UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2016

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _______________

Commission File No.: 0-28312

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

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

None

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

Bear State Financial, Inc.

Form 10-K

For the Year Ended December 31, 2016

PART I.

Item 1. Business

GENERAL

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

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

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

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

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

Business Strategy

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

Lending Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources of Funds

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

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

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

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

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

At December 31, 2016, the Bank’s unused borrowing availability primarily consisted of (1) $456.0 million of available borrowing capacity with the FHLB, (2) $47.9 million of investment securities available to pledge for federal funds or other borrowings and (3) $103.0 million of available unsecured federal funds borrowing lines. In addition, at December 31, 2016, the Company had available borrowing capacity of $9.8 million with an unaffiliated bank.

Competition

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

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

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

Employees

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

Subsidiaries

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

Available Information

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

REGULATION

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

The Company

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

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

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

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

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

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

The Bank

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

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

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

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

Restrictions on Bank Subsidiary.

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

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

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

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

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

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

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

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

Financial Regulatory Reform

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

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

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

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

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

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

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

The Increasing Regulatory Emphasis on Capital

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

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

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

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

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

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

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

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

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

Other Financial Regulatory Matters

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

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

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

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

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

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

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

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain forward-looking statements and information relating to the Company and the Bank that are based on the beliefs of management as well as assumptions made by and information currently available to management. As used in this document, the words "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," "will," "should" and similar expressions, or the negative thereof, as they relate to the Company, the Bank or the management thereof, are intended to identify forward-looking statements.

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

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

Item 1A.      Risk Factors

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

Risks Related to Our Business:  

Our profitability is dependent on our banking activities.

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

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

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

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

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

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

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

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

• historical experience;

• repayment capacity of borrowers;

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

• regular reviews of delinquencies and loan portfolio quality;

• collateral evaluations;

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

• the existence and effect of concentrations of credit; and

• results of regulatory examinations.

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

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

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

We depend on key personnel for our success.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are subject to environmental liability risks.

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

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

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

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

We rely on certain external vendors.

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

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

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

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

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

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

Risks Related to Our Industry:

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

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

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

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

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

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

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

Risks Related to Our Common Stock:

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments.

None

Item 2. Properties .

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

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

Item 3. Legal Proceedings.

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

Item 4. Mine Safety Disclosures.

Not applicable.

PART II.

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

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

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

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

Issuer Purchases of Equity Securities

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

Performance Graph

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

Item 6. Selected Financial Data .

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .

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

2016 OVERVIEW

During 2016 the Company:

ACQUISITIONS

Metropolitan National Bank

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

First National Security Company

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

RECENT DEVELOPMENTS

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

Net Interest Income. The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest earning assets, such as loans and investments, and interest expense on interest bearing liabilities, such as deposits and borrowings. Net interest income for 2016 was $67.5 million compared to $54.5 million in 2015 and $37.4 million in 2014. The increases in net interest income resulted from changes in interest income and interest expense discussed below.

Interest Income.

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

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

Interest Expense.  

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

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

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.

Average Balance Sheets . The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing interest income or interest expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are based on daily balances during the periods.

(1) Includes nonaccrual loans. 

(2) Includes FRB and FHLB stock.

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

Management determined that provisions for loan losses of $2.5 million and $1.8 million were required for the years ended December 31, 2016 and 2015 to maintain the ALLL at an adequate level. Management determined the necessity of the provision and the amount thereof taking into consideration (i) loans originated by the Bank during the period, (ii) changes in the overall portfolio of nonperforming and classified loans of the Bank, (iii) the credit quality of the Bank’s loan portfolio, (iv) ALLL coverage of classified loans and (v) discount balance of acquired loans. The ALLL as a percentage of loans receivable was 1.0% at December 31, 2016 and 2015. The ALLL plus the discount on acquired loans as a percentage of total loans receivable gross of the acquired loan discount was 1.7% at December 31, 2016 compared to 2.1% at December 31, 2015. The ALLL as a percentage of nonaccrual loans was 89.7% at December 31, 2016 compared to 75.2% at December 31, 2015. The ALLL as a percentage of classified loans was 29.5% at December 31, 2016 compared to 29.2% at December 31, 2015. See “Allowance for Loan and Lease Losses” in the “Asset Quality” section. A quarterly review is completed on purchased credit impaired (“PCI”) loans to determine if changes in estimated cash flows have occurred. Subsequent decreases in the amount expected to be collected may result in a provision for loan and lease losses with a corresponding increase in the ALLL.

Noninterest Income. Noninterest income is generated primarily through deposit account fee income, profit on sale of loans, and earnings on life insurance policies . Total noninterest income increased $3.2 million to $16.7 million for 2016 compared to $13.5 million in 2015. The increase in 2016 was primarily due to increases in deposit fee income and gain on sales of loans. The increase in deposit fee income was primarily attributable to the acquisition of Metropolitan. The increase in gain on sales of loans was due to an increase in the volume of loans sold as well as an increase in the average net profit per loan.

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

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

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

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

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

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

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

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

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

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

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