13.

INCOME TAXES

The provisions (benefits) for income taxes are summarized as follows at

December

(in thousands):

	2016			2015			2014

Income tax provision (benefit):
Current:
Federal	$	403		$	252		$	--
State		237			136			--
Total current		640			388			--

Deferred:
Federal		6,064			3,551			367
State		1,052			820			919
Valuation allowance		(897	)		(120	)		(21,856	)
Total deferred		6,219			4,251			(20,570	)

Total	$	6,859		$	4,639		$	(20,570	)

The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows at

December

(dollars in thousands):

	2016					2015					2014

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

Total	$	6,859		28.2	%	$	4,639		30.5	%	$	(20,570	)	(550.6	)%

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities are adjusted through the provision for income taxes.

The Company’s net deferred tax asset account was comprised of the following at

December

(in thousands):

	2016			2015

Deferred tax assets:
Allowance for loan and lease losses	$	8,278		$	7,580
Discount on purchased loans		2,044			2,584
Real estate owned		263			1,743
Section 382 net operating loss carryforward		1,976			2,114
Net operating loss carryforward		1,346			7,710
Nonaccrual loan interest		1,471			1,266
Unrealized loss on securities available for sale		891			--
Other		1,923			1,365

Total deferred tax assets		18,192			24,362
Valuation allowance		--			(897	)
Deferred tax asset, net of allowance		18,192			23,465

Deferred tax liabilities:
Office properties		(2,964	)		(2,990	)
Core deposit intangible		(2,293	)		(2,562	)
Unrealized gain on securities available for sale		--			(239	)
Other		(1,316	)		(961	)

Total deferred tax liabilities		(6,573	)		(6,752	)

Net deferred tax asset	$	11,619		$	16,713

For the year ended

December

31,

2016,

the net deferred tax asset decreased by

$5.1

million or

30.5%

primarily as a result of a decrease in the net operating loss ("NOL") carryforward which was utilized to offset taxable income for the year ended

December

31,

2016.

A financial institution

may,

for federal income tax purposes, carryback net operating losses to the preceding

two

taxable years and forward to the succeeding

taxable years. At

December

31,

2016,

the Company had an

$8.1

million NOL for federal income tax purposes that will be carried forward. The federal NOL carryforwards, if unused, expire in calendar year

2034.

The

$8.1

million federal NOL includes

$5.8

million of Internal Revenue Code (“IRC or the “Code””) Section

382

NOL carryforwards that have an annual limit of

$405,000

that can be utilized to offset taxable income. At

December

31,

2016,

the Company had a

$13.2

million NOL for Arkansas state income tax purposes. The state NOL carryforwards, if unused, expire in calendar years

2018

through

2019.

Specifically exempted from deferred tax recognition requirements are bad debt reserves for tax purposes of U.S. savings and loans in the institution’s base year, as defined under Code Section

593(g)(2)(A)(ii).

Base year reserves totaled approximately

$4.2

million. Consequently, a deferred tax liability of approximately

1.6

million related to such reserves was not provided for in the consolidated statements of financial condition at

December

31,

2016

December

31,

2015.

Payment of dividends to stockholders out of retained earnings deemed to have been made out of earnings previously set aside as bad debt reserves

may

create taxable income to the Bank. No provision has been made for income tax on such a distribution as the Bank does not anticipate making such distributions.

The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard as defined by generally accepted accounting principles. In accordance with ASC Topic

740

10,

Income Taxes

(ASC

740),

a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than

50%)

that some portion or all of a deferred tax asset will not be realized. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback and carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

●

Future reversals of existing temporary differences;

●

Future taxable income exclusive of reversing temporary differences and carryforwards;

●

Taxable income in prior carryback years; and

●

Tax planning strategies

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

●

Nature, frequency and severity of recent losses;

●

Duration of statutory carryforward periods;

●

Historical experience with tax attributes expiring unused; and

●

Near- and medium-term financial outlook.

For the year ended

December

31,

2014

the Company recorded a valuation allowance reversal on the basis of management’s assessment of the amount of its deferred tax assets that are more likely than not to be realized, resulting in a net tax benefit of

$21.1

million for the year ended

December

31,

2014.

Prior to the quarter ended

June

30,

2016,

the Company had certain deferred tax assets related to net unrealized built-in losses (“NUBILs”) established under IRC Section

382

May

2011,

the date of the Company’s ownership change related to the initial investment by Bear State Financial Holdings, LLC.

If these losses had been realized before

May

2016

(five

years after the ownership change date), then they would not be allowed to be taken as a deduction and would have been permanently lost. If these losses were to be realized after

May

2016,

then the future deduction for the losses is no longer limited. As a result of passing the

five

year anniversary date of the ownership change, during the

second

quarter of

2016

the Bank reversed the valuation allowance of

$0.9

million for the remaining NUBILs.

The Company recognizes interest and penalties related to income tax matters as additional income taxes in the consolidated statements of income. The Company had

interest or penalties related to income tax matters during the years ended

December

31,

2016,

2015

2014.

The Company files consolidated income tax returns in the U.S. federal jurisdiction and the states of Arkansas and Missouri while Bear State Bank files in the state of Oklahoma. The Company is subject to U.S. federal and state income tax examinations by tax authorities for tax years ended

December

31,

2013

and forward.