bonds and corporate debt securities. Inputs used for valuing Level 2 securities include observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels and market consensus prepayment speeds, among other things. Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models. No securities were included in the Recurring Level 3 category at or for the periods ended September 30, 2017 or December 31, 2016.

27

The following table presents major categories of assets measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 (in thousands):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2017
Available for sale investment securities:
U.S. Treasuries and government agencies	$	4,973	$	--	$	4,973	$	--
Municipal securities		94,472		--		94,472		--
Residential mortgage-backed securities		100,727		--		100,727		--
Corporate debt securities		5,220		--		5,220		--
Total	$	205,392	$	--	$	205,392	$	--
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	$	--

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

Impaired Loans Receivable

Loans which meet certain criteria are evaluated individually for impairment. A loan is considered impaired when, based upon current information and events, it is probable the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.  The majority of the Bank’s impaired loans at September 30, 2017 and December 31, 2016 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, selling costs were estimated at 8%. Fair value adjustments are made by partial charge-offs or 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 nine months ended September 30, 2017 and 2016 were $117,000, and $302,000, respectively.

The following table presents major categories of assets measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016 (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)
September 30, 2017
Impaired loans	$	2,832	$	--	$	--	$	2,832
REO, net		645		--		--		645
December 31, 2016
Impaired loans	$	7,105	$	--	$	--	$	7,105
REO, net		963		--		--		963

28

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

	September 30, 2017				December 31, 2016
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
FINANCIAL ASSETS:
Level 1 inputs:
Cash and cash equivalents	$	80,571	$	80,571	$	78,789	$	78,789
Level 2 inputs:
Held to maturity securities		42,879		42,446		26,977		25,090
Interest-bearing time deposits in banks		4,075		4,095		4,571		4,572
Other investment securities		24,802		24,802		13,759		13,759
Loans held for sale		7,258		7,258		8,954		8,954
Cash surrender value of life insurance		57,794		57,794		57,267		57,267
Accrued interest receivable		8,027		8,027		7,006		7,006
Level 3 inputs:
Loans receivable—net		1,692,463		1,696,254		1,540,805		1,551,099
FINANCIAL LIABILITIES:
Level 1 inputs:
Securities sold under agreement to repurchase		21,629		21,629		19,114		19,114
Level 2 inputs:
Checking, money market and savings accounts		1,103,047		1,103,047		1,095,178		1,095,178
Other borrowings		372,316		372,124		152,004		151,605
Accrued interest payable		640		640		314		314
Level 3 inputs:
Certificates of deposit		486,089		484,958		548,902		548,520

For cash and cash equivalents, 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 14. 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 September 30, 2017 and December 31, 2016. 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.

29

16. 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.

However, three shareholder lawsuits have been filed against the Company in connection with the proposed Merger with Arvest. The first action, Owens and Hurliman v. Massey, et al, Case No. 60CV-17-5022, is a putative class action that was first filed on September 11, 2017 in the Circuit Court of Pulaski County, Arkansas. An amended complaint was filed on October 13, 2017, and the action was removed to the United States District Court for the Eastern District of Arkansas on November 1, 2017. The complaint names the individual members of the Company board, as well as BSF Holdings, as defendants. The complaint generally alleges, among other things, that members of the Company board breached their fiduciary duties to the Company’s shareholders by (i) agreeing to sell the Company for an inadequate price, (ii) agreeing to inappropriate deal protection provisions in the merger agreement that may preclude the Company from soliciting any potential acquirers and limit the ability of the Company board to engage in discussions or negotiations for superior acquisition proposals, and (iii) disseminating a proxy statement that is materially incomplete and misleading. The complaint also alleges that Richard Massey and BSF Holdings, in their capacities as shareholders of the Company, breached fiduciary duties owed by them to the minority shareholders of the Company. The complaint seeks certification by the court as a shareholders’ class action, approval of the plaintiffs as proper plaintiff class representatives, injunctive relief enjoining the defendants from consummating the merger unless and until the Company (a) adopts and implements a procedure or process to obtain a merger agreement providing the best possible terms for shareholders and (b) supplements its proxy disclosure (or, in the event the merger is consummated, rescinding the merger or awarding rescissory damages). The complaint also seeks to recover costs and disbursement from the defendants, including attorneys’ fees and experts’ fees.

The second action, Reichert v. Bear State Financial, Inc., et al, Case No. 4:17-cv-654, was filed on October 11, 2017 in the United States District Court for the Eastern District of Arkansas. The third action, Parshall v. Bear State Financial, Inc., et al, Case No. 4:17-cv-669, is a putative class action filed on October 13, 2017 in the United States District Court for the Eastern District of Arkansas. The Reichert complaint names the Company and the individual members of the Company’s board as defendants. The Parshall complaint names the Company, the Bank, the individual members of the Company board and Arvest and Acquisition Sub as defendants. The Reichert and Parshall complaints generally allege, among other things, that defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by disseminating materially deficient and misleading disclosures in the proxy statement dated October 5, 2017 relating to the proposed Merger. The Reichert and Parshall complaints seek injunctive relief enjoining the defendants from consummating the Merger unless and until the Company discloses the material information identified in the complaints. The complaints also seek to recover rescissory damages against the defendants and costs associated with bringing the actions, including attorneys’ fees and experts’ fees.

