UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

OF THE SECURITIES EXCHANGE ACT OF 1934

~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the quarterly period ended ~~March~~June 310, 2018

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 0-23325

Guaranty Federal Bancshares, Inc.

~~(Exact~~ (Exact name of registrant as specified in its charter)

Delaware	43-1792717
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2144 E Republic Rd, Suite F200
Springfield, Missouri	65804
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (417) 520-4333

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 [X] 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 [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Emerging growth company [ ]

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of ~~May~~ 7August 1, 2018
Common Stock, Par Value $0.10 per share	~~4,447,257~~4,451,723 Shares

GUARANTY FEDERAL BANCSHARES, INC.

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Condensed Consolidated Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Income		4
	Condensed Consolidated Statements of Comprehensive Income		5
	Condensed Consolidated Statements of Stockholders’ Equity		6
	Condensed Consolidated Statements of Cash Flows		7
	Notes to Condensed Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30 35

Item 3. Quantitative and Qualitative Disclosures about Market Risk			35 43

Item 4. Controls and Procedures		36	44

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		37 45

Item 1A. Risk factors		37 45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37 45

Item 3. Defaults Upon Senior Securities		37 45

Item 4. Mine Safety Disclosures		37 45

Item 5. Other Information		37 45

Item 6. Exhibits		37 45

Signatures	38	46

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

~~MARCH 31,~~JUNE 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

	3/31/18			12/31/17			6/30/18			12/31/17
ASSETS
Cash and due from banks	$	3,871,850		$	4,094,694		$	5,275,544		$	4,094,694
Interest-bearing deposits in other financial institutions		36,162,017			33,312,236			25,081,703			33,312,236
Cash and cash equivalents		40,033,867			37,406,930			30,357,247			37,406,930
Available-for-sale securities		81,943,424			81,478,673			89,316,993			81,478,673
Held-to-maturity securities		15,097			16,457			14,111			16,457
Stock in Federal Home Loan Bank, at cost		4,183,600			4,597,500			4,791,200			4,597,500
Mortgage loans held for sale		781,075			1,921,819			1,771,560			1,921,819
Loans receivable, net of allowance for loan losses of March 31, 2018 - $7,102,712 - December 31, 2017 - $7,107,418		637,957,786			629,605,009
Loans receivable, net of allowance for loan losses of June 30, 2018 - $7,572,510 - December 31, 2017 - $7,107,418								772,517,090			629,605,009
Accrued interest receivable		2,525,967			2,449,847			2,996,175			2,449,847
Prepaid expenses and other assets		5,076,193			3,846,686			4,825,645			3,846,686
Goodwill								2,615,352			-
Core deposit intangible								3,300,000			-
Foreclosed assets held for sale		350,001			282,785			1,546,951			282,785
Premises and equipment, net		11,948,116			10,607,094			22,306,826			10,607,094
Bank owned life insurance		19,852,638			19,740,623			19,966,634			19,740,623
Deferred and income taxes receivable		2,357,521			2,506,097			4,193,271			2,506,097
	$	807,025,285		$	794,459,520		$	960,519,055		$	794,459,520

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits	$	632,998,549		$	607,364,350		$	764,771,510		$	607,364,350
Federal Home Loan Bank advances		80,600,000			94,300,000			90,400,000			94,300,000
Note payable to bank								5,000,000			-
Subordinated debentures		15,465,000			15,465,000			21,804,760			15,465,000
Advances from borrowers for taxes and insurance		281,497			180,269			560,802			180,269
Accrued expenses and other liabilities		1,326,064			1,962,865			2,021,887			1,962,865
Accrued interest payable		519,635			295,543			711,911			295,543
		731,190,745			719,568,027			885,270,870			719,568,027

COMMITMENTS AND CONTINGENCIES		-			-			-			-

STOCKHOLDERS' EQUITY
Capital Stock:
Common stock, $0.10 par value; authorized 10,000,000 shares; issued March 31, 2018 and December 31, 2017 - 6,883,003 and 6,878,503 shares; respectively		688,300			687,850
Common stock, $0.10 par value; authorized 10,000,000 shares; issued June 30, 2018 and December 31, 2017 - 6,890,503 and 6,878,503 shares; respectively								689,050			687,850
Additional paid-in capital		50,844,042			50,856,069			51,043,177			50,856,069
Retained earnings, substantially restricted		61,502,282			60,679,308			60,625,026			60,679,308
Accumulated other comprehensive loss		(233,135	)		(206,193	)		(142,119	)		(206,193	)
		112,801,489			112,017,034			112,215,134			112,017,034
Treasury stock, at cost; March 31, 2018 and December 31, 2017 - 2,443,246 and 2,453,728 shares, respectively		(36,966,949	)		(37,125,541	)
Treasury stock, at cost; June 30, 2018 and December 31, 2017 - 2,443,246 and 2,453,728 shares, respectively								(36,966,949	)		(37,125,541	)
		75,834,540			74,891,493			75,248,185			74,891,493
	$	807,025,285		$	794,459,520		$	960,519,055		$	794,459,520

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2018 AND 2017 (UNAUDITED)

	3/31/2018		3/31/2017		Three months ended						Six months ended
					6/30/2018			6/30/2017			6/30/2018			6/30/2017
Interest Income
Loans	$	7,378,575	$	6,246,510	$	9,818,707		$	6,743,613		$	17,197,282		$	12,990,123
Investment securities		449,369		475,469		492,931			454,040			942,300			929,509
Other		128,372		49,423		67,487			43,855			195,859			93,278
		7,956,316		6,771,402		10,379,125			7,241,508			18,335,441			14,012,910
Interest Expense
Deposits		1,422,570		621,854		1,719,614			746,701			3,142,184			1,368,555
FHLB advances		333,527		399,927		405,817			449,698			739,344			849,625
Subordinated debentures		168,967		151,680		277,594			155,910			446,561			307,590
Other						3,833			-			3,833			-
		1,925,064		1,173,461		2,406,858			1,352,309			4,331,922			2,525,770
Net Interest Income		6,031,252		5,597,941		7,972,267			5,889,199			14,003,519			11,487,140
Provision for Loan Losses		225,000		475,000		500,000			575,000			725,000			1,050,000
Net Interest Income After
Provision for Loan Losses		5,806,252		5,122,941
Net Interest Income After Provision for Loan Losses						7,472,267			5,314,199			13,278,519			10,437,140
Noninterest Income
Service charges		317,166		267,106		552,011			290,926			869,177			558,032
Gain on sale of investment securities		3,183		-
Net gain (loss) on sale of investment securities						(10,388	)		62,274			(7,205	)		62,274
Gain on sale of mortgage loans held for sale		379,557		408,614		616,928			523,534			996,485			932,148
Gain on sale of Small Business Administration loans		170,862		130,488		225,379			124,857			396,241			255,345
Net gain on foreclosed assets		44,331		38,073
Net gain (loss) on foreclosed assets						76,481			(29,809	)		120,812			8,264
Other income		403,940		385,084		493,401			395,278			897,341			780,362
		1,319,039		1,229,365		1,953,812			1,367,060			3,272,851			2,596,425
Noninterest Expense
Salaries and employee benefits		3,173,424		2,857,771		4,101,741			2,934,648			7,275,165			5,792,419
Occupancy		770,407		486,229		1,037,665			485,154			1,808,072			971,383
FDIC deposit insurance premiums		78,298		53,112		116,837			59,377			195,135			112,489
Data processing		302,532		229,316		464,360			232,436			766,892			461,752
Advertising		131,250		131,250		134,650			131,250			265,900			262,500
Merger costs		228,000		-		3,192,050			-			3,420,050			-
Other expense		791,944		661,942		1,175,334			725,051			1,967,278			1,386,993
		5,475,855		4,419,620		10,222,637			4,567,916			15,698,492			8,987,536
Income Before Income Taxes		1,649,436		1,932,686
Provision for Income Taxes		293,691		503,445
Net Income Available to Common Shareholders	$	1,355,745	$	1,429,241
Income (Loss) Before Income Taxes						(796,558	)		2,113,343			852,878			4,046,029
Provision (Credit) for Income Taxes						(453,574	)		520,770			(159,883	)		1,024,215
Net Income (Loss) Available to Common Shareholders					$	(342,984	)	$	1,592,573		$	1,012,761		$	3,021,814

Basic Income Per Common Share	$	0.31	$	0.33
Diluted Income Per Common Share	$	0.30	$	0.32
Basic Income (Loss) Per Common Share					$	(0.08	)	$	0.36		$	0.23		$	0.69
Diluted Income (Loss) Per Common Share					$	(0.08	)	$	0.36		$	0.23		$	0.68

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2018 AND 2017 (UNAUDITED)

3/31/2018

3/31/2017

NET INCOME
$ 1,355,745 $ 1,429,241
OTHER ITEMS OF COMPREHENSIVE INCOME:

Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes
(1,298,792 ) 635,854
Change in unrealized gain on interest rate swaps, before income taxes
1,265,812 -
Less: Reclassification adjustment for realized gains on investment securities included in net income, before income taxes
(3,183 ) -
Total other items of comprehensive income
(36,163 ) 635,854
Income tax expense (benefit) related to other items of comprehensive income
(9,221 ) 235,266
Other comprehensive income (loss)
(26,942 ) 400,588
TOTAL COMPREHENSIVE INCOME
$ 1,328,803 $ 1,829,829

	Three months ended						Six months ended
	6/30/2018			6/30/2017			6/30/2018			6/30/2017
NET INCOME (LOSS)	$	(342,984	)	$	1,592,573		$	1,012,761		$	3,021,814
OTHER ITEMS OF COMPREHENSIVE INCOME:
Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes		(391,138	)		812,311			(1,689,930	)		1,448,165
Change in unrealized gain on interest rate swaps, before income taxes		502,917			227,642			1,768,729			227,642
Less: Reclassification adjustment for realized (gains) losses on investment securities included in net income, before income taxes		10,388			(62,274	)		7,205			(62,274	)
Total other items of comprehensive income		122,167			977,679			86,004			1,613,533
Income tax expense related to other items of comprehensive income		31,151			361,742			21,930			597,008
Other comprehensive income		91,016			615,937			64,074			1,016,525
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(251,968	)	$	2,208,510		$	1,076,835		$	4,038,339

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
~~THREE~~SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2018 (UNAUDITED)

	Common Stock		Additional Paid- In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total			Common Stock		Additional Paid- In Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, January 1, 2018	$	687,850	$	50,856,069		$	(37,125,541	)	$	60,679,308		$	(206,193	)	$	74,891,493		$	687,850	$	50,856,069	$	(37,125,541	)	$	60,679,308		$	(206,193	)	$	74,891,493
Net income		-		-			-			1,355,745			-			1,355,745			-		-		-			1,012,761			-			1,012,761
Other comprehensive income (loss)		-		-			-			-			(26,942	)		(26,942	)
Dividends on common stock ($0.12 per share)		-		-			-			(532,771	)		-			(532,771	)
Other comprehensive income																			-		-		-			-			64,074			64,074
Dividends on common stock ($0.24 per share)																			-		-		-			(1,067,043	)		-			(1,067,043	)
Stock award plans		-		(35,357	)		158,592			-			-			123,235			-		125,878		158,592			-			-			284,470
Stock options exercised		450		23,330			-			-			-			23,780			1,200		61,230		-			-			-			62,430
Balance, March 31, 2018	$	688,300	$	50,844,042		$	(36,966,949	)	$	61,502,282		$	(233,135	)	$	75,834,540
Balance, June 30, 2018																		$	689,050	$	51,043,177	$	(36,966,949	)	$	60,625,026		$	(142,119	)	$	75,248,185

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
~~THREE~~SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2018 AND 2017 (UNAUDITED)

