4 .	LOANS RECEIVABLE

Loans receivable consisted of the following at

September 30, 2017

and

December

31,

2016

(in thousands):

	September 30 , 2017			December 31, 201 6
Real estate :
One- to four-family residential	$	393,082		$	389,107
Multifamily residential		92,837			92,460
Nonfarm nonresidential		568,318			495,173
Farmland		99,189			94,018
Construction and land development		147,071			125,785
Commercial		373,464			323,096
Consumer		36,859			36,265
Total loans receivable		1,710,820			1,555,904
Unearned discounts and net deferred loan costs		325			485
Allowance for loan and lease losses		(18,682	)		(15,584	)

Loans receivable —net	$	1,692,463		$	1,540,805

Loan Origination and Underwriting

– The Bank employs several tools to manage risk in its loan portfolio. Prior to origination, a borrower’s ability to repay is analyzed by reviewing financial information with a comparison of the sustainability of these cash flows to the proposed loan terms, with consideration given to possible changes in underlying business and economic conditions. The financial strength and support offered by any guarantors to the loan is evaluated and any collateral offered is assessed using internal and external valuation resources. Finally, the credit request is compared against the Bank’s board-approved written lending policies and standards. The ongoing risk in the loan portfolio is managed through regularly reviewing loans to assess key credit elements, providing for an adequate allowance for loan losses and diversifying the portfolio based on certain metrics including industry and collateral types, loan purpose and underlying source of repayment.

Real Estate Loans

– The real estate loan portfolio consists primarily of single family residential, commercial real estate and construction loans. Loans in this category are differentiated by whether the property owner or parties unrelated to the borrower occupy the property. This difference can directly affect the sensitivity of the source of loan repayment to changes in interest rates and market conditions, which can impact the underlying collateral value. Therefore, the analysis of these credits focuses on current and forecasted economic trends in certain sub-markets, including residential, industrial, retail, office and multi-family segments. Changes in these segments are influenced by both local and national cycles, which

may

fluctuate in both similar and opposing directions and sustain for varying durations. These differences provide the Bank with opportunities for diversification of loans by property type, geography and other factors.

Commercial Loans

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

Consumer Loans

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

oans sold with servicing retained are

not

included in the accompanying consolidated statements of financial condition. The unpaid principal balances of such loans at

September 30, 2017

and

December 31, 2016

were

$4.2

million and

$14.7

million, respectively. Servicing loans for others generally consists of collecting payments and disbursing payments to investors. Servicing income for the periods ended

September 30, 2017

and

2016

was

not

significant.

As of

September 30, 2017

and

December 31, 2016,

qualifying loans collateralized by

first

lien

one

- to

four

-family mortgages with balances totaling approximately

$22.6

million and

$26.4

million, respectively, were held in custody by the Federal Home Loan Bank of Dallas and were pledged for outstanding advances or available for future advances. The Bank also pledged a significant portion of its remaining loans at

September 30, 2017

under a blanket lien with the FHLB.

Purchased Loans

– The Company evaluated

$583.6

million of net loans (

$595.1

million gross loans less

$11.5

million discount) purchased in conjunction with the acquisition of First National Security Company (“FNSC”) in

2014

in accordance with the provisions of FASB ASC Topic

310

20,

Nonrefundable Fees and Other Costs

. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method.

The Company evaluated

$364.5

million of net loans (

$375.0

million gross loans less

$10.5

million discount) purchased in conjunction with the acquisition of Metropolitan

National Bank (“Metropolitan”) in

2015

in accordance with the provisions of FASB ASC Topic

310

20,

Nonrefundable Fees and Other Costs

. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method.

The Company evaluated

$21.1

million of net loans (

$26.9

million gross loans less

$5.8

million discount) purchased in conjunction with the acquisition of FNSC in

2014

in accordance with the provisions of FASB ASC Topic

310

30,

Loans and Debt Securities Acquired with Deteriorated Credit Quality

. The following table reflects the carrying amount of purchased credit impaired (“PCI”) loans, which are included in the loan categories above (in thousands):

	September 30 , 201 7		December 31 , 201 6		September 30 , 2016
One- to four-family residential	$	2,265	$	2,714	$	2,833
Nonfarm nonresidential		1,858		7,576		8,353
Farmland		29		53		58
Construction and land development		1,445		1,432		1,419
Commercial		524		556		570
Consumer		43		53		55
Total carrying value of PCI loans	$	6,164	$	12,384	$	13,288
Outstanding principal balance of PCI loans	$	8,652	$	15,468	$	17,676

The following table documents changes

for the

nine

months ended

September 30, 2017

and

2016

to the amount of accretable yield on loans evaluated in accordance with the provisions of FASB ASC Topic

310

(in thousands).