The Company believes these allegations are without merit and intends to defend vigorously against these allegations. At this time, the Company is unable to state whether the likelihood of an unfavorable outcome of the lawsuits is probable or remote. The Company is also unable to provide an estimate of the range or amount of potential loss if the outcome should be unfavorable

17. REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking regulators. The Bank is a state chartered bank jointly supervised by the Arkansas State Bank Department (“ASBD”) and the Board of Governors of the Federal Reserve System (“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.

30

The actual and required capital amounts (in thousands) and ratios of the Company (Consolidated) and the Bank as of September 30, 2017 and December 31, 2016 are presented in the following tables:

											To be Categorized
											as Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes*					Action Provisions
September 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Capital to Adjusted Average Assets
Consolidated	$	201,385		9.16	%	$	87,932		4.00	%		N/A		N/A
Bear State Bank		211,433		9.62	%		87,905		4.00	%	$	109,881		5.00	%
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated	$	201,385		10.84	%	$	83,631		4.50	%		N/A		N/A
Bear State Bank		211,433		11.38	%		83,571		4.50	%	$	120,714		6.50	%
Tier I Capital to Risk-Weighted Assets
Consolidated	$	201,385		10.84	%	$	111,508		6.00	%		N/A		N/A
Bear State Bank		211,433		11.38	%		111,428		6.00	%	$	148,571		8.00	%
Total Capital to Risk-Weighted Assets
Consolidated	$	220,067		11.84	%	$	148,677		8.00	%		N/A		N/A
Bear State Bank		230,115		12.39	%		148,571		8.00	%	$	185,714		10.00	%
December 31, 2016
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%.

Dividends. The Company may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause its 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 pay to the parent company in any calendar year without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the FRB, the maximum dividend that may be paid without prior approval by the FRB is the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years.  At September 30, 2017, the Bank had approximately $20.7 million available for payment of dividends to the Company without prior regulatory approval from the ASBD and approximately $21.0 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.

31

Repurchase Program. During the three and nine months ended September 30, 2017, the Company did not repurchase any shares of its common stock. The Company’s share repurchase program was initially approved by the Board of Directors on March 13, 2015 and 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 September 30, 2017, the Company had $2 million remaining under the Repurchase Program.

18. SUBSEQUENT EVENTS

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

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

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

OVERVIEW

The Company’s net income increased 8.3% to $5.1 million, or $0.14 per diluted common share, for the three months ended September 30, 2017 compared to $4.7 million or $0.13 per diluted common share for the three months ended September 30, 2016. The Company’s net income increased 32.3% to $16.7 million, or $0.44 per diluted common share, for the nine months ended September 30, 2017 compared to $12.6 million, or $0.33 per diluted common share, for the nine months ended September 30, 2016. Factors that impacted the increases in net income for the comparative periods include:

● Increased net interest income to $19.1 million and $56.6 million for the three and nine months ended September 30, 2017, respectively, compared to $16.8 million and $50.4 million for the same periods in 2016;

● Improved operating efficiency as indicated by an improvement in the efficiency ratio to 61% and 60% for the three and nine months ended September 30, 2017, respectively, compared to 63% and 70% for the same periods in 2016;

● Improved efficiency and cost-effectiveness of our operations in 2017 by consolidating three retail branch locations and transitioning three branch locations to personalized technology centers equipped with ITMs during the nine months ended September 30, 2017; and

● Improved nonperforming assets to total assets ratio to 0.85% at September 30, 2017 compared to 0.94% at December 31, 2016 and 0.95% at September 30, 2016.

MERGER

On August 22, 2017, the Company and the Bank entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Arvest Bank, an Arkansas banking corporation (“Arvest”), and Arvest Acquisition Sub, Inc., an Arkansas corporation and a wholly-owned subsidiary of Arvest (“Acquisition Sub”), pursuant to which Arvest will acquire the Company by merging Acquisition Sub with and into the Company with the Company surviving as a wholly-owned subsidiary of Arvest (the “Merger”).

Pursuant to the Merger Agreement, each share of the Company’s common stock issued and outstanding as of the effective time of the Merger will be converted into a right to receive $10.28 per share, payable in cash. The Merger is expected to close in the fourth quarter of 2017 or first quarter of 2018 and is subject to customary closing conditions, including both regulatory approval and approval by the Company’s shareholders.

CRITICAL ACCOUNTING POLICIES

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

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

32

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.

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.

33

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

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2017 Compared to Three and Nine Months Ended September 30, 2016

Net Interest Income. The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest earning assets, such as loans and investments, and interest expense on interest bearing liabilities, such as deposits and borrowings. Net interest income for the third quarter of 2017 was $19.1 million compared to $16.8 million for the same period in 2016. Net interest income for the nine months ended September 30, 2017 was $56.6 million compared to $50.4 million for the same period in 2016. The increases in net interest income resulted from changes in interest income and interest expense discussed below.

Interest Income. Interest income for the third quarter of 2017 was $22.1 million compared to $18.8 million for the same period in 2016. Interest income for the nine months ended September 30, 2017 was $64.3 million compared to $56.2 million for the same period in 2016. The increases in interest income for the three and nine months ended September 30, 2017 compared to the same periods in 2016 were primarily due to increases in the average balances of and the yields earned on loans receivable and investment securities.