	3/31/2018			3/31/2017			6/30/2018			6/30/2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,355,745		$	1,429,241		$	1,012,761		$	3,021,814
Items not requiring (providing) cash:
Deferred income taxes		(26,484	)		(375,774	)		(145,762	)		(786,131	)
Depreciation		331,330			230,186			660,972			465,587
Provision for loan losses		225,000			475,000			725,000			1,050,000
Gain on sale of Small Business Administration loans		(170,862	)		(130,488	)
Gain on sale of mortgage loans held for sale and investment securities		(382,740	)		(408,614	)		(989,280	)		(994,422	)
Gain on sale of foreclosed assets		(54,910	)		(76,462	)		(141,477	)		(60,132	)
Gain on sale of Small Business Administration Loans								(396,241	)		(255,345	)
Amortization of deferred income, premiums and discounts		113,284			183,994			337,877			398,523
Amortization of intangible assets								220,000			-
Accretion of purchase accounting adjustments								(454,792	)		-
Stock award plan expense		123,235			136,782			284,470			194,724
Origination of loans held for sale		(13,144,364	)		(14,032,641	)		(34,084,892	)		(30,824,846	)
Proceeds from sale of loans held for sale		14,664,665			14,384,621			35,155,111			32,037,565
Increase in cash surrender value of bank owned life insurance		(112,015	)		(116,092	)		(226,011	)		(232,729	)
Changes in:
Accrued interest receivable		(76,120	)		15,706			(546,328	)		(113,583	)
Prepaid expenses and other assets		36,306			(250,972	)		5,300,310			(302,583	)
Accounts payable and accrued expenses		(414,507	)		(132,064	)		(1,530,909	)		456,151
Income taxes receivable/payable		141,574			609,055
Income taxes receivable								(323,051	)		619,280
Net cash provided by operating activities		2,609,137			1,941,478			4,857,758			4,673,873
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of loans								5,273,649			19,683,510
Net change in loans		(8,457,089	)		(46,986,724	)		(4,240,878	)		(90,700,542	)
Principal payments on available-for-sale securities		1,360,549			1,756,038			1,139,659			3,655,127
Principal payments on held-to-maturity securities		1,360			3,335			2,347			6,573
Purchase of premises and equipment		(1,672,352	)		(401,640	)		(2,294,704	)		(1,311,938	)
Net cash received for acquisition								2,455,964			-
Purchase of available-for-sale securities		(3,777,647	)		-			(9,788,468	)		(5,568,959	)
Proceeds from sale of available-for-sale securities		565,935			-			6,497,699			10,717,148
Redemption of FHLB stock		413,900			101,500
Redemption (purchase) of Federal Home Loan Bank stock								(193,700	)		33,500
Purchase of tax credit investments		-			(48,955	)		(452,171	)		(223,750	)
Proceeds (payments) from sale of foreclosed assets held for sale		54,910			960,388
Proceeds from sale of foreclosed assets held for sale								142,193			1,644,191
Net cash used in investing activities		(11,510,434	)		(44,616,058	)		(1,458,410	)		(62,065,140	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid		(530,973	)		(441,003	)
Cash dividends paid on common stock								(1,063,744	)		(883,131	)
Net increase in demand deposits, NOW accounts and savings accounts		19,272,583			49,337,734			1,507,491			38,682,025
Net increase (decrease) in certificates of deposit		6,361,616			(3,293,022	)		(5,276,741	)		22,968,861
Proceeds from FHLB advances		166,250,000			67,300,000
Repayments of FHLB advances		(179,950,000	)		(70,900,000	)
Proceeds from Federal Home Loan Bank advances								336,550,000			149,500,000
Repayments of Federal Home Loan Bank and Federal Reserve advances								(342,450,000	)		(151,400,000	)
Proceeds from issuance of notes payable								5,000,000			-
Repayment of notes payable								(3,000,000	)		-
Net decrease of securities sold under agreements to repurchase								(2,159,000	)		-
Advances from borrowers for taxes and insurance		101,228			84,661			380,533			182,418
Stock options exercised		23,780			-			62,430			-
Net cash provided by financing activities		11,528,234			42,088,370
Net cash provided by (used in) financing activities								(10,449,031	)		59,050,173
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,626,937			(586,210	)		(7,049,683	)		1,658,906
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		37,406,930			9,088,441			37,406,930			9,088,441
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	40,033,867		$	8,502,231		$	30,357,247		$	10,747,347

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Guaranty Federal Bancshares, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). The results of operations for the periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2017, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

Note 2: Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Guaranty Bank (the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation.

Note 3: Acquisition

On April 2, 2018, the Company completed the acquisition of Carthage, Missouri-based Hometown Bancshares, Inc. (“Hometown”), including its wholly owned bank subsidiary, Hometown Bank, National Association. Under the terms of the Agreement and Plan of Merger, each share of Hometown common stock was exchanged for $20.00 in cash and the transaction was valued at approximately $4.6 million. Hometown’s subsidiary bank, Hometown Bank, National Association, was merged into Guaranty Bank on June 8, 2018.

Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $178.8 million in assets, including approximately $143.9 million in loans (inclusive of loan discounts) and approximately $161.2 million in deposits. Goodwill of $2.6 million was recorded as a result of the transaction. The merger strengthened the Company’s position in Southwest Missouri and the Company will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.

A summary, at fair value, of the assets acquired and liabilities assumed in the Hometown transaction, as of acquisition date, is as follows:

Guaranty Federal Bancshares, Inc.
Net Assets Acquired from Hometown
April 2, 2018
(In Thousands)


	Acquired from			Fair Value			Fair
	Hometown			Adjustments			Value
Assets Acquired
Cash and Due From Banks	$	7,083		$	-		$	7,083
Investment Securities		7,521			-			7,521
Loans		150,390			(6,471	)		143,919
Allowance for Loan Losses		(2,348	)		2,348			-
Net Loans		148,042			(4,123	)		143,919

Fixed Assets		9,268			798			10,066
Foreclosed Assets held for sale		1,647			(400	)		1,247
Core Deposit Intangible		-			3,520			3,520
Other Assets		4,146			1,283			5,429

Total Assets Acquired	$	177,707		$	1,078		$	178,785

Liabilities Assumed
Deposits		161,001			247			161,248
Federal Home Loan Bank advances		2,000			-			2,000
Securities Sold Under Agreements to Repurchase		2,159			-			2,159
Other borrowings		3,000			-			3,000
Subordinated debentures		6,186			176			6,362
Other Liabilities		2,003			-			2,003
Total Liabilities Assumed		176,349		$	423			176,772

Stockholders' Equity
Common Stock		231			(231	)		-
Capital Surplus		18,936			(18,936	)		-
Retained Earnings		(17,587	)		17,587			-
Accumulated Other Comprehensive Loss		(222	)		222			-
Treasury Stock		-			-			-
Total Stockholders' Equity Assumed		1,358		$	(1,358	)		-

Total Liabilities and Stockholders' Equity Assumed	$	177,707		$	(935	)	$	176,772

Net Assets Acquired							$	2,013
Purchase Price								4,628
Goodwill							$	2,615

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the acquisitions above.

Cash and due from banks – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.

Investment securities – Investment securities were acquired with an adjustment to fair value based upon quoted market prices if material. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.

Loans acquired – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

Fixed assets – Fixed assets were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property and equipment values completed in connection with the acquisition and book value acquired.

Foreclosed assets held for sale – These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.

Core deposit intangible – This intangible asset represents the value of the relationships that Hometown had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.

Other assets – The fair value adjustment results from recording additional deferred tax assets related to the transaction. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The Company performed a fair value analysis of the estimated weighted average interest rate of the certificates of deposits compared to the current market rates and recorded a fair value adjustment for the difference when material.

Federal Home Loan Bankadvances and Other borrowings – The fair value of Federal Home Loan Bank advances and other borrowings are estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

Securities sold under agreement to repurchase – The carrying amount of securities sold under agreement to repurchase is a reasonable estimate of fair value based on the short-term nature of these liabilities.

Subordinated debentures – The fair value of subordinated debentures is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

Other liabilities – The carrying amount of these other liabilities was deemed to be reasonable estimate of fair value.

Pro Forma Financial Information

The results of operations of Hometown have been included in the Company’s consolidated financial statements since the acquisition date. The following schedule includes pro forma results (unaudited) for the three and six months ended June 30, 2018 and 2017, as if the Hometown acquisition occurred as of the beginning of the reporting periods presented.

	Three months ended June 30,
	2018			2017
	(In Thousands, Except Per Share Data)
Summary of Operations
Net interest income	$	7,972		$	7,597
Provision for loan losses		500			437
Net interest income after provision for loan losses		7,472			7,160
Non interest income		1,954			1,753
Non interest expense		10,223			6,898
Income (loss) before income taxes		(797	)		2,015
Provision (credit) for income taxes		(454	)		680
Net income (loss)	$	(343	)	$	1,335
Basic income (loss) per common share	$	(0.08	)	$	0.31
Diluted income (loss) per common share	$	(0.08	)	$	0.30

	Six months ended June 30,
	2018			2017
	(In Thousands, Except Per Share Data)
Summary of Operations
Net interest income	$	15,716		$	15,195
Provision for loan losses		725			875
Net interest income after provision for loan losses		14,991			14,320
Non interest income		3,574			3,505
Non interest expense		17,725			13,795
Income before income taxes		840			4,030
Provision (credit) for income taxes		(131	)		1,360
Net income	$	971		$	2,670
Basic income per common share	$	0.22		$	0.61
Diluted income per common share	$	0.22		$	0.60

The pro forma information is presented for information purposes only and not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results. The pro forma information includes net losses from Hometown of approximately ($1,300,000) and ($163,000) for the three and six months ended June 30, 2018 and 2017, respectively.

Note 4: Securities

The amortized cost and approximate fair values of securities classified as available-for-sale were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of March 31, 2018
As of June 30, 2018
Debt Securities:
Agencies										$	5,537,396	$	10,914	$	(176	)	$	5,548,134
Municipals	$	33,772,192	$	52,108	$	(858,930	)	$	32,965,370		32,746,933		6,975		(883,396	)		31,870,512
Corporates		3,000,000		60,791		-			3,060,791		3,000,000		22,500		(166	)		3,022,334
Government sponsored mortgage-backed securities and SBA loan pools		47,274,879		12,439		(1,370,055	)		45,917,263		50,429,427		18,016		(1,571,430	)		48,876,013
	$	84,047,071	$	125,338	$	(2,228,985	)	$	81,943,424	$	91,713,756	$	58,405	$	(2,455,168	)	$	89,316,993

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2017
Debt Securities:
Municipals	$	33,908,207	$	253,872	$	(263,621	)	$	33,898,458
Corporates		3,000,000		65,000		-			3,065,000
Government sponsored mortgage-backed securities and SBA loan pools		45,414,845		9,283		(908,913	)		44,515,215
	$	82,323,052	$	328,155	$	(1,172,534	)	$	81,478,673

Maturities of available-for-sale debt securities as of ~~March 31,~~June 30, 2018:

	Amortized Cost		Approximate Fair Value		Amortized Cost		Approximate Fair Value
Less than 1 year						1,754,116		1,755,289
1-5 years	$	434,711	$	434,909		4,216,085		4,226,191
6-10 years		10,751,633		10,600,771		11,951,057		11,712,349
After 10 years		25,585,848		24,990,481		23,363,071		22,747,151
Government sponsored mortgage-backed securities and SBA loan pools not due on a single maturity date		47,274,879		45,917,263		50,429,427		48,876,013
	$	84,047,071	$	81,943,424	$	91,713,756	$	89,316,993

The amortized cost and approximate fair values of securities classified as held to maturity are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of March 31, 2018
As of June 30, 2018
Debt Securities:
Government sponsored mortgage-backed securities	$	15,097	$	253	$	(82	)	$	15,268	$	14,111	$	264	$	(90	)	$	14,285

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2017
Debt Securities:
Government sponsored mortgage-backed securities	$	16,457	$	327	$	(55	)	$	16,729

Maturities of held-to-maturity securities as of ~~March 31,~~June 30, 2018:

Amortized
Cost

Approximate
Fair Value

Government sponsored mortgage-backed securities not due on a single maturity date
$ 15,097 $ 15,268

Amortized

Cost

Approximate

Fair Value

Government sponsored mortgage-backed securities not due on a single maturity date

14,111

14,285

The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to ~~$45,622,168~~$37,201,699 and $35,774,863 as of ~~March 31,~~June 30, 2018 and December 31, 2017, respectively. The approximate fair value of pledged securities amounted to ~~$44,265,603~~$36,104,346 and $35,355,969 as of ~~March 31,~~June 30, 2018 and December 31, 2017, respectively.

Realized gains and losses are recorded as net securities gains. Gains on sales of securities are determined on the specific identification method. Gross gains (losses) of ~~$3,183~~($7,205) and $0$62,274 as of ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017, respectively, were realized from the sale of available-for-sale securities. The tax effect of these net gains (losses) was ~~$700~~($1,837) and $0$23,041 as of ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017, respectively.