	201 7			201 6
Balance at January 1	$	890		$	1,370
Accretion		(972	)		(622	)
Adjustments to accretable differences due to:
Reclassification from nonaccretable difference		2,082			1,328
Changes in expected cash flows that do not affect nonaccretable differences		(695	)		(868	)
Transfers to real estate owned		10			5
Balance at September 30	$	1,315		$	1,213

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

September 30 , 2017	30-89 Days Past Due		90 Days or More Past Due		Current		Total

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

December 31, 2016	30-89 Days Past Due		90 Days or More Past Due		Current		Total

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

As of

September 30, 2017

and

December 31, 2016,

there were

$0.5

million and

$0.8

million, respectively, of PCI loans acquired in the merger with FNSC that were

days or more past due and accruing. Restructured loans totaled

$5.6

million as of

September 30, 2017

and

$6.0

million as of

December 31, 2016,

with

$4.4

million and

$1.2

million of such restructured loans on nonaccrual status at

September 30, 2017

and

December 31, 2016,

respectively.

The following table presents age analyses of nonaccrual loans

as of the dates indicated (in thousands):

September 30 , 2017	30-89 Days Past Due		90 Days or More Past Due		Current		Total

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

December 31, 2016	30-89 Days Past Due		90 Days or More Past Due		Current		Total

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

As of

September 30, 2017

and

December 31, 2016,

there were

$3.0

million and

$1.0

million, respectively, of loans in the process of foreclosure, of which

$0.9

million and

$0.5

million were

one

- to

four

-family residential mortgage loans at

September 30, 2017

and

December 31, 2016,

respectively.

The following tables summarize information pertaining to impaired loans as of

September 30, 2017

and

December

31,

2016

and for the

three

and

nine

months ended

September 30, 2017

and

2016

(in thousands). The tables below do

not

include ASC

310

PCI loans which are disclosed separately above.

	September 30 , 2017						December 31 , 201 6
	Unpaid Principal Balance		Recorded Investment		Valuation Allowance		Unpaid Principal Balance		Recorded Investment		Valuation Allowance
Impaired loans with a valuation allowance:
One- to four-family residential	$	242	$	220	$	68	$	244	$	229	$	74
Multifamily		--		--		--		--		--		--
Nonfarm nonresidential		--		--		--		--		--		--
Farmland		--		--		--		--		--		--
Construction and land development		--		--		--		--		--		--
Commercial		434		434		333		1,865		1,788		488
Consumer		5		5		5		5		5		5
		681		659		406		2,114		2,022		567

Impaired loans without a valuation allowance:
One- to four-family residential		9,060		6,862		--		8,704		6,677		--
Multifamily		--		--		--		--		--		--
Nonfarm nonresidential		10,179		8,760		--		11,022		9,421		--
Farmland		1,214		1,174		--		1,226		783		--
Construction and land development		370		278		--		728		539		--
Commercial		1,409		1,152		--		2,893		2,570		--
Consumer		174		162		--		184		168		--
		22,406		18,388		--		24,757		20,158		--
Total impaired loans	$	23,087	$	19,047	$	406	$	26,871	$	22,180	$	567

	Three Months Ended September 30 ,
	201 7				201 6
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	222	$	2	$	233	$	2
Nonfarm nonresidential		--		--		698		--
Farmland		--		--		--		--
Construction and land development		--		--		--		--
Commercial		217		--		3,209		--
Consumer		5		--		5		--
		444		2		4,145		2

Impaired loans without a valuation allowance:
One- to four-family residential		6,849		--		7,177		--
Multifamily		60		--		75		--
Nonfarm nonresidential		8,287		9		4,842		--
Farmland		1,099		--		802		--
Construction and land development		282		1		576		1
Commercial		1,141		4		860		--
Consumer		174		--		198		--
		17,892		14		14,530		1
Total impaired loans	$	18,336	$	16	$	18,675	$	3

Interest based on original terms			$	255			$	277

Interest income recognized on a cash basis on impaired loans			$	--			$	--

	Nine Months Ended September 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with a valuation allowance:
One- to four-family residential	$	225	$	5	$	357	$	5
Nonfarm nonresidential		--		--		1,129		--
Farmland		95		--		118		--
Construction and land development		--		--		94		--
Commercial		997		--		2,707		--
Consumer		5		--		5		--
		1,322		5		4,410		5

Impaired loans without a valuation allowance:
One- to four-family residential		6,777		--		7,173		1
Multifamily		60		--		134		--
Nonfarm nonresidential		8,861		9		4,715		--
Farmland		971		--		730		--
Construction and land development		404		4		606		4
Commercial		1,803		13		1,438		--
Consumer		180		--		209		--
		19,056		26		15,005		5
Total impaired loans	$	20,378	$	31	$	19,415	$	10

Interest based on original terms			$	862			$	832

Interest income recognized on a cash basis on impaired loans			$	--			$	--

Credit Quality Indicators.