Interest Expense.   Interest expense for the third quarter of 2017 was $3.0 million compared to $2.0 million for the same period in 2016. Interest expense for the nine months ended September 30, 2017 was $7.7 million compared to $5.8 million for the same period in 2016. The increases in interest expense for the three and nine months ended September 30, 2017 compared to the same periods in 2016 were primarily due to an increase in the average balance of other borrowings and an increase in the average rate paid on deposit accounts.

34

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

	Three Months Ended September 30,
	2017 vs. 2016
	Increase (Decrease) Due to
	Volume		Rate			Rate/ Volume			Total Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	2,163	$	190		$	23		$	2,376
Investment securities		354		254			93			701
Other interest-earning assets		34		89			45			168
Total interest-earning assets		2,551		533			161			3,245
Interest expense:
Deposits		24		167			2			193
Other borrowings		784		(10	)		(23	)		751
Total interest-bearing liabilities		808		157			(21	)		944
Net change in net interest income	$	1,743	$	376		$	182		$	2,301

	Nine Months Ended September 30,
	2017 vs. 2016
	Increase (Decrease) Due to
	Volume		Rate			Rate/ Volume			Total Increase (Decrease)
	(In Thousands)
Interest income:
Loans receivable	$	5,919	$	112		$	12		$	6,043
Investment securities		974		661			220			1,855
Other interest-earning assets		64		124			34			222
Total interest-earning assets		6,957		897			266			8,120
Interest expense:
Deposits		132		345			10			487
Other borrowings		1,825		(164	)		(292	)		1,369
Total interest-bearing liabilities		1,957		181			(282	)		1,856
Net change in net interest income	$	5,000	$	716		$	548		$	6,264

35

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

	Three Months Ended September 30,
	2017							2016
	Average Balance		Interest		Average Yield/ Cost			Average Balance		Interest		Average Yield/ Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)	$	1,706,952	$	20,184		4.69	%	$	1,522,106	$	17,808		4.64	%
Investment securities(2)		276,578		1,676		2.40			202,868		975		1.91
Other interest-earning assets		66,364		234		1.40			43,918		66		0.60
Total interest-earning assets		2,049,894		22,094		4.28			1,768,892		18,849		4.23
Noninterest-earning assets		196,437							212,690
Total assets	$	2,246,331						$	1,981,582
Interest-bearing liabilities:
Deposits	$	1,411,163		1,855		0.52		$	1,395,501		1,662		0.47
Other borrowings		354,199		1,103		1.24			109,751		352		1.27
Total interest-bearing liabilities		1,765,362		2,958		0.66			1,505,252		2,014		0.53
Noninterest-bearing deposits		225,383							239,886
Noninterest-bearing liabilities		7,027							4,686
Total liabilities		1,997,772							1,749,824
Stockholders' equity		248,559							231,758
Total liabilities and stockholders' equity	$	2,246,331						$	1,981,582
Net interest income			$	19,136						$	16,835
Net earning assets	$	284,532						$	263,640
Interest rate spread						3.62	%						3.70	%
Net interest margin						3.70	%						3.78	%
Ratio of interest-earning assets to Interest-bearing liabilities						116.12	%						117.51	%

	Nine Months Ended September 30,
	2017							2016
	Average Balance		Interest		Average Yield/ Cost			Average Balance		Interest		Average Yield/ Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)	$	1,658,587	$	59,055		4.76	%	$	1,492,010	$	53,012		4.75	%
Investment securities(2)		265,549		4,788		2.41			199,324		2,933		1.97
Other interest-earning assets		52,218		452		1.16			40,863		230		0.75
Total interest-earning assets		1,976,354		64,295		4.35			1,732,197		56,175		4.34
Noninterest-earning assets		200,409							214,644
Total assets	$	2,176,763						$	1,946,841
Interest-bearing liabilities:
Deposits	$	1,420,299		5,272		0.50		$	1,386,540		4,785		0.46
Other borrowings		288,140		2,396		1.11			103,764		1,027		1.32
Total interest-bearing liabilities		1,708,439		7,668		0.60			1,490,304		5,812		0.52
Noninterest-bearing deposits		219,831							225,905
Noninterest-bearing liabilities		6,092							3,043
Total liabilities		1,934,362							1,719,252
Stockholders' equity		242,401							227,589
Total liabilities and stockholders' equity	$	2,176,763						$	1,946,841
Net interest income			$	56,627						$	50,363
Net earning assets	$	267,915						$	241,893
Interest rate spread						3.75	%						3.82	%
Net interest margin						3.83	%						3.89	%
Ratio of interest-earning assets to Interest-bearing liabilities						115.68	%						116.23	%

(1) Includes nonaccrual loans.

(2) Includes FHLB and FRB stock.