The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates, or declines in stock prices of equity securities. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold the debt securities to maturity or until recovery of the unrealized loss. Should the impairment of any of these debt securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified, to the extent the loss is related to credit issues, and to other comprehensive income to the extent the decline on debt securities is related to other factors and the Company does not intend to sell the security prior to recovery of the unrealized loss.

Certain other investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at ~~March 31,~~June 30, 2018 and December 31, 2017, was ~~$68,482,288~~$72,896,278 and $62,107,660, respectively, which is approximately ~~84%~~82% and 76% of the Company’s investment portfolio.

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at ~~March 31,~~June 30, 2018 and December 31, 2017.

	March 31, 2018															June 30, 2018
	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

U. S. government agencies																$	1,015,035	$	(176	)	$	-	$	-		$	1,015,035	$	(176	)
Corporates																	999,834		(166	)		-		-			999,834		(166	)
Municipals	$	19,061,837	$	(483,654	)	$	8,559,989	$	(375,277	)	$	27,621,826	$	(858,931	)		21,278,029		(515,479	)		8,539,798		(367,917	)		29,817,827		(883,396	)
Government sponsored mortgage-backed securities and SBA loan pools		19,768,125		(497,936	)		21,092,337		(872,118	)		40,860,462		(1,370,054	)		21,537,912		(625,003	)		19,525,670		(946,517	)		41,063,582		(1,571,520	)
	$	38,829,962	$	(981,590	)	$	29,652,326	$	(1,247,395	)	$	68,482,288	$	(2,228,985	)	$	44,830,810	$	(1,140,824	)	$	28,065,468	$	(1,314,434	)	$	72,896,278	$	(2,455,258	)

	December 31, 2017															December 31, 2017
	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Municipals	$	11,024,593	$	(103,747	)	$	8,802,796	$	(159,874	)	$	19,827,389	$	(263,621	)	$	11,024,593	$	(103,747	)	$	8,802,796	$	(159,874	)	$	19,827,389	$	(263,621	)
Government sponsored mortgage-backed securities and SBA loan pools		20,088,694		(253,907	)		22,191,577		(655,006	)		42,280,271		(908,913	)		20,088,694		(253,907	)		22,191,577		(655,006	)		42,280,271		(908,913	)
	$	31,113,287	$	(357,654	)	$	30,994,373	$	(814,880	)	$	62,107,660	$	(1,172,534	)	$	31,113,287	$	(357,654	)	$	30,994,373	$	(814,880	)	$	62,107,660	$	(1,172,534	)

Note 4:5: Loans and Allowance for Loan Losses

Categories of loans at ~~March 31,~~June 30, 2018 and December 31, 2017 include:

	March 31,			December 31,			June 30,			December 31,
	2018			2017			2018			2017
Real estate - residential mortgage:
One to four family units	$	105,840,035		$	106,300,790		$	135,439,026		$	106,300,790
Multi-family		81,982,799			85,225,074			83,204,490			85,225,074
Real estate - construction		81,228,819			64,743,582			105,974,945			64,743,582
Real estate - commercial		254,715,822			261,866,285			300,325,513			261,866,285
Commercial loans		97,830,737			94,522,840			120,292,323			94,522,840
Consumer and other loans		24,107,835			24,716,447			35,579,723			24,716,447
Total loans		645,706,047			637,375,018			780,816,020			637,375,018
Less:
Allowance for loan losses		(7,102,712	)		(7,107,418	)		(7,572,510	)		(7,107,418	)
Deferred loan fees/costs, net		(645,549	)		(662,591	)		(726,420	)		(662,591	)
Net loans	$	637,957,786		$	629,605,009		$	772,517,090		$	629,605,009

Classes of loans by aging at ~~March 31,~~June 30, 2018 and December 31, 2017 were as follows:

As of March 31, 2018
As of June 30, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing			30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)															(In Thousands)
Real estate - residential mortgage:															Real estate - residential mortgage:
One to four family units	$	374	$	63	$	2,090	$	2,527	$	103,313	$	105,840	$	-		$	191	$	184	$	2,180	$	2,555	$	132,884	$	135,439	$	-
Multi-family		-		-		-		-		81,983		81,983		-			6,015		-		-		6,015		77,189		83,204		-
Real estate - construction		-		-		-		-		81,229		81,229		-			517		-		-		517		105,458		105,975		-
Real estate - commercial		90		-		-		90		254,626		254,716		-			-		533		-		533		299,793		300,326		-
Commercial loans		306		-		75		381		97,449		97,830		-			687		96		763		1,546		118,746		120,292		-
Consumer and other loans		102		-		-		102		24,006		24,108		-			47		31		50		128		35,452		35,580		-
Total	$	872	$	63	$	2,165	$	3,100	$	642,606	$	645,706	$	-		$	7,457	$	844	$	2,993	$	11,294	$	769,522	$	780,816	$	-

As of December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing			30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)															(In Thousands)
Real estate - residential mortgage:															Real estate - residential mortgage:
One to four family units	$	510	$	731	$	2,495	$	3,736	$	102,565	$	106,301	$	-		$	510	$	731	$	2,495	$	3,736	$	102,565	$	106,301	$	-
Multi-family		775		-		-		775		84,450		85,225		-			775		-		-		775		84,450		85,225		-
Real estate - construction		-		-		-		-		64,744		64,744		-			-		-		-		-		64,744		64,744		-
Real estate - commercial		243		135		-		378		261,488		261,866		-			243		135		-		378		261,488		261,866		-
Commercial loans		276		-		588		864		93,659		94,523		-			276		-		588		864		93,659		94,523		-
Consumer and other loans		8		8		-		16		24,700		24,716		-			8		8		-		16		24,700		24,716		-
Total	$	1,812	$	874	$	3,083	$	5,769	$	631,606	$	637,375	$	-		$	1,812	$	874	$	3,083	$	5,769	$	631,606	$	637,375	$	-

At June 30, 2018, there were purchased credit impaired loans of $290,618 30-59 days past due, $334,175 60-89 days past due and $462,036 that were greater than 90 days past due.

Nonaccruing loans are summarized as follows:

	March 31,		December 31,		June 30,		December 31,
	2018		2017		2018		2017
Real estate - residential mortgage:
One to four family units	$	4,258,645	$	4,423,074	$	4,329,527	$	4,423,074
Multi-family		-		-		-		-
Real estate - construction		4,354,409		4,452,409		4,270,409		4,452,409
Real estate - commercial		161,491		161,491		1,551,563		161,491
Commercial loans		655,581		802,628		1,707,342		802,628
Consumer and other loans		-		121,915		49,726		121,915
Total	$	9,430,126	$	9,961,517	$	11,908,567	$	9,961,517

At June 30, 2018, purchased credit impaired loans comprised $1.8 million of nonaccrual loans.

The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and six months ended ~~March 31,~~June 30, 2018 and 2017:

March 31, 2018	Construction			Commercial Real Estate		One to four family		Multi-family		Commercial			Consumer and Other			Unallocated			Total
Three months ended June 30, 2018																						Construction		Commercial Real Estate			One to four family		Multi- family		Commercial		Consumer and Other			Unallocated			Total
	(In Thousands)																					(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,244		$	1,789	$	946	$	464	$	1,031		$	454		$	179		$	7,107		$	2,223	$	1,876		$	1,113	$	487	$	958	$	291		$	155		$	7,103
Provision charged to expense		(40	)		87		167		23		20			(8	)		(24	)	$	225			248		(90	)		123		66		122		126			(95	)	$	500
Losses charged off		-			-		-		-		(96	)		(168	)		-		$	(264	)		-		-			-		-		-		(59	)		-		$	(59	)
Recoveries		19			-		-		-		3			13			-		$	35			13		1			1		-		5		9			-		$	29
Balance, end of period	$	2,223		$	1,876	$	1,113	$	487	$	958		$	291		$	155		$	7,103		$	2,484	$	1,787		$	1,237	$	553	$	1,085	$	367		$	60		$	7,573

March 31, 2017	Construction			Commercial Real Estate		One to four family			Multi-family		Commercial			Consumer and Other			Unallocated		Total
Six months ended June 30, 2018																						Construction		Commercial Real Estate			One to four family		Multi- family		Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)																					(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,377		$	1,687	$	856		$	206	$	1,168		$	337		$	111	$	5,742		$	2,244	$	1,789		$	946	$	464	$	1,031		$	454		$	179		$	7,107
Provision charged to expense		(96	)		55		(33	)		67		(287	)		5			764	$	475			208		(3	)		290		89		142			118			(119	)	$	725
Losses charged off		-			-		(11	)		-		-			(70	)		-	$	(81	)		-		-			-		-		(96	)		(226	)		-		$	(322	)
Recoveries		18			-		6			-		2			10			-	$	36			32		1			1		-		8			21			-		$	63
Balance, end of period	$	1,299		$	1,742	$	818		$	273	$	883		$	282		$	875	$	6,172		$	2,484	$	1,787		$	1,237	$	553	$	1,085		$	367		$	60		$	7,573

Three months ended June 30, 2017	Construction		Commercial Real Estate		One to four family		Multi- family		Commercial			Consumer and Other			Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,643	$	1,742	$	825	$	273	$	1,354		$	293		$	42	$	6,172
Provision charged to expense		75		212		109		50		(45	)		89			85	$	575
Losses charged off		-		-		-		-		(85	)		(53	)		-	$	(138	)
Recoveries		21		-		2		-		2			6			-	$	31
Balance, end of period	$	1,739	$	1,954	$	936	$	323	$	1,226		$	335		$	127	$	6,640

Six months ended June 30, 2017	Construction		Commercial Real Estate		One to four family			Multi- family		Commercial			Consumer and Other			Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,377	$	1,687	$	856		$	206	$	1,168		$	337		$	111	$	5,742
Provision charged to expense		323		267		83			117		139			105			16	$	1,050
Losses charged off		-		-		(11	)		-		(85	)		(123	)		-	$	(219	)
Recoveries		39		-		8			-		4			16			-	$	67
Balance, end of period	$	1,739	$	1,954	$	936		$	323	$	1,226		$	335		$	127	$	6,640

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of ~~March 31,~~June 30, 2018 and December 31, 2017:

March 31, 2018

Construction

Commercial
Real Estate

One to four family

Multi-family

Commercial

Consumer
and Other

Unallocated

Total

(In Thousands)

Allowance for loan losses:
Ending balance: individually
evaluated for impairment
$ 741 $ - $ 302 $ - $ 219 $ 10 $ - $ 1,272
Ending balance: collectively
evaluated for impairment
$ 1,482 $ 1,876 $ 811 $ 487 $ 739 $ 281 $ 155 $ 5,831
Loans:

Ending balance: individually
evaluated for impairment
$ 4,354 $ 161 $ 4,259 $ 762 $ 656 $ 81 $ - $ 10,273
Ending balance: collectively
evaluated for impairment
$ 76,875 $ 254,555 $ 101,581 $ 81,221 $ 97,174 $ 24,027 $ - $ 635,433

As of June 30, 2018	Construction		Commercial Real Estate		One to four family		Multi- family		Commercial		Consumer and Other		Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	738	$	-	$	322	$	-	$	213	$	14	$	-	$	1,287
Ending balance: collectively evaluated for impairment	$	1,746	$	1,787	$	915	$	553	$	872	$	353	$	60	$	6,286
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans:
Ending balance: individually evaluated for impairment	$	4,298	$	161	$	4,396	$	-	$	574	$	89	$	-	$	9,518
Ending balance: collectively evaluated for impairment	$	101,677	$	295,782	$	131,043	$	83,204	$	118,337	$	35,290	$	-	$	765,333
Ending balance: loans acquired with deteriorated credit quality	$	-	$	4,383	$	-	$	-	$	1,381	$	201	$	-	$	5,965

December 31, 2017	Construction		Commercial Real Estate		One to four family		Multi- family		Commercial		Consumer and Other		Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	738	$	-	$	127	$	-	$	246	$	138	$	-	$	1,249
Ending balance: collectively evaluated for impairment	$	1,506	$	1,789	$	819	$	464	$	785	$	316	$	179	$	5,858
Loans:
Ending balance: individually evaluated for impairment	$	4,452	$	161	$	4,424	$	775	$	739	$	276	$	-	$	10,827
Ending balance: collectively evaluated for impairment	$	60,292	$	261,705	$	101,877	$	84,450	$	93,784	$	24,440	$	-	$	626,548