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

$1.0

million. The Bank uses the following definitions for risk ratings:

Pass.

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

Special Mention.

Loans rated as special mention, while still adequately protected by the borrower’s repayment capability, exhibit distinct weakening trends. If left unchecked or uncorrected, these potential weaknesses

may

result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming adversely classified credits.

Substandard.

Loans

rated as substandard are inadequately protected by the current sound net worth and paying capacity of the borrower or the collateral pledged, if any. These assets must have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are

not

corrected.

Doubtful.

Loans

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

Loss.

Loans

rated as a loss are considered uncollectible and of such little value that continuance as an asset is

not

warranted. A loss classification does

not

mean that an asset has

recovery or salvage value, but that it is

not

practical or desirable to defer writing off or reserving all or a portion of the asset, even though partial recovery

may

be effected in the future.

Based on analyses performed at

September 30, 2017

and

December 31, 2016,

the risk categories of loans are as follows (in thousands):

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

	December 31, 201 6
	Pass / Not Rated		Special Mention		Substandard		Total
One- to four-family residential	$	375,287	$	206	$	13,614	$	389,107
Multifamily residential		92,460		--		--		92,460
Nonfarm nonresidential		473,343		314		21,516		495,173
Farmland		92,131		--		1,887		94,018
Construction and l and development		116,269		--		9,516		125,785
Commercial		317,069		--		6,027		323,096
Consumer		35,953		1		311		36,265
Total	$	1,502,512	$	521	$	52,871	$	1,555,904

As of

September 30, 2017

and

December 31, 2016,

the Bank did

not

have any loans classified as doubtful or loss.

Troubled Debt Restructurings.

Troubled debt restructurings (“TDRs”) are loans where the contractual terms on the loan have been modified and both of the following conditions exist: (i) the borrower is experiencing financial difficulty and (ii) the restructuring constitutes a concession that the Bank would

not

otherwise make. The Bank assesses all loan modifications to determine if the modifications constitute a TDR. Restructurings resulting in an insignificant delay in payment are

not

considered to be TDRs. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All TDRs are considered impaired loans. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The following table summarizes TDRs as of

September 30, 2017

and

December 31, 2016 (

dollars in thousands):

September 30 , 2017	Number of Accruing TDR Loans		Balance		Number of Nonaccrual TDR Loans		Balance		Total Number of TDR Loans		Total Balance
One- to four-family residential		2	$	191		3	$	93		5	$	284
Nonfarm nonresidential		1		632		2		4,323		3		4,955
Construction and land development		1		71		1		--		2		71
Commercial		1		286		--		--		1		286
Consumer		--		--		1		5		1		5

Total		5	$	1,180		7	$	4,421		12	$	5,601

December 31, 2016	Number of Accruing TDR Loans		Balance		Number of Nonaccrual TDR Loans		Balance		Total Number of TDR Loans		Total Balance
One- to four-family residential		2	$	197		6	$	315		8	$	512
Nonfarm nonresidential		1		4,244		3		410		4		4,654
Farmland		--		--		1		250		1		250
Construction and land development		1		76		2		215		3		291
Commercial		1		287		--		--		1		287
Consumer		--		--		1		5		1		5

Total		5	$	4,804		13	$	1,195		18	$	5,999

loans were restructured as TDRs during the

three

months ended

September 30, 2017

2016.

Loans receivable that were restructured as TDRs during the

nine

months ended

September 30, 2017

and

2016

were as follows (dollars in thousands):

	Nine Months Ended September 30, 201 7

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

Total		1	$	642	$	632	$	642	$	--

_________________________

(

)

The borrower

’s payment was lowered for the remainder of the term resulting in an extended amortization term.

	Nine Months Ended September 30, 201 6

			Balance		Balance at		Nature of Modification
	Number of Loans		Prior to TDR		September 30, 201 6		Payment Term ( 2 )		Other
Commercial		1	$	35	$	--	$	35	$	--

Total		1	$	35	$	--	$	35	$	--

_________________________

(

)

Concessions represent skipped payments

, maturity date extensions or amortization term extensions.

The

Bank had

one

loan totaling

$4.2

million for which a payment default occurred during the

nine

months ended

September 30, 2017

that had been modified as a TDR within

months or less of the payment default. There were

loans receivable for which a payment default occurred during the

three

months ended

September 30, 2017

2016

or during the

nine

months ended

September 30, 2016

that had been modified as a TDR within

months or less of the payment default.

As of

September 30, 2017

and

December 31, 2016,

the Bank was

not

committed to lend additional funds to any customer whose loan was classified as a TDR.