36

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 $1.9 million and $0.6 million were required for the three months ended September 30, 2017 and 2016, respectively, and $4.0 million and $1.7 million were required for the nine months ended September 30, 2017 and 2016, respectively, to maintain the ALLL at an adequate level. Management determined the necessity of the provision and the amount thereof taking into consideration (i) loans originated by the Bank during the period, (ii) changes in the overall portfolio of nonperforming and classified loans of the Bank, (iii) the credit quality of the Bank’s loan portfolio, (iv) ALLL coverage of classified loans and (v) discount balance of acquired loans. The increase in the provision was primarily attributable to loan originations and migration of acquired loans from the purchased loan portfolio to the originated loan portfolio. The ALLL as a percentage of loans receivable was 1.09% at September 30, 2017 and 1.00% at December 31, 2016. The ALLL as a percentage of nonaccrual loans was 104.56% at September 30, 2017 compared to 89.69% at December 31, 2016. The ALLL as a percentage of classified loans was 45.98% at September 30, 2017 compared to 29.48% at December 31, 2016. See “Allowance for Loan and Lease Losses” in the “Asset Quality” section. A quarterly review is completed on purchased credit impaired (“PCI”) loans to determine if changes in estimated cash flows have occurred. Subsequent decreases in the amount expected to be collected may result in a provision for loan and lease losses with a corresponding increase in the ALLL.

Noninterest Income. Noninterest income is generated primarily through deposit account fee income, profit on sale of loans, and earnings on life insurance policies. Total noninterest income of $4.2 million for the three months ended September 30, 2017 decreased from $4.3 million for the same period in 2016. Total noninterest income of $13.1 million for the nine months ended September 30, 2017 increased from $12.3 million for the same period in 2016. The decrease in the three month comparison period was primarily due to a decrease in gain on sales of loans due to a decrease in the number of loans sold during the quarter, slightly offset by an increase in deposit fee income. The increase in the nine month comparison period was primarily due to increases in deposit fee income and earnings on bank owned life insurance, offset by a decrease in gain on sales of loans.

Noninterest Expense. Noninterest expense consists primarily of employee compensation and benefits, office occupancy expense, data processing expense and other operating expense. Total noninterest expense for the three months ended September 30, 2017 was $14.3 million, which was an increase of $0.9 million or 6.4% from $13.4 million during the same period in 2016. Total noninterest expense for the nine months ended September 30, 2017 was $41.5 million, which was a decrease of $2.2 million or 5.1% from $43.7 million during the same period in 2016. The variances in certain noninterest expense items are further explained in the following paragraphs.

Salaries and Employee Benefits. Salaries and employee benefits decreased $0.7 million and $2.0 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The decreases in salaries expense for the three and nine months ended September 30, 2017 compared to the same periods in 2016 were primarily due to a decrease in the average number of full time equivalent employees. Salaries expense for the nine months ended September 30, 2017 included $1.2 million of severance expense, primarily due to severance of $0.8 million accrued upon the departure of our former CEO in January 2017. The changes in the composition of this line item are presented below (in thousands):

	Three Months Ended September 30,							Nine Months Ended September 30,
	2017		2016		Change			2017		2016		Change
Salaries	$	5,620	$	6,170	$	(550	)	$	17,582	$	18,886	$	(1,304	)
Payroll taxes		375		438		(63	)		1,408		1,646		(238	)
Insurance		487		572		(85	)		1,497		1,710		(213	)
401(k) plan expenses		98		106		(8	)		296		294		2
Other retirement plans		51		45		6			143		130		13
Stock compensation		278		286		(8	)		836		1,055		(219	)
Other		4		1		3			5		4		1
Total	$	6,913	$	7,618	$	(705	)	$	21,767	$	23,725	$	(1,958	)

Other Noninterest Expense. Other noninterest expense increased $1.5 million and $0.7 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The increase in other noninterest expense for the three and nine month comparative periods was primarily related to expenses of $1.3 million associated with the Company’s pending transaction with Arvest, partially offset by decreases in certain expenses related to the Company’s efforts to improve its operational efficiency and the decrease in the number of branches.

37

Income Taxes. The provision for income taxes was $2.1 million, or an effective tax rate of 28.8%, and $7.5 million, or an effective tax rate of 30.8%, for the three and nine months ended September 30, 2017, respectively, compared to $2.4 million, or an effective tax rate of 33.5%, and $4.7 million, or an effective tax rate of 27.0%, for the same periods in 2016. Income tax provisions decreased for the third quarter of 2017 compared to the third quarter of 2016, primarily due to a tax rate adjustment of the federal deferred tax asset and increased nontaxable interest income. Income tax provisions for the nine months ended September 30, 2017 increased compared to the same period in 2016 primarily due to an increase in taxable income in 2017 partially offset by the recording of a valuation allowance reversal of $897,000 on deferred tax assets in the second quarter of 2016.

CHANGES IN FINANCIAL CONDITITION

Loans Receivable. Changes in loan composition between September 30, 2017 and December 31, 2016, are presented in the following table (dollars in thousands).