December 31, 2017

Construction

Commercial
Real Estate

One to four family

Multi-family

Commercial

Consumer
and Other

Unallocated

Total

(In Thousands)

Allowance for loan losses:
Ending balance: individually
evaluated for impairment
$ 738 $ - $ 127 $ - $ 246 $ 138 $ - $ 1,249
Ending balance: collectively
evaluated for impairment
$ 1,506 $ 1,789 $ 819 $ 464 $ 785 $ 316 $ 179 $ 5,858
Loans:

Ending balance: individually
evaluated for impairment
$ 4,452 $ 161 $ 4,424 $ 775 $ 739 $ 276 $ - $ 10,827
Ending balance: collectively
evaluated for impairment
$ 60,292 $ 261,705 $ 101,877 $ 84,450 $ 93,784 $ 24,440 $ - $ 626,548

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

Included in the Company’s loan portfolio are certain loans acquired in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and performing assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. 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.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

The following table summarizes the recorded investment in impaired loans at ~~March 31,~~June 30, 2018 and December 31, 2017:

		March 31, 2018						December 31, 2017						June 30, 2018						December 31, 2017
		Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
		(In Thousands)												(In Thousands)
Loans without a specific valuation allowance	Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units		$	1,778	$	1,778	$	-	$	3,180	$	3,180	$	-	$	2,129	$	2,129	$	-	$	3,180	$	3,180	$	-
Multi-family			762		762		-		775		775		-		-		-		-		775		775		-
Real estate - construction			2,742		2,742		-		2,840		2,840		-		2,686		2,686		-		2,840		2,840		-
Real estate - commercial			161		161		-		161		161		-		4,544		4,544		-		161		161		-
Commercial loans			170		170		-		465		465		-		1,542		1,542		-		465		465		-
Consumer and other loans			-		-		-		3		3		-		201		201		-		3		3		-
Loans with a specific valuation allowance	Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units		$	2,481	$	2,481	$	302	$	1,244	$	1,244	$	127	$	2,267	$	2,267	$	322	$	1,244	$	1,244	$	127
Multi-family			-		-		-		-		-		-		-		-		-		-		-		-
Real estate - construction			1,612		2,845		741		1,612		2,845		738		1,612		2,845		738		1,612		2,845		738
Real estate - commercial			-		-		-		-		-		-		-		-		-		-		-		-
Commercial loans			486		486		219		274		274		246		413		413		213		274		274		246
Consumer and other loans			81		81		10		273		273		138		89		89		14		273		273		138
Total
Real estate - residential mortgage:
One to four family units		$	4,259	$	4,259	$	302	$	4,424	$	4,424	$	127	$	4,396	$	4,396	$	322	$	4,424	$	4,424	$	127
Multi-family			762		762		-		775		775		-		-		-		-		775		775		-
Real estate - construction			4,354		5,587		741		4,452		5,685		738		4,298		5,531		738		4,452		5,685		738
Real estate - commercial			161		161		-		161		161		-		4,544		4,544		-		161		161		-
Commercial loans			656		656		219		739		739		246		1,955		1,955		213		739		739		246
Consumer and other loans			81		81		10		276		276		138		290		290		14		276		276		138
Total		$	10,273	$	11,506	$	1,272	$	10,827	$	12,060	$	1,249	$	15,483	$	16,716	$	1,287	$	10,827	$	12,060	$	1,249

The above amounts include purchased credit impaired loans. At June 30, 2018, purchased credit impaired loans comprised $6.0 million of impaired loans without a specific valuation allowance.

The following table summarizes average impaired loans and related interest recognized on impaired loans for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017:

		For the Three Months Ended				For the Three Months Ended				For the Six Months Ended				For the Six Months Ended
		March 31, 2018				March 31, 2017				June 30, 2018				June 30, 2017
		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
		(In Thousands)								(In Thousands)
Loans without a specific valuation allowance	Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units		$	2,688	$	-	$	1,888	$	-	$	1,961	$	-	$	1,856	$	-
Multi-family			765		5		-		-		509		-		-		-
Real estate - construction			2,775		-		2,990		-		2,287		-		2,978		-
Real estate - commercial			161		-		521		-		2,326		46		460		-
Commercial loans			349		-		601		-		916		-		583		-
Consumer and other loans			2		-		10		-		9		-		11		-
Loans with a specific valuation allowance	Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units		$	1,607	$	-	$	41	$	-	$	2,353	$	-	$	43	$	-
Multi-family			-		-		-		-		-		-		-		-
Real estate - construction			1,612		-		2,415		-		2,055		-		2,406		-
Real estate - commercial			-		-		-		-		27		-		-		-
Commercial loans			323		-		550		-		403		-		507		-
Consumer and other loans			181		-		87		-		132		-		79		-
Total
Real estate - residential mortgage:
One to four family units		$	4,295	$	-	$	1,929	$	-	$	4,314	$	-	$	1,899	$	-
Multi-family			765		5		-		-		509		-		-		-
Real estate - construction			4,387		-		5,405		-		4,342		-		5,384		-
Real estate - commercial			161		-		521		-		2,353		46		460		-
Commercial loans			672		-		1,151		-		1,319		-		1,090		-
Consumer and other loans			183		-		97		-		141		-		90		-
Total		$	10,463	$	5	$	9,103	$	-	$	12,978	$	46	$	8,923	$	-

At ~~March 31,~~June 30, 2018, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

The following table ~~summarizes, by class, loans that were newly classified as TDRs for the three months ended March 31, 2018:~~

Number
of Loans

Pre-Modification
Outstanding
Recorded Balance

Post-Modification
Outstanding
Recorded Balance

Real estate - residential mortgage:

One to four family units
- $ - $ -
Multi-family
- - -
Real estate - construction
- - -
Real estate - commercial
- - -
Commercial loans
2 510,420 414,515
Consumer and other loans
- - -
Total
2 $ 510,420 $ 414,515

~~The following table summarizes, by type of concession, loans that were newly classified as TDRs for the three months ended March 31, 2018:~~

Interest Rate

Term

Combination

Total Modification

Real estate - residential mortgage:

One to four family units
$ - $ - $ - $ -
Multi-family
- - - -
Real estate - construction
- - - -
Real estate - commercial
- - - -
Commercial loans
- - 414,515 414,515
Consumer and other loans
- - - -
Total
$ - $ - $ 414,515 $ 414,515

~~The following table~~ presents the carrying balance of TDRs as of ~~March 31,~~June 30, 2018 and December 31, 2017:

	March 31, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Real estate - residential mortgage:
One to four family units	$	1,248,510	$	1,290,462	$	1,234,651	$	1,290,462
Multi-family		-		-		-		-
Real estate - construction		4,354,410		4,452,409		4,298,409		4,452,409
Real estate - commercial		5,653,777		5,666,096		5,637,357		5,666,096
Commercial loans		580,301		214,529		562,138		214,529
Consumer and other loans		-		118,855		-		118,855
Total	$	11,836,998	$	11,742,351	$	11,732,555	$	11,742,351

The Bank did not have any new TDRs for the three months ending June 30, 2018. The Bank has allocated ~~$976,551~~$939,567 and $372,321 of specific reserves to customers whose loan terms have been modified in TDR as of ~~March 31,~~June 30, 2018 and December 31, 2017, respectively.

There were no TDRs for which there was a payment default within twelve months following the modification during the three and six months ending ~~March 31,~~June 30, 2018 and 2017. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of ~~March 31,~~June 30, 2018 and December 31, 2017:

March 31, 2018	Construction		Commercial Real Estate			One to four family		Multi-family		Commercial		Consumer and Other		Total
June 30, 2018																Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)															(In Thousands)
Rating:
Pass	$	76,778	$	244,309		$	97,103	$	81,220	$	96,355	$	24,027	$	619,792	$	101,580	$	285,604	$	127,604	$	83,204	$	117,553	$	35,240	$	750,785
Special Mention		-		6,573			3,133		-		296		-		10,002		-		6,545		2,217		-		294		-		9,056
Substandard		4,451		3,834			5,604		763		1,179		81		15,912		4,395		8,177		5,618		-		2,445		340		20,975
Doubtful		-		-			-		-		-		-		-		-		-		-		-		-		-		-
Total	$	81,229	$	254,716	��	$	105,840	$	81,983	$	97,830	$	24,108	$	645,706	$	105,975	$	300,326	$	135,439	$	83,204	$	120,292	$	35,580	$	780,816

December 31, 2017	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	60,291	$	254,658	$	96,723	$	84,450	$	93,102	$	24,440	$	613,664
Special Mention		-		5,578		3,799		-		200		-		9,577
Substandard		4,453		1,630		5,779		775		708		276		13,621
Doubtful		-		-		-		-		513		-		513
Total	$	64,744	$	261,866	$	106,301	$	85,225	$	94,523	$	24,716	$	637,375

The above amounts include purchased credit impaired loans. At June 30, 2018, purchased credit impaired loans comprised of $6.0 million were rated “Substandard”.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Note 5:6: Accounting for Certain Loans Acquired

The Company acquired loans during the quarter ended June 30, 2018. At acquisition, certain acquired loans evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at June 30, 2018. The amount of these loans is shown below:

	June 30,
	2018
	(In Thousands)
Real estate - commercial	$	6,023
Commercial loans		2,174
Consumer and other loans		349
Outstanding balance	$	8,546
Carrying amount, net of fair value adjustment of $2,581 at June 30, 2018	$	5,965

Accretable yield, or income expected to be collected, is as follows:

	Three months ended
	June 30,
	2018
	(In Thousands)
Balance at beginning of period	$	238
Additions		-
Accretion		(34	)
Reclassification from nonaccretable difference		-
Disposals		-
Balance at end of period	$	204

During the three months ended June 30, 2018, the Company did not increase or reverse the allowance for loan losses related to these purchased credit impaired loans.

Note 7: Goodwill and Other Intangible Assets

The Company recorded $2.6 million of goodwill as a result of its 2018 Hometown acquisition and the goodwill is not deductible for tax purposes. Goodwill impairment was neither indicated nor recorded during the three months ended June 30, 2018.

Goodwill is tested annually, or more often if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill totaled $2.6 million at June 30, 2018.

Core deposit premiums are amortized over a seven year period and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Core deposit premiums of $3.5 million were recorded during the second quarter of 2018 as part of the Hometown acquisition.

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at June 30, 2018 were as follows:

	June 30,
	2018
	(In Thousands)
Goodwill	$	2,615
Core deposit intangible:
Gross carrying amount		3,520
Accumulated amortization		(220	)
Core deposit intangible, net		3,300
Outstanding balance	$	5,915

The Company’s estimated remaining amortization expense on intangibles as of June 30, 2018 is as follows:

	Amortizaton Expense
	(In Thousands)
Remainder of 2018	$	440
2019		785
2020		661
2021		534
2022		409
2023		282
Thereafter		189
Total	$	3,300

Note 8: Benefit Plans

The Company has stock-based employee compensation plans, which are described in the Company’s 2017 Annual Report.

The following tables below summarize transactions under the Company’s equity plans for the ~~three~~six months ended ~~March 31,~~June 30, 2018:

Stock Options
	Number of shares								Number of shares
	Incentive Stock Option			Non- Incentive Stock Option			Weighted Average Exercise Price		Incentive Stock Option			Non- Incentive Stock Option			Weighted Average Exercise Price

Balance outstanding as of January 1, 2018		46,000			25,000		$	15.74		46,000			25,000		$	15.74
Granted		-			-			-		-			-			-
Exercised		(4,500	)		-			5.28		(12,000	)		(5,000	)		7.78
Forfeited		(20,000	)		(10,000	)		28.71		(20,000	)		(10,000	)		28.71
Balance outstanding as of March 31, 2018		21,500			15,000		$	6.37
Options exercisable as of March 31, 2018		21,500			15,000		$	6.37
Balance outstanding as of June 30, 2018										14,000			10,000		$	5.16
Options exercisable as of June 30, 2018										14,000			10,000		$	5.16

The total intrinsic value of stock options exercised for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017 was ~~$79,130~~$267,366 and $0, respectively. The total intrinsic value of outstanding stock options (including exercisable) was ~~$625,260~~$462,900 and ~~$566,840~~$618,320 at ~~March 31,~~June 30, 2018 and 2017, respectively.

