NOTE

ACQUISITION

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 and Hometown Bancshares Statutory Trust I, a Delaware statutory trust. 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

$1.4

million was recorded as a result of the transaction. The merger strengthened the Company’s position in Southwest Missouri and the Company believes it 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.

In accordance with generally accepted accounting principles for acquisition accounting, the loans acquired through the acquisition of Hometown were recorded at fair value; therefore, there was

allowance associated with Hometown’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired Hometown loans factoring in the net remaining discount of

$2.45

million at

December 31, 2018.

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			2,463			6,609

Total Assets Acquired	$	177,707		$	2,258		$	179,965

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							$	3,193
Purchase Price								4,628
Goodwill							$	1,435

During the

fourth

quarter, management recorded an adjustment to goodwill for additional deferred income taxes related to the final book versus tax differences on Hometown’s fixed assets upon completion of its final consolidated income tax returns. The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. Management will continue to review the estimated fair values and evaluate the assumed tax positions. The Company expects to finalize its analysis of the acquired assets and assumed liabilities, within

one

year of the acquisition. Therefore, further adjustments to the estimated amounts and carrying values

may

occur.

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.

ederal

ome

oan

ank

advances 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

twelve

months ended

December 31, 2018

and

2017,

as if the Hometown acquisition occurred as of the beginning of the reporting periods presented.

	Twelve months ended December 31,
	2018		2017
	(In Thousands, Except Per Share Data)
Summary of Operations
Net interest income	$	35,031	$	30,389
Provision for loan losses		1,225		1,750
Net interest income after provision for loan losses		33,806		28,639
Non interest income		6,853		7,011
Non interest expense		31,485		27,591
Income before income taxes		9,174		8,059
Provision for income taxes		1,884		2,720
Net income	$	7,290	$	5,339
Basic income per common share	$	1.66	$	1.22
Diluted income per common share	$	1.63	$	1.20

The pro forma information is presented for informational purposes only and

not

indicative of the results of operations that actually would have been achieved had the acquisition been consummated at that time, nor is it intended to be a projection of future results. The pro forma information includes net losses from Hometown of approximately (

$417,000

) for the

twelve

months ended

December 31, 2017,

respectively.