	September 30,			December 31,			Increase
	2017			2016			(Decrease)			% Change
One- to four-family residential	$	393,082		$	389,107		$	3,975			1.0	%
Multifamily residential		92,837			92,460			377			0.4
Nonfarm nonresidential		568,318			495,173			73,145			14.8
Farmland		99,189			94,018			5,171			5.5
Construction and land development		147,071			125,785			21,286			16.9
Total real estate loans		1,300,497			1,196,543			103,954			8.7
Commercial		373,464			323,096			50,368			15.6
Consumer		36,859			36,265			594			1.6
Total loans receivable		1,710,820			1,555,904			154,916			10.0
Unearned discounts and net deferred loan costs		325			485			(160	)		(33.0	)
Allowance for loan and lease losses		(18,682	)		(15,584	)		(3,098	)		19.9
Loans receivable, net	$	1,692,463		$	1,540,805		$	151,658			9.8	%

Total loans receivable increased $154.9 million to $1.71 billion at September 30, 2017, compared to $1.56 billion at December 31, 2016. The change in the Bank’s loan portfolio was primarily due to increases in nonfarm nonresidential and 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 period.

38

ASSET QUALITY

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

	September 30, 2017					December 31, 2016
	Net (2)		% Total Assets			Net (2)		% Total Assets			Increase (Decrease)
Nonaccrual Loans:
One- to four-family residential	$	6,891		0.30	%	$	6,709		0.33	%	$	182
Nonfarm nonresidential		8,128		0.35	%		5,177		0.25	%		2,951
Farmland		1,174		0.05	%		783		0.04	%		391
Construction and land development		207		0.01	%		463		0.02	%		(256	)
Commercial		1,300		0.06	%		4,071		0.20	%		(2,771	)
Consumer		167		0.01	%		173		0.01	%		(6	)
Total nonaccrual loans		17,867		0.78	%		17,376		0.85	%		491
Accruing loans 90 days or more past due		--		--			--		--			--
Real estate owned, net		1,461		0.07	%		1,945		0.09	%		(484	)
Total nonperforming assets		19,328		0.85	%		19,321		0.94	%		7
Performing restructured loans		1,180		0.05	%		4,804		0.23	%		(3,624	)
Total nonperforming assets and performing restructured loans (1)	$	20,508		0.90	%	$	24,125		1.17	%	$	(3,617	)

(1) The table does not include substandard loans which were judged not to be impaired totaling $21.6 million at September 30, 2017 and $30.7 million at December 31, 2016 or acquired ASC 310-30 purchased credit impaired loans which are considered performing.

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

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

	September 30, 2017					December 31, 2016					Increase (Decrease)
	Balance		Percentage of Total			Balance		Percentage of Total			Balance			Percentage of Total
Bankruptcy or foreclosure	$	3,831		21.4	%	$	1,442		8.3	%	$	2,389			13.1	%
Over 90 days past due		6,331		35.4			5,784		33.3			547			2.1
30-89 days past due		1,847		10.4			1,027		5.9			820			4.5
Not past due		5,858		32.8			9,123		52.5			(3,265	)		(19.7	)
	$	17,867		100.0	%	$	17,376		100.0	%	$	491			--

The following table presents nonaccrual loan activity for the nine months ended September 30, 2017 and 2016 (in thousands):

	Nine Months Ended September 30,
	2017			2016
Balance of nonaccrual loans—beginning of period	$	17,376		$	19,340
Loans added to nonaccrual status		10,691			5,343
Net cash payments		(4,546	)		(3,653	)
Loans returned to accrual status		(3,932	)		(2,099	)
Charge-offs to the ALLL		(337	)		(344	)
Transfers to REO		(1,385	)		(1,099	)
Balance of nonaccrual loans—end of period	$	17,867		$	17,488

39

Real Estate Owned. Changes in the composition of real estate owned during the period ended September 30, 2017 are presented in the following table (dollars in thousands).

	January 1, 2017		Additions		Fair Value Adjustments			Net Sales Proceeds(1)			Net Gain		September 30, 2017
One- to four-family residential	$	904	$	1,359	$	(29	)	$	(1,526	)	$	138	$	846
Land		368		207		(86	)		(115	)		35		409
Nonfarm nonresidential		673		--		(2	)		(561	)		96		206
Total	$	1,945	$	1,566	$	(117	)	$	(2,202	)	$	269	$	1,461

(1) Net sales proceeds include $24,000 of loans made by the Bank to facilitate the sale of real estate owned.

Classified Assets. Federal regulations require that each financial institution risk rate their classified assets into three classification categories - substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is generally considered uncollectible and of such little value that continuance as an asset is not warranted. As of September 30, 2017 and December 31, 2016, the Bank did not have any assets classified as doubtful or loss.  

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

	September 30, 2017			December 31, 2016			September 30, 2016
Nonaccrual loans	$	17,867		$	17,376		$	17,488
Accruing classified loans		22,763			35,495			28,716
Classified loans		40,630			52,871			46,204
Real estate owned		1,461			1,945			1,576
Total classified assets	$	42,091		$	54,816		$	47,780
Texas Ratio (1)		8.4	%		8.8	%		8.8	%
Classified Assets Ratio (2)		18.3	%		24.9	%		22.1	%

(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.

40

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.

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 $18.7 million to be appropriate based on evaluations of the management of the Bank of the loan portfolio and the losses inherent in the loan portfolio as of September 30, 2017. 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.