Restricted Stock

Number of
Shares

Weighted
Average Grant-
Date Fair Value

Balance of shares non-vested as of January 1, 2018
45,550 $ 16.44
Granted
12,838 22.41
Vested
(22,597 ) 16.49
Forfeited
- -
Balance of shares non-vested as of March 31, 2018
35,791 $ 18.54

Restricted Stock

	Number of Shares			Weighted Average Grant- Date Fair Value

Balance of shares non-vested as of January 1, 2018		45,550		$	16.44
Granted		12,838			22.41
Vested		(25,063	)		16.31
Forfeited		-			-
Balance of shares non-vested as of June 30, 2018		33,325		$	18.83

In February 2018, the Company granted 5,852 shares of restricted stock to directors pursuant to the 2015 Equity Plan that have a cliff vesting at the end of one year and thus, expensed over that same period. These shares had a grant date market price of $22.41 per share. The total amount of expense for restricted stock grants to directors (including all previous years grants) during the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017 was ~~$34,649~~$69,652 and ~~$33,120,~~$66,924, respectively.

For the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017, the Company granted 6,986 and ~~5,926~~6,426 shares, respectively, of restricted stock to officers that have a cliff vesting at the end of three years. The expense is being recognized over the applicable vesting period. The total amount of expense for restricted stock grants to officers (including all previous years grants) during the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017 was ~~$53,748~~$95,475 and ~~$57,687,~~$108,039, respectively.

Performance Stock Units

	Performance Stock Units		Weighted Average Grant-Date Fair Value		Performance Stock Units		Weighted Average Grant- Date Fair Value

Balance of shares non-vested as of January 1, 2018		55,823	$	20.48		55,283	$	20.48
Granted		-		-		-		-
Vested		-		-		-		-
Forfeited		-		-		-		-
Balance of shares non-vested as of March 31, 2018		55,823	$	20.48
Balance of shares non-vested as of June 30, 2018						55,283	$	20.48

On March 29, 2017, the Company granted restricted stock units representing 55,823 hypothetical shares of common stock to officers. There are three possible levels of incentive awards: threshold (25%); target (50%); and maximum (100%). The restricted stock units vest based on two financial performance factors over the period from March 29, 2017 to December 31, 2019 (the “Performance Period”). The two performance measurements of the Company (and the weight given to each measurement) applicable to each award level are as follows: (i) Total Assets (50%) and (ii) Return on Average Assets (50%). In determining compensation expense, the fair value of the restricted stock unit awards was determined based on the closing price of the Company’s common stock on the date of grant, which was $20.48 per share. The expense is being recognized over the applicable vesting period. Due to the fact that the measurements cannot be determined at the time of the grant, the Company currently estimates that the most likely outcome is the achievement between the target and maximum levels. If during the Performance Period, additional information becomes available to lead the Company to believe a different level will be achieved for the Performance Period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis. The total amount of expense for restricted stock units during the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017 was ~~$84,504~~$169,008 and ~~$1,654,~~$51,816, respectively.

Total stock-based compensation expense recognized for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017 was ~~$172,901~~$334,135 and ~~$92,461,~~$134,318, respectively. As of ~~March 31,~~June 30, 2018, there was ~~$1,033,295~~$872,061 of unrecognized compensation expense related to nonvested restricted stock awards, which will be recognized over the remaining vesting period.

Note 6:9: Income Per Common Share

For three months ended March 31, 2018

Income Available
to Common
Stockholders

Weighted Average Common Shares Outstanding

Per Common
Share

Basic Income per Common Share
$ 1,355,745 4,391,717 $ 0.31
Effect of Dilutive Securities
75,069
Diluted Income per Common Share
$ 1,355,745 4,466,786 $ 0.30

	For three months ended June 30, 2018								For six months ended June 30, 2018
	Income Available to Common Shareholders			Average Common Shares Outstanding		Per Common Share			Income Available to Common Shareholders		Average Common Shares Outstanding		Per Common Share
Basic Income Per Common Share	$	(342,984	)		4,404,029	$	(0.08	)	$	1,012,761		4,397,907	$	0.23
Effect of Dilutive Securities					N/A							71,513
Diluted Income Per Common Share	$	(342,984	)		4,404,029	$	(0.08	)	$	1,012,761		4,469,420	$	0.23

For three months ended March 31, 2017

Income Available
to Common
Stockholders

Weighted Average Common Shares Outstanding

Per Common
Share

Basic Income per Common Share
$ 1,429,241 4,363,071 $ 0.33
Effect of Dilutive Securities
56,952
Diluted Income per Common Share
$ 1,429,241 4,420,023 $ 0.32

	For three months ended June 30, 2017						For six months ended June 30, 2017
	Income Available to Common Shareholders		Average Common Shares Outstanding		Per Common Share		Income Available to Common Shareholders		Average Common Shares Outstanding		Per Common Share
Basic Income Per Common Share	$	1,592,573		4,374,725	$	0.36	$	3,021,814		4,368,921	$	0.69
Effect of Dilutive Securities				51,686						54,439
Diluted Income Per Common Share	$	1,592,573		4,426,411	$	0.36	$	3,021,814		4,423,360	$	0.68

Stock options to purchase 58,500 shares of common stock were outstanding during the three and six months ended ~~March 31,~~June 30, 2017 but were not included in the computation of diluted income per common share because their exercise price was greater than the average market price of the common shares.

Note 7:10: New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, (Topic 606): Revenue from Contracts with Customers (“ASU 2014-09”). The scope of the guidance applies to revenue arising from contracts with customers, except for the following: lease contracts, insurance contracts, contractual rights and obligations within the scope of other guidance and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The core principle of the new guidance was that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration that the entity receives or expects to receive. ASU 2014-09 did not significantly impact the timing or approach to revenue recognition for financial institutions. Initially, the amendments were effective for public entities for annual reporting periods beginning after December 15, 2016, however, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to annual and interim periods beginning after December 15, 2017. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under GAAP, which comprises a significant portion of our revenue stream. The Company adopted ASU 2014-09 during the first quarter of 2018 and completed an evaluation of the impact of the revenue streams which are included in the scope of these updates, such as deposit fees and revenue from the sale of other real estate owned. The Company analyzed each revenue stream under Topic 606 and determined that there were no material changes to existing recognition practices. The Company concluded that the adoption of this update did not change significantly from our current practice of recognizing the in-scope non-interest income. In addition, we did not retroactively revise prior period amount or record a cumulative adjustment to retained earnings upon adoption.

Descriptions of our significant revenue-generating transactions that are within the scope of the new revenue recognition standards, which are presented in the consolidated statements of comprehensive income as components of non-interest income, are as follows:

●

Service Charges on Deposit Accounts – Services charges on deposit accounts include general service fees for monthly account maintenance, account analysis fees, non-sufficient funds fees, wire transfer fees and other deposit account related fees. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for service charges on deposit accounts is received immediately or in the following month through a direct charge to customers’ accounts.

●

Gains/Losses on Sales of OREO – Gains/Losses on sales of OREO are recorded from the sale when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 simplifies the impairment assessment of equity investments, clarifies reporting disclosure requirements for financial instruments measured at amortized cost, and requires the exit price notion be disclosed when measuring fair value of financial instruments. ASU 2016-01 details the required separate presentation in other comprehensive income for the change in fair value of a liability related to change in instrument specific credit risk and details the required separate presentation of financial assets and liabilities by measurement category and clarifies the guidance for a valuation allowance on deferred tax assets related to available-for-sale securities. ASU 2016-01 was effective for annual and interim reporting periods beginning after December 15, 2017. ASU 2016-01 was effective for the Company on January 1, 2018 and did not have a material impact on our consolidated financial statements. See Note 9- Disclosures about Fair Value of Assets and Liabilities for further information regarding the valuation method for loans.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact and have determined that the provisions of ASU 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, we do not expect this to have a material impact to the Company’s results of operations or cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has formed a committee that is assessing our data and evaluating the impact of adopting ASU 2016-13. The Company has also selected a third party vendor to assist in generating loan level cash flows and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update was intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows with respect to eight types of cash flows. This new accounting guidance was effective for interim and annual reporting periods beginning after December 15, 2017. Adoption of ASU 2016-15 did not significantly impact the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Subtopic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity does not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 was effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 was effective for the Company on January 1, 2018 and did not have a material impact on our consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part 1) Accounting for certain financial instruments with down round features and (Part II), Replacement of the indefinite deferral for mandatory redeemable financial instruments of certain nonpublic entities and certain mandatory redeemable non-controlling interests with a scope exception. Part I of the update addresses the complexity of accounting for certain financial instruments with down round features such as warrants or convertible instruments and will be effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, but at this time do not believe the standard will have a significant impact on the financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted ~~improvements~~Improvements to ~~accounting~~Accounting for ~~hedging activities.~~Hedging Activities. The purpose of this updated guidance is to better align financial reporting for hedging activities with the economic objectives of those activities. The amendments in this update are effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The standard requires the modified retrospective transition approach as of the date of adoption. The Company is currently evaluating the ~~impact that~~adoption of this standard ~~will have~~ on its Consolidated Financial ~~Statements.~~Statements, but at this time do not believe the standard will have a significant impact on the financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) are recorded. This standard is effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company elected to early adopt ASU 2018-02 and, as a result, reclassified $31,818 from accumulated other comprehensive income to retained earnings as of December 31, 2017. The reclassification impacted the Consolidated Balance Sheet and the Consolidated Statement of Stockholder’s Equity as of and for the year ended December 31, 2017.

Note 8:11: Derivative Financial Instruments

The Company records all derivative financial instruments at fair value in the financial statements. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.

When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as 1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective.

In June 2017, the Company entered into a forward start interest rate swap agreement totaling $50 million notional amount to hedge against interest rate risk on FHLB advances. As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At ~~March 31,~~June 30, 2018, the Company reported a ~~$1,431,255~~$1,740,642 unrealized gain, net of a ~~$402,260~~$508,158 tax effect, in other comprehensive income related to this cash flow ~~hedge.~~hedge, with the offset recorded in Prepaid expenses and other assets on the balance sheet. The Company documents, both at inception and periodically over the life of the hedge, its analysis of actual and expected hedge effectiveness. To the extent that the hedge of future cash flows is deemed ineffective, changes in the fair value of the derivative are recognized in earnings as a component of other noninterest expense. For the quarter ended ~~March 31,~~June 30, 2018, there was no ineffectiveness attributable to the cash flow hedge.

A summary of the Company’s derivative financial instruments at ~~March 31,~~June 30, 2018 is shown in the following table:

Forward Start

Termination

Derivative

Notional

Rate

Estimated Fair Value

Termination

Derivative

Notional

Rate

Estimated Fair

Value

Inception Date

Date

Type

Amount

Paid

Hedged

at March 31, 2018

Date

Type

Amount

Paid

Hedged

at June 30, 2018

2/28/2018

2/28/2025

Interest rate swap

50,000,000

2.12

3 month LIBOR Floating

1,833,515

2/28/2025

Interest rate swap

50,000,000

2.12%

3 month LIBOR Floating

2,248,800

Note 9:12: Disclosures about Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-sale securities: Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. government agencies, municipal securities and government sponsored mortgage-backed securities. The Company has no Level 3 securities.

Derivative financial instruments (Cash flow hedge): The Company’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets.

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at ~~March 31,~~June 30, 2018 and December 31, 2017 (dollar amounts in thousands):

3/31/2018
6/30/2018
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Debt securities:
Agencies									$	-	$	5,548	$	-	$	5,548
Municipals	$	-	$	32,965	$	-	$	32,965		-		31,871		-		31,871
Corporates		-		3,061		-		3,061		-		3,022		-		3,022
Government sponsored mortgage-backed securities and SBA loan pools		-		45,917		-		45,917		-		48,876		-		48,876
Available-for-sale securities	$	-	$	81,943	$	-	$	81,943	$	-	$	89,317	$	-	$	89,317

Interest Rate Swaps	$	-	$	1,834	$	-	$	1,834

12/31/2017

Financial assets:

Level 1 inputs

Level 2 inputs

Level 3 inputs

Total fair value

Debt securities:

Municipals
$ - $ 33,898 $ - $ 33,898
Corporates
- 3,065 - 3,065
Government sponsored mortgage-backed securities and SBA loan pools
- 44,515 - 44,515
Available-for-sale securities
$ - $ 81,478 $ - $ 81,478

Interest Rate Swaps
$ - $ 568 $ - $ 568

		Level 1 inputs				Level 2 inputs				Level 3 inputs				Total fair value
Interest rate swaps		$	-			$	2,249			$	-			$	2,249

12/31/2017
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Debt securities:
Municipals	$	-	$	33,898	$	-	$	33,898
Corporates		-		3,065		-		3,065
Government sponsored mortgage-backed securities and SBA loan pools		-		44,515		-		44,515
Available-for-sale securities	$	-	$	81,478	$	-	$	81,478

Interest Rate Swaps	$	-	$	568	$	-	$	568

The following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.

Foreclosed Assets Held for Sale: Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs and discounts based on management’s assessment of the condition and marketability of the collateral. Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.

Impaired loans (Collateral Dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at ~~March 31,~~June 30, 2018 and December 31, 2017 (dollar amounts in thousands):

Impaired loans:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
March 31, 2018	$	-	$	-	$	2,378	$	2,378
June 30, 2018									$	-	$	-	$	2,553	$	2,553

December 31, 2017	$	-	$	-	$	2,224	$	2,224	$	-	$	-	$	2,224	$	2,224

Foreclosed assets held for sale:

Level 1 inputs

Level 2 inputs

Level 3 inputs

Total fair value

~~March 31,~~June 30, 2018

December 31, 2017

There were no transfers between valuation levels for any asset during the ~~three~~six months ended ~~March 31,~~June 30, 2018 or 2017. If valuation techniques are deemed necessary, the Company considers those transfers to occur at the end of the period when the assets are valued.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurement (dollar amounts in thousands):

	Fair Value March 31, 2018		Valuation Technique	Unobservable Input	Range (Weighted Average)					Fair Value June 30, 2018		Valuation Technique	Unobservable Input	Range (Weighted Average)

Impaired loans (collateral dependent)	$	2,378	Market Comparable	Discount to reflect realizable value		0%	-	100%	(12%)	$	2,553	Market Comparable	Discount to reflect realizable value	0%	-	100%	(17%)

Foreclosed assets held for sale	$	-	Market Comparable	Discount to reflect realizable value			N/A			$	-	Market Comparable	Discount to reflect realizable value	N/A

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.

Cash and cash equivalents, interest-bearing deposits and Federal Home Loan Bank stock

The carrying amounts reported in the condensed consolidated balance sheets approximate those assets' fair value.

Held-to-maturity securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

��

Loans

For ~~March 31,~~June 30, 2018, the fair value of loans is estimated on an exit price basis incorporating contractual cash flow, prepayments discount spreads, credit loss and liquidity premiums. For December 31, 2017, the fair value of loans was estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances

The fair value of advances is estimated by using rates on debt with similar terms and remaining maturities.

Subordinated debentures

For these variable rate instruments, the carrying amount is a reasonable estimate of fair value. There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated debentures at an amount close to its par value.

Interest payable

The carrying amount approximates fair value.

Commitments to originate loans, letters of credit and lines of credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

The following tables present estimated fair values of the Company’s financial instruments at ~~March 31,~~June 30, 2018 and December 31, 2017.

	March 31, 2018						June 30, 2018
	Carrying Amount		Fair Value		Hierarchy Level		Carrying Amount		Fair Value		Hierarchy Level
Financial assets:
Cash and cash equivalents	$	40,033,867	$	40,033,867		1	$	30,357,247	$	30,357,247	1
Held-to-maturity securities		15,097		15,268		2		14,111		14,285	2
Federal Home Loan Bank stock		4,183,600		4,183,600		2		4,791,200		4,791,200	2
Mortgage loans held for sale		781,075		781,075		2		1,771,560		1,771,560	2
Loans, net		637,957,786		633,960,077		3		772,517,090		772,012,078	3
Interest receivable		2,525,967		2,525,967		2		2,996,175		2,996,175	2
Financial liabilities:
Deposits		632,998,549		631,320,253		2		764,771,510		762,555,564	2
Federal Home Loan Bank advances		80,600,000		80,636,998		2		90,400,000		90,425,438	2
Subordinated debentures		15,465,000		15,465,000		3		21,804,760		21,804,760	3
Notes payable								5,000,000		5,000,000	2
Interest payable		519,635		519,635		2		711,911		711,911	2
Unrecognized financial instruments (net of contractual value):
Unrecognized financial instruments
(net of contractual value):
Commitments to extend credit		-		-		-		-		-	-
Unused lines of credit		-		-		-		-		-	-

	December 31, 2017
	Carrying Amount		Fair Value		Hierarchy Level
Financial assets:
Cash and cash equivalents	$	37,406,930	$	37,406,930	1
Held-to-maturity securities		16,457		16,729	2
Federal Home Loan Bank stock		4,597,500		4,597,500	2
Mortgage loans held for sale		1,921,819		1,921,819	2
Loans, net		629,605,009		627,498,508	3
Interest receivable		2,449,847		2,449,847	2
Financial liabilities:
Deposits		607,364,350		606,548,280	2
Federal Home Loan Bank advances		94,300,000		94,417,733	2
Subordinated debentures		15,465,000		15,465,000	3
Interest payable		295,543		295,543	2
Unrecognized financial instruments (net of contractual value):
Commitments to extend credit		-		-	-
Unused lines of credit		-		-	-

~~Note 10:~~ ~~Subsequent Event~~

Pursuant to the terms of an Agreement and Plan of Merger (the “Agreement”), Hometown Bancshares, Inc., a Missouri corporation (“Hometown”) merged with the Company on April 2, 2018. Under the terms of the Agreement, each share of Hometown common stock was exchanged for $20.00 in cash and the transaction was valued at approximately $4.6 million. In its March 31, 2018, unaudited financial statements, Hometown, reported total consolidated assets of $182.1 million, total liabilities of $176.1 million and total equity of $6.0 million. Due to the timing of the merger, the Company is continuing to determine their preliminary fair values and the purchase price allocation. The Company expects to finalize the analysis of the acquired assets and liabilities over the new few months. The Company will record the merger using the acquisition method of accounting and will recognize the assets acquired and liabilities assumed at their fair values as of the date of acquisition. The result of the merger will be included in our consolidated operating results beginning on the acquisition date.

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

General

The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company’s financial condition as of ~~March 31,~~June 30, 2018, and the results of operations for the three and six months ended ~~March 31,~~June 30, 2018 and ~~2017.~~

The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company’s operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; changes in general or local economic conditions; changes in federal or state regulations and legislation governing the operations of the Company or the Bank; and other factors set forth in reports and other documents filed by the Company with the SEC from time to time, including the risk factors described under Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions of Guaranty Federal Bancshares, Inc. (“Guaranty Federal Bancshares”) and its wholly-owned subsidiary, Guaranty Bank (the “Bank”, with Guaranty Federal Bancshares and the Bank being referred to collectively hereinafter as the “Company”) that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the real estate values and the local economies in which the Company conducts operations; risks associated with ~~the completion of~~ the Company’s acquisition of Hometown Bancshares, Inc. (“Hometown”) and its wholly-owned subsidiary Hometown Bank, National Association (“Hometown Bank”) and the integration of Hometown Bank with the Bank, including the possibility that we may not realize the anticipated benefits of the acquisition; the impact of recent and potential future changes in the laws, rules, regulations, interpretations and policies relating to financial institutions, accounting, tax, monetary and fiscal matters and their application by our regulators; the effects of, and changes in, trade, monetary and fiscal policies and laws, changes in interest rates; the timely development of and acceptance of new products and services of the company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); asset quality deterioration; environmental liability associated with real estate collateral; technological changes and cybersecurity risks; acquisitions; employee retention; the success of the Company at managing the risks resulting from these factors; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. For further information about these and other risks, uncertainties and factors, please review the disclosure included in Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2017.

The Company cautions that the listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

On April 2, 2018, pursuant to the previously announced Agreement and Plan of Merger dated as of November 30, 2017 (the “Merger Agreement”) by and between Guaranty Federal Bancshares and Hometown Bancshares, Inc., a Missouri corporation (“Hometown”), Hometown merged with and into Guaranty Federal Bancshares with Guaranty Federal Bancshares being the surviving corporation (the “Merger”). Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of Hometown common stock was converted into the right to receive $20.00 in cash. In the aggregate, the Company paid $4.6 million in respect of the outstanding shares of Hometown common stock. Hometown’s subsidiary bank, Hometown Bank, National Association, was merged into Guaranty Bank on June 8, 2018.

In connection with the Merger, pursuant to a Second Supplemental Indenture, dated as of April 2, 2018, by and among the Company, Hometown, and Wilmington Trust Company, as trustee (the “Trustee”), the Company assumed Hometown’s rights, duties, and obligations under the Indenture, dated as of October 29, 2002, as supplemented by that certain First Supplemental Indenture, dated as of May 19, 2014, by and between Hometown and the Trustee, under which Hometown issued approximately $6.1 million aggregate principal amount of its Floating Rate Junior Subordinated Debt Securities due 2032.

Financial Condition

The Company’s total assets increased ~~$12,565,765 (2%~~$166,059,535 (21%) from $794,459,520 as of December 31, 2017, to ~~$807,025,285~~$960,519,055 as of ~~March 31,~~June 30, 2018. The increase is primarily due to the Hometown assets acquired of $178,785,000.

Available-for-sale securities increased ~~$464,751 (1%~~$7,838,320 (10%) from $81,478,673 as of December 31, 2017, to ~~$81,943,424~~$89,316,993 as of ~~March 31,~~June 30, 2018. The increase was attributable primarily to $7,521,000 in securities acquired in the Hometown acquisition. The Company also had purchases of ~~$3,777,647~~$9,788,468 offset by sales and principal payments of ~~$1,926,484~~$7,637,358 and an increase in unrealized losses of ~~$1,259,269~~$1,552,385 when compared December 31, 2017.

Net loans receivable increased by ~~$8,352,777 (1%~~$142,912,081 (23%) from $629,605,009 as of December 31, 2017 to ~~$637,957,786~~$772,517,090 as of ~~March 31,~~June 30, 2018. ~~New production included a mix of multi-family, agriculture, hospitality and Small Business Administration lending. For~~The increase was attributable in large part to the ~~quarter, construction~~Hometown acquisition, which added loans increased $16,485,237 (25%), commercial loans increased $3,307,897 (34%), commercial real estate loans decreased $7,150,462 (3%), permanent multi-family loans decreased $3,242,275 (4%), consumer and other loans decreased $608,612 (2%) and one-to-four mortgage loans decreased $460,755 (less than 1%).totaling $143,919,000 at fair value. The Company continues to focus its lending efforts in the commercial, owner occupied real estate and small business lending categories.

Allowance for loan losses ~~decreased $4,706 (less than 1%~~increased $465,092 (7%) from $7,107,418 as of December 31, 2017 to ~~$7,102,712~~$7,572,510 as of ~~March 31,~~June 30, 2018. In addition to the provision for loan losses of ~~$225,000~~$725,000 recorded by the Company for the ~~quarter~~six months ended ~~March 31,~~June 30, 2018, charge-offs of specific loans (classified as nonperforming at December 31, 2017) exceeded loan recoveries by ~~$229,706.~~$259,908. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of ~~March 31,~~June 30, 2018 and December 31, 2017 was ~~1.10%~~0.97% and 1.12%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of ~~March 31,~~June 30, 2018 and December 31, 2017 was ~~75.3%~~63.6% and 71.3%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio.

Goodwill increased $2,615,532 (100%) and core deposit intangible increased $3,300,000 (100%) as of June 30, 2018 when compared to December 31, 2017. The increases are due to the Hometown acquisition and are further discussed in Note 7 to the Condensed Consolidated Financial Statements.

Premises and equipment increased $11,699,732 (110%) from $10,607,094 as of December 31, 2017 to $22,306,826 as of June 30, 2018. This is increase is primarily due to the $10,066,000 of fixed assets acquired from the Hometown acquisition.