41

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

	Nine Months Ended September 30,
	2017			2016
	(Dollars in Thousands)
Total loans outstanding at end of period	$	1,710,820		$	1,514,650
Average loans outstanding	$	1,658,587		$	1,492,010
Allowance at beginning of period	$	15,584		$	14,550
Charge-offs:
One- to four-family residential		(125	)		(340	)
Multifamily residential		--			(1	)
Nonfarm nonresidential		--			(9	)
Farmland		(203	)		--
Construction and land development		--			--
Commercial		(283	)		(83	)
Consumer (1)		(526	)		(277	)
Purchased credit impaired		(65	)		(638	)
Total charge-offs		(1,202	)		(1,348	)
Recoveries:
One- to four-family residential		20			32
Multifamily residential		--			--
Nonfarm nonresidential		--			10
Farmland		48			--
Construction and land development		20			61
Commercial		25			8
Consumer (1)		87			60
Purchased credit impaired		66			74
Total recoveries		266			245
Net charge-offs		(936	)		(1,103	)
Total provisions for losses		4,034			1,665
Allowance at end of period	$	18,682		$	15,112
ALLL as a percentage of total loans outstanding at end of period		1.09	%		1.00	%
Net loans charged-off as a percentage of average loans outstanding		0.08	%		0.10	%
ALLL as a percentage of nonaccrual loans		104.56	%		86.41	%

(1) Consumer loan charge-offs include overdraft charge-offs of $353,000 and $237,000 for the nine months ended September 30, 2017 and 2016, respectively. Consumer loan recoveries include recoveries of overdraft charge-offs of $84,000 and $57,000 for the nine months ended September 30, 2017 and 2016, respectively.

42

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

	September 30, 2017					December 31, 2016
	Amount		Percentage of Loans			Amount		Percentage of Loans
	(Dollars in Thousands)
One-to-four family residential	$	4,303		22.84	%	$	3,896		24.83	%
Multifamily residential		1,036		5.43			962		5.94
Nonfarm nonresidential		4,259		33.11			3,210		31.34
Farmland		1,096		5.80			863		6.04
Construction and land development		2,162		8.51			1,791		7.99
Commercial		4,930		21.80			3,909		20.73
Consumer		451		2.15			360		2.33
Purchased credit impaired		445		0.36			593		0.80
Total	$	18,682		100.00	%	$	15,584		100.00	%

INVESTMENT SECURITIES

The following table sets forth the carrying values of the Company's investment securities (in thousands):

	September 30, 2017		December 31, 2016		Increase (Decrease)
Available for Sale
U.S. Treasuries and government agencies	$	4,973	$	5,631	$	(658	)
Municipal securities		94,472		87,050		7,422
Residential mortgage-backed securities		100,727		95,795		4,932
Corporate debt securities		5,220		--		5,220
Total available for sale	$	205,392	$	188,476	$	16,916
Held to Maturity
Municipal securities	$	42,879	$	26,977	$	15,902
Total held to maturity	$	42,879	$	26,977	$	15,902

The increase in investment securities was due to purchases made to provide a better risk adjusted return.  The overall yield of the investment portfolio improved to 2.63% at September 30, 2017 compared to 2.52% at December 31, 2016 and 2.22% at September 30, 2016.

DEPOSITS

Deposits. Changes in the composition of deposits between September 30, 2017 and December 31, 2016, are presented in the following table (dollars in thousands).

	September 30, 2017		December 31, 2016		Increase (Decrease)			% Change
Checking accounts	$	722,702	$	724,137	$	(1,435	)		(0.2	)%
Money market accounts		216,522		206,388		10,134			4.9
Savings accounts		163,823		164,653		(830	)		(0.5	)
Certificates of deposit		486,089		548,902		(62,813	)		(11.4	)
Total deposits	$	1,589,136	$	1,644,080	$	(54,944	)		(3.3	)%

The decrease in certificates of deposit was primarily related to decreases in retail and public fund certificates of deposit. The increase in money market accounts was primarily due to fluctuations in existing customers’ account balances.

43

OTHER LIABILITIES

Other liabilities increased $4.6 million between September 30, 2017 and December 31, 2016 primarily due to an increase of $2.9 million in income taxes payable related to an increase in taxable income in 2017 and the incurrence of liabilities totaling $0.5 million associated with the Company’s pending Merger with Arvest.

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 September 30, 2017 and December 31, 2016, the Bank’s off-balance sheet arrangements principally included lending commitments, which are described below (in thousands). At September 30, 2017, the Company had no interests in non-consolidated special purpose entities.

	September 30, 2017		December 31, 2016
Commitments to extend or originate loans	$	19,889	$	80,265
Rate lock agreements with customers		11,829		14,079
Funded mortgage loans committed to sell		7,258		8,954
Unadvanced portion of construction loans		61,822		75,365
Unused lines of credit		124,513		132,796
Standby letters of credit		3,726		2,870
Overdraft protection limits		16,213		16,585

Total unfunded commitments to originate loans for sale and the related commitments to sell included above totaled $11.8 million at September 30, 2017, all of which meet the definition of a derivative financial instrument. The related asset and liability are considered immaterial at September 30, 2017.

Historically, a very small percentage of predetermined overdraft limits have been used. At September 30, 2017, overdrafts of accounts with Bounce Protection™ represented usage of 1.85% of the limit.

Liquidity and Capital Resources

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

44

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 September 30, 2017, the Bank’s unused borrowing availability primarily consisted of (1) $216.8 million of available borrowing capacity with the FHLB, (2) $127.6 million of investment securities available to pledge for federal funds or other borrowings and (3) $103.0 million of available unsecured federal funds borrowing lines. In addition, at September 30, 2017, the Company had available borrowing capacity of $12.4 million with an unaffiliated bank.

At September 30, 2017, the Company’s consolidated liquidity ratio was approximately 11.15% 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 24.15%, 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 September 30, 2017, the Company’s leverage, common equity tier 1, tier 1 risk-based and total risk-based capital ratios were 9.16%, 10.84%, 10.84% and 11.84%, respectively, compared to capital adequacy requirements of 4%, 4.5%, 6% and 8%, respectively. See Note 17 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 50%, a maximum classified asset ratio of 50% and a minimum Tier 1 leverage ratio of 8% for the Bank. At September 30, 2017, the Company was in compliance with the applicable covenants imposed by the loan agreement.

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the SEC and other oral and written statements or reports by the Company, the Bank or the management thereof, include certain forward-looking statements that are intended to come within the safe harbor afforded by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements presented herein with respect to, among other things, the Company’s or the Bank’s plans, objectives, expectations and intentions, the Merger, anticipated changes in noninterest expenses in future periods, changes in earnings, impact of outstanding off-balance sheet commitments, sources of liquidity and that we have sufficient liquidity, the sufficiency of the allowance for loan losses, expected loan, asset, and earnings growth, growth in new and existing customer relationships, potential resolution of litigation or other disputes, our intentions with respect to our investment securities, the payment of dividends and financial and other goals and plans are forward looking. These forward-looking statements include, without limitation, statements relating to the terms and closing of the proposed transaction between the Company and Arvest.  Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those risks previously disclosed in the Company’s filings with the SEC, the Company’s and Arvest’s ability to consummate the Merger or satisfy the conditions to the completion of the Merger, including the receipt of shareholder approval, the receipt of regulatory approvals required for the Merger on the terms expected or on the anticipated schedule; the failure of the proposed Merger to close for any other reason; occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the effect of the announcement of the Merger on customer relationships and operating results (including, without limitation, difficulties in maintaining relationships with employees or customers); the diversion of management time on transaction related issues;  general economic conditions, changes in interest rates, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel, and market acceptance of the Bank’s pricing, products and services, and with respect to the loans extended by the Bank and real estate owned, market prices of the property securing loans and the costs of collection and sales. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “will,” “should,” and similar expressions, or the negative thereof, as they relate to the Company, the Bank or the management thereof, are intended to identify forward-looking statements.

45

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, assumptions and changes in circumstances that are difficult to predict and many of which are outside of our control. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, but are not limited to, general economic, capital market, credit market and real estate market conditions, competitive factors, strategic actions, including integrating or managing acquisitions, failure of assumptions underlying the establishment of our allowance for loan and lease losses, legislative and regulatory changes, and disruptions to our technology network. Additionally, other risks and uncertainties are described in the Company’s Annual Report on Form 10-K as filed with the SEC on March 10, 2017. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake the responsibility, and specifically disclaims any obligation, to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

MARKET RISK MANAGEMENT

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

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.

46

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 October 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	-3.5%
+300	-2.2%
+200	-1.1%
+100	--%
-100	-5.4%
-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.

Item 4. Controls and Procedures.

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

The Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, regularly review our controls and procedures and make changes intended to ensure the quality of our financial reporting. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

On September 11, 2017, a putative shareholder class action complaint challenging the merger, captioned Owens and Hurliman v. Massey, et al, Case No. 60CV-17-5022, was filed in the Circuit Court of Pulaski County, Arkansas. An amended complaint was filed on October 13, 2017, and the action was removed to the United States District Court for the Eastern District of Arkansas on November 1, 2017.  The complaint names the individual members of the Company’s board of directors, as well as BSF Holdings, as defendants. The complaint generally alleges, among other things, that members of the Company board breached their fiduciary duties to the Company’s shareholders by (i) agreeing to sell the Company for an inadequate price, (ii) agreeing to inappropriate deal protection provisions in the merger agreement that may preclude the Company from soliciting any potential acquirers and limit the ability of the Company board to engage in discussions or negotiations for superior acquisition proposals and (iii) disseminating a proxy statement that is materially incomplete and misleading. The complaint also alleges that Richard Massey and BSF Holdings, in their capacities as shareholders of the Company, breached fiduciary duties owed by them to the minority shareholders of the Company. The complaint seeks certification by the court as a shareholders’ class action, approval of the plaintiffs as proper plaintiff class representatives, injunctive relief enjoining the defendants from consummating the merger unless and until the Company (a) adopts and implements a procedure or process to obtain a merger agreement providing the best possible terms for shareholders and (b) supplements its proxy disclosure (or, in the event the merger is consummated, rescinding the merger or awarding rescissory damages). The complaint also seeks to recover costs and disbursement from the defendants, including attorneys’ fees and experts’ fees.