Deposits increased ~~$25,634,199 (4%~~$157,407,160 (26%) from $607,364,350 as of December 31, 2017, to ~~$632,998,549~~$764,771,510 as of ~~March 31,~~June 30, 2018. The deposit growth was attributable in large part to the Hometown acquisition, which added deposits of $161,248,424 at fair value. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, checking and savings accounts increased by ~~$19,272,583~~$1,507,491 and certificates of deposit ~~increased~~decreased by ~~$6,361,616.~~$5,276,741. The increase in checking and savings accounts was due to the Bank’s continued focus to increase core transaction deposits, including retail, commercial and public funds. See also the discussion under Item 3-“Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”

Federal Home Loan Bank advances decreased ~~$13,700,000 (15%~~$3,900,000 (4%) from $94,300,000 as of December 31, 2017 to ~~$80,600,000~~$90,400,000 as of ~~March 31, 2018~~June 30, 2018. The Company acquired $2,000,000 in Federal Home Loan Bank advances due to the Hometown acquisition but the increase was offset by net principal reductions.

Note payable to bank increased $5,000,000 (100%) for the quarter. The Company opened a $5,000,000 revolving line of credit with a variable interest rate tied to Libor which matures on June 28, 2020. The funds were used to provide additional capital for funding Bank asset growth.

Subordinated debentures increased $6,339,760 (41%) from $15,465,000 as of December 31, 2017 to $21,804,760 as of June 30, 2018. The increase is due to the Hometown acquisition, which added $6,362,000 of subordinated debentures at fair value.

Stockholders’ equity (including net unrealized loss on available-for-sale securities and interest rate swaps) increased ~~$943,047 (1%~~$356,692 (less than 1%) from $74,891,493 as of December 31, 2017, to ~~$75,834,540~~$75,248,185 as of ~~March 31,~~June 30, 2018. The Company’s ~~net income~~dividends paid or declared during this period exceeded ~~dividends paid or declared~~net income by ~~$822,974.~~$54,282. On a per common share basis, ~~stockholders’ equity increased~~tangible book value decreased from $17.10 as of December 31, 2017 to ~~$17.22~~$15.71 as of ~~March 31, 2018.~~June 30, 2018 due to the Hometown acquisition.

Average Balances, Interest and Average Yields

The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact net income.

The following table sets forth certain information relating to the Company’s average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.

		Three months ended 3/31/2018								Three months ended 3/31/2017								Three months ended 6/30/2018								Three months ended 6/30/2017
		Average Balance		Interest			Yield / Cost			Average Balance		Interest			Yield / Cost			Average Balance		Interest			Yield / Cost			Average Balance		Interest			Yield / Cost
ASSETS
Interest-earning:
Loans		$	642,346	$	7,378			4.66	%	$	569,251	$	6,247			4.45	%	$	797,034	$	9,819			4.94	%	$	608,269	$	6,743			4.45	%
Investment securities			80,400		495			2.50	%		93,602		475			2.06	%		88,755		493			2.23	%		88,267		454			2.06	%
Other assets			23,478		83			1.43	%		17,234		49			1.15	%		16,725		67			1.61	%		10,289		44			1.72	%
Total interest-earning			746,224		7,956			4.32	%		680,087		6,771			4.04	%		902,514		10,379			4.61	%		706,825		7,241			4.11	%
Noninterest-earning			37,801								42,285								64,965								39,043
		$	784,025							$	722,372							$	967,479							$	745,868

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing:
Savings accounts		$	31,320		21			0.27	%	$	28,527		14			0.20	%	$	43,012		26			0.24	%	$	29,509		14			0.19	%
Transaction accounts			369,135		930			1.02	%		332,208		362			0.44	%		425,153		1,126			1.06	%		340,975		459			0.54	%
Certificates of deposit			155,525		472			1.23	%		109,345		246			0.91	%		211,246		568			1.08	%		114,227		273			0.96	%
FHLB advances			65,252		333			2.07	%		101,552		400			1.60	%		77,991		406			2.09	%		104,255		450			1.73	%
Other borrowed funds																			1,109		4			0.00	%		-		-			0.00	%
Subordinated debentures			15,465		169			4.43	%		15,465		151			3.96	%		21,651		277			5.13	%		15,465		156			4.05	%
Total interest-bearing			636,697		1,925			1.23	%		587,097		1,173			0.81	%		780,162		2,407			1.24	%		604,431		1,352			0.90	%
Noninterest-bearing			71,472								64,055								94,344								68,342
Total liabilities			708,169								651,152								874,506								672,773
Stockholders’ equity			75,856								71,220								92,973								73,095
		$	784,025							$	722,372							$	967,479							$	745,868
Net earning balance		$	109,527							$	92,990							$	122,352							$	102,394
Earning yield less costing rate								3.10	%							3.23	%							3.38	%							3.21	%
Net interest income, and net yield spread on interest earning assets				$	6,031			3.28	%			$	5,598			3.34	%			$	7,972			3.54	%			$	5,889			3.34	%
Ratio of interest-earning assets to interest-bearing liabilities					117	%							116	%							116	%							117	%

	Six months ended 6/30/2018								Six months ended 6/30/2017
	Average Balance		Interest			Yield / Cost			Average Balance		Interest			Yield / Cost
ASSETS
Interest-earning:
Loans	$	719,690	$	17,197			4.82	%	$	588,792	$	12,990			4.45	%
Investment securities		84,577		978			2.33	%		90,919		930			2.06	%
Other assets		20,101		161			1.62	%		13,743		93			1.36	%
Total interest-earning		824,368		18,336			4.49	%		693,454		14,013			4.08	%
Noninterest-earning		51,384								40,685
	$	875,752							$	734,139
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing:
Savings accounts	$	37,166		47			0.26	%	$	29,021		28			0.19	%
Transaction accounts		397,144		2,056			1.04	%		338,155		821			0.49	%
Certificates of deposit		183,385		1,039			1.14	%		111,800		519			0.94	%
FHLB advances		71,622		739			2.08	%		102,911		850			1.67	%
Other borrowed funds		555		4			0.00	%		-		-			0.00	%
Subordinated debentures		18,558		447			4.86	%		15,465		308			4.02	%
Total interest-bearing		708,430		4,332			1.23	%		597,352		2,526			0.85	%
Noninterest-bearing		82,908								64,624
Total liabilities		791,338								661,976
Stockholders’ equity		84,414								72,163
	$	875,752							$	734,139
Net earning balance	$	115,938							$	96,102
Earning yield less costing rate							3.25	%							3.22	%
Net interest income, and net yield spread on interest earning assets			$	14,004			3.43	%			$	11,487			3.34	%
Ratio of interest-earning assets to interest-bearing liabilities				116	%							116	%

Results of Operations - Comparison of Three and Six Month Periods Ended ~~March 31,~~June 30, 2018 and 2017

Net income (loss) for the three and six months ended ~~March 31,~~June 30, 2018 was ($342,984) and ~~2017 was $1,355,745~~$1,012,761, respectively, compared to $1,592,573 and ~~$1,429,241,~~$3,021,814 for the three and six months ended June 30, 2017, respectively, which represents a decrease in earnings of ~~$73,496 (5%~~$1,935,557 (122%).

~~Interest Income~~

~~Total interest income~~ and $2,009,053 (66%) for the three ~~months ended March 31, 2018 increased $1,184,914 (17%) as compared~~and six month periods, respectively. Generally, earnings were negatively impacted by non-recurring costs related to the three months ended March 31, 2017. For the three month period ended March 31, 2018 compared to the same period in 2017, the average yield on interest earning assets increased 28 basis points to 4.32%, while the average balance of interest earning assets increased approximately $66,137,000. The increase is primarily due to higher loan balances and loan yields compared to the same quarter in 2017. The average balance of loans increased $73,095,000 compared to March 30, 2017. The yield on loans increased 21 basis points to 4.66% for the first quarter when compared to the same quarter of 2017.

~~Interest Expense~~

Total interest expense for the three months ended March 31, 2018 increased $751,603 (64%) when compared to the three months ended March 31, 2017. For the three month period ended March 31, 2018, the average cost of interest bearing liabilities increased 42 basis points to 1.23%, and the average balance of interest bearing liabilities increased approximately $49,600,000 when compared to the same period in 2017. The increases are due to the necessary funding of the Company’s asset growth and to maintain prudent liquidity levels. The Company will continue to utilize a cost effective mix of retail and commercial deposits along with non-core, wholesale funding.Hometown acquisition.

Net Interest Income

Net interest income for the three and six months ended ~~March 31,~~June 30, 2018 increased ~~$433,311 (8%~~$2,083,068 (35%) and increased $2,516,379 (22%), respectively, when compared to the same periods in 2017. For the three and six month periods ended June 30, 2018, the average balance of net interest earning assets over liabilities increased by

approximately $19,958,000 and $19,836,000, respectively, when compared to the same periods in 2017. For the three and six month periods ended June 30, 2018, the net interest margin increased 20 basis points to 3.54% and 9 basis points to 3.43%, respectively, when compared to the same periods in 2017.

Loan discount accretion and amortization of fair value adjustments for time deposits and subordinated debentures from the Hometown acquisition resulted in an additional $454,792 in net interest income for the three months ended June 30, 2018, with no comparable amounts during the same period in 2017. ~~The~~Combined, these components of net interest income contributed 20 and 12 basis points to net interest margin for the three and six months ended June 30, 2018.

Interest Income

Total interest income for the three and six months ended June 30, 2018 increased $3,137,617 (43%) and $4,322,531 (31%), respectively, as compared to the three and six months ended June 30, 2017. For the three and six month period ended June 30, 2018 compared to the same periods in 2017, the average yield on interest earning assets increased 50 basis points to 4.61% and increased 41 basis points to 4.49%, while the average balance of interest earning assets increased by approximately ~~$16,537,000 more than~~$195,689,000 for the three month period and increased approximately $130,914,000 for the six month period. Increased average interest-earning balances were primarily attributable to the Hometown acquisition along with organic loan growth when compared to the same periods in 2017. The increase in the average yield on interest-earning assets was primarily due to loan discount accretion of $360,812, discussed above.

Interest Expense

Total interest expense for the three and six months ended June 30, 2018 increased $1,054,549 (78%) and $1,806,152 (72%), respectively, when compared to the three and six months ended June 30, 2017. For the three and six months period ended June 30, 2018 compared to the same periods in 2017, the average cost of interest bearing liabilities increased 34 basis points to 1.24% and increased 38 basis points to 1.23%, while the average balance of interest bearing liabilities increased ~~when comparing~~approximately $175,731,000 for the three month period ~~ended March 31, 2018~~and increased approximately $111,078,000 for the six month period. Increased average interest-bearing balances were primarily attributable to the ~~same period in 2017. For the three month period ended March 31, 2018, the net interest margin decreased 6 basis points to 3.28% when compared~~deposit and subordinated debenture growth, which was due to the ~~same period~~Hometown acquisition, offset by a decline in ~~2017.~~average balances of FHLB advances. The increase in the average cost of interest-bearing liabilities was primarily due to an increased rates on retail deposits and FHLB borrowings which was partially offset by the deposit and subordinated debentures adjustments, discussed above.

Provision for Loan Losses

Provisions for loan losses are charged or credited to earnings to bring the total allowance for loan losses to a level considered adequate by the Company to provide for potential loan losses in the existing loan portfolio. When making its assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and impaired and past due loans in the Company’s loan portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s loan portfolio.

Based on its internal analysis and methodology, ~~Management~~management recorded a provision for loan losses of ~~$225,000~~$500,000 and $725,000 for the three months and six months ended ~~March 31,~~June 30, 2018, respectively, compared to ~~$475,000~~$575,000 and $1,050,000 for the same ~~period~~periods in 2017.

The Company’s increase in provision ~~for the quarter~~ was primarily due to the increased construction loan balances ~~and increased reserves on~~which carry a ~~few small problem credits.~~higher general reserve. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management may need to increase the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank’s loan portfolio ~~increases~~continues to increase or other circumstances warrant.

Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

Noninterest Income

Noninterest income increased ~~$89,674 (7%~~$586,752 (43%) and $676,426 (26%) for the three months and six months ended ~~March 31,~~June 30, 2018, respectively, when compared to the three months and six months ended ~~March 31,~~June 30, 2017. This ~~was~~is primarily due to the Company’s ~~increased~~increase in fixed-rate mortgage loan income ~~from sales~~ of ~~Small Business Administration (“SBA”)~~approximately $93,000 and ~~increased service charges on deposit accounts. For the quarter,~~$64,000 and increase in gains on ~~sales~~sale of SBA loans ~~increased $40,000~~of approximately $101,000 and $141,000 for the three and six months ended June 30, 2018, respectively, when compared to the same periods in 2017. Increases in service charges ~~on deposit accounts increased $50,000.~~of approximately $261,000 and $311,000 for the three and six months ended June 30, 2018 were attributable primarily to the April 2018 Hometown acquisition.