47

A second action, Reichert v. Bear State Financial, Inc., et al, Case No. 4:17-cv-654, was filed on October 11, 2017 in the United States District Court for the Eastern District of Arkansas. A third action, Parshall v. Bear State Financial, Inc., et al, Case No. 4:17-cv-669, is a putative class action filed on October 13, 2017 in the United States District Court for the Eastern District of Arkansas. The Reichert complaint names the Company and the individual members of the Company’s board of directors as defendants. The Parshall complaint names the Company, the Bank, the individual members of the Company’s board of directors and Arvest and Acquisition Sub as defendants. The Reichert and Parshall complaints generally allege, among other things, that defendants violated Sections 14(a) and 20(a) of the Exchange Act by disseminating materially deficient and misleading disclosures in the proxy statement dated October 5, 2017 relating to the proposed Merger. The Reichert and Parshall complaints seek injunctive relief enjoining the defendants from consummating the Merger unless and until the Company discloses the material information identified in the complaints. The complaints also seek to recover rescissory damages against the defendants and costs associated with bringing the actions, including attorneys’ fees and experts’ fees.

The Company believes that the claims in these lawsuits are wholly without merit and intends to defend them vigorously. It is possible that other potential plaintiffs may file additional lawsuits challenging the Merger. The outcome of the pending and any additional future litigation is uncertain. The lawsuits could result in costs to the Company, including costs associated with the indemnification of, and advancement of expenses for, directors and officers of the Company that are not covered by insurance. The defense or settlement of the lawsuits may adversely affect the Company’s business, financial condition, results of operations and cash flows.

Item 1A. Risk Factors

The Company and the Bank are subject to certain risks, including those described below and in Part I, Item 1A. of the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2017.

Business uncertainties while the Merger is pending may negatively impact our ability to attract and retain personnel and impact our customer relationships.

Uncertainty about the effect of the Merger on our employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with us to seek to change their existing business relationships with us. Retention of certain employees may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined entity, our business could be harmed.

If the Merger is not completed, we will have incurred substantial expenses without realizing the expected benefits of the Merger.

We have incurred substantial expenses in connection with the negotiation and entry into the Merger Agreement and will incur additional expenses as we move toward completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, we would have to recognize the expenses we have incurred without realizing the expected benefits of the Merger, which could materially impact our earnings and results of operations.

Additionally, the closing price of our common stock on October 27, 2017 was $10.27 per share, which is 11.6% higher than the $9.20 closing price of our common stock on August 21, 2017, the day immediately prior to the announcement of the Merger. If the Merger is not completed, it is likely that the market price of our common stock will decline to the extent that the current market price reflects a market assumption that the Merger will be completed.

The Merger may distract our management from their other responsibilities and the Merger Agreement may limit our ability to pursue new opportunities.

The Merger could cause our management to focus their time and energies on matters related to the transaction that otherwise would be directed to our business and operations. Any such distraction on the part of our management could affect our ability to service existing business and develop new business and adversely affect our business and earnings before the completion of the Merger.

Additionally, the Merger Agreement contains operating covenants that limit certain of our operating activities or require the approval of Arvest before we may engage in such activities during the pendency of the Merger. These operating covenants may adversely affect our ability to develop or pursue new business opportunities.

48

The Merger Agreement limits our ability to pursue acquisition proposals and requires us to pay a termination fee under limited circumstances.

The Merger Agreement prohibits us from initiating, soliciting, knowingly encouraging or knowingly facilitating certain third party acquisition proposals. The Merger Agreement also provides that we must pay a termination fee in the amount of $14 million in the event the Merger Agreement is terminated under certain circumstances, including involving our failure to abide by certain obligations not to solicit acquisition proposals and our board of directors withdrawing or materially and adversely changing its recommendation that our shareholders approve the Merger proposal. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing such an acquisition.

Our ability to complete the Merger is subject to the receipt of consents and approvals from regulatory agencies which may impose conditions that could adversely affect us or cause the Merger to be abandoned.

Before the Merger may be completed, Arvest must obtain various approvals or consents from the FRB and the Arkansas State Bank Department. These regulators may impose conditions on the completion of the Merger, and any such conditions could have the effect of delaying completion of the Merger or causing a termination of the Merger Agreement. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.

Shareholder litigation could prevent or delay the closing of the proposed Merger or otherwise negatively impact our business and operations.

We may incur additional costs in connection with the defense or settlement of the currently pending or any future shareholder lawsuits filed in connection with the proposed Merger. Such litigation could have an adverse effect on our financial condition and results of operations and could prevent or delay the consummation of the Merger.

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

We had no unregistered sales of equity securities and did not purchase any shares of our common stock during the period covered by this report.

Item 6. Exhibits

Exhibit No.	Description
2.1	Agreement and Plan of Reorganization by and between Bear State Financial, Inc., Arvest Bank, and Arvest Acquisition Sub, Inc., dated August 22, 2017 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 25, 2017).
3.1	Amended and Restated Articles of Incorporation of Bear State Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on June 3, 2014).
3.2	Amended and Restated Bylaws of Bear State Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on June 19, 2014).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Section 906 Certification of the PEO.
32.2	Section 906 Certification of the PFO.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.
101.DEF	XBRL Taxonomy Extension Definition Linkbase

49

SIGNATURES

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

			BEAR STATE FINANCIAL, INC.
Date:	November 3, 2017	By:	/s/ Matt Machen
			Matt Machen
			President and Chief Executive Officer

Date:	November 3, 2017	By:	/s/ Sherri Billings
			Sherri Billings
			Senior Executive Vice President and Chief Financial Officer

50