Noninterest Expense

Noninterest expenses increased ~~$1,056,235 (24%~~$5,654,721 (124%) and $6,710,956 (75%) for the three and six months ended ~~March 31,~~June 30, 2018 when compared to the same periods in 2017. The increase is due to a few significant factors.

Due to the Company’s acquisition of Hometown, $3,192,050 and $3,420,050 of one-time, nonrecurring merger costs were incurred for the three and six months ended ~~March 31, 2017. Generally,~~June 30, 2018. The costs relate to legal, accounting and investment advisory fees, as well as the ~~Company’s expansion efforts have resulted in an increase in both compensation and occupancy expense.~~cost incurred for termination of a specific vendor core processing contract of approximately $2 million.

Salaries and employee benefits increased ~~$316,000~~$1,167,093 (40%) and $1,482,746 (26%) for the ~~quarter.~~three and six months ended June 30, 2018 when compared to the same periods in 2017. The increase is ~~partially attributable~~primarily due to ~~an increase of $188,000 for~~ the Company’s ~~increased~~existing expansion in the Joplin, Missouri market ~~(including new mortgage producers)~~(pre-acquisition) and ~~increases in areas such as operations~~the Hometown acquisition which contributed $604,000 of additional expense for the three and information technology. The Company has also experienced an $87,000 increase in employee benefits for Company paid contributions into employee health savings accounts and restricted stock compensation expense due to strong Company results.six months ended June 30,2018.

Occupancy expenses increased ~~$284,000~~$552,511 (114%) and $836,689 (86%) for the ~~quarter primarily due~~three and six months ended June 30, 2018 when compared to the ~~Company’s move to a new headquarters.~~same periods in 2017. Lease expense on the new headquarters facility began in January 2018 and total expense was approximately $155,000 and $310,000 for the ~~quarter. There was also an increase in~~three and six months ended June 30, 2018. The remaining increases relate to depreciation on furniture and ~~equipment depreciation (which was primarily due to~~fixtures for the new ~~facility) of $83,000~~facility and the newly acquired assets from the Hometown acquisition.

Data processing increased $231,924 (100%) and $305,140 (66%) for the ~~quarter~~three and six months ended June 30, 2018 when compared to the same ~~quarter~~periods in 2017.

Due to the Company’s acquisition of Hometown (as discussed above in Note 10 to the Condensed Consolidated Financial Statements), $228,000 of merger costs were incurred during the quarter. These costs were comprised of legal and investment advisory fees.

~~Other expense increased $130,000 when compared to the same quarter in 2017~~ The increase is primarily due to ~~an increase~~increased technology investments for the new headquarters facility and additional core processing expense associated with the Hometown acquisition.

Amortization expense of ~~$35,000~~the core deposit intangible from the Hometown acquisition was $220,000 for ~~legal~~the three and six months ended June 30, 2018. There was no amortization expense ~~and an increase of $28,000~~ for ~~loan origination expenses.~~the same periods in 2017.

Provision for Income Taxes

The provision for income taxes decreased by ~~$209,754 (42%~~$974,344 (187%) and $1,184,098 (116%) for the three and six months ended ~~March 31,~~June 30, 2018 when compared to the ~~three months ended March 31,~~same periods of 2017. The decrease in the provision for income taxes ~~for the quarter~~ is primarily due to the reduction in taxable income, the increased utilization of tax credits and the decline in federal tax rates as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017.

Nonperforming Assets

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of ~~its~~ loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of ~~March 31,~~June 30, 2018 and December 31, 2017 was ~~75.3%~~63.6% and 71.3%, respectively. Total loans classified as substandard, doubtful or loss as of ~~March 31,~~June 30, 2018, were ~~$15,911,524~~$20,975,000 or ~~1.97%~~2.18% of total assets as compared to ~~$14,134,215~~$14,134,000 or 1.78% of total assets at December 31, 2017. At June 30, 2018, acquired loans from Hometown made up $6.0 million of loans classified as substandard. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank’s allowance for loan losses.

The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank are comprised of nonperforming loans (including troubled debt restructurings) and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.

	3/31/2018			12/31/2017			12/31/2016			6/30/2018			12/31/2017			12/31/2016
Nonperforming loans	$	9,430		$	9,961		$	8,632		$	11,909		$	9,961		$	8,632
Real estate acquired in settlement of loans		350			283			2,682			1,547			283			2,682
Total nonperforming assets	$	9,780		$	10,244		$	11,314		$	13,456		$	10,244		$	11,314

Total nonperforming assets as a percentage of total assets		1.21	%		1.29	%		1.64	%		1.40	%		1.29	%		1.64	%
Allowance for loan losses	$	7,103		$	7,107		$	5,742		$	7,573		$	7,107		$	5,742
Allowance for loan losses as a percentage of gross loans		1.10	%		1.12	%		1.05	%		0.97	%		1.12	%		1.05	%

Included in the table above is $1.8 million of nonperforming loans acquired from Hometown and $1.2 million in real estate acquired in settlement of loans.

Liquidity and Capital Resources

Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and Federal Home Loan Bank of Des Moines borrowings. The Company also has established borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.

The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled ~~$40,033,867~~$30,357,247 as of ~~March 31,~~June 30, 2018 and $37,406,930 as of December 31, 2017, representing ~~an increase~~a decrease of ~~$2,626,937.~~$7,049,683. The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments, deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the ~~Company and the~~ Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by ~~the Company and~~ the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively resulting in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. We expect that the capital ratios for the ~~Company and the~~ Bank under Basel III will continue to exceed the well capitalized minimum capital requirements, when fully phased in.

The Bank’s capital ratios are above the levels required to be considered a well-capitalized financial institution. As of ~~March 31,~~June 30, 2018, the Bank’s common equity Tier 1 ratio was ~~10.81%~~10.48%, the Bank’s Tier 1 leverage ratio was ~~10.13%~~11.35%, its Tier 1 risk-based capital ratio was ~~10.81%~~10.48% and the Bank’s total risk-based capital ratio was ~~11.77%~~11.33% - all exceeding the minimums of 6.5%, 5.0%, 8.0% and 10.0%, respectively, as ~~well as exceeding the minimums plus the 1.25%~~ of ~~capital conservation buffer required as of March 31,~~June 30, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management

The goal of the Bank’s asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments. Management monitors the Bank’s net interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, the Bank offers deposit rates and loan rates designed to maximize net interest income. Management also attempts to fund the Bank’s assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank’s net interest income. Since the relative spread between financial assets and liabilities is constantly changing, the Bank’s current net interest income may not be an indication of future net interest income.

As a part of its asset and liability management strategy and throughout the past several years, the Bank has continued to emphasize the origination of short-term commercial real estate, commercial business and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market.

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.

Interest Rate Sensitivity Analysis

The following table sets forth as of ~~March 31,~~June 30, 2018 management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100 and 200 basis point (“BP”) instantaneous and permanent increases and decreases in market interest rates. Dollar amounts are expressed in thousands.

BP Change	Estimated Net Portfolio Value								NPV as % of PV of Assets						Estimated Net Portfolio Value								NPV as % of PV of Assets
in Rates	$ Amount		$ Change			% Change			NPV Ratio			Change			$ Amount		$ Change			% Change			NPV Ratio			Change
+200	$	127,203	$	5,125			4	%		15.92	%		1.00	%	$	143,619	$	8,239			6	%		15.32	%		1.18	%
+100		125,756		3,678			3	%		15.54	%		0.62	%		140,972		5,592			4	%		14.87	%		0.73	%
NC		122,078		-			0	%		14.92	%		0.00	%		135,380		-			0	%		14.14	%		0.00	%
-100		116,461		(5,617	)		-5	%		14.13	%		-0.79	%		129,587		(5,793	)		-4	%		13.42	%		-0.72	%
-200		103,882		(18,196	)		-15	%		12.52	%		-2.40	%		115,811		(19,569	)		-14	%		11.92	%		-2.22	%

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity Analysis Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Management cannot predict future interest rates or their effect on the Bank’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have an initial fixed rate period typically from one to five years, and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank’s portfolio could decrease in future periods due to refinancing activity if market interest rates remain steady in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The Bank’s Board of Directors (the “Board”) is responsible for reviewing the Bank’s asset and liability management policies. The Board meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank’s management is responsible for administering the policies and determinations of the Board with respect to the Bank’s asset and liability goals and strategies.

Item 4. Controls and Procedures

(a) The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended ~~March 31,~~June 30, 2018, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2018.

(b) There have been no changes in the Company’s internal control over financial reporting during the quarter ended ~~March 31,~~June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1.

Legal Proceedings

None.

~~Item 1A.~~

Item 1A. Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

The Company has a repurchase plan which was announced on August 20, 2007. This plan authorizes the purchase by the Company of up to 350,000 shares of the Company’s common stock. There is no expiration date for this plan. There are no other repurchase plans in effect at this time. The Company had no repurchase activity of the Company’s common stock during the quarter ended ~~March 31,~~June 30, 2018.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None

Item 6.

Exhibits

10.1

Written Description of 2018 Executive Incentive Compensation Annual Plans-Chief Executive,Chief Financial,Chief Operating,Chief Lending and Chief Credit Officers* (1) ~~(1)~~

	~~10.2~~	~~Written Description of 2017 Executive Long-Term Incentive Performance Share Plans-Chief Executive,Chief Financial,Chief Operating,Chief Lending~~ ~~and~~ Chief Credit Officers* ~~(2)~~11.
	~~11.~~	Statement re: computation of per share earnings (set forth in “Note 6:9: Income Per Common Share” of the Notes to Condensed Consolidated Financial Statement (unaudited))

31(i).1

Certification of the Principal Executive Officer pursuant to Rule 13a -14(a) of the Exchange Act

31(i).2

Certification of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the Exchange Act

Officer certifications pursuant to 18 U.S.C. Section 1350

	101	The following materials from Guaranty Federal Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31, 2017~~June 30, 2018 formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Income (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (unaudited), (iv) Condensed Consolidated Statement of Stockholders’ Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and (vi) related notes.*

	*Pursuant to Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

*Pursuant to Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

(1)

Filed as Exhibit 10.1 through 10.5 to the Current Report on Form 8-K filed by the Registrant on May 7, 2018 ~~and incorporated herein by reference.~~

~~(2)~~

~~Filed as Exhibit 10.6 through 10.10 to the Current Report on Form 8-K filed by the Registrant on March 31, 2017~~ and incorporated herein by reference.

SIGNATURES

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

Guaranty Federal Bancshares, Inc.

	Signature and Title		Date

	/s/ Shaun A. Burke		~~May~~ August149,, 2018
	Shaun A. Burke
	President and Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer)



	/s/ Carter Peters		~~May~~ August149, 2018
	Carter Peters
	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

	Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate - residential mortgage:
One to four family units		-	$	-	$	-
Multi-family		-		-		-
Real estate - construction		-		-		-
Real estate - commercial		-		-		-
Commercial loans		2		510,420		414,515
Consumer and other loans		-		-		-
Total		2	$	510,420	$	414,515

	Interest Rate		Term		Combination		Total Modification
Real estate - residential mortgage:
One to four family units	$	-	$	-	$	-	$	-
Multi-family		-		-		-		-
Real estate - construction		-		-		-		-
Real estate - commercial		-		-		-		-
Commercial loans		-		-		414,515		414,515
Consumer and other loans		-		-		-		-
Total	$	-	$	-	$	414,515	$	414,515

	For three months ended March 31, 2018
	Income Available to Common Stockholders		Weighted Average Common Shares Outstanding		Per Common Share
Basic Income per Common Share	$	1,355,745		4,391,717	$	0.31
Effect of Dilutive Securities				75,069
Diluted Income per Common Share	$	1,355,745		4,466,786	$	0.30

	For three months ended March 31, 2017
	Income Available to Common Stockholders		Weighted Average Common Shares Outstanding		Per Common Share
Basic Income per Common Share	$	1,429,241		4,363,071	$	0.33
Effect of Dilutive Securities				56,952
Diluted Income per Common Share	$	1,429,241		4,420,023	$	